Tag Archives: exit reporting

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.

Purchase the audio for the 18th Annual NASPP Conference.
Tune in for today’s webcast, “Alan Dye on the Latest Section 16 Developments.”
Submit your questions for the Feb 3 webcast “Ask the Experts: Last Chance to Ask Questions About Section 6039 Returns.”
Complete the Compliance-O-Meter quiz on Section 6039.
Complete the Quick Survey on Section 6039.
Take the “Question of the Week” challenge.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today).
Attend local chapter meetings in Connecticut, Orange County, Philadelphia, and Portland.

– Barbara

Tags: affiliate, exit reporting, insider, Rule 144, Section 16

January 18, 2011

Section 16 Exit Reporting

With Alan Dye’s annual Q&A webcast coming up next week, I’ve got Section 16 on my mind, so I thought I’d address an issue that comes up quite frequently in the NASPP Q&A Discussion Forum: the required reporting when an insider ceases to be subject to Section 16. I’ve found that many people assume that all transactions that occur in the six months after Section 16 status ceases are reportable, but this is not true. In many cases, no post-Section 16 reporting is required at all.

Previously Unreported Transactions

First off, any reportable transactions the insider engaged in while still subject to Section 16 that haven’t yet been reported still have to be reported. For example, suppose an insider gifts stock; since gifts are reportable on Form 5, the gift may not be reported immediately. If the insider ceases to be subject to Section 16 prior to when the gift is reported, this doesn’t let the insider off the hook: the gift still must be reported.

Probably the smart thing to do is to check for any unreported transactions whenever an insider ceases to be subject to Section 16 and file a Form 4 to report those transactions at that time, so you don’t forget about them later. Even so, when reviewing insider transactions and holdings for Forms 5, it’s a good idea to include individuals that ceased to be subject to Section 16 during the past year, to make sure nothing was missed (and to get a statement from them that no Form 5 is due).

No Reporting Necessary for Exempt Transactions

Once someone ceases to be subject to Section 16, none of his/her exempt transactions is reportable, no matter how shortly the transactions occur after cessation of insider status. Thus, option exercises and forfeitures of restricted stock that occur after an individual is no longer subject to Section 16 generally are not reportable.

Moreover, cancellations and forfeitures of derivative securities, such as options and restricted stock units, for no value are never reportable, even if they occur while the holder is subject to Section 16.

Reporting Might Be Required for Non-Exempt Transactions (But Then Again, Might Not)

Non-exempt transactions (such as open market purchases and sales) that occur after cessation of insider status may be reportable, but only if they occur within six months of an opposite-way, non-exempt transaction that the individual engaged in while still an insider.

For example, assume an insider terminates employment and is no longer subject to Section 16 as of her last day of employment. She did not engage in any non-exempt transactions in the six months prior to her termination. After termination, she engages in a same-day sale exercise. The exercise should be an exempt transaction; as such, it is not reportable. The sale is a non-exempt transaction, but, as such, it would only be reportable if it occurred within six months of a non-exempt purchase that the insider had engaged in prior to her termination. We know that this isn’t the case, since she had no non-exempt purchases within the six months before her termination. Thus, the sale also is not reportable.

Now, let’s take the same scenario, but, this time, let’s assume that the insider purchased stock on the open market five months prior to her termination. An open market purchase is a non-exempt transaction. This fact changes things a bit. As an exempt transaction, the post-termination exercise still does not have to be reported. The sale of the exercised shares will have to be reported if it occurs within six months of the pre-termination open market purchase:

If the sale occurs within the first month after the insider terminated, the sale will be within six months of the purchase and, thus, will be reportable. Incidentally, this is the exact situation in which short-swing profits recovery is also required; assuming the sale price is higher than the purchase price, the company might as well get started on that also.
If the sale occurs more than one month after the insider terminates, it will be more than six months after the open market purchase and the sale will not be reportable (nor will any profits have to be recovered).

More Next Week

Be sure to tune in next week, when I will cover who is responsible for post-termination Section 16 reporting, the Exit box, Forms 144, and best practices.

Got Questions on Section 16?
Alan Dye has the answers. Email your burning Section 16 questions to adye@section16.net and Alan will answer them during his popular, annual Q&A webcast on Section 16. This year’s webcast will be held on January 25; this is your one chance all year to get answers from one of the nation’s foremost authorities on Section 16–don’t miss it!

Quick Survey on Section 16
Take our quick survey on Section 16 and find out how your practices compare to your peers’. With only 12 questions, the survey can be completed in less than five minutes!

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.

Purchase the audio for the 18th Annual NASPP Conference.
Submit your questions to adye@section16.net for the Jan 25 webcast, “Alan Dye on the Latest Section 16 Developments.”
Submit your questions for the Feb 3 webcast “Ask the Experts: Last Chance to Ask Questions About Section 6039 Returns.”
Complete the Compliance-O-Meter quiz on Section 6039.
Take the “Question of the Week” challenge.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today).
NASPP chapter meetings are really picking up for the year! Attend local chapter meetings in Chicago, Dallas, San Fernando Valley, San Francisco, Seattle, Silicon Valley, and the Twin Cities.

– Barbara

Tags: exit reporting, insider, Section 16