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As you are aware, the Sarbanes-Oxley Act of 2002 (the “Act”) was signed into law by President Bush on July 30, 2002, in an attempt to help eliminate accounting fraud and restore confidence in the nation’s financial markets. This Alert focuses specifically on important law changes under the Act affecting the insider reporting requirements under Section 16 of the Securities Exchange Act of 1934, as amended.
New Insider Trading Regulations
Accelerated Reporting of Transactions by Insiders. Effective August 29, 2002, the Act requires that insiders (including executive officers, directors and greater than 10% beneficial owners) report changes in beneficial ownership on Form 4 by the end of the second business day following the date of execution of the subject transaction. Reportable transactions include purchases and sales, option or warrant exercises, security-based swap agreements, 401(k) transactions, gifts, and the award, exercise, cancellation, expiration or conversion of related derivative instruments. Previously, insiders did not have to report most transactions until the tenth day of the month following the month in which the transaction occurred, meaning that an insider transaction could go unreported for as many as 40 days.
In addition, no later than July 30, 2003, insiders will be required to file all Form 4s electronically via EDGAR. Each issuer that maintains a corporate web site will be required to post a copy of such filings on its web site by the end of the business day following the date of filing, and the Securities and Exchange Commission (the “SEC”) will be required to make the filing available electronically within the same time frame.
SEC Rulemaking. On August 6, 2002, the SEC issued Release No. 34-46313 (the “Release”) regarding these provisions of the Act. In the Release, the SEC states that it will adopt final rules related to the implementation of these provisions of the Act no later than August 29, 2002. The Release generally discusses the scope of the SEC’s anticipated new rules.
The Release also states the following:
- The SEC intends to adopt amendments to Form 4 to make it consistent with the new reporting requirements under the Act.
- Transactions that are exempt pursuant to Rule 16b-3 (e.g., employee benefit plan transactions and transactions with the issuer) that were previously permitted to be reported on Form 5 within 45 days after the end of the year in which the subject transaction occurred will now be required to be reported on Form 4 within the two-day deadline.
- The SEC states that it does not intend to grant extensions on the two-day filing deadline except in very limited circumstances affecting the issuer’s ability to control the timing of such filing.
Recommendations. As a result of these provisions of the Act and the SEC’s anticipated rulemaking, we recommend that issuers and insiders consider taking the following immediate actions:
- Establish Internal Procedures. In order to ensure timely reporting, issuers should immediately adopt internal procedures and controls to require insiders to report any transaction in the issuer’s securities on the day such transaction occurs. We would go further to suggest pre-sale notification to the issuer (i.e., General Counsel or Chief Financial Officer) to provide adequate time to review the proposed transaction and consider any complicated Section 16 issues.
- Distribute Internal Memorandum. Issuers should promptly distribute a memorandum to all directors, executive officers, and greater than 10% beneficial owners advising them of these provisions of the Act and the importance of prompt reporting of any transactions in the issuer’s securities.
- Send Periodic Alerts and Reminders. Issuers should send periodic alerts and reminders to directors, executive officers and greater than 10% beneficial owners regarding the importance of prompt reporting of any transactions in the issuer’s securities.
- Review List of Reporting Officers. Issuers should review the list of executive officers filing reports pursuant to Section 16 to confirm that all persons (and only those persons) legally required to file reports are reporting their transactions.
- Make Future Filings via EDGAR. Although the mandatory EDGAR filing requirement is one year away, issuers and insiders should convert to electronic filings as soon as possible in order to expedite the filing of these reports. Otherwise, the two-day deadline effectively requires issuers to send overnight materials to the SEC one day after the subject transaction. Insiders and issuers that wish to file via EDGAR on or shortly after August 29, 2002, should immediately obtain the required electronic filer submission codes from the SEC for this purpose. Issuers also may want to explore the possibility of making EDGAR filings themselves, subject to the training of personnel.
- Establish Powers of Attorney. Issuers should consider designating one or more officers to whom insiders may grant a limited power of attorney for purposes of future required filings on Form 4. Through such an arrangement, issuers would have greater control over filings to ensure that they are made within the prescribed time period.
- Require Brokers to Sign Pre-Clearance Letters. In order to enlist the help of insiders’ stockbrokers, issuers should ask insiders to have their stockbrokers sign a letter agreeing that the stockbroker will report securities transactions to the issuer and will not enter any order without first verifying that the trade has been pre-cleared under the issuer’s policy.
This Client Alert summarizes certain key points of the Act, but does not cover all of the provisions of this very complex legislation. For a more detailed discussion of reporting issues and other items raised by this Act, please see the Haynes and Boone, LLP client alert Sarbanes-Oxley Act of 2002 Promises Far-Reaching Implications for Public Companies. Implementation of the Act will require resolution of ambiguities and further rulemaking by the SEC. Because the SEC is responsible for adopting rules to implement the Act, we expect that SEC proposals will be submitted for public comment. We will regularly update you with regard to material developments concerning implementation of the Act.
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 informational 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 Governance Practice Group.