SEC Proposes New, Amended Corporate Disclosure Rules on Periodic Reporting and Insider Transactions
April 2002
On April 12, 2002, the U.S. Securities and Exchange Commission (SEC) issued proposals for new and amended rules that, if approved after brief 30- and 60-day public comment periods, will significantly change the disclosure obligations of public companies. The proposals, which are summarized below, are set forth in SEC Release Nos. 33-8089 and 33-8090.
Accelerated Periodic Reporting and Website Posting
The proposed rules affecting periodic reports under the Securities Exchange Act of 1934 (Exchange Act) would accelerate the filing of quarterly and annual reports by shortening the filing deadlines from 45 to 30 calendar days after period end for quarterly reports and from 90 to 60 calendar days after fiscal year end for annual reports. These rules would apply only to U.S. companies that have a public float of at least $75 million and have been subject to reporting requirements for at least 12 calendar months. In the proposing release, the SEC notes that the changes would not affect foreign companies that file annual reports on Form 20-F or 40-F, but the commission did solicit comments on whether the six-month filing deadlines for these forms should be shortened to perhaps four or five months.
The proposed rules would also require companies subject to the accelerated filing deadlines to disclose in their annual reports where investors can obtain access to company filings, including whether the company provides access to its reports on Forms 10-K, 10-Q and 8-K on its internet website, free of charge, as soon as reasonably practicable and, in any event, on the same day as those reports are electronically filed with the SEC; and if not, the reason for not providing such information.
Current Reporting of Insider Transactions
The proposed rules regarding insider transactions would require certain reporting companies to file current reports on Form 8-K that describe directors’ and executive officers’ transactions in company equity securities, directors’ and executive officers’ Rule 10b5-1 arrangements for the purchase and sale of company equity securities and loans of money to a director or an executive officer made or guaranteed by the company or an affiliate of the company.
Implications
The implications of the proposed rules include the following:
- A new 8-K compliance obligation would be created consisting of an extra layer of insider transaction reporting by companies in addition to compliance with reporting requirements applicable to insiders under Section 16 of the Exchange Act.
- The proposals contemplate that companies with adequate "procedures and systems" with respect to the new 8-K reporting will have some protection against sanctions for isolated violations of the new rules. In developing such procedures and systems, companies may wish to also re-evaluate current compliance programs under Section 16.
- Insider equity compensation grants, stock trades and derivative (including hedging arrangements) and loan transactions will be available almost on a real-time basis to the public through electronic SEC filings. Currently, most of this information is generally only available either in Section 16 paper filings that report transactions up to a year later or in the following year’s proxy statement reporting certain grants and transactions for the prior year.
- Companies that have not already done so may consider adopting a written policy on insiders’ use of Rule 10b5-1 stock trading plans that provide an affirmative defense to an allegation of insider trading.
- The enhanced publicity regarding insider transactions will likely increase scrutiny of executive compensation because institutional, and activist stockholders will be better able to monitor how well companies keep executive compensation and stockholder interests closely aligned.
- Strong encouragement in the rule proposals that companies post their reports on their websites goes further than the SEC has before in embracing the internet as a tool used for corporate disclosure.
Comments Solicited
The SEC releases solicits specific comments on a number of questions, including, among others, the following:
- Should non-employee director transactions be exempted from the new reporting?
- Should companies also report on transactions with stockholders beneficially holding more than 10 percent of the company’s equity?
- How should "executive officer" be defined for purposes of the new rules?
- Are the proposed accelerated deadlines and threshold amounts ($75 million) for reporting appropriate given the compliance burden on companies?
- What transaction details should be required to be reported?
Proposed Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports
The proposed rules accelerate the filing of a quarterly reports on Form 10-Q from 45 to 30 calendar days after quarter end and annual reports on Form 10-K from 90 to 60 calendar days after fiscal year end. These proposals would apply only to U.S. reporting companies that have a public float of at least $75 million, have been subject to Exchange Act reporting for at least 12 calendar months and have previously filed at least one annual report under the Exchange Act.
The new rules would require companies subject to the accelerated filing deadlines to explain in their annual reports on Form 10-K how investors can access company filings, including the following:
- that the public may read and copy the company’s filings at the SEC Public Reference Room and can access electronically filed information at the SEC website;
- disclosure of the company’s website address, if it has one;
- whether the company makes available free of charge on its website, if it has one, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports no later than the same day such material is electronically filed with or furnished to the commission;
- if the company does not make its filings available in this manner, the reasons why;
- if the company does not make its filings available in this manner, one or more locations, if any, where the public can access these filings electronically immediately upon filing, and whether there is a fee for such access; and
- whether the company voluntarily will provide electronic or paper copies of its filings free of charge upon request.
Comments on these proposals are due within 30 days after publication in the Federal Register.
Proposed Amendments to Form 8-K Requiring Companies to Report Transactions by Directors and Executive Officers
The proposed amendments to Form 8-K, the form for current reports under the Exchange Act , relate to transactions and other arrangements relating to directors and executive officers. Companies with a class of equity security registered under Section 12 of the Exchange Act would be required to report on Form 8-K information about directors’ and executive officers’ transactions in company equity securities (including derivative securities transactions and transactions with the company); directors’ and executive officers’ plans and other arrangements for the purchase or sale of company equity securities intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c); and loans of money to directors and executive officers made or guaranteed by the company or an affiliate of the company.
Generally, reports of transactions and loans with an aggregate value of $100,000 or more would be due within two business days. Most other reports would be due by the close of business on the second business day of the following week. However, reports of transactions and loans with an aggregate value less than $10,000 would be deferrable until the aggregate cumulative value of unreported events for the same director or executive officer exceeds $10,000. Specific exemptions are also provided for certain routine and estate planning transactions. Note that foreign issuers will not be affected by these proposed amendments because they are not required to file reports on Form 8-K.
Comments on these proposals are due within 60 days after publication in the Federal Register.
