The newest edition of Peter Romeo and Alan Dye’s Section 16 Forms & Filing Handbook arrived in my mailbox last week. I thought the last edition contained a model form for every possible Section 16 reporting scenario, but no–there are 15 new forms in this version. It’s so big, I practically needed some assistance toting it upstairs to my office. Here are four things I learned from perusing the new forms.
1. Reporting Performance Awards with a Service Tail
New Model Form 135 clears up some of the confusion with respect to a performance award that is still subject to service-based vesting conditions after the performance goal has been achieved. As my readers know, performance awards in which vesting is conditioned on goals other than stock price targets aren’t reportable until the performance goes are achieved. Once the compensation committee has certified achievement of the goals, however, the award is reportable, even where it isn’t paid out immediately or is still subject to time-based vesting requirements. The award essentially becomes a standard RSU once the performance goals have been achieved. Assuming the award can only be paid out in stock, it can then be reported as the acquisition of either a derivative security or common stock, just like any other time-based RSU.
2. Voluntary Reporting of ESPP Purchases
Alan Dye doesn’t always report purchases under Section 423 ESPPs, but when he does, he uses transaction code A of J. (I couldn’t resist–it’s not often that I can invoke beer commercials in my blogs). Because purchases under an ESPP aren’t reportable, there’s no transaction code assigned to them. If you are going to voluntarily report these transactions, New Model Form 145 suggests using code A or J and including a footnote to explain the transaction. Personally, I like code A because it specifically applies to exempt acquisitions, whereas code J can apply to either exempt or nonexempt transactions.
3. Voluntary Exit Forms
I did already know that it isn’t necessary to file an exit form unless the former insider has reportable transactions that occur after his/her termination. Despite this, some companies voluntarily file exit forms for departing insiders anyway. I’d never really thought about some of the specifics related to filing a voluntary exit form when there aren’t any transactions to report on the form. New Model Form 214 provides some guidance. In addition to the obvious (check the “Exit” box and include a note in the remarks field explaining the reason for the filing), if using a Form 4, the date of the “earliest transaction” in box 3 should be the insider’s termination date (if using a Form 5, the date of the fiscal year end is reported in box 3), and the insider’s title in box 5 can either be his/her former title or you can select the “other” checkbox and specify his/her status (e.g., “former insider”).
4. Grants to Spouses of Insiders
Given how common dating is in the workplace, I bet that this situation comes up more frequently than you’d think: an insider meets someone at work, they fall in love and get married and then, unconnected to the marriage, the insider’s spouse is granted an option or an award. Because they are married, the grant has to be reported as an acquisition of an indirectly held security on a Form 4 for the insider. But because the spouse isn’t an insider, the award might not be submitted to the compensation committee/board for approval, making it a non-exempt grant unless the shares underlying the grant are held for at least six months. The 2014 Handbook includes new Model Form 91 explaining how to report the grant.
It’s probably unlikely that the shares underlying the grant would be sold within six months, but even so, my takeaway here is to consider submitting grants to spouses of insiders to the comp committee for approval. I imagine that it wouldn’t be that much extra work for the committee, it seems like it might be a good idea from a shareholder optics perspective anyway, and then the exempt status of the grant is one less thing to worry about.
Luckily, grants to any person(s) the insider is having an affair with probably aren’t considered to be indirectly owned by the insider (unless it’s some sort of weird Woody Allen-type situation) and, thus, aren’t reportable. Moreover, when the insider divorces, Model Form 74 (which is not new) explains that any transfers of securities pursuant to the divorce settlement generally aren’t reportable.
Form 5 filings, if needed, are due 45 days after the end of a company’s fiscal year or within six months of an individual ceases to be an insider. If December is your year end, now is the time to start reviewing your Section 16 filings to determine if any Form 5 filings are required for your insiders.
Deferred Reporting
Some transactions are exempt from Form 4 reporting requirements under Rule 16b-6 and may instead be reported on a Form 5. There are two types of transactions that are eligible for this deferred reporting: acquisitions and dispositions through gift or inheritance and “small acquisitions.” Although these types of transactions are not required to be reported on a Form 4, insiders may choose to report them on a Form 4.
Many companies encourage Form 4 reporting of transactions that are eligible for deferred reporting. While these transactions themselves may not need to be reported on a Form 4, they do impact the total holdings which must be reported on a Form 4 any time there is a reportable acquisition or disposition of common stock. Reporting the actual transaction on a Form 4 provides clarity for potential investors or shareholders and reminds insiders that the transaction is only eligible for deferred reporting, not exempt from reporting altogether.
Small acquisitions are particularly tricky because they may not exceed $10,000 when aggregated over the preceding six months. Additionally, a disposition of the same class of securities that is not exempt from Section 16-b in the proceeding six months disqualifies an acquisition from deferred reporting; it must be included on a Form 4 within two days of the disposition. Simply reporting the acquisition on a Form 4 in the first place eliminates the need to track the total value of small acquisitions and monitor for matching dispositions.
Form 4 and Form 3 Errors
The other reason a Form 5 may be required is if transactions or holdings were either missed or not reported correctly on a Form 4 or Form 3 during the year (or the past two years if the individual became an insider in the current year). Of course, nobody wants to have to file a Form 5 for this reason (see Barbara’s blog entry, “Ignore the Romeo & Dye Model Forms At Your Own Risk“). For these errors, insiders do not need to file a Form 5; a late or amended Form 4 may also be used. If an issue is discovered prior to the year-end reconciliations, the correction should be reported immediately. Additionally, only Form 4 errors from the same year can be included on a Form 5. If there is a Form 4 transaction between the end of the year and the Form 5 filing deadline, it should not be reported on the prior year’s Form 5, regardless of whether or not it was reported timely and correctly on a Form 4.
Know Your Insiders
Your company should have a process in place to confirm if a Form 5 is needed for each of your insiders. This can be done by reconciling reported transactions and holdings in combination with a questionnaire or other verification completed by the insiders. If it appears no Form 5 is needed, have your insiders confirm your findings in a signed statement.
Form 5 Details
For small acquisitions that are eligible for deferred reporting on a year-end Form 5, use “L” as the transaction code. Code G is used for gifts (either acquisitions or dispositions) and code W is used for acquisitions or dispositions by will or the laws of descent and distribution.
If incorrectly reported holdings from a Form 3 are being reported on the Form 5, add a “3” to the transaction code. When reporting a missed or incorrectly reported Form 4 transaction on a Form 5, no special code is needed. Use the footnotes to explain any Form 3 or Form 4 item included on the Form 5. A Form 5 has checkboxes to indicate that it includes line items that should have been reported on a Form 3 or Form 4, but EDGAR will automatically check the appropriate box based on the transaction code.
For more information on Forms 3, 4, and 5, see the NASPP’s Section 16 portal. The most comprehensive resource on Section 16 filings is the Romeo & Dye Section 16 Annual Service, which includes the Section 16 Deskbook along with the Section 16 Updates Quarterly Newsletter.
February isn’t just time to be thinking about your sweetheart, it’s also the deadline for Form 5 filings for many companies. If your company year-end is December 31st, then the Form 5 filing deadline for 2010 is Tuesday, February 16 (Feb 14, the 45th day after December 31, is a Sunday and Feb 15 is a federal holiday).
While it is true that the responsibility for reporting ownership and transactions falls squarely on the Section 16 insiders themselves, it is in the best interest of the company to manage the SEC filings on behalf of the Section 16 insiders. This blog is written with the assumptions that your company is managing the SEC filings for your insiders and that you have a December 31st year-end.
Confirm List of Reporting Persons
Take a moment to review who your filing persons are. Once you have your list together, confirm it with your legal department and have your board of directors formally approve the list.
Verify Current Holdings
Although you should be verifying all equity securities held by your Section 16 insiders every time you file a Form 3 or Form 4, take time at the end of the year to do a final reconciliation. Remember that their holdings include not only the shares held in their name, but may also include securities owned by immediate family members or by business entities in which the Section 16 insider has a controlling interest. If you discover any inconsistencies, confirm that the discrepancy isn’t the result of a transaction that should have been reported on a Form 4 or that was reported incorrectly.
Review 2009 Transactions and Filings
Review all known transactions for your Section 16 insiders and confirm that they were correctly reported. Be sure to include insiders who left the company in 2009 in your transaction audit. Verify the transactions in your stock plan administration database against the brokerage records to ensure that the details are all correct. In addition, review any Rule 10b5-1 trading plans to check for transactions that may have been overlooked. Some transactions, such as gifts/inheritances or “small acquisitions”, are not required to be reported on a Form 4. In conducting your review, be sure to include these types of transactions. In addition, be sure to check your Form 4 filing dates for any delinquent filings that will need to be disclosed in your proxy and Form 10-K.
Include each insider’s individual transaction list as an attachment to his or her D&O questionnaire. That way, your insiders will be able to focus their attention on any missed transactions. If any transaction that was required to be reported on a Form 4 was overlooked, you will need to include it on the Form 5.
“No Filing Due” Statements
Where Form 5 reportable transactions were not voluntarily reported early on a Form 4, you will need to include them on the insider’s Form 5. Obtain “No Filings Due” statements for insiders that don’t have any transactions to report on Form 5. Like the transaction list, the “no filing due” statement can be included as an attachment to the D&O questionnaire. Don’t forget about anyone who ceased to be a Section 16 insider during 2009! If you didn’t get a representation from the individual when they ceased to be a Section 16 insider, then you will need to get a “no filing due” statement at year-end.
Administrative
There are also a couple administrative points to focus on at the end of your fiscal year.
First, make sure that your own EDGAR password has been renewed (for more on this, check out Barbara’s March 10 entry from last year).
Finally, review the power of attorney for each of your Section 16 insiders and confirm that all are filed with the SEC and are still effective. Pay special attention to who is named as appointee in the power of attorney, if the agreement includes reference to the EDGAR filing system, and to confirm that the agreement indemnifies the company and/or appointees.
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.