As required by Exchange Act Rule 10C-1, which was recently adopted by the SEC pursuant to the Dodd-Frank Act (see my June 26 entry, “Comp Committees and Their Advisors“), the NYSE and NASDAQ have proposed changes to their listing standards with respect to compensation committee independence.
The More Things Change, the More They Stay the Same
I almost titled this blog that way, because, frankly, I thought we already had rules in place on compensation committee independence. And, it turns out, I was at least partly correct. We definitely already have them under Section 16 and Secton 162(m), but the exchanges already had their own standards in this area as well. The proposed rules continue to require companies to have compensation committees comprised of independent directors and largely just reaffirm the requirements that already exist in each exchange’s current listing standards with respect to director independence.
So What’s New?
The SEC’s rule calls for a couple additional factors that should be taken into consideration in assessing director independence: (1) the source of the director’s compensation, including consulting, et. al. fees, and (2) any affiliations the director has with the company. Both exchanges propose to incorporate these additional assessments into their standards.
Under both proposals, #2 is not a dealbreaker, however; the proposals concede that there could be some situations where affiliation does not impair a director’s independence (e.g., in the case of a director that is an affiliate by virtue of stock ownership). The NYSE and NASDAQ proposals depart with respect to #1 however. Under NASDAQ’s proposal, any fees paid to the director (other than for service as a director) preclude independence; the NYSE proposal just includes this as a factor to consider–the fees aren’t necessarily a dealbreaker.
NASDAQ also proposes to require that companies have a formal compensation committee (the NYSE already requires this).
What Else is New?
Probably the most significant new requirement is that the compensation committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.) that it relies on. Given that I think this is significant, you’d think I’d have more say about it, but that’s all I’ve got. I’m sure you don’t need me to blather on about why this is significant.
In addition, the compensation committee must have authority and funding to retain compensation advisors and must be directly responsible for appointment, compensation, and oversight of any advisors that it uses.
Many things in life take on a “hurry up and wait” path, and the SEC’s evaluation of whether or not to incorporate International Financial Reporting Standards (“IFRS”) into U.S. accounting practices is no different. As I write this blog, we are approaching four years since the SEC first issued their proposed road map to IFRS (August 27, 2008) and the acronym IFRS became a buzz word in the stock compensation world.
What’s the Latest News?
On July 13th, the SEC issued a long-awaited staff report that basically summarized their considerations around whether or not the U.S. should adopt IFRS. The key word here is “considerations”. The bottom line of the SEC’s report can be articulated quite simply: the SEC’s report did not contain a recommendation on whether IFRS should be adopted, or a decision and time frame for potential adoption, but rather an analysis of all of the related pros and cons. Where does that leave us? We remain in uncertain territory as to if, when and how IFRS will be adopted (thus the title of this blog). We are still very much in “if” territory, though many accounting experts keeping watch on this issue seem to feel strongly that it’s still a matter of “how” and “when” and not “if”.
No News is….No News!
The IASB has vocalized their impatience surrounding the U.S.’s slow decision making process when it comes to adopting IFRS, so that pressure is undoubtedly mounting. Even so, the prospect of the U.S. adopting IFRS remains on the horizon, and is not something the SEC is likely to decide on before the end of 2012. The good news is that we can turn our attention to more pressing matters (such as what to do about all the tax rate changes that are scheduled to kick in January 1, 2013), and, at least from a stock compensation perspective, not have to worry about looming accounting changes having an impact on us anytime soon.
This is still on the radar, and we’ll keep any updates coming. If you do have spare time, our IFRS2 Portal contains information on many of the considerations on the topic.
Last week, the SEC issued final rules requiring US exchanges to adopt listing standards on the independence of compensation committee members and the use of compensation advisors by said committees.
I don’t have a lot to say about these rules because they don’t directly relate to stock compensation. Sure, the compensation committee typically has authority over the company’s stock plans and changing who sits on the committee and which advisors the committee relies on could have implications for the company’s stock plan, but there’s nothing specific to stock compensation in the rules. And, let’s face it, for purposes of this blog, there are only two categories of stuff: 1) Stock compensation and things that explicity impact it and 2) Things I don’t care about. But, despite that fact that the new rules seem to fall into category #2, it is a current development that, at least peripherally impacts our world, so I figured a blog entry might be in order.
Rules to Create Rules
The final rules issued by the SEC are 124 pages (and no, I haven’t read them all–see #2 above–but I did read a nifty summary by Morrison & Foerster). What strikes me is that here we have 124 pages of rules, but these aren’t actually the real rules yet. These rules just direct the exchanges (Nasdaq, NYSE) to adopt the rules. They don’t even tell Nasdaq and the NYSE what the rules should be, they just suggest things that should be considered in creating the rules. The exchanges now have around 90 days to propose the actual rules, which presumably will be subject to comment (although the SEC rules were already subject to comment) and then eventually the actual, final rules will be adopted. Just an observation, not a criticism of the SEC–they are just doing what they were instructed to do under Dodd-Frank.
Three Independence Standards
The rules require the exchanges to adopt rules requiring compensation committee members to be independent, taking into consideration sources of compensation paid to directors and any relationships directors have with the company or its officers. If you’re thinking that this sounds familiar, you’re right. For purposes of Section 16, most companies maintain a committee of two or more “nonemployee” directors and for purposes of Section 162(m), companies also ensure that the members of that committee are “outside” directors. Now the committee members will also have to be “independent” under the listing standards the exchanges adopt. My guess is that they aren’t going to just adopt the Section 16 or 162(m) definition (which are similar to each other but just different enough to be confusing) and that we’ll have a third standard to comply with.
Compensation Advisors
The rules also stipulate that the exchange listing standards require that compensation committees have sole authority to engage advisors (compensation consultants and/or attorneys) and that company provide funding to the committee to pay the advisors. The rules specify a number of independence factors that the exchanges are to direct compensation committees to consider when engaging advisors. The rules don’t preclude the committee from receiving advise from non-independent counsel or consultants (e.g., the company’s in-house or outside legal counsel).
Compensation committee reliance on independent advisors has been a best practice for many years now; I suspect that many companies already have practices that partially or fully comply with this requirement. Even so, given that the advisors your compensation committee hires are likely to be making recommendations on stock compensation issued to executives, it’s something to be aware of. See topics #1 and #2 in our recent webcast “Ten Equity Compensation Issues That Affect All Stock Plan Professionals (That No One Told You About).”
Disclosures
The final rules also update the disclosures companies are required to make with respect to compensation consultants, expanding the factors that must be considered in evaluating the independence of the consultants.
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 we keep an ongoing “to do” list for you here in our blog.
For the past few years, the IPO market has behaved like a pendulum, swinging from left to right, from existent, to non-existent, to hot again. I’ve heard the buzz over and over: “this year the IPO market will be hot again”. Certainly with companies like Zynga and Yelp recently taking the IPO plunge, and with savory IPO prospect Facebook in full rumor mode, there are definite signs of life. That’s why a bill making its way through Congress has garnered the interest of those who are keeping an eye on the IPO market.
The “JOBS” Act
Last week the House made a rare bipartisan move in approving the “Jumpstart Our Business Startups”, or JOBS, Act. What is this bill? Well, it’s legislation aimed at making it easier for small businesses to gain access to capital and for startups to go public and continue to grow. One aspect of the bill that caught my eye is a provision that would create a special category of startup companies, called “Emerging Growth Companies”. Classification in this category would mean that a company would gain a temporary reprieve from SEC provisions for up to 5 years, or, until it exceeds $1 billion in annual gross revenue or becomes a large filer. Companies would gradually phase in compliance with SEC requirements, minimizing the cost impact of compliance at the time of the IPO.
What to do When You’re Not Focused on SEC Compliance
Obtaining reprieve from SEC provisions would mean startups could continue to focus on what they are doing best, without the burden of assuming the cost, resources and time associated with complying with all of the SEC requirements imposed on public companies today. More funds could be directed towards their growth momentum, and related activities like hiring talent. This could be a giant incentive for a small company that wants to raise more capital through an IPO, but can’t necessarily afford the typical cost burden of going public.
So is it a Shoo-In?
So far the measure has only been approved by the House of Representatives. The next step is a Senate vote. And while the Senate prepares to receive the bill, companies aren’t sitting idle, waiting for action; just this week executives from more than 700 companies, including Apple and Yelp, sent a letter to Senate leaders encouraging them to pass the legislation.
It almost sounds too good to be true; and yet, it seems like there is a good possibility this legislation may fly. If it does happen, I’m betting the incentives will be enough to entice more than a few companies to accelerate their IPO timelines. For those working in companies on the IPO track, now may be a good time to start preparing for the possibility that you will find that email in your inbox: “We’re going public…and FAST!”
We think of SEC documents as a snore, but the complaints issued by the SEC’s enforcement division can be more interesting than you think. Today I look at a recent complaint related to insider trading that illustrates how important it is to make sure employees understand the laws in this area.
In the complaint (SEC vs. Toby G. Scammell), the SEC alleges that Toby Scammell, an employee of an investment fund, found out about Disney’s acquisition of Marvel Entertainment before the deal was announced publicly (by sneaking a look at his girlfriend’s Blackberry), purchased call options on Marvel, and then sold them at a 3,000% profit after the deal was announced.
This is a good case for me to write about because, as far as I can tell from the complaint, Disney wasn’t in any way at fault for this. Scammell didn’t work for Disney and his girlfriend, who did work for Disney as an extern, didn’t voluntarily give the information to him. So I don’t have to suggest that an NASPP member had less than perfect procedures (I’m sure all of you are perfect anyway).
There are many things that are interesting about this case and there’s definitely some entertainment value in reading the complaint (or at least the SEC’s summary of it). What I find most interesting is that Scammell isn’t some high level executive or celebrity (a la Martha Stewart) and, although he realized a 3,000% profit, his investment apparently wasn’t that much to begin with, because that only worked out to around $200,000. On the surface, the whole thing hardly seems worth the SEC’s time, but not only is the SEC pursuing the case, it has garnered a fair amount of attention from the media.
And this is exactly why you have an insider trading compliance policy and why you want to make sure all your employees, not just your executives, understand it. Even if your employees aren’t subject to black-out periods and don’t regularly have access to material, non-public information, it is important that they understand what insider trading is, that it is prohibited by law, what the penalties could be, and your company’s insider trading compliance policy. You just never know what someone is going to overhear or come across–a confidential document could be left out on a copier, for example.
Insider Trading = Bad News for Everyone
Here’s why you don’t want your employees to be prosecuted for insider trading:
It’s bad news for your employees. They could pay stiff penalties to the SEC and/or face criminal prosecution (and have to pay back all the money they made on the trades, of course). They might also end up being fired for cause, since this is a common provision in insider trading compliance policies. Even if they aren’t guilty–and Scammell has been vocal about professing his innocence–their legal fees are likely to be significant (unless they opt for a public defender).
It’s bad news for the company–literally. The SEC prosecuting your employees for insider trading is likely to generate a lot of unwanted media attention, as evidenced by the flurry of articles, blogs, etc. on this case (which I am now contributing to).
It’s more bad news for the company. If the SEC is successful in prosecuting your employees for insider trading, then they could potentially focus their attentions on the company as well. Your insider trading compliance policy demonstrates that you actively discouraged employees from insider trading and could protect the company from an SEC enforcement action.
Your insider trading compliance policy is not just ceremonial or a formality. It is an important policy that protects both the company and its employees. A key part of your stock plan education program is to make sure employees understand this policy, even if they aren’t subject to black-out periods, and understand the types of transactions that are prohibited by law and by your policy.
For more information on insider trading compliance polices, check out this month’s Compliance-O-Meter quiz.
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.
As of June 15, 2011, SAS 70 is being replaced as the U.S. auditing standard for service organizations. Today, I explore some of the background for a SAS 70 report and why it’s being superseded.
Acronym Soup and Background Information
The Auditing Standards Board (ASB), which is a part of the American Institute of Certified Public Accountants (AICPA), issues guidance for auditors including the Statements on Auditing Standards (SAS). SAS No. 70 (SAS 70) is specifically guidance for auditors to use when “auditing the financial statements of an entity that uses a service organization to process certain transactions.” (See the AICPA site for more information.)
Section 404 of the Sarbanes-Oxley Act requires public companies to report on the effectiveness of the internal controls relating to their financial statements. The Public Company Accounting Oversight Board (PCAOB) issued Auditing Standard No. 2 in 2004–superseded by Auditing Standard No. 5 in 2007–which identified how the independent auditor evaluating a public company may rely on a “service auditor report” like the SAS 70 Type 2 report. The process breaks down like this:
An independent auditor for an issuing company must evaluate the controls that are in place to ensure the accuracy of financial reporting. If that company outsources administration processes that could impact financial reporting, the independent auditor should evaluation the controls in place at the service provider as well. A SAS 70 report can provide the necessary opinion of not only that the controls are suitably designed (i.e., a Type 1 report), but also that service company has effectively maintained each of those controls over a period of time (i.e., a Type 2 report). The issuing company auditor is, therefore, able to review the information in the Type 2 SAS 70 report instead of assessing the service provider’s internal controls directly. This saves a huge amount of time, money, and energy for both the issuing company and the service provider. The SAS 70 report has become a standard request for companies evaluating or using third-party stock plan administration service providers.
SSAE 16
The Standards on Standards for Attestation Engagements No. 16 (SSAE 16) replaces SAS 70 as of June 15, 2011. The new standard is intended to bring U.S. auditing practices more in line with the international standard, ISAE 3402. Like SAS 70, SSAE 16 consists of a Type 1 and a Type 2 evaluation, Type 2 being the necessary follow-up to determine if controls are being effectively performed over time. Companies with a current Type II SAS 70 report may transition directly to the Type 2 SSAE 16 report. You can tell the essential difference between SAS 70 and SSAE 16 in their names alone. SAS 70 is an audit standard that requires only the auditor’s assessment of controls. SSAE is an attestation standard that requires the company to also demonstrate the effectiveness of controls. SSAE 16 requires management at a service organization to provide not just a description of the controls in place, but of the system as a whole. (SAS 70 only requires a description of controls.) In addition, management must attest to the suitability of the system in a written statement that includes a description of the criteria used to make this assertion and the risks that could threaten the company’s ability to effectively maintain the system.
A Little Appreciation, Please
If you’re at an issuing company and the SAS 70 report is something you ask for–or better yet, something you automatically receive–from your stock plan administration service providers, I think it’s time to take a moment to appreciate the effort that’s going to go into the new standard. When you do get your hands on that SSAE 16 report, give it a good look before you pass it on to your auditors. It will give you some serious insight into what controls your service provider feels are essential, which can help you design some of your own internal controls. It can also shed light on what procedures you may need to update in order to help your service provider achieve the control objectives in the report, which in turn helps your company get through that portion of your audit.
The SEC plans to address the clawbacks in Section 954 of the Dodd-Frank Act between August and December of this year. Many companies appear to be waiting to make final decisions on how to apply the clawback requirements until the SEC completes the proposed rules. (There is more information on creating a clawback policy in the NASPP blog entry, Clawbacks and Executive Compensation.)
Under the Dodd-Frank Act, companies risk delisting if they do not adopt a clawback policy that complies with Section 954 (which is now Section 10D of the Exchange Act). Some of the more difficult aspects of compliance may be in the clawback period (there is a three-year look-back), the potential for little or no company discretion in enforcing the policy, the fact that the executive does not need to be at fault or have contributed to a financial restatement and the actual calculation of compensation that must be recouped.
SEC Enforcement
In 2009, the SEC brought the first enforcement action based solely on SOX clawback provisions. There has been an increase since that case of suits involving clawbacks initiated by the SEC. Last month Beazer CEO, Ian McCarthy, agreed to pay back $6.5 million in compensation under the SEC action against him. (It may not be a coincidence, then, that Beazer’s shareholders voted against pay packages for company executives this year).
Enforcement Snags
The legal aspect of actually recouping compensation under a clawback provision or policy is complex. In the Unites States, enforcement is subject to state wage laws and may or may not be feasible. Presumably, the federal regulations from Dodd-Frank will trump state law, but that is yet another detail to be worked out. Another difficulty for companies to overcome is with respect to di minimis recoupment amounts or clawbacks that would require unreasonable efforts, such as situations where the individual does not have the finances available to repay the compensation.
International Considerations
International considerations for clawbacks are covered in this great matrix from Baker & McKenzie, which differentiates between Dodd-Frank, noncompete, and nonsolicitation clawback practices. In some countries like Canada, Germany, and Mexico, the provisions of Dodd-Frank are likely to be enforceable. However, in many countries like Australia, Japan, Spain, such policies most likely would not be enforceable, particularly if there isn’t an issue of misconduct or individual culpability. There are even situations like in Ireland or the UK where the provisions are likely to be enforceable as long as they were included in the original agreement, which could be a problem for existing equity compensation.
We’ve gotten a two-week reprieve from the risk of a U.S. government shutdown, leaving everyone to worry over what a shutdown would mean exactly. First, it certainly doesn’t mean that everyone working for the government just stays home and that the machine of the U.S. governmental infrastructure comes to a screeching halt. Only non-essential functions would be suspended. In the world of stock plan administration, we are most interested in whether or not the SEC and the IRS will still function normally. Most importantly, will we be able to file required forms through the SEC’s EDGAR and the IRS’s FIRE system? I’m sure our partners in the Payroll department are also wondering if they will still be able to submit payroll withholding through EFTPS (or, more likely, that the service provider they are using will be able to), but don’t worry, I’m sure that the government will consider functions that bring tax money in are essential.
The truth is that nobody really knows, but we can all speculate. There hasn’t been a government shutdown since 1995 and the rules for determining which government positions are considered nonessential haven’t been updated since the 80’s. One section that is already covered is that all “activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury” are included in the list of essential government functions. This could potentially cover the personnel required to run both the electronic filings for the IRS, including the forms 3921 and 3922 if you haven’t taken care of that already. What probably won’t be deemed “essential” are personnel to help answer any questions you might have. According to this article, the SEC is already working on a contingency plan that would include stopping all audit processes, but I assume would keep EDGAR up and running. So, we are in a “wait and see” mode right now, both on whether or not a shutdown will take place and what exactly that would mean for stock plan managers.
On a related note, one of the fears expressed in this article is the threat posed by a lack of cyber-security in the event of a government shutdown; the list of critical-need computer security employees hasn’t been updated since 1995. With how much we rely on electronic filing in the world of equity compensation, that also has me a little concerned.
Electrifying Section 6039
Speaking of electronic filing, many companies that had originally planned on submitting paper returns the IRS have either requested an extension or decided to go ahead and file electronically. If you either missed the February 28th deadline to file for an extension or have decided to brave the electronic filing, you’re now faced with the problem of actually creating the file to submit through the IRS’s FIRE system.
Unfortunately, if you weren’t expecting to file electronically, then I suspect you didn’t send a test file to the IRS while the test files were still being accepted. This means that you have two choices: 1) engage a service provider to create and/or submit file on your behalf or 2) create the file yourself and hope you get it right. The first choice is, of course, the easiest. To make it even easier, the NASPP has a great matrix of service providers who are prepared to help you through this from our November 18th webcast. If you decide to go it alone without a test file, we can still help. Stock & Option Solutions recently provided NASPP members with an example of what the files for forms 3921 and 3922 should look like. Whatever your decision, the NASPP has got you covered!
In addition to the various changes we know are coming under the Dodd-Frank Act–e.g., CEO to median employee pay ratio, disclosures of hedging policies, expanded clawback requirements, expanded pay-for-performance disclosures, Say-on-Pay (wait, that’s already here)–this week, I blog about a potential change you might not have been aware of: less time to file Forms 3.
Form 3 Deadline In a little-known provision (at least to me), the Dodd-Frank Act amended Section 16(a) to authorize the SEC to shorten the deadline for filing Forms 3. The amendment isn’t effective until July and then some SEC rulemaking will be necessary to effect the change, but, since the SEC requested the authority to do this, it seems likely that they will follow through on it.
Currently, when someone becomes an insider at a reporting company, a Form 3 must be filed within ten days. Alan Dye, of Section16.net and Hogan Lovells, speculates that the SEC will change the deadline to be more in line that of Form 4–e.g., two business days.
As things stand now, most new officers and directors receive a grant upon assuming their new role that must be reported on Form 4 within two business days anyway, even if the Form 3 is not due for ten days (and, in this circumstance, the SEC encourages insiders to file the Form 3 concurrently with the Form 4). It does seem to me to create a fundamental unbalance in the universe to file a Form 4 before filing a Form 3 for an insider–now, presumably, balance will be restored (at least, that’s what Alan thinks–and my money’s on him–but this is all speculation, we don’t actually know what the new Form 3 deadline will be).
A two-day deadline on filing Forms 3 will make it even more critical to be on top of obtaining EDGAR codes for new insiders.
Thanks to Tami Bohm of Radian Group (and member of the NASPP Executive Advisory Committee) for bringing this development to my attention.
A More Social NASPP The NASPP is networking socially: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
Online Fundamentals–Early-Bird Ends February 25 The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation. It’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register by February 25 for early-bird savings.
Submit Speaking Proposals for the NASPP Conference by February 28 The NASPP is currently accepting speaking proposals for 19th Annual NASPP Conference. Submit your proposal by February 28.
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.
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.