October 16, 2018

October 16, 2018

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October 15, 2018

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Recent SEC Enforcement Actions Highlight Importance of Robust Insider Trading Compliance Policies

Recently the SEC announced enforcement actions which highlight the importance of complying with the beneficial ownership reporting requirements under Sections 13(d), 13(g) and 16(a) of the Securities Exchange Act of 1934, or the Exchange Act.

Sections 13(d) and 13(g) of the Exchange Act require any beneficial owner of 5% or more of a public company’s registered equity securities to file a report regarding such ownership on Schedule 13D or Schedule 13G, depending on whether the filing person is a qualified institutional investor, passive investor or exempt investor who is eligible to file the shorter Schedule 13G.

Section 16(a) of the Exchange Act requires directors, officers and principal stockholders who beneficially own more than 10% of a public company’s registered equity securities to report regarding such ownership on Forms 3, 4, or 5.

  • Insiders must file initial statements of holdings on Form 3 within 10 days of becoming an officer, director or greater than 10% beneficial owner.

  • Changes in ownership of insiders must be reported on Form 4 within two business days.

  • Insiders are required to file an annual statement on Form 5 within 45 days of the company’s fiscal year end to report any changes of ownership that should have been reported on Form 3 or Form 4 during the year but were not previously reported.

The recent action by the SEC highlights the importance of having a robust insider trading program in place and should cause all public companies to evaluate their policies with respect to these important reporting obligations.  In particular, to protect themselves and their insiders against enforcement actions, public companies should:

  • Implement an insider trading and beneficial ownership compliance program and train insiders periodically;

  • Require insiders to acknowledge and sign the company’s insider trading policy;

  • Re-evaluate officers, directors and principal stockholders to determine which individuals should be filing Section 16 reports;

  • Establish clear policies for alerting insiders when filing obligations are triggered and assist insiders in those obligations as necessary, including taking all efforts to ensure timely filing by insiders;

  • Establish communication with brokers used by insiders, especially during trading windows, to help further monitor trading activity;

  • Require preclearance of and closely monitor trades under 10b5-1 plans to determine if Section 16 filings are necessary, including calendaring any planned sales;

  • Require preclearance of all other trades by Section 16 insiders and ensure the person in charge of Section 16 compliance is notified of the trade;

  • Review Section 16 powers of attorney to make sure attorneys-in-fact are current (i.e. new officers are added as signatories and persons who may have left the company are removed) so signers are available when reports need to be filed;

  • Obtain EDGAR codes as far in advance of an individual’s appointment as a director or officer as possible;

  • Work with counsel to ensure Form 4s are timely filed for any equity grants;

  • Ensure any director or officer who beneficially owns greater than 5% of the company’s common stock files a Schedule 13D;

  • Confirm any late Section 16 filings by inquiring of directors and officers on annual proxy season questionnaires; and

  • Conduct a thorough review of each of the filed Forms 3, 4 and 5 for the preceding year when preparing the company’s proxy statement and annual report on Form 10-K disclosure, and ensure that any late filings for Section 16 persons are accurately reported.

Investment firms should also take the opportunity to re-evaluate their protocols and set clear policies for monitoring trading that could trigger reporting requirements.

Copyright © 2018, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Robert L. Wernli, Jr., lawyer corporate attorney, Sheppard Mullin law firm
Special Counsel

Robert L. Wernli, Jr. is a special counsel in the Corporate Practice Group in the firm's Del Mar office.

Mr. Wernli specializes in corporate and securities law and has worked on numerous public and private capital raising transactions, mergers and acquisitions (buy-side and sell-side) and other strategic transactions. Mr. Wernli has also regularly advised clients on all aspects of SEC reporting and listing exchange compliance matters, corporate governance and general corporate law matters.

Areas of Practice

Securities. Mr....

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