SEC Law: Section 16

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How Executives And Directors Can Avoid SEC Troubles Before Trading Their Company Stock (Part 2)

Merrill Freed and Steven Schraibman
Your advisors say now is the time to buy or sell your company stock or to exercise options. But before you proceed, you'd better understand the securities laws that apply. Part 1 focused on insider trading and Rule 10b5-1 plans. This article looks at other pitfalls of securities law, including short-swing-profits violations under Section 16(b), and required SEC filings, such as Form 4 and Form 144.

Late Options Filings Proliferate, Firm Says

Jessica Guynn
San Francisco Chronicle
The SEC may crack down on late Form 4 filings for stock grants and trades.

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FAQs (Jump to articles)

What are Forms 3, 4, and 5? When are they filed with the SEC?

Senior executives, directors, and large-block shareholders need to make ongoing filings about their company stock holdings to report any changes. The initial report to be filed by a Section 16 reporting person is Form 3. It must be filed with the SEC within...

I am a senior executive. When do I make my Form 4 filing for restricted stock, restricted stock units, and performance shares?

Within two business days of any grant, you file Form 4 electronically under the SEC's Section 16 rules. However, while the filing rules for these grants are similar, there are some important differences that depend on the performance goals used...

Where are Forms 3, 4, and 5 filed?

One copy of each form must be filed electronically at the SEC...

If I make a mistake in my filings of Form 3, Form 4, or Form 5, how do I fix an error?

The Section 16 filing rules are complex and difficult, and it is easy for you (or your legal counsel) to make mistakes in the filings. Fixing a mistake can require...

Will my company help me prepare and file Forms 3, 4, and 5?

The obligation to file reports is yours, not the company's...

Is the information filed on Forms 3, 4, and 5 confidential?

No. The reports are public information. The SEC publishes...

When I sell stock under a Rule 10b5-1 plan, do I report the sale differently on Form 4?

Only transactions prompt the need for filings: the mere adoption of a 10b5-1 trading plan is...

What is the penalty for a late or omitted filing of Form 3, 4 or 5?

In both its proxy statement and its annual report on Form 10-K a public company must name any individual who fails to file any of the forms punctually...

Can I exercise stock options or sell company stock not included in my initial filing of ownership on Form 3?

If you have stock options option that, according to the terms of the grant agreement and the stock plan, are vested and exercisable...

Must I still file Form 4 for my company stock purchases and sales after I leave the company, or if I want to indicate that I am no longer an insider? Do the rules for matching short-swing profits still apply?

The Section 16 rules, including the requirements of Form 4, apply for up to six months after...

What is "short-swing profits" liability, and how does it affect my stock options and restricted stock?

If you are a "reporting person" under Section 16(a) of the Securities Exchange Act of 1934 (i.e., you file Forms 3, 4, or 5), then you are also subject to the short-swing profits liability provisions that match purchases and sales within six months. This matching period is calculated from the date of...

If I must disgorge short-swing profits under Section 16(b), do I still have to pay tax on those profits? Do I get a tax deduction for the disgorgement?

Having recoverable profits under Section 16(b) for a matching purchase or sale within six months does not mean that you will report the same amount as income for taxes. You calculate the profits under Section 16(b) differently...

My company's stock price has substantially dropped. As an executive, I want to buy the stock on the open market to show confidence to investors and analysts. Do I still need to worry about insider trading and liability for short-swing profits under Section 16?

Yes. Your intentions do not matter under the securities laws. You cannot...

If I gift my company stock to a grantor-retained annuity trust (GRAT), do the securities laws still apply?

When you are the trustee of a grantor-retained annuity trust (GRAT), and the beneficiary during the annuity payment period, the securities law prohibition on insider trading...

Do senior executives or directors need to make personal SEC filings, such as Forms 4 and 5, for nonqualified deferred compensation plan participation or distributions?

Plan participation itself does not trigger any SEC filings for senior executives, directors, and other company insiders. However, Section 16 filings are required if nonqualified deferred compensation for corporate insiders is put into company stock units in a phantom stock account. Filings are required at...

Is there any risk of violating the insider trading or Section 16 rules after I leave the company by exercising options or selling company stock?

The rules do not apply only to trades in your company stock while you are working for the company...

If I enter into a hedging transaction in my company stock, as a senior executive do I need to report this to the SEC on Form 4? Can I be banned from hedging?

The SEC's Division of Enforcement has been investigating executives' reporting of certain derivative securities transactions. When you enter into a hedging type of transaction, such as collars or prepaid variable forward contracts, you need to...

I am a senior executive and plan to sell enough restricted stock at vesting to cover the taxes I will owe. Is this sale still subject to the short-swing profit rules under Section 16?

Yes. Assuming the company's grant meets the rules for exemption under Section 16, the grant and vesting are not matchable...

If I sold my stock immediately upon exercise or at vesting, the transaction would violate the insider-trading laws and the laws of short-swing profits under Section 16(b) because I had a purchase within six months of the sale. Would this then delay the date of the tax treatment?

The spread at exercise is what matters for the tax calculation...

If my restricted stock vests during a blackout period, or if the stock sale on the vest date would trigger Section 16 short-swing profit liability, is the tax treatment delayed until a later date?

You are taxed on the full value of the shares at vesting, when the restrictions lapse. It does not matter whether...

Do Rule 144, Section 16, and the insider-trading rules apply to gifts and donations of company stock by senior executives or directors?

Not surprisingly, anything you do with your company stock as an executive or director raises issues involving the securities laws, potential SEC reporting requirements, and liability risks...

Can I donate shares and then immediately buy the same number of shares on the open market?

Yes. You may donate company stock to the charity and simultaneously...

I am an officer in my company. Should I avoid participating in our ESPP because of Section 16 reporting and issues that stem from liability for short-swing profits?

If your company's ESPP is qualified under Section 423 of the Internal Revenue Code, the Section 16 ramifications of participating in the plan are not as...

Are there any special securities law issues and filing requirements with stock appreciation rights (SARs) for senior executives and directors?

For senior executives, stock-settled SARs avoid the concerns about cashless exercises by officers and directors raised by...

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