By: Clyde Tinnen, Partner, Kelley Drye & Warren LLP – Clyde Tinnen is a partner in the Chicago office of Kelley Drye & Warren LLP. He focuses his practice on corporate law matters, including finance and securities law. Any questions relating to topics discussed in this article may be directed to the author at firstname.lastname@example.org.
Practical Tips to Comply with SEC Beneficial Ownership Reporting Requirements
On September 10, 2014, the Securities and Exchange Commission announced charges against 28 officers, directors, or major shareholders for failure to promptly file Form 4 and Schedule 13D and 13G reports, resulting in financial penalties totaling $2.6 million. Six publicly-traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies. SEC enforcement staff used quantitative data analytics to catch the violators. The news came as a shock to many practitioners given the Commission’s historically passive stance on such violations.
Form 4s are required to be filed within 2 business days of the relevant transaction by certain officers, directors and parties that beneficially own more than 10% of a registered class of a company’s stock. Schedule 13D and 13G are reports that beneficial owners of more than 5% of a registered class of a company’s stock. Schedule 13D reports must be filed within 10 days after the trade date for the acquisition of 5%. Amendments of Schedule 13D reports are required to be filed “promptly” to disclose the acquisition or disposition of greater than 1% of the outstanding shares, in addition to other factual changes on the report, for example, the investor’s intended actions with respect to the issuer. Schedule 13G reports must be filed within 10 days after the end of the first month in which the person’s beneficial ownership exceeds 10% of the class, computed as of the last day of the month, or if beneficial ownership is less than 10%, within 45 days after the end of the calendar year in which the person acquired 5%.
Given the SEC’s willingness to pursue enforcement actions for these violations, officers, directors and large shareholders should consider the following suggestions:
Avoid being subject to the reporting requirements, if possible. Often investors become the beneficial owners of greater than 5% of a registered class of equity by virtue of the investor’s ownership of other instruments, such as options, warrants, preferred stock and debt that can be converted into the registered class of equity within 60 days. If the terms of such instruments expressly provide that the investor may not convert the instrument if doing so would cause it to own more than 5% of the registered class of equity or do not permit such conversion to occur for 61 days or more, the investor may be relieved of its filing obligation. It is important in such instances that the terms be binding and valid (e.g., provisions that are non-waivable, enforceable, established in the issuer’s governing instruments, applicable to affiliates and assigns, etc.) to effectively eliminate the right of the investor to acquire the securities.
Grant power of attorney to reliable securities counsel to make filings on your behalf. Most officers, directors and large shareholders of publicly traded companies are extremely busy and depending upon their travel and work schedules may find it difficult to prepare SEC filings. Moreover, many of such persons do not have access to, or experience in, completing the filings electronically through one of the filing software programs. In addition, there are many interpretations and SEC “no-action” letters with respect to reporting requirements in particular circumstances that many reporting persons may not be aware of. Rather than bear the administrative burden and expense of completing filings and learning curve associated with getting familiarized with all of the SEC’s guidance on reporting, it is highly recommended to utilize the services of a reliable securities counsel and to grant such counsel power of attorney to make the appropriate filings as required. A firm with multiple persons available at short notice to make such filings is preferable, however, granting power of attorney to internal issuer counsel with securities law experience is also an excellent option, especially considering that other reporting obligations may be implicated by the transaction such as Form 8-K or Form 144 reports. Please note that the power of attorney must be filed with the SEC at the same time or prior to such person acting on behalf of the reporting person.
Hold all shares in one brokerage account with appropriate controls in place. Consolidating holdings of securities in one brokerage account greatly simplifies and enhances the likelihood of reporting compliance. Annual grants under compensation plans should be made directly to such account. The broker with custody of such account should be given very specific instructions that prohibit transfers absent clearance from the securities counsel that has been granted power of attorney and should also require that all confirmations of trades be delivered to such securities counsel. For officers or directors that enter into 10b5-1 trading plans (plans permitted under Rule 10b5-1 that allow shareholders to sell a predetermined number of shares at a predetermined time to avoid trading on inside information and the liability related thereto), the broker that administers such plan should receive similar instructions.
Clyde Tinnen is a partner in the Chicago office of Kelley Drye & Warren LLP. He focuses his practice on corporate law matters, including finance and securities law. Any questions relating to topics discussed in this article may be directed to the author at email@example.com.
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 Form 4 filings are required for an issuer’s president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Officers of the issuer’s parent(s) or subsidiaries shall be deemed officers of the issuer if they perform such policy-making functions for the issuer. In addition, when the issuer is a limited partnership, officers or employees of the general partner(s) who perform policy-making functions for the limited partnership are deemed officers of the limited partnership. When the issuer is a trust, officers or employees of the trustee(s) who perform policy-making functions for the trust are deemed officers of the trust.
 For a further discussion of the factors that may indicate that a conversion cap is binding and valid, see Brief of the Securities and Exchange Commission, Amicus Curiae in Levy v. Southbrook International Investments, Ltd. (September 14, 2009)