SEC Adopts Final Rule to Mandate Electronic Filing and Website Posting for Forms 3, 4 and 5

May 21, 2003

As required by Section 403 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (the “SEC”) has adopted final rules and form amendments mandating the electronic filing, and website posting by issuers with corporate websites, of beneficial ownership reports filed by officers, directors and principal security holders under Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).  The SEC has also adopted rule changes to eliminate magnetic cartridges as a means of electronic filing.  The new SEC rules will become effective on June 30, 2003.  In addition, magnetic cartridges may not be used as a means of electronic filing after June 27, 2003.

Section 16 Application

Section 16 applies to every person who is the beneficial owner of more than 10% of any class of equity security registered under Section 12 of the Securities Exchange Act of 1934, and each officer and director (collectively, “reporting persons” or “insiders”) of the issuer of the security.  Insiders must file reports of changes in ownership of equity securities of the issuer before the end of the second business day following the day on which the transaction was executed.

Required Electronic Filings of Forms 3, 4 and 5

The new SEC rules amend Regulation S-T to require insiders to file Forms 3, 4 and 5 on the SEC’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”).  The new SEC rules delete the provision in Rule 16a-3(h) under the Exchange Act, which states, generally, that Forms 3, 4 or 5 will be deemed timely filed if the filing person establishes that the form was timely delivered to a third party entity providing delivery services in the ordinary course of business that guaranteed delivery of the filing to the SEC no later than the required filing date.  This provision applies to paper filings, and thus is no longer necessary.  Now, mandated electronic filing will apply to Forms 3, 4 and 5.  To facilitate this requirement, a new on-line filing system for these forms has been created.  Forms 3, 4 and 5 submitted by direct transmission on or before 10 p.m. Eastern time will be deemed filed on the same business day.  In light of these extended filing hours, temporary hardship exemptions will not be available for these forms.

Many commentators had urged a deadline of midnight on the due date in order to provide more time for filers located on the West Coast (and even farther west).  The SEC decided to make temporary hardship exemptions unavailable because of the relative ease of using the new on-line filing system, the extended 10:00 p.m. Eastern time filing deadline, the limited value to the public of paper filings, and the availability of a filing date adjustment.

Although temporary hardship exemptions will be unavailable, relief in the form of a filing date adjustment may be granted by the SEC in appropriate circumstances.  It is anticipated that filing date adjustments will be available under generally the same circumstances a temporary hardship exemption would have been available.  However, the SEC has stated that filing date adjustments for Section 16 forms should be few in number.  For example, a failure to timely obtain an identification number or access codes will not justify a filing date adjustment.

Required Website Posting of Forms 3, 4 and 5

The new SEC rules require an issuer that maintains a corporate website (a public internet site) to post on its website all Forms 3, 4 and 5 filed with respect to its equity securities by the end of the business day after filing.  This requirement also applies to an issuer that is an investment company that does not maintain its own website, provided that the company’s investment adviser, sponsor, depositor, trustee, administrator, principal underwriter, or any affiliated person of the investment company maintains a website that includes the name of the investment company.  Each form must remain accessible on the issuer’s website for at least a 12-month period.  The website posting requirement may be satisfied by providing direct access to the website.  The requirement may also be satisfied by hyperlinking to the documents via a third party service, provided that the following conditions are met:

  • the forms are made available in the appropriate time frame;

  • access to the reports is free of charge to the user;

  • the display format allows retrieval of all information in the forms;

  • the medium to access the forms is not so burdensome that the intended users cannot effectively access the information provided;

  • the access includes any exhibits or attachments;

  • access to the forms is through the issuer website address the issuer normally uses for disseminating information to investors; and

  • any hyperlink is directly to the Section 16 forms (or to a list of the Section 16 forms) instead of just to the home page or general search page of the third-party service, and such hyperlink caption clearly indicates that the link leads to the issuer’s insiders’ Section 16 forms.

Recommendations

In connection with compliance with the new SEC rules mandating electronic filing and website posting for Forms 3, 4, and 5, we recommend that issuers:

  • Consider whether to engage a third-party service provider to maintain the issuer’s website posting.

  • Strictly adhere to the filing deadline of 10:00 p.m. Eastern time in order to prevent late filing.  Issuers in the Mountain and Pacific time zones should be especially cognizant of the deadline.  Although this issue was discussed by various commentators, the SEC decided against pushing back the filing deadline to further accommodate West Coast filers.  Remember, the final rules make temporary hardship exemptions unavailable to these forms.

  • Begin posting Section 16(a) reports on their websites before the implementation date of the new rule.

  • Communicate the SEC’s website posting requirements to the company’s Technology Department and designate responsibility for posting all Section 16 reports within the one day deadline.  Companies should post this information on their websites along with the Section 16 filings.

  • Designate an electronic transmission medium for use by insiders that is compatible with the issuer’s own systems, so that a form sent via that medium when it is filed with the SEC will be received by the issuer in time to satisfy the website posting deadline.

  • Train employees on the features of the SEC’s on-line system, and establish a system for reporting errors or problems in the electronic filing process immediately after they occur, so that problems can be solved timely and a hardship exemption can be filed, if applicable.

  • Establish a policy now of making all future Section 16 filings via EDGAR, prior to the effective date of the new SEC rules, so that the company can gain proficiency in the electronic filing process without risk of violating the two day deadline.

  • Develop a policy of communication between employees charged with making Section 16 electronic filings and employees responsible for website posting of Section 16 filings to ensure timely website posting.

Further Information

This Alert summarizes certain key points of the SEC final rules implementing the Act, but does not cover all of the provisions of these rules.  For a more detailed discussion of other items raised by the Act, please see the Haynes and Boone, LLP publication Sarbanes-Oxley Act of 2002: SEC Adopts Amendments to Accelerate Section 16 Filings, August 30, 2002.  We will regularly update you with regard to material developments concerning implementation of the Act and related SEC rules.

This Alert is a publication of Haynes and Boone, LLP and should not be construed as legal advice on any particular facts or circumstances.  This Alert is for general information purposes only, and may not be quoted or referred to in any other documents or legal proceeding without our prior written consent.  The publication of this Alert is not intended to create an attorney-client relationship.

If you would like to learn more about the Act and the rules and regulations relating to the Act, please feel free to contact your regular Haynes and Boone attorney or any member of our Corporate practice group.

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