SEC Says Just File Your Form 4s on Time
Looked at in one way, we have two kinds of insider trading. One is the kind most people think of when you say “insider trading”: a person learns material, nonpublic information about a company and then buys or sells shares when the person is obligated not to. That’s a little simplistic but is mostly right. You can go to jail for it. Nobody ever calls the second kind “insider trading” but it is literally just that. A particular kind of corporate insider trades in the securities of that company. You can’t go to jail for this kind but you do have to say out loud, and promptly, when the trades happen.
Section 16(a)
Here is some law: Section 16(a) of the Exchange Act requires officers and directors of a public company, and anyone who owns more than 10% of the company, to file some securities holdings and transaction reports. Rule 16a-3 says you have to file a:
Form 3 disclosing your ownership of any company securities when you first become one of these insiders;
Form 4 if you buy or sell those securities (or exercise options, or receive a grant of restricted stock units, etc.) within two business days after the transaction; and
Form 5 within 45 days after the company’s fiscal year-end to report any transactions or holdings that should have been, but weren’t, reported on Form 3 or 4 during that year.
The obligation to file these reports applies regardless of profits or the filer’s reasons for engaging in the transactions. The idea behind the law was “to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.” H.R. Rep. 73-1383, at 13, 24 (1934).
Who is an “officer”?
It can be somewhat flexible. Rule 16a-1(f) defines an officer for these purposes as a president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any officer or other employee who performs a policy-making function. Because of the flexibility in the latter options, courts have looked to a staff member’s duties and function rather than title when determining who an “officer” is for these purposes. Many vice presidents won’t count, but other corporate policy makers will.
Who is an “owner”?
It’s broad. For purposes of determining who is a greater than 10% owner required to file these reports, Rule 16a-1(a)(1) incorporates the standards in Rule 13d-3, which specifies that a “beneficial owner” includes anyone who has or shares voting or investment power, regardless of whether they have any economic interest in the securities. More than one person may be a beneficial owner of the same securities.
The SEC cares if you file these reports on time! And on September 25th it filed a bunch of settled cases against corporate insiders who didn’t. Here’s how some of the administrative orders shook out:[i]
Curtis Drew Hodgson
Hodgson has been an executive officer and director of Legacy Housing Corporation in Texas since 2018. He filed a Form 3 on time in 2018, but was late in filing his Form 4s 93 different times between 2019 and 2022. “Substantially all” of the transactions requiring those filings were open market sales of Legacy shares. Hodgson blamed Legacy staff for not filing the Form 4s on time. This wasn’t a crazy strategy because in the adopting release the Commission “encourage[d] this practice” of having companies assist their executives with these reports. But they also left liability for late filings on the insiders themselves. The order also adds that Hodgson “took inadequate and ineffective steps to monitor whether timely and accurate filings were made on his behalf by Legacy.”
Peter M. Thomas
Switch, Inc. went public in an IPO in October 2017, and Thomas owned more than 10% of Switch’s Class A common stock from then until March 26, 2020. He filed a Form 3 on time in 2017, but then didn’t file any of the Form 4s for his transactions in Switch’s securities between September 11, 2018 and January 8, 2019. On February 14, 2019, Thomas caught up on a bunch of his switch transactions by filing 23 Form 5s and two Form 4s. Later that year he filed two more late Form 4s. After that, at different points a bunch of Class B common stock was converted to Class A common stock (which counted as transactions for reporting purposes) and Thomas also failed to timely file Form 4s for those.
David L. Kanen
Kanen was more than a 10% beneficial owner of BBQ Holdings, Inc. between May 2018 and August 2022 and of CarParts.com, Inc. between November 2018 and July 2020. He was also a director of both companies for narrower time windows. He filed timely Form 3s for them in 2018. He missed on the Form 4s, though. He barely missed the two-day deadline for CarParts twice, once in 2018 and once in 2020. He was late on his Form 4s nine times for BBQ Holdings in 2018 and was then 26 days late filing the year-end Form 5 in 2019.
Jack Schuler
Schuler’s business is investing in healthcare industry securities for his own account. It appears to be lucrative, but over time he became a director or more-than-10% owner of the shares in six different companies, so he was subject to a lot of reporting requirements. His order is silent on his Form 3s, so we’ll assume he filed those on time. But he was late on a lot of Form 4s: 112 by our count, though we could be off.
Lesson
File your Form 4s on time? Have a process in place to double check your staff to be sure they’re doing it for you? This is a thing companies do. They can:
require insiders to hold company securities at a designated broker-dealer;
require insiders to get clearance from their general counsel or chief compliance officer;
instruct the B-D not to execute trades in company securities without that clearance; and
file the Form 4s for the insiders because they know exactly when they have to be filed.
If you don’t it could cost you tens of thousands of dollars. It seems like a waste.
[i] These orders weren’t litigated, so the “facts” are really only allegations and might be fake.