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On September 10, 2014, the SEC announced charges against 28 officers, directors and major shareholders, as well as six publicly-traded companies, for violating federal securities laws requiring insiders to promptly report information about their holdings in company stock. Echoing SEC Chair Mary Jo White’s October 2013 “broken windows” Securities Enforcement Forum speech,1 the SEC has brought in some expensive new panes of glass and started replacing broken windows with publicly-traded companies and insiders footing the bill. The SEC charged the insiders for violating requirements to make filings under Sections 13(d) and (g) and Section 16(a) of the Exchange Act, and more notably, brought charges against six public companies for failing to account for their insiders’ insufficient reports and provide related disclosure under Item 405 of Regulation S-K. 27 of the 28 targeted individuals and all six companies agreed to settle with the SEC and pay financial penalties totaling $2.6 million.

The SEC brought the charges as part of an enforcement initiative focusing on two types of ownership reports. Forms 4 require that corporate officers, directors and beneficial owners of more than 10 percent of a registered class of company stock report their transactions in company stock within two business days. Beneficial owners of more than five percent of a registered class of company stock must also use Schedule 13D or 13G to, among other items, report their ownership holdings (and material changes in such holdings) with respect to such stock. Some of the insiders referenced in the SEC orders had been late in filing Forms 4 or Schedules 13D/G filings by weeks, months or even years. In other instances, a respondent had timely filed an initial beneficial ownership form on Schedule 13G or 13D, but later failed to amend the form to reflect material changes in ownership.

The SEC’s actions are particularly striking in the current instance, as they send a new and clear message that companies must be vigilant and monitor their insiders or potentially suffer the consequences. Under Regulation S-K, companies are required to report omitted or late filings by insiders, typically in their proxy statements. In one charge, the SEC stated that Tel-Instrument Electronics Corp. was not simply guilty of poor oversight, but was actually “a cause of certain Section 16(a) violations by its officers and directors as a result of Respondent’s negligence in performing certain tasks it voluntarily agreed to undertake in connection with the filing of Section 16(a) reports on their behalf.”

This shift to targeting public companies for omitted or delinquent filings by their insiders is an aggressive tactic by the SEC and could result in more costly settlements for companies that aren’t able to, or choose not to, accurately track their insiders’ filing obligations. To the extent that this action by the SEC reflects the beginning of a trend of cracking down on insider reporting requirements, it is important for companies to revisit their internal processes as they relates to Section 16 and Rule 13(d) and (g) reporting, confirm that proper protocols are in place to allow for the execution and filing of prompt reports and ensure that their insiders do the same. Otherwise, there may be many more windows to replace, and the glass isn’t cheap.


1Chair Mary Jo White’s Remarks at the Securities Enforcement Forum on October 9, 2013, available here.