SEC Adopts Final Rules Mandating Electronic Filing and Web Site Posting of Forms 3, 4 and 5

Introduction

On May 7, 2003, the SEC adopted amendments to its rules and forms that will require:

• electronic filing with the SEC of Forms 3, 4 and 5 by officers, directors and 10% stockholders (commonly referred to as "insiders") of public companies; and
• Web site posting by public companies of the forms filed by their insiders with respect to their outstanding securities by the end of the business day after the filing.

These rules become effective for all forms filed on or after June 30, 2003. The rules will not apply to foreign private issuers that are subject to SEC filing requirements or their directors and officers because these individuals are not required to file Form 3, 4 or 5 reports.

Electronic Filing of Forms

SEC rules currently permit insiders to file Forms 3, 4 and 5 via the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The new rules require that these forms be filed via the EDGAR system. For securities listed on the New York, American and Chicago Stock Exchanges, filing these forms via EDGAR satisfies the requirements of Section 16 to file copies of the forms with the exchange on which the securities are listed.

While the SEC did not address the electronic filing of Form 144 in the new rules, the SEC indicated that it may in the future propose to require electronic filing of that form as well.

Electronic Filing Procedure

To facilitate the electronic filing of Forms 3, 4 and 5, the SEC has implemented a new online filing system that allows insiders and those who act on their behalf to access the SEC's Web site to complete and submit the forms online. As a result, EDGARLink filing is no longer available for these forms. The SEC expects to make additional improvements to the online filing system, which are currently scheduled to be in place by the end of July 2003.

The online filing procedures have some limitations. Although filers will be able to revise and print the reports before filing, the filing system will not save an incomplete form online from session to session. In addition, the system will have time limits for data entry and will terminate filing sessions if one hour elapses since the last activity on the system. If the system terminates a session, all of the information must be re-entered by the filing person.

The SEC filing system will also permit filers, either directly or through third parties, to create a customized form and file it as a "reduced content filing." A reduced content filing is a filing that provides header information (e.g., form type) and the data for mandatory fields that the SEC specifies and otherwise complies with specified technical filing requirements. Reduced content filings will enable companies and insiders to use third-party service providers for filings, if they wish to do so, just as they do today. The SEC previously announced the mandatory fields and technical filing requirements, and they are available at the SEC's Web site at http://www.sec.gov/info/edgar/edgar85xmlspec.htm

Filing Hours

Currently, filings of reports and other documents with the SEC can be made by direct electronic transmission between the hours of 8 a.m. and 10 p.m. Eastern time on weekdays that are not federal holidays. An accepted filing for which transmission begins before 5:30 p.m. Eastern time is deemed filed on the same day. Generally, an accepted filing that begins after 5:30 p.m. is deemed filed on the next business day.

To ease filers' administrative burdens, beginning June 30, 2003 the SEC's EDGAR system will treat any Form 3, 4 or 5 submitted by direct transmission on or before 10 p.m. Eastern time as filed on that same business day. However, the SEC's "filer support" hours will not be correspondingly extended, so filer support will remain available only until 7 p.m. Eastern time. As a result, filers should submit their filings as early in the day as practicable to avoid the risk that last-minute difficulties will result in a late filing. Note that other SEC filings, such as Form 10-K, Form 10-Q and Form 8-K reports, are not eligible for these extended filing hours and must still be filed by 5:30 p.m. Eastern time on the due date to avoid being late.

The EDGAR system will be programmed to provide that a form filed between 5:30 p.m. and 10 p.m. Eastern time is assigned a filing date on the same business day and disseminated that evening. However, the SEC does not expect that programming to be completed until around the end of July 2003. Until then, EDGAR will continue to assign the next business day to these filings as their filing date and disseminate them on the next business day. However, from June 30, 2003 until the programming is completed, the SEC will consider a Form 3, 4 or 5 to be timely filed based on the time of receipt displayed on its Web site. A form with a time of receipt on or before 10 p.m. will be deemed to be filed on the date of receipt.

Hardship Exemptions

Based in part on the ease of using the new online filing system and the extended 10 p.m. Eastern time filing deadline, the new rules eliminate temporary hardship exemptions with respect to Forms 3, 4 and 5. The only relief for late filings under the new rules will be an adjustment to the filing date, which the SEC may grant if the filer can satisfy the requirements of applicable SEC rules. The SEC indicated that it expects filing date adjustments will be few in number. A delay in obtaining an identification number or access codes will not justify a filing date adjustment. Moreover, upon effectiveness of the final rules, the filing desk will not accept in paper format any Form 3, 4 or 5 except in the highly unlikely event that the filing satisfies the requirements for a continuing hardship exemption.

Reporting Delinquencies

Recognizing that insiders may experience temporary difficulties in transitioning to the mandated electronic filing, the SEC granted issuers limited, temporary relief from disclosing Section 16 reporting delinquencies under Item 405 of Regulations S-K and S-B. This disclosure is required in a company's proxy statement for the annual meeting at which directors are elected.

The SEC will not require disclosure of a late Form 4 filing that is:

• filed not later than one business day following the due date; and
• filed during the first 12 months following the effective date of mandated electronic filing (i.e., between June 30, 2003 and June 30, 2004).

Eligibility for this disclosure relief does not change the fact that filings after the applicable due date violate Section 16(a).

Web Site Posting of Reports

The new rules require public companies that maintain corporate Web sites to post on their Web sites all Forms 3, 4 and 5 filed by their insiders with respect to their outstanding equity securities by the end of the business day after the filing is made with the SEC. Each form must remain accessible on the company's Web site for at least a 12-month period. Companies may satisfy this requirement by providing access directly to the forms on their Web sites or by providing hyperlinks to the forms via a third-party service if the following conditions are satisfied:

• the forms are made available within the required time;
• access to the reports is free of charge;
• 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 company Web site address the company 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) instead of simply to the home page or general search page of a third-party service.

The SEC made it clear that the link caption must indicate clearly that the link leads to the company's insiders' Section 16 forms. The SEC stated that hyperlinking to the Section 16 forms in the EDGAR database related to the company on the SEC's Web site will satisfy the posting requirement if the conditions listed above are otherwise met. The SEC release provided the following example of a link for this purpose: http://www.sec.gov/cgi-bin/browse-edgar?company= &CIK=0000906648&owner=only&action=getcompany. Companies wishing to use this link should customize it by inserting their CIK code in lieu of the numbers (i.e., 0000906648) in the example.

The Web site posting requirement becomes effective at the same time as the electronic filing requirement (i.e., June 30, 2003). However, the SEC continues to encourage companies to voluntarily post Forms 3, 4 and 5 on their Web sites before the effective date.

The SEC modified its proposed rules with respect to investment companies. The new rules apply to forms filed by insiders of registered investment companies with regard to their investment company shares, and hence only apply to investment companies with exchange-traded shares and to closed-end investment companies, but not to traditional open-end investment companies (mutual funds). Under the final rules, the requirement to post Forms 3, 4 and 5 applies to an investment company that does not maintain its own Web site if the company's investment adviser, sponsor, depositor, trustee, administrator, principal underwriter, or any affiliated person of the investment company maintains a Web site that includes the name of the investment company. In such a case, the forms must be posted on only one of those Web sites.

Preparations Companies Should Be Considering Now

Because the new rules are effective as of June 30, 2003, companies and their insiders should begin (if they have not already done so) the process of obtaining the necessary EDGAR access codes for their insiders and become familiar with the filing process. Companies should also evaluate how they will comply with the proposed Web site access requirement.

Obtain EDGAR Codes. In order to comply with the SEC's mandatory electronic filing proposals, insiders will need to obtain EDGAR filing codes like those currently required for companies to file on the EDGAR system. The codes may only be obtained by submitting a Form ID, which may be obtained at the SEC's Web site at http://www.sec.gov/about/forms/formid.pdf.

Under the new filing system, if a filing is made on behalf of multiple insiders, each insider will be required to obtain individual EDGAR codes for validation. Multiple insiders will be allowed to report on a single form only if they all have an interest in a transaction or holding reported.

The SEC no longer accepts Form IDs submitted through the mail. All completed Form IDs requesting these codes must be sent to the SEC by telecopier to one of the following fax numbers: 202-504-2474 or 703-914-4240. The SEC will not provide a hard copy of the access codes through the mail but will advise filers of the codes by telephone. Filers who wish to receive a written confirmation of the codes should include either an e-mail address or a telecopier number with their request.

Persons submitting a Form ID for a director and/or officer should first determine whether the individual has previously been assigned EDGAR filing codes and should submit the Form ID well in advance of the first expected filing. While the SEC attempts to assign only one set of codes to each person, if multiple requests are made for the same person and new codes are assigned in error, the previously assigned codes will be invalidated. This could result in late filings if, for example, Company A for which an individual serves as a director and/or officer attempts to file a Form 4 using previously assigned codes that have been invalidated as a result of a subsequent submission of a Form ID for that individual by Company B.

Evaluate Web Site Posting of Reports. Companies that have corporate Web sites should evaluate how they will satisfy the proposed Web site posting requirement. If a company prefers to provide access on a third-party Web site rather than on its own Web site, it should begin considering how these arrangements can be made within the SEC requirements.

The Section 16 Committee at Goodwin Procter keeps current on these and other matters involving Section 16. Its members are available to help advise companies and their officers and directors on specific issues, as well as to provide educational presentations to help avoid liability. Please contact us either directly or through your regular Goodwin Procter lawyer if we may be of assistance.