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Tag Archives: affiliate

January 25, 2011

Section 16 Exit Reporting – Part 2

Last week, I covered the ground rules for Section 16 exit reporting. This week, I have a few more pointers on the topic.

Best Practices

I’ve already covered a couple of best practices: whenever insiders cease to be subject to Section 16, review their transactions for the year for any that haven’t been reported and file a Form 4 to report these transactions at that time, rather than waiting until the end of the year, when you are more likely to forget about them. Also, be sure to include these former insiders in your year-end surveys and reconciliations for Section 16 (and obtain a “no Form 5 due” statement from them).

It’s also a good idea to review their transactions for the past six months for any non-exempt transactions. Count out six months from their last non-exempt purchase and that tells you how long they need to report non-exempt sales. Then count out six months from their last non-exempt sale to determine the last date they need to report non-exempt purchases. Inform former insiders of these dates, so they are aware that their non-exempt transactions are still subject to Section 16, both for reporting purposes and short-swing profits recovery purposes. If the company will continue to assist with their post-Section 16 reporting, you may want to make a note of these dates in your calendar as well.

The Exit Box

Both Form 4 and Form 5 include a checkbox to indicate that the reporting person is no longer subject to Section 16, commonly referred to as the “exit box.” Any time a new form is submitted after an insider is no longer subject to Section 16, whether to report newly occurring non-exempt transactions that are still reportable or to report previously unreported transactions, this box should be selected.

Who Is Responsible for Post-Termination Reporting?

Section 16 imposes an obligation on the individual insider, but, as my readers well know, most companies assist their officers and directors with this obligation by preparing and submitting the required forms on their behalf. And my guess is that this continues to be the case during that short period where the individual has ceased to be a designated insider but is still subject to the reporting and short-swing profits recovery provisions of Section 16.

I would certainly expect this to be the case if the individual is still employed by the company but has merely experienced a reduction in responsibility (no sense in adding insult to injury by making them take on their own Section 16 filings). But, even in the case of former insiders that have terminated their employment, the company probably still submits their Section 16 filings for them. The exception might be where an insider has left on bad terms, e.g., was dismissed for some sort of egregious behavior or violated a non-compete or other agreement. In that case, some companies might leave the offending insider to his/her own devices for Section 16 purposes (and be happy to disclose a reporting violation and recover profits in the event that the insider doesn’t manage the obligation sufficiently).

What About Form 144?

Most Section 16 insiders are also considered affiliates of the company and are required to sell under Rule 144. They are subject to Rule 144 by virtue of the authority they possess over the company. If they no longer possess this authority, then they also should no longer be subject to Rule 144 (unless, of course, they hold unregistered shares). But when exactly does Rule 144 no longer apply?

Although the determination should be made based on the relevant facts and circumstances, the Rule 144 experts we look to here at the NASPP–Jesse Brill, Bob Barron, and Alan Dye–generally believe that, in most cases where individuals have cut all ties to the company, they cease to be subject to Rule 144 when their employment ends. A recent SEC interpretation, however, suggests that it is a good idea for former affiliates to sell under Rule 144 for three months or until the company files its next periodic report and many companies have implemented similar policies.

Got Questions on Section 16?
Alan Dye has the answers. Tune in later today for his popular, annual Q&A webcast on Section 16. 

Quick Survey on Section 6039
Take our Quick Survey on Section 6039 and learn how companies are planning to comply with this new tax reporting requirement. A mere seven questions–you can complete the survey in less than five minutes!

ShareComp 2011
The NASPP is happy to announce its support of ShareComp 2011, a fully virtual conference on stock compensation. NASPP members can attend the event for free using the sponsor pass “VCP”; feel free to share this sponsor code with others at your company.

ShareComp 2011 will be held live on February 23, 2011 and all presentations, documents, and booths will be available on-demand for a year afterwards. More than just a series of webinars, ShareComp is a 3-D rendered environment with all of the features of a physical conference, without the cost and time of travel. Benefits of attending include:

  • 16 hours of live global interactive learning and networking
  • Best practices for designing, implementing and managing stock compensation programs
  • Instructional sessions that will share real-world examples, tactics and lessons learned
  • Facilitated discussion forums with experts and practitioners
  • A searchable library, including presentations, Q&A sessions and booth materials
  • A year of access to the conference center and materials

To find out more, visit ShareComp2011.com. Register today for this no-risk, high-impact event (be sure to enter sponsor pass “VCP” for free registration). While you are attending the event, we hope you’ll stop by the NASPP virtual booth to say hello.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara

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November 6, 2008

Rule 144

Background

The Securities Act of 1933 (1933 Act) is a piece of federal legislation that was enacted to prevent securities fraud by regulating the sale of securities in interstate commerce through registration of offers and sales. The basic filings used by companies are the Form S-1, S-3, and S-8. There are exemptions to the filing requirements outlined in the 1933 Act; Rule 701, Regulation D, and Rule 144. Rule 144 provides an exemption from securities registration through a safe harbor on the resale of restricted and/or control securities. To take advantage of the safe harbor provided by Rule 144, sales must comply with restrictions on the information publicly available on the company, holding period for restricted securities, sale amount limitations, the manner of the sale, and notification requirements.

Restricted and Control Securities

With restricted stock units and award grants growing in popularity, it’s easy for new stock professionals to hear “restricted securities” and think that it refers to a restricted stock grant. Restricted securities, as they apply to the Rule 144 safe harbor, refer to shares that were acquired in an unregistered offering. Restricted securities are restricted from resale until or unless they are registered or sold pursuant to an exemption. The most common example of restricted securities is shares that are acquired by employees of a private equity company, often in anticipation of an initial public offering. Restricted securities become restricted because of the manner in which they are acquired. Control securities are shares that are owned by affiliates of the company or persons who are in a control position in the company (such as your Section 16 officers and directors). Control securities may also be restricted securities (when they are acquired in an unregistered offering), but they are control securities because of the holder’s relationship to the company.

Affiliate Status All directors, policy making executive officers, and 10% shareholders should be considered control persons (affiliates). In addition, any relative or spouse living in the same household, trust or estate in which the affiliate or relative/spouse is a trustee, or any corporation in which the seller or family is a 10% owner fall under the same umbrella and will be considered affiliates of the company for the purposes of determining control securities. There may be other situations that give rise to control securities; stock plan administrators should work closely with their legal team to ensure that these people and/or entities are properly identified.

Safe Harbor Requirements

Restricted securities will need to either be registered, or sold pursuant to Rule 144, including the holding requirements. Restricted securities of a public company must be held for six months prior any sale, and restricted securities of a private company must be held for one year prior to any sale.

Control securities are a more common issue for public companies because they arise due to the holder’s relationship to the company. Even if the shares are acquired by the affiliate through an open market purchase, they become control securities subject to Rule 144 because they are held by the affiliate. In order for affiliates to sell control securities, the company’s publicly available information must be current. Control securities are subject to the same holding requirements as restricted securities, that is one year for private companies, and six months for public companies. However, Rule 144(d)(3)(x) does provide an exception for sales associated with cashless exercise transactions. In addition, the sales must be an amount that is less than one percent of the outstanding securities of the class being sold or the average weekly trading volume during the four weeks preceding the transaction and must be sold through an unsolicited broker transaction, directly to a market maker, or in a “riskless principal transaction”. Finally, the sale must be reported to eh SEC on a Form 144 if the shares sold during a three-month period exceed 5,000 shares or have a value in excess of $50,000.

Stock Plan Management Team

The stock plan administrator will most likely not participate directly with a significant portion of the implications of Rule 144. The stock plan management team should work closely with the legal team to ensure that all affiliates are flagged in the stock plan administration system and that all affiliates are educated regarding their status, including how their status may impact their families, trusts, etc. Once affiliates are identified, the stock plan administrator will want to work with any brokers who are known to sell shares for the affiliates (e.g., the captive broker or a broker whit whom the affiliate has a 10b5-1 trading plan) to confirm that the broker knows the affiliate status of the individual and is prepared to help with the Form 144 filing. The most important action a stock plan administrator can take, however, is to ensure that the company’s public filings are up to date. This is the one portion of Rule 144 that is out of the control of the affiliate themselves and is the direct responsibility of the company.

For more information on Rule 144, visit our Rule 144 portal. Rule 144 is also extensively covered in our Fundamentals of Stock Plan Administration course, which is designed to bring professionals who are new to the field up to date will all regulatory requirements as well as administrative best practices. Finally, if you were in New Orleans for our 16th Annual Conference, be sure to review your conference material from the session “New Rule 144: Updates and Issues”. If you weren’t able to attend in person (or you were there but didn’t get to all the sessions you were interested in), it’s not too late. The full conference audio is now available on CD. Order today to listen to the above sessions and all 40+ panels, including sessions addressing performance plans, hold-til-retirement, termination provisions, global stock plans, and much more.

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