August 28, 2002 To our clients and friends: SEC Releases Final Section 16 Reporting Rules The SEC has released the final Section 16 reporting rules that it adopted yesterday. These rules effect the following changes: transactions between officers or directors and the issuer exempted by Rule 16b-3 from Section 16(b) liability that were previously reportable on an annual basis on Form 5 must now be reported within two business days on Form 4. the two business day Form 4 due date may be calculated differently for the following transactions: - transactions pursuant to certain Rule 10b5-1 pre-planned trading programs where the reporting person does not select the date of execution; and - discretionary transactions pursuant to employee benefit plans where the reporting person does not select the date of execution; amendment of the rule exempting certain small acquisitions from Section 16(b) liability to conform to the new two business day deadline; and amendment of Forms 4 and 5 to conform all references to the Form 4 filing deadline to the new two business day due date and to reflect that Form 4 is no longer a monthly form; The new rules are available on the SEC s website at: http://www.sec.gov/rules/final/34-46421.htm. Effective Date The amendments will apply to transactions that occur on or after August 29, 2002. Transactions previously reportable on Form 5 that are not covered by these amendments will remain Note: This Bulletin is intended solely for general informational purposes and should not be construed as, or used as a substitute for, legal advice with respect to specific transactions. Such advice requires a detailed analysis of applicable requirements and an evaluation of precise factual information. We do not undertake to keep recipients advised as to all relevant legal developments. This Bulletin may be construed as an advertisement or solicitation. 2002 Bryan Cave LLP. All Rights Reserved.
reportable on Form 5 to the same extent as before. In addition, transactions previously exempt from Section 16(a) reporting will remain exempt. Accordingly, routine acquisitions under tax qualified employee benefit plans and dividend reinvestment plans will remain exempt from Section 16(a) reporting. Background As previously reported, Section 403(a) of the Sarbanes-Oxley Act of 2002 ( Sarbanes- Oxley ) amended Section 16(a) to require reports of a change in beneficial ownership of an issuer s equity securities or a purchase or sale of a security-based swap agreement "before the end of the second business day following the day on which the subject transaction has been executed, or at such other time as the SEC establishes, by rule, in any case in which the SEC determines that such 2-day period is not feasible." Sarbanes-Oxley provided that the amendment becomes effective on August 29, 2002. Thus, reporting persons will be required to report all transactions subject to Section 16(a) for which the date of execution (trade date) is on or after August 29, 2002 on Form 4 in accordance with the amended two-business day deadline, except where the rules under Section 16(a) provide otherwise. Amendments to the Section 16 Reporting Rules Rule 16a-3 sets forth the general reporting requirements under Section 16(a). The SEC amended this rule in several respects to address the new reporting deadlines: Elimination of deferred reporting of Rule 16b-3 exempt transactions Previously, certain transactions by an officer or director with an issuer that were exempted from Section 16(b) by Rule 16b-3 were reportable on a deferred basis on Form 5. In order to provide for immediate disclosure of insider transactions with an issuer, the SEC has eliminated deferred reporting for these transactions. Consequently, most routine transactions by officers and directors that were previously reported on Form 5 must now be reported within two business days on Form 4. These include: grants, awards and other acquisitions from the issuer exempted by Rule 16b-3(d), such as awards of stock options, restricted stock and similar transactions; dispositions to the issuer exempted by Rule 16b-3(e), including tax withholding of shares, the tender of stock upon exercise, and any routine purchase of shares by an issuer to fund tax payments; virtually all derivative securities transactions with the issuer, including issuances, exercises, and cancellations and regrants of stock options, including repricings; and discretionary transactions (which are described below) pursuant to employee benefit plans exempted by Rule 16b-3(f) previously reportable on a deferred basis on Form 5. 2
Two narrowly defined exceptions The new rules provide for an exception from the two-business day deadline only for two narrowly defined types of transactions where, in the SEC s view, objective criteria prevent the reporting person from controlling the trade date. Rule 10b5-1 Plans. A number of insiders have implemented pre-planned trading programs in response to the adoption of Rule 10b5-1 in 2000. That rule provides that a person trades "on the basis of" material nonpublic information when the person purchases or sells securities while aware of material nonpublic information. However, Rule 10b5-1(c) establishes affirmative defenses that permit a person to trade in circumstances where it is clear that the information was not a factor in the decision to trade, i.e., where the trade takes place pursuant to a pre-planned trading program meeting certain requirements. A reporting person generally cannot know whether such a transaction will be executed immediately. Where the reporting person has not selected the date of execution, the reporting person generally knows that an order has been placed, but does not control and may not be able reasonably to predict when the transaction actually will occur. Instead, price movement in the market may determine the date of execution for these transactions. Discretionary Transactions. The second exception addresses discretionary transactions, which generally involve an intra-plan transfer of previously invested assets into or out of the company stock fund, or a cash-out from the company stock fund. The SEC acknowledged that in many cases the logistics of plan administration may prevent a reporting person from selecting the date of execution. A reporting person may not reasonably expect a discretionary transaction to be executed immediately, but instead at a time consistent with the plan's particular administrative procedures. Under the new rules, the date of execution will be defined differently for these transactions, solely for Form 4 reporting purposes: For a transaction pursuant to a valid Rule 10b5-1(c) plan, where the reporting person does not select the date of execution, the date on which the executing broker, dealer or plan administrator notifies the reporting person of execution of the transaction is deemed the date of execution, so long as the notification date is not later than the third business day following the trade date. For a discretionary transaction where the reporting person does not select the date of execution, the date on which the plan administrator notifies the reporting person that the transaction has been executed is deemed the date of execution, so long as the notification date is not later than the third business day following the trade date. In both cases, the notification date is deemed to be the third business day following the trade date if actual notification does not occur by then. Additionally, neither exception will be available if the reporting person has selected the date of transaction execution, for example where a Rule 10b5-1 plan provides for a sale on the first business day of each month. 3
In either case, the transaction must be reported on Form 4 before the end of the second business day following the deemed date of execution. The SEC expects the reporting person will make specific arrangements for the broker, dealer or plan administrator to provide the reporting person actual notice of transaction execution as quickly as feasible. The SEC indicated that brokers, dealers or plan administrators may use any means of communication, including oral, paper or electronic means, to notify the reporting person that the transaction has been executed. While a broker or dealer has an obligation to provide the reporting person with a transaction confirmation under existing rules, the confirmation may not arrive soon enough for Form 4 purposes. For example, a confirmation sent through the mail could take several days to arrive. Thus, the SEC expects arrangements to be made for the information to be provided either electronically or by telephone. Amendment to the Small Acquisitions Rule Rule 16a-6 permits small acquisitions to be reported on Form 5, subject to specified conditions. If the conditions are no longer met, so that the small acquisition no longer qualifies for deferred reporting on Form 5, it must be reported on a Form 4. The SEC amended the rule to conform the timetable, so the Form 4 will be due two business days after the deferral conditions are no longer met. The SEC also amended the rule so that it will not be available to defer reporting of small acquisitions from the issuer (including an employee benefit plan sponsored by the issuer). This will prohibit reliance on the rule to report on Form 5 transactions exempted by Rule 16b-3 that will now be required to be reported on Form 4, as described above. Amendments to Forms 4 and 5 In order to conform to the new filing deadlines, the SEC effected several amendments to Form 4, including the following: all references to the deadline have been conformed and to reflect that it is no longer a monthly form; the holdings columns must report holdings following the reported transaction(s), rather than month-end holdings; reportable Rule 16b-3 exempt transactions must now be reported on Form 4; and a new column 2A to Table I and column 3A to Table II have been added to require reporting of deemed execution dates computed in accordance with the new amendments. (These are designed to enable investors and the SEC to determine if the form was filed on a timely basis) Similarly, the SEC effected several amendments to Form 5, including the following: new columns 2A and 3A to Form 5 have been added to enable investors and the SEC to similarly determine how late a transaction was reported; and clarification that reportable Rule 16b-3 exempt transactions no longer may be reported on that form on a deferred basis. 4
While the SEC plans to publish new forms promptly, it indicated that reporting persons may continue to use the current versions until the new forms are available; however, they should modify box 4 on Form 4 to state the month, day and year of the transaction. Further, when using the current forms to report a transaction with a deemed execution date computed as described above, a reporting person should include an asterisk next to the trade date in the transaction date column, and add a footnote to disclose the deemed execution date. Electronic Filing and Website Posting As previously reported, Sarbanes-Oxley also requires, not later than July 30, 2003, electronic filing of Forms 3, 4 and 5, and website posting of such reports by both the SEC and issuers. At yesterday s open meeting, the SEC staff indicated that it expects to publish proposed rules in the near future to make the filing of Section 16(a) reports on EDGAR mandatory, possibly within two months. Meanwhile, the SEC encourages electronic filings of these forms. To facilitate EDGAR conversion under the current filing system, the SEC indicated that it will accept electronically-filed Section 16(a) reports that are not presented in the standard box format and omit the horizontal and vertical lines separating information items, so long as the captions of the items and all required information are presented in the proper order. The SEC advises reporting persons who plan to file their forms electronically to submit Forms ID requesting EDGAR access codes as soon as possible to minimize processing delays. The SEC also encourages companies to post Forms 4 and 5 on their websites before the July 30, 2003 statutory implementation date. Requests for Comments Although the new rules are effective August 29, as described above, the SEC invites comments on the changes. In particular, the SEC asks whether there are any other types of transactions for which the new reporting deadlines are not feasible. Additionally, the SEC requests comment on whether any changes are required in the treatment of stock options under Section 16. Recommended Actions In view of these accelerated deadlines, we recommend that issuers take the following steps: alert insiders to the accelerated deadlines; review pre-clearance and notice procedures of your insider trading policies, particularly in light of the new prohibition on trading in company securities by insiders during qualified plan blackout periods established by Sarbanes-Oxley; review filing procedures, particularly in cases in which companies expect to take responsibility for completing and filing Form 4s on behalf of directors and executive officers; 5
obtain powers of attorney from directors and executive officers for whom companies will handle Form 4 reporting, and consider voluntary EDGAR filing prior to the implementation of mandatory EDGAR filing; and consider establishing uniform broker contacts and procedures * * * * * As required by Sarbanes-Oxley, the SEC will be promulgating a series of rules to implement various other sections of the Act over the coming months. Please feel free to contact your Bryan Cave lawyer with any questions or issues relating to these matters. Note: This memorandum is intended solely for general informational purposes and should not be construed as, or used as a substitute for, legal advice with respect to specific transactions. Such advice requires a detailed analysis of applicable requirements and an evaluation of precise factual information. 6