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SEC Law: Basics

What are Forms 3, 4, and 5? When are these insider reports filed with the SEC?

Under Section 16 of the securities laws and SEC rules, senior executives, directors, and large-block shareholders are required to make ongoing filings about their company stock holdings to report any changes. These filings are made on Form 3, Form 4, and Form 5. Your company must post these forms on its website within one day after they are filed with the SEC.

Alert: The SEC takes your Section 16 filing responsibilities and deadlines seriously, as shown by an enforcement action and related penalties issued by the SEC in September 2014. For more details and lessons, see commentaries from the law firms Hogan Lovells and Gibson Dunn & Crutcher.

Form 3

Form 3 is the initial report to be filed by a Section 16 reporting person (e.g. a senior executive). It must be filed either (1) within 10 days after a director or officer assumes his or her position or (2) no later than the effective date of the registration statement for an IPO company registering stock for the first time under Section 12 of the Exchange Act. The form shows how much company stock, and in what form, the officer held on the date he or she assumed this rank or of the IPO. Form 3 must also be filed within ten days after a person's holdings exceed 10% of any class of the company's registered equity securities.

Form 4

Form 4 is used for the required reporting of changes in stock ownership. Laws that became effective in 2002 require you to file Form 4 before the end of the second business day after the day on which the relevant transaction took place: virtually every change of ownership must be reported with the appropriate transaction code, even if, as a result of balancing purchases and sales, there has been no net change in holdings during the month.

Alert: Check the calendar of holidays observed by the federal government if you are uncertain whether a specific holiday qualifies as a "business day" for the purposes of the two-day filing deadline. The EDGAR system will not receive filings on official holidays.

Generally, Form 4 must be filed for any equity-related grant, option exercise, vesting of restricted stock/RSUs (in certain situations), sales of stock (including sales under Rule 10b5-1 trading plans), receipt of a bequest under a will, transfer to a trust, and transaction in company stock by a partnership of which the reporting person is a member. If certain conditions are met, it is permissible to report multiple open-market purchases or sales on the same day in the aggregate (e.g. on a single line) on Form 4. (See the SEC's No-Action Letter of June 25, 2008, to the Society of Corporate Secretaries & Corporate Governance Professionals.) There are specific exemptions for certain transactions under domestic-relations orders in divorce and special rules in the event of death.

Form 5

Form 5 used to be filed by every person subject to Section 16(a) to report any securities transactions that had not yet been reported on Form 4 either because the rules permit deferred reporting (e.g. for gifts) or because the reporting person failed to file a required report. It was filed on or before the 45th day after the close of the company's fiscal year. But the SEC has narrowed the use of Form 5: transactions with the company, including option issuances, cancellations, regrants, and repricings, as well as exercises, now require two-day reporting on Form 4. The future of Form 5 is unclear.

Alert: The SEC no longer accepts paper filings of Forms 3, 4, and 5 (except in rare cases where hardship exemption is granted). Electronic filing of Section 16 reports is now mandatory. To file electronically, you must obtain EDGAR access codes by completing and submitting SEC Form ID. Reports filed late will trigger the Item 405 disclosure in your company's proxy statement and Form 10-K, plus the risk of SEC enforcement actions for ongoing flagrant violations.

Further Reading

For a list of what transactions must be reported and on what Section 16 forms, see SEC Adopts New Section 16 Reporting Rules by Gibson Dunn & Crutcher. For recent interpretations on Section 16 by staff of the SEC's Division of Corporation Finance, and related rules and forms, see the section Compliance and Disclosure Interpretations on the SEC's website.

Note that the Form 3, 4, and 5 filing requirements are separate from the rules of short-swing profits liability, i.e. the matching of purchases and sales within a six-month period.

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