Sarbanes-Oxley Act of 2002: SEC Adopts Amendments to Accelerate Section 16 Filings 

August, 2002 - Brian D Barnard

On August 27, 2002, the Securities and Exchange Commission (the “SEC”) unanimously adopted the first rules implementing the Sarbanes-Oxley Act of 2002 (the “Act”). This Alert addresses the amendments to the rules regarding the acceleration of insider reporting requirements under Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 16 Amendments: Accelerated Insider Reporting Obligations In Release No. 34-46421, the SEC adopts rule and form amendments to implement the accelerated filing deadline applicable to Form 4 reports required to be filed by officers, directors and greater than 10% beneficial owners. The amendments apply to transactions that occur on or after August 29, 2002. The following is a summary of the changes to Section 16 rules and forms that were adopted by the SEC. 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 (the trade date, not the settlement date). Reportable transactions include purchases and sales, security-based swap agreements and the award, exercise, cancellation, amendment, replacement, expiration or conversion of related derivative instruments, including stock options (other than the expiration or cancellation of stock options for which no value is received by the insider). Insiders previously 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. Rule 16b-3 Transactions. Certain transactions that are exempt pursuant to Rule 16b-3 (for example, some employee benefit plan transactions and transactions with the issuer such as option awards), which previously were permitted to be reported on Form 5 within 45 days after the end of the year in which the subject transaction occurred, now will be required to be reported on Form 4 within the two business day deadline. Certain exempt transactions not covered by the amendments to the rules, however, will remain reportable on Form 5 to the same extent as before and transactions previously exempt from Section 16 reporting will remain exempt, such as acquisitions pursuant to Qualified Plans, Excess Benefit Plans and Stock Purchase Plans, each as defined in Rule 16b-3. Exceptions to Accelerated Reporting Requirements. Two exceptions to the new filing deadline permit delayed reporting of transactions: (i) transactions pursuant to arrangements that satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) where the reporting person does not select the date of execution and (ii) Discretionary Transactions (as defined in Rule 16b-3(b)(1)) pursuant to employee benefit plans where the reporting person does not select the date of execution. For these two types of transactions, the date the broker or plan administrator notifies the insider of the date of execution will be deemed the transaction date, but such notice must be given no later than three business days after the execution date. Thus, the deadline for delayed reporting for these two types of transactions is no more than five business days, consisting of the maximum three business day notice period plus the two business day reporting period. EDGAR Filings Encouraged. Pursuant to the Act, insiders will be required to file every Form 4 electronically via EDGAR by at least July 30, 2003. In addition, each issuer that maintains a corporate website will be required to post a copy of such filings on its website by the end of the business day following the date of filing, and the SEC will be required to make the filing available electronically within the same time frame. The SEC indicated at the hearing implementing this provision that it strongly encourages all reporting persons to begin reporting their transactions using EDGAR immediately. The SEC staff expects to issue rulemaking proposals on mandatory EDGAR filing and issuer website posting within the next 2-3 months and indicated an intention to mandate EDGAR filing of reports well before July 30, 2003. Changes to Form 4. The SEC intends to adopt amendments to Form 4 to make the form consistent with the new reporting requirements under the Act. The form will be modified to include a column entitled “Deemed Execution Date” where insiders eligible for delayed reporting pursuant to a Rule 10b5-1(c) plan or a Discretionary Transaction pursuant to an employee benefit plan will list the date on which the insider received notice of the transaction.


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