Form 4s Required to be Filed Within Two Business Days of Transaction Beginning August 29, 2002

Co-authored by Jan Davison and Deborah Froling

Summary of Section 403 of the Act

Section 403(a) of the recently enacted Sarbanes-Oxley Act of 2002 amends Section 16(a) of the Securities Exchange Act, effective August 29, 2002, to require each public company’s Section 16 reporting persons to report transactions in the company’s equity securities within two business days. The Act authorizes the SEC to adopt rules to extend the two business day deadline for transactions for which the SEC determines this deadline is not feasible. No later than July 30, 2003, all Section 16(a) reports must be filed electronically and posted on the SEC’s website and the issuer’s website by the next business day following the filing.

In a release dated August 6, 2002, the SEC provided limited additional information and guidance regarding its rulemaking pursuant to Section 403(a) of the Act. The SEC requested public comments on the implementation of Section 403(a) of the Act by August 15, 2002.

The SEC anticipated that it would adopt final rules effective no later than the August 29th deadline pursuant to which:

• All Form 4s would be due within two business days of the reported transaction; and
• Transactions between Section 16 reporting persons and the issuer that were previously exempt from Section 16(b) pursuant to Rule 16b-3 and not exempt from reporting under Section 16(a) would be reportable on Form 4 within two business days of the reported transaction.

The SEC also stated in the release that it intended to adopt one or more new rules that would provide extended filing deadlines for some narrowly defined specified transactions as to which the SEC determines the two business day reporting period is not feasible. It identified the following types of transactions as potentially falling within this category:

• A transaction pursuant to a single market order that is executed over more than one day, not to exceed a specified number of days;
• A transaction involving pre-existing arrangements the timing of which is outside the knowledge and control of the insider before a confirmation or other notice of the transaction is sent, with a delay not to exceed a specified number of days; and
• A discretionary transaction involving an employee benefit plan, whether or not exempted by Rule 16b-3, where the delay would be tied to notice of the transaction.

The extension of the two business day reporting requirement would turn on the feasibility of the reporting and not on the type of issuer, size of the transaction or convenience to or the type of the Section 16 reporting person.

In addition, the SEC stated that it will not be considering further action on its proposed amendments relating to reporting directors’ and officers’ transactions in company equity securities on a Form 8-K.

The SEC encouraged Section 16(a) reports to be made electronically. In order to make it easier to file electronically, the SEC stated that it will accept electronically filed reports that are not presented in the standard box format and that omit the lines separating information items, so long as all information is presented in the proper order. Note, however, that if Section 16 reports are filed electronically, certain personal information, such as home addresses and Social Security numbers, should not be provided.

Based on the limited information in the SEC’s release and more detailed recent statements by representatives of the SEC, it now appears that under the Act and the rules the SEC intends to adopt, effective August 29, 2002:

• Form 4s must be filed two business days after the execution date of the transaction being reported.
• Transactions between Section 16 reporting persons and the issuer that were previously exempt from Section 16(b) pursuant to Rule 16b-3, and not exempt from the reporting requirements of Section 16(a), are no longer reportable on Form 5, but instead will be required to be reported on Form 4 within two business days after the execution date of the transaction being reported. These transactions include stock option grants and exercises, restricted stock awards and stock option repricings.
• Transactions that were exempt from Section 16(b) pursuant to Rule 16b-3(c) and were also exempt from the reporting requirements of Section 16(a), such as employee stock purchase plan transactions and ongoing acquisitions under a 401(k) plan or similar tax qualified plan, will continue to be nonreportable transactions.
• Other transactions that were previously reportable on Form 5, such as gifts, will continue to be reportable on Form 5 within 45 days after the issuer’s fiscal year end.

For Form 4 transactions that occurred prior to August 29^th, the Form 4s reporting these transactions will be due on or before September 10^th. For Form 5 transactions that occurred prior to August 29^th, the Forms 5s reporting these transactions will continue to be due 45 days after the issuer’s fiscal-year end.

The ABA Federal Regulation of Securities Committee’s Subcommittee on Employee Benefits, Executive Compensation and Section 16 intends to submit a comment letter to the SEC relating to these issues and has preliminarily identified four areas in which transactions should be considered for relief from the two business day filing requirement. These areas include:

• Open market stock purchase plans;
• Deferred compensation plans;
• Voluntary contributions to dividend reinvestment plans; and
• Transactions pursuant to 10b5-1 plans.

We intend to continue to monitor the developments in this area very closely and will provide updates with respect to important developments, including the final rules issued by the SEC. We would be pleased to discuss any of the issues presented in this Legal Alert with interested readers.

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