October 16, 2023
On September 27, 2023, the Securities and Exchange Commission (the “SEC”) announced settled enforcement actions against six officers, directors and major shareholders of various public companies for allegedly failing to timely report information about their holdings and transactions in company stock, and simultaneously announced settled actions against five public companies for allegedly causing these insiders’ filing failures or for failing to report their insiders’ filing delinquencies. The actions are part of a recent SEC enforcement initiative aimed at ensuring compliance with ownership disclosure rules by company insiders.
Under Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 16a-3 promulgated thereunder, officers and directors of public companies, and any beneficial owners of greater than 10% of stock in a public company, must file initial statements of holdings on Form 3 either (1) within 10 days of becoming an insider or (2) on or before the effective date of the registration of the stock. Such insiders are then obligated to keep this information current by reporting subsequent transactions on Forms 4 and 5. In turn, Section 13(a) of the Exchange Act and Item 405 of Regulation S-K promulgated thereunder require issuers to disclose information regarding delinquent Section 16(a) filings by insiders in their annual reports.
Similarly, under Section 13(d)(1) of the Exchange Act and Rule 13d-2(a) thereunder, any person who has acquired beneficial ownership of more than 5% of a public company’s stock must, within 10 days of the acquisition, file an initial disclosure statement on Schedule 13D with the SEC, which must include, among other things, the identity of the beneficial owner, the amount of beneficial ownership and the owner’s intentions for the issuer. The owner must then update the SEC on any material changes to its position. Certain investors are eligible to file a simplified statement on Schedule 13G. The deadline to file a Schedule 13G is also within 10 days of acquiring more than 5% beneficial ownership, but certain institutional investors may be permitted to defer disclosing their passive holdings on Schedule 13G until 45 days after the end of the calendar year.
Here, the SEC alleged that six persons, who were either officers or directors of a public company or owned at least 5% of the stock in a public company, repeatedly failed to timely file or update reports required under Sections 16(a) and/or Section 13(d)(1) to reflect transactions in their company’s stock, in violation of those provisions—allegedly resulting in late filings ranging from weeks to years. The SEC explained that its enforcement staff used data analytics to identify the insiders it ultimately identified as allegedly having repeatedly filed late reports. The SEC also alleged that five public companies had either failed to ensure that their insiders were making timely disclosures under Section 16(a) or failed to report such delinquent reports in their annual filings, as required under Section 13(a).
The insiders and companies charged agreed to pay civil penalties totaling $1.5 million to settle the actions. The individual penalties ranged from $66,000 to $150,000 and the corporate penalties ranged from $125,000 to $200,000. Public companies and their insiders should be aware that the SEC plans to continue its emphasis on enforcing insider disclosure rules, and that the SEC is increasing its use of data analytics, which will make it even easier to identify late filings to conduct investigations.