Securities Law

Posted on Wednesday, September 17 2014 at 6:09 pm by The Kilpatrick Townsend Securities Team

Wave of SEC Enforcement Actions Reinforces Importance of Strong Compliance Culture

On September 10, 2014, the Securities and Exchange Commission (the “SEC”) announced charges against 18 individuals and ten investment firms for violating federal securities laws that require prompt reporting about their holdings and transactions in company stock.  Six publicly traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.

The enforcement actions were concerned with two types of ownership reports – Form 4 and Schedules 13D and 13G.   A Form 4 is a report that officers, directors, and beneficial owners of more than 10 percent of a registered class of a company’s stock must use to report their transactions in company stock.  Schedules 13D and 13G are reports that beneficial owners of more than 5 percent of a registered class of a company’s stock must use to report holdings or intentions with respect to the company.  The SEC focused on these forms as they can provide investors the opportunity to evaluate a company’s future prospects based on the holdings and transactions of company insiders.

All but one of the individuals and companies agreed to settle the charges, with civil money penalties totaling $2.6 million.  The penalties for individual directors or officers ranged from $25,000 to $100,000, and the penalties for public companies ranged from $75,000 to $150,000.

All of the individuals charged had multiple violations.  Notably, many of the violations were reports that were late by just a few days.

In announcing these actions, the SEC emphasized that these reporting requirements apply irrespective of profits or a person’s reasons for acquiring holdings or engaging in transactions.  Moreover, the failure to timely file a required beneficial ownership report, even if inadvertent, constitutes a violation of these rules.

Most of the public companies charged with violations had voluntarily accepted responsibility for handling Section 16 filing requirements for their insiders – as most public companies do – but were negligent in performing those tasks, resulting in multiple untimely filings.  In addition, most of the companies charged failed to disclose information concerning delinquent Section 16 filings by its insiders, as required by Item 405 of Regulation S-K.

The investment firms charged failed to file multiple Section 16 reports on a timely basis and, in some cases, failed to file an initial Schedule 13G statement and/or amendments on a timely basis.

These enforcement actions reinforce the importance of a strong compliance culture at public companies.  The responsibility for complying with the federal securities laws are the responsibility of the individual and, as a result, directors, officers and major shareholders should familiarize themselves with the federal reporting requirements and ensure that all reports are timely filed in connection with any qualifying transaction.

Companies that accept responsibility for making these filings on behalf of insiders can also be held liable for individual violations of the reporting requirements and, therefore, must ensure they have an adequate public reporting compliance program in place.




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