The NASPP Blog

A new Section 16 insider (officer, director, or 10% shareholder) must file a Form 3 within 10 calendar days to report all equity securities of the company that he or she beneficially owns. But, what must be done when that person terminates their insider status?

Form 4 and Form 5

Both Form 4 and Form 5 have a box that, when checked, indicates that the filer is no longer subject to Section 16 at the time of filing. Although this “exit box” should be checked for all required post-termination filings, the SEC does not actually require the insider to report his or her change in status. However, if the insider feels that it is important to make a public declaration that he or she is no longer subject to Section 16, the SEC will accept a blank Form 4 or Form 5 with the exit box checked.

Post-Termination Transactions

It is important to be sure that the transaction is actually post-termination. If the termination triggers a transaction (like an acceleration of vesting for restricted stock), then the transaction may be deemed to have occured pre-termination. Only officers and directors are subject to the post-termination filing requirements of Rule 16a-2(b). So, if a 10% shareholder ceases to hold 10% of the outstanding shares, then no further filing is required. Officers and directors may need to report certain transactions for up to six months from the termination of their insider status.

In order for a post-termination transaction to be reportable, it must be subject to Section 16(b) and take place within six months of a pre-termination opposite-way transaction that is also subject to Section 16(b). If the officer or director did not engage in any non-exempt transactions in the six months leading up to his or her termination, then post-termination transactions will not need to be reported on an Form 4 or Form 5. This does mean, however, that if the post-termination transaction is reportable, it is also potentially subject to short-swing profit recovery. Two post-termination transactions should not be matched against each other.

Delinquent Filings

Of course, if there are any reportable transactions prior to the termination date that the insider failed to report, the obligation to report the missed transactions still stands after termination. If the insider did not engage in any transactions in the six months leading up to his or her termination, the company should obtain a statement from the insider upon termination that all reportable transactions have been reported. Otherwise, the company should obtain a “no filing due” certification from the former insider at the end of the fiscal year to ensure that no Form 5 is required.

8-K

When directors, and certain officers of the company, leave their position, the company is required to report their departure by filing a Form 8-K under Item 5.02.

Important NASPP Resources

The NASPP Section 16 portal is a great resource for source documents, memos, and sample documents regarding Section 16. You can also catch up on the latest Section 16 developments on Alan Dye’s February webcast. Finally, don’t miss out on the “Section 16 and Rule 144 Considerations in a Difficult Market” workshop in the NASPP’s upcoming 17th Annual Conference in San Francisco. There is still time to catch the early bird rate. Even better, registration for this year’s NASPP conference includes a complementary bonus registration to the “6th Annual Executive Compensation Conference”!

-Rachel