Client Memorandum. Under the SEC's final rules, the Section 16 reporting rules have been amended as follows:

Transcription

1 Client Memrandum RE: SEC Adpts New Sectin 16 Reprting Rules August 28, 2002 The recently enacted Sarbanes-Oxley Act (the "S-O Act") amended and restated Sectin 16(a) f the Securities Exchange Act f 1934 (the "Exchange Act") t require executive fficers, directrs and greater than ten percent stckhlders ("insiders") t file Sectin 16 transactin reprts "befre the end f the secnd business day fllwing the day n which the subject transactin has been executed." The S-O Act authrized the Securities and Exchange Cmmissin ("SEC") t exempt transactins frm the tw business day reprting requirement if it determines that reprting within that time is nt "feasible." In additin, the SEC's general exemptive and rulemaking authrity under Sectin 16(a) was nt affected by the S-O Act. The amendment t Sectin 16(a) became effective n August 29, On August 27, 2002, the SEC adpted final rules t address the amendments t Sectin 16(a). The final rules appear at Under these rules, the new reprting requirements apply t transactins ccurring n r after August 29, Sectin 16(a) Reprting Changes Under the SEC's final rules, the Sectin 16 reprting rules have been amended as fllws: Frm 4 Reprting f Transactins between the Cmpany and the Insider. Transactins between an insider and the cmpany (r an emplyee benefit plan) that are exempt frm Sectin 16(b) liability but that previusly were required t be reprted n Frm 5 are nw reprtable n Frm 4. As a result, the fllwing transactins are subject t tw business day reprting: rants, awards and ther acquisitins frm the issuer that satisfy the requirements f Rule 16b-3(d). This categry includes stck ptin grants, restricted stck grants and acquisitins f stck units under nn-tax qualified deferred cmpensatin plans. Dispsitins t the issuer that satisfy the requirements f Rule 16b-3(e). This categry includes shares delivered t the cmpany t pay tax withhlding amunts r an ptin exercise price, ptins surrendered t the cmpany in an ptin repricing, and sales f shares t a cmpany. Discretinary transactins that satisfy the requirements f Rule 16b-3(f). A "discretinary transactin" is a participant-directed mvement f a prtin f his r her accunt balance int r ut f a cmpany stck fund under a deferred cmpensatin plan. The term des nt include transactins made in cnnectin with the plan participant s death, disability, retirement r terminatin f emplyment, r that are required t be prvided under IRS regulatins. Discretinary transactins may ccur in a tax-qualified plan, such as a 401(k) plan, r in a nn-tax qualified plan, such as a SERP r a directrs fee deferral arrangement. As discussed belw, the SEC prvided a limited extensin f time fr Frm 4 reprting f discretinary transactins. Accelerated Reprting f Transactins n Frm 4. All Frms 4 are due n the secnd business day after the transactin is executed, subject t tw narrw exceptins. As a result, in additin t the transactins described abve, the fllwing transactins are subject t tw business day reprting: stck ptin exercises; and pen market purchases and sales. Ls Angeles New Yrk Washingtn D.C. San Francisc Pal Alt Lndn Paris Munich Orange Cunty Century City Dallas Denver

2 The SEC has prvided a limited extensin f time fr Frm 4 reprting fr "discretinary transactins" (described abve), and fr transactins pursuant t Rule 10b5-1(c) trading plans, prvided in bth cases that the insider des nt select the date the transactin is t ccur. Under the limited extensin, the tw business day deadline is cunted frm a "deemed" transactin date, which is the earlier f (i) the date the insider receives ntice that the transactin was executed, r (ii) the third business day after the date the transactin is executed. Cnsequently, the latest a Frm 4 can be timely filed fr these transactins is n the fifth business day after the transactin. Insiders shuld nte, hwever, that the extended time perid fr these transactins is nt available if the insider has selected the date fr transactin executin. Fr example, if an insider establishes a Rule 10b5-1(c) trading plan that prvides fr a sale n the first business day f each mnth, the insider has selected the date f the transactin and the limited extensin is nt available. If a emplyee benefit plan perates such that a discretinary transactin ccurs n a date determined by the day the insider prvides instructins authrizing the transactin (as ppsed t being executed n a date selected in the discretin f the plan administratr), the insider arguably has selected the date fr executin f the transactin, and cnsequently the limited filing extensin wuld nt be available. In these circumstances, the insider will need t receive infrmatin frm the plan administratr t cmplete and file a Frm 4 reprting the transactin within the nrmal tw business day deadline. Other Reprting Exemptins Will Cntinue. All pre-existing exemptins frm Sectin 16 transactin reprting cntinue t be available. Cnsequently, as befre, insiders are nt required t reprt the fllwing transactins: Acquisitins under tax-cnditined plans that satisfy the requirements f Rule 16b-3(c). This includes purchases that ccur pursuant t stck allcatins under ERISA prfit-sharing plans and emplyee stck wnership plans ("ESOPs") and purchases that ccur pursuant t payrll deductins under 401(k) plans, excess benefit plans that prvide nly fr benefits r cntributins in excess f certain limits impsed n tax-qualified plans, emplyee stck purchase plans that satisfy Sectin 423 f the Internal Revenue Cde and similar plans that are nt tax qualified but satisfy certain cverage and participatin requirements. Frfeiture r expiratin f stck ptins r restricted stck. Acquisitins pursuant t dividend reinvestment plans, ther than purchases that result frm a discretinary cntributin t such plans. Stck splits, stck dividends and distributins f stck purchase rights. Transfers pursuant t divrce decrees and dmestic relatins rders. Changes in the frm f wnership that d nt affect the insider s pecuniary interest in the shares (such as changes frm indirect t direct wnership). Transactins fllwing terminatin f insider status, if the insider has nt effected a matchable transactin during the previus six mnths while still an insider. Transactins effected in a fiduciary capacity as a guardian, executr r receiver, during the twelve mnths fllwing the insider s appintment t such psitin. Frm 5 Reprting f Other Transactins. A few categries f transactins remain eligible fr reprting annually n Frm 5. Cnsequently, as befre, insiders can use Frm 5 t reprt the fllwing transactins: Acquisitins r dispsitins f shares thrugh gifts r inheritance. Ls Angeles New Yrk Washingtn D.C. San Francisc Pal Alt Lndn Paris Munich Orange Cunty Century City Dallas Denver

3 "Small" acquisitins, meaning purchases aggregating less than $10,000, prvided that the transactins are nt transactin with the cmpany r an emplyee benefit plan that are described in Rule 16b-3(d) r (f), which as addressed abve are nw subject t tw business day reprting. A cmmn example f small transactins that remain eligible fr Frm 5 reprting are acquisitins under dividend reinvestment arrangements spnsred by brkerage firms when a cmpany itself des nt ffer a reinvestment plan. Nte, hwever, that if the $10,000 threshld is exceeded, a Frm 4 t reprt the transactins must be filed within the new tw business day deadline. In additin, Frm 5 cntinues t be available fr year-end disclsure f late transactin reprts. Frm 3 and Frm 5 Reprting. The S-O Act did nt change the filing deadlines fr Frm 3. Fr persns wh becme insiders after a cmpany s initial public ffering, a Frm 3 is due within 10 days (nt business days) after the persn becmes a Sectin 16 insider. When cmpanies first g public, Frms 3 are due n the effective date f a cmpany s registratin under Sectin 12. The S-O Act als des nt address the timing f Frm 5 filings, and the SEC has retained the deadline it riginally develped fr that frm; i.e., 45 days after the end f the cmpany s fiscal year. Reprting Hldings. Frms 4 cntinues t require "end f perid" hldings t be reprted, but the SEC has clarified that each Frm 4 must reprt the persn s hldings after giving effect t the transactin reprted n the frm. As in the past, a Frm 4 is nt required t reflect the effect n an insider s hldings f a transactin that is nt reprted n the Frm 4 and that has nt previusly been reprted (such as the effect f a gift r a discretinary transactin that has nt yet been reprted) and need nly reflect the effect f nn-reprtable transactins (such as purchases under 401(k) payrll cntributins and dividend reinvestment plans) as f the mst recently available statement. Transitin Cnsideratins. The new reprting rules apply t all transactins effected n r after August 29, Transactins that currently are reprtable n Frm 4 but that ccur befre August 29, 2002 must be reprted n a Frm 4 filed n r befre September 10, In additin, Rule 16b-3 transactins that ccurred befre August 29, 2002 remain eligible fr reprting n Frm 5. Frm 8-K Reprting. In the release adpting the new rules, the SEC indicated that it will nt pursue its rule prpsal t require that cmpanies disclse insiders stck transactins n a Frm 8-K. Hwever, the SEC cntinues t cnsider its ther Frm 8-K cmpany disclsure requirements (including its prpsal that cmpanies disclse the existence and any amendment f an insider s Rule 10b5-1(c) trading plan n a Frm 8-K filing). Sectin 16(a) Reprting Changes Neither the S-O Act nr the SEC rules changed any f the pre-existing exemptins frm liability under Sectin 16(b). Thus, any transactin that is exempt frm reprting and any transactin that is exempt under a 16(b) rule (such as Rule 16b-3) is nt subject t ptential matching fr purpses f determining shrt-swing liability. Planning fr Accelerated Sectin 16 Reprting In light f the August 29, 2002 effective date fr tw business day reprting, cmpanies shuld prepare nw fr the new rules. It is imprtant t reiterate that the legal bligatin t timely file reprts is impsed n the insiders themselves, nt n cmpanies. If a Frm 4 is filed late, the insiders will be identified in the cmpany's prxy statement and/r Frm 10-K as late filers, and it is the insiders wh are subject t ptential SEC enfrcement actins fr late filings. Insiders shuld understand that a cmpany s undertaking t assist them des nt shift this respnsibility. Nevertheless, recgnizing that cmpanies typically take an active rle in prmting Sectin 16 reprting cmpliance, many cmpanies will als undertake the prcedures described belw. Nt all f these suggestins will be apprpriate fr each cmpany, and cmpanies may cnsider ther actins t prmte Sectin 16 reprting cmpliance and t address the increased public transparency f insider transactins. Ls Angeles New Yrk Washingtn D.C. San Francisc Pal Alt Lndn Paris Munich Orange Cunty Century City Dallas Denver

4 Infrm Insiders f the New Reprting Deadlines. Cmpanies shuld infrm insiders f the new deadlines fr Frm 4 reprting. T the extent that a cmpany is undertaking varius steps t assist insiders in Sectin 16 cmpliance, the cmpany shuld describe thse steps t their insiders. Insiders shuld infrm family members and thers whse hldings r transactins are attributed t them f the new reprting deadlines. A sample memrandum fr this purpse (which cntemplates cmpany assistance in a number f areas described belw) is attached t this client memrandum. Designate Several Cmpliance Officers. The new deadlines mean that the timing f transactin reprts will be less predictable. Therefre, it will be helpful fr designated individuals t be available at all times t assist insiders with their Sectin 16 reprts. Each cmpany shuld designate at least tw peple fr this respnsibility, t accm mdate times when ne is n vacatin r therwise is absent. Files shuld be established with respect t each insider s that the cmpliance fficers may keep track f past Sectin 16(a) filings and ther vital reprting infrmatin. Crdinate with Plan Administratrs. Cntact plan administratrs inside and utside f the cmpany t ensure that they are aware f the new reprting deadlines, especially the fact that administratrs need t reprt executin f trades n an expedited basis. While the three business day extensin may be available in sme instances, as nted abve, if the insider knws when the plan administratr executes rders (fr instance, by the business day after the rder is placed), the three business day extensin may nt be available, and the administratr wuld need t prvide infrmatin n the trade within ne business day t enable the insider t meet the tw business day deadline. Ask insiders t request that a cpy f their plan accunt statements be sent t the cmpany, after talking with the administratrs t be sure that they can accmmdate such requests. Find ut hw discretinary transactins are prcessed and hw quickly they can be reprted. Cmpanies may wish t impse a temprary "black ut" n insiders discretinary transactins until the reprting requirements and prcedures fr thse trades are established. Tighten Preclearance Prcedures. Mre than ever, it will be imprtant fr cmpanies that assist their insiders with Sectin 16 filings t knw f prpsed transactins in advance. We have always recmmended a preclearance prcess t reduce the likelihd f insider trading r Sectin 16(b) vilatins. Nw, thse prcedures shuld be revised t gather mre infrmatin. Specifically, preclearance prcedures shuld capture infrmatin n the size and terms f the prpsed transactin (fr example, whether it invlves a limit rder), the exact date the rder is t be placed and cntact infrmatin fr the brker wh is respnsible fr the rder. Cmpanies and insiders shuld begin t prepare the Frm 4 at the same time an rder is placed. The insider shuld instruct the brker t prmptly reprt executin f the trade (whether executed in whle r in part) t the cmpany s cmpliance fficers. Obtain Pwers f Attrney. iven the shrt reprting deadlines, a cmpany may need t file reprts n behalf f an insider withut time fr btaining the insider s review f r signature n a Frm 4. In rder t establish their authrity t make thse filings, cmpanies shuld btain a pwer f attrney frm their insiders. As with the cmpliance fficers, several individuals shuld be authrized t act under an insider s pwer f attrney. A cmpany may wish t ensure that the authrized individuals (as well as any cmpliance fficers) are included r added t the cmpany s D&O insurance plicy as cvered persns r, alternatively, may wish t include an indemnificatin prvisin in the pwer f attrney. Catalg Insiders Hldings. In rder t track transactins and accurately reprt hldings, insiders (and cmpanies assisting them) shuld catalg all f their hldings (including hldings f family members) and their n-ging stck purchase arrangements (401(k) plans, dividend reinvestment plans, emplyee stck purchase plans, stck fund accruals under nn-qualified deferred cmpensatin plans) and shuld understand wh has authrity ver the shares. Obtain cpies f any trading plans established under Rule 10b5-1(c). (Insiders shuld discuss with cunsel whether t suspend trading plans with respect t transactins that may ccur n r sn after August 29, until the reprting rules and prcedures are established.) Cntact infrmatin (telephne numbers, fax numbers and addresses) shuld be btained fr brkers and any thers whse assistance is necessary t prepare insiders reprts. Ls Angeles New Yrk Washingtn D.C. San Francisc Pal Alt Lndn Paris Munich Orange Cunty Century City Dallas Denver

5 Cnsider a "Catch-Up" Frm 4 Filing. Insiders and cmpanies shuld cnsider filing a Frm 4 disclsing all f the insiders Frm 5 reprtable transactins ccurring prir t August 29, Regardless f the fact that exempt emplyee benefit plan transactins ccurring befre August 29, 2002 remain reprtable n the current year s Frm 5, as a matter f gd practice it wuld be helpful t reprt thse transactins early in September. This will avid cnfusin in reprting hldings that may have been affected by thse transactins, nce tw business day reprting applies t all reprtable emplyee benefit plan transactins. That same Frm 4 can be used t list all f the insiders hldings and thereby establish a "baseline" reprt fr all future transactin reprts. Cnsider Establishing Shrtened Trading Windws. In the past, cmpanies typically restricted insider transactins t a limited pen windw trading perid (such as the traditinal "ten business days fllwing the secnd business day after an earnings annuncement"). In recent years, hwever, the trend has been t lengthen trading windws r t eliminate trading windws cmpletely and instead apply nly a strict preclearance plicy. In light f the demands n crdinated reprting that the tw business day requirement will prduce and the fact that investrs are mre fcused n tracking insiders transactin reprts, cmpanies may wish t establish a shrt pen trading windw as well as a preclearance prcedure. Sme cmpanies will find this apprach preferable t prevent infrmatin n transactins frm dribbling int the marketplace ver extended perids. Prepare fr EDAR Filing f Frms 4. Because it will be necessary fr Frms 4 t be received by the SEC during its filing desk business hurs (currently, befre 5:30 p.m. Eastern time) n the secnd business day after a transactin is executed, cmpanies shuld cnsider training in-huse staff n filing Frms 4 by EDAR. The SEC has stated that, t facilitate EDAR filing f Sectin 16 reprts, it will accept EDAR submissins that are nt presented in the standard Frm 4 bx frmat and that mit the hrizntal and vertical lines separating infrmatin items, s lng as all required infrmatin is presented in the prper rder. Hwever, each insider will need t btain individual EDAR access cdes. Therefre, cmpanies may wish t prepare and btain insiders signatures n Frm ID applicatins t btain EDAR access cdes fr insiders wh have nt already btained individual access cdes. If a cmpany s insiders already have individual EDAR access cdes (fr example, because a directr is an insider at anther cmpany that files Sectin 16 reprts electrnically), the cmpany shuld request the insider t prvide the cmpany his r her access cdes. Nte that cmpanies shuld check with insiders befre requesting EDAR access cdes fr them, because filing t btain a new EDAR access cde will autmatically cancel an insider s current access cdes. Cmpanies can als check fr current EDAR access cdes n the SEC s website at Cmpanies that have nt purchased a sftware prgram fr tracking and generating insider transactin reprts may wish t d s nw. It shuld be nted that althugh mre than 90% f Sectin 16 reprts are currently filed in paper frmat thrugh the SEC s filing desk, the S-O Act requires the SEC t establish rules by July 30, 2003 mandating that all Frms 4 be filed electrnically and psted n the issuer s website, and the SEC has stated that it is prceeding "expeditiusly" with rulemaking in this area. Even befre that deadline, the SEC is likely t adpt rules that mandate tw business day filings by cmpanies fr certain material crprate develpments that are reprtable n Frm 8-K. Therefre, establishing in-huse EDAR filing capacity will prepare a cmpany fr each f these develpments. Cnsider the Reprting Implicatins f Cmpensatin Practices. Cmpanies will need t review and cnsider the implicatins n their cmpensatin practices f accelerated reprting. Fr example, tw business day reprting f emplyee stck ptin and restricted stck grants may affect the timing r frequency f such events. Cmpanies may need t revise the manner in which such grants are annunced internally in light f the prmpt public discl sure bligatins. Transactins pursuant t Rule 10b5-1(c) trading plans may becme mre cmmnplace because f the view that sphisticated investrs will nt seek t read meaning int individual transactins nce the exis tence f the trading prgram has been publicly disclsed. Other prvisins f the S-O Act are addressed in ur memrandum t clients dated July 30, 2002, available at Fr mre infrmatin n Sectin 16 reprting, please cntact the ibsn Dunn attrney with whm yu wrk, r Rnald O. Mueller ( ), Brian J. Lane ( ), Amy dman ( ) r Stantn P. Eigenbrdt ( ). T cntact any f these attrneys by , use the first letter f the attrney's first name, fllwed by the attrney's last name, fllwed by "@gibsndunn.cm". Ls Angeles New Yrk Washingtn D.C. San Francisc Pal Alt Lndn Paris Munich Orange Cunty Century City Dallas Denver