On May 7, 2003, the SEC issued final rules that mandate electronic filing of Forms 3, 4 and 5 by corporate insiders, and require companies to post these reports on their websites within one business day of filing with the SEC. These rules implement the provisions of Section 403 of the Sarbanes-Oxley Act that require all reports by corporate insiders under Section 16(a) of the Securities Exchange Act of 1934 to be filed electronically. The final rules become effective on June 30, 2003.
Section 16 Reporting
Section 16(a) of the Exchange Act generally requires insiders (directors, officers and greater-than-ten-percent beneficial owners) of U.S. public companies with a class of equity securities registered under the Exchange Act to report their ownership of and transactions in company equity securities with the SEC. Currently, Section 16 reports (Forms 3, 4 and 5) can be filed with the SEC electronically via EDGAR or in paper format. Beginning June 30, 2003, SEC rules will no longer permit Section 16 reports to be filed in paper format.
Electronic Filing of Reports and Extension of Time Deadline
The final rules require Section 16 reports to be filed electronically with the SEC. In connection with this new requirement, the SEC has implemented a new online filing system that allows insiders, and persons acting on their behalf, to access an SEC maintained website to complete and file Section 16 reports. However, due to the current limitations of the SEC's online filing system (for example, incomplete forms cannot be saved, forms can only be completed online), many filers will continue to utilize third-party software to prepare and file reports. The final rules extend the filing deadline for electronically filed Section 16 reports from 5:30 p.m. Eastern time to 10 p.m. Eastern time. In light of the extended filing hours, temporary hardship exemptions will no longer be available for the Section 16 reports.
Instead of pursuing a hardship exemption, in appropriate circumstances, a filer may request a filing date adjustment under applicable SEC rules. These adjustments are not likely to be frequently granted.
Temporary Late Filing Disclosure Relief
Recognizing that insiders may experience temporary difficulties in transitioning to mandated electronic filing, the SEC has provided temporary relief from the disclosure of late Section 16 reports in a company's proxy statement or Form 10-K. This relief will be permitted during the first 12 months after the effective date of the rules and requires that the Form 4 be filed not later than one business day following the regular due date. The release notes that eligibility for this disclosure relief does not change the fact that any Form 3, 4 or 5 filed later than the applicable due date violates Section 16(a).
Website Posting of Reports
The final rules require an issuer that maintains a corporate website to post on its website all Forms 3, 4 and 5 filed with respect to its securities by the end of the business day after filing. Additionally, each report is required to be accessible for at least a 12 month period. The release notes that an issuer could satisfy the website posting requirement by providing access directly or by hyperlinking to the reports via a third-party service (including hyperlinking to the section of the SEC's website containing the reports of the company's insiders) in lieu of maintaining the forms itself if the following conditions are met:
- the forms are made available in the required time frame;
- access to the reports is free of charge to the user;
- the display format allows retrieval of all information in the forms;
- the medium to access the forms is not so burdensome that the intended users cannot effectively access the information provided;
- the access includes any exhibits or attachments;
- access to the forms is through the issuer website address the issuer normally uses for disseminating information to investors; and
- any hyperlink is directly to the Section 16 forms (or to a list of the Section 16 forms) relating to the posting issuer instead of just to the home page or general search page of the third-party service.
The SEC's website was recently modified to conform to the new requirements by allowing a user to display an issuer's filings which either include or exclude "ownership" filings (i.e., Section 16 reports), or link only to those reports. Issuers electing to hyperlink to the SEC's website to satisfy the requirements of the final rules should select the ownership (Section 16) only option. The release cites a sample link showing an issuer's insiders' ownership reports at: http://www.sec.gov/cgi-bin/browse-edgar?company=&CIK=0000906648& owner=only&action=getcompany.
Quarles & Brady Comment
The new website posting requirement appears to be most easily, and most reliably, satisfied by hyperlinking to the SEC's website. The hyperlink should link directly to the Section 16 reports relating to the company, accessing the option which provides that only the Section 16/ownership reports are displayed. The hyperlink should indicate clearly that the link leads to the Section 16 reports. Issuers should make sure that the persons responsible for maintaining their website understand and comply with these requirements.
The Section 16 website posting requirement is in addition to, and distinct from, the provisions for disclosure of the posting of, or links to, a company's own SEC filings on the issuer's website. Those separate provisions can also be satisfied by linking through EDGAR, but displaying reports "including" or "excluding" the ownership reports.
In order to electronically file reports filers will need to have valid personal EDGAR access codes. Insiders can only acquire the access codes by submitting a "Form ID" to the SEC. Company EDGAR codes will not be sufficient and the failure to timely obtain an identification number or access codes will not justify a filing date adjustment. When making requests for EDGAR access codes, the Form ID should indicate whether the insider is a reporting person with respect to any other company, and whether a filing (i.e., CIK) number already has been assigned to that person. Unless this information is provided in the Form ID, a new filing number will be assigned by the SEC and the EDGAR system will not accept filings under the previously assigned filing number.
The text of the SEC's release is available on the SEC's website at http://www.sec.gov/rules/ final/33-8230.htm. The SEC has also published a frequently asked questions release relating to the electronic filing of Forms 3, 4 and 5 which is available at http://www.sec.gov/divisions/corpfin/sec16faq.htm. Please let your Quarles & Brady attorney know if you would like a copy of either release.