Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405. Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep. The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.” It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.
Legal framework. As you know, under Section 16(a) and Rule 16a-3, insiders are required to file initial statements of holdings on Form 3 and update the information by reporting transactions on Forms 4 and 5. As described by the SEC in some of these orders, “Section 16(a) was motivated by a belief that ‘the most potent weapon against the abuse of inside information is full and prompt publicity’ and by a desire ‘to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.’”
Under Section 13(d) of the Exchange Act, a person (or group) that has acquired beneficial ownership of more than 5% of a registered class of equity securities is required to file a Schedule 13D; during the period relevant to most of these orders, the filings were due within 10 days after the acquisition, and material changes were required to be reported promptly in amended filings. The SEC noted that, in October 2023, the SEC adopted amendments to the rules to update and shorten certain filing deadlines, including shortening the deadline for filing the initial statement on Schedule 13D from 10 days to five business days, and revising the deadline for filing amendments to Schedule 13D to two business days after the date on which a material change occurs. The changes became effective on February 5, 2024. Under Section 13(g), “any person, including a group, who, as of the end of a calendar year, was directly or indirectly the beneficial owner of more than 5% of any class of equity security registered under Section 12 of the Exchange Act, and who had not made an acquisition subject to Section 13(d),” is required to file a Schedule 13G and to file certain updating amendments. At the relevant time, the filing was required to be made within 45 days after the end of the calendar year in which the obligation arises. An annual amendment was required within 45 days after the end of each calendar year if there were any changes in the information reported in the previous Schedule, unless certain limited exceptions applied. But take note: the 2023 amendments instead require that the more-than-5% beneficial owner file an initial statement on Schedule 13G within 45 days of the end of the quarter in which the obligation arises, and file amendments within 45 days after the end of a calendar quarter in which a material change occurs to the information previously included on the Schedule. Compliance with these new requirements is required beginning September 30, 2024. (See this PubCo post.)
Under Section 13(f)(1) of the Exchange Act and Rule 13f-1, an “institutional investment manager” that exercised discretion over accounts holding Section 13(f) securities—primarily, U.S. exchange-traded stocks—having an aggregate fair market value of least $100 million on the last trading day of at least one month in any calendar year must file a Form 13F on a quarterly basis. One Congressional purpose in enacting Section 13(f)(1) of the Exchange Act was to create “a central depository of historical and current data about the investment activities of institutional investment managers” to assist investors and government regulators. An “institutional investment manager” is broadly defined to include “any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion with respect to the account of any other person.”
The SEC noted that there is “no state of mind requirement for violations” of these sections and related rules: “[t]he failure to timely file a required report, even if inadvertent, constitutes a violation.”
Orders. Often, in these instances, we’re talking about scads of late filings. For example, in one of the orders related to a public company that failed to make filings on behalf of insiders, the SEC charged that, over a three-year period, the company’s insiders filed more than 200 late Forms 4 to report transactions related to, among other things, “open-market stock sales and award grants of stock and options to officers and directors. Although Respondent had agreed to perform all tasks in connection with preparing and filing such reports, the reports were not timely filed due to Respondent’s negligent procedures and practices.” The company agreed to pay a civil penalty of $200,000.
But some instances involved just a couple of late filings related to more complex situations. For example, in this order, the respondent owned convertible preferred and common stock that totaled over 14% of the common on an as-converted basis. The conversion of the preferred was, however, conditioned on the whether there were authorized but unissued shares of common stock that were not reserved for other purposes. In the respondent’s Schedule 13D, the condition was not disclosed nor was the beneficial ownership of the underlying common disclaimed. The Schedule 13D was filed almost two months late, as was a Form 3. Subsequently, when the respondent sought to convert the preferred, the respondent was advised that there were insufficient common shares to effect the conversion. As a result, the SEC charged, respondent could no longer “be deemed the beneficial owner of the common stock underlying the preferred shares. This decrease in the amount of beneficial ownership represented a material change to the facts set forth in its filed Schedule 13D. Thus, Respondent was required to file, but never filed, an amendment to its Schedule 13D.” Respondent paid a civil penalty of $40,000.
One case involved failure by a public company to file a Form 13F—typically considered a form applicable to investment money managers. In this instance, however, the SEC charged that the company held a “portfolio of U.S. exchange-traded stocks” and met the definition of an “institutional investment manager” because it “directly or indirectly through wholly-owned subsidiaries invests in or buys and sells securities for its own account” and “exercised investment discretion over at least $100 million in Section 13(f) securities.” At various points, the portfolio included securities of over 60 exchange-traded companies with an aggregate value, at times, of billions of dollars. As a result, the SEC charged, the company filed 36 untimely Forms 13F. The company also failed to timely file, the SEC charged, a number of Forms 4. The company agreed to pay a civil penalty of $750,000.
