Our Securities Group weighs in on the settlement by the Securities and Exchange Commission with 23 separate entities and individuals for alleged violations involving the failure to timely report ownership information.
- Companies should understand who an “insider” is
- Companies should remain aware of what they need to file and the filing deadlines
- Companies should keep accurate and timely records
On September 25, 2024, the Securities and Exchange Commission (SEC) announced the settlement of charges against 23 separate entities and individuals for alleged violations of Section 13 and Section 16 of the Securities Exchange Act of 1934, as amended, involving the failure to timely report ownership information.
Pursuant to Section 13 of the Exchange Act, stockholders who beneficially own 5% or more of a registered voting class of a company’s outstanding equity are required to file reports on Schedules 13D or 13G to provide information about the holdings and intentions of such investors, and institutional money managers are required to file Forms 13F to report certain sizeable securities holdings. In addition, Section 16 of the Exchange Act requires certain individuals and entities to report their beneficial ownership of a publicly traded company’s securities, as well as imposes certain trading restrictions on such covered individuals and entities. These individuals, commonly referred to as “insiders,” include a company’s officers (as defined in the Exchange Act) and directors, as well as stockholders who beneficially own more than 10% of a class of the company’s outstanding equity. Insiders are obligated to timely report their beneficial ownership by filing Forms 3, 4, and 5 with the SEC. The Section 16 reporting requirements are intended to help regulate insider trading and discourage insiders from profiting off material nonpublic information.
Penalties for Noncompliance
The SEC has the authority to impose fines and sanctions on any beneficial owner or insider who fails to timely make any Section 13 or Section 16 filing or who files inaccurate or incomplete reports. The SEC also can charge public companies who contribute to filing failures or fail to report the delinquencies of their insiders. The settlement of the charges announced on September 25, 2024 directly resulted from SEC enforcement initiatives focused on beneficial ownership reporting requirements. The penalties ranged from $10,000 for an individual to $750,000 for one company. This latest crackdown comes roughly a year after the SEC’s September 27, 2023 announcement of charges against six insiders for failing to timely file multiple reports under Section 16 and against five companies for negligence in their contribution to their insiders’ noncompliance. The entities and individuals in both announcements were largely required to agree to cease and desist from any violations and to pay civil penalties.
Next Steps
The SEC is committed to protecting shareholders against insider trading and providing them with the proper resources to make informed investment decisions, including timely reports about insider holdings and transactions and changes in potential controlling interests. The SEC’s recent actions, along with its 2023 charges, are a reminder to individuals and companies that they must ensure the Section 13 and Section 16 reports are timely and accurately filed. To avoid noncompliance, companies should consider the following:
- Understand who is an “insider” and what is required to be filed.
- Be aware of filing deadlines.
- Maintain accurate and timely records.
- Ensure policies are in place that require insiders to communicate when transactions are made.
- File a Form 5 to report transactions not previously reported.
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