electronic reporting of securities transactions

Over the last year, the Securities and Exchange Commission (SEC) has made dramatic changes in the way insiders need to report securities transactions. Effective on Aug. 29, 2002, the reporting period shortened from as much as 40 days to just two. Said in another way, if an insider makes a trade on Monday, the SEC had better know about it by Wednesday. Welcome to the 21st century.

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special to the national law journal Over the last year, the Securities and Exchange Commission (SEC) has made dramatic changes in the way insiders need to report securities transactions. Effective on Aug. 29, 2002, the reporting period shortened from as much as 40 days to just two. Said in another way, if an insider makes a trade on Monday, the SEC had better know about it by Wednesday. Welcome to the 21st century. If the dramatic reduction in filing time isn’t change enough, stay tuned. Starting on July 30, insiders are going to face another dramatic shift in the filing process. Fortunately, several companies are rushing to provide filing professionals with all the help they’ll need. Section 403 of the Sarbanes-Oxley Act, 15 U.S.C. 78p, affects the filing requirements for insider traders. Insider traders are all directors, officers or anyone else owning 10% or more of a publicly traded company. Most companies pay these senior executives well. Often, their remuneration involves stock grants, options or simple gifts of company stock. Many insiders augment their grants of company stock with private purchases of their own. Regardless of how insiders come by their stock, all transactions involving securities of the company of which they are a part must be reported to the SEC. The forms used to make statements of ownership, sales, gifts or trades are known as forms 3, 4 or 5. Before Aug. 29, 2002, insiders could have as much as 40 days in which to file a form 3, 4 or 5. Today it must be done within two business days of the transaction. And a more dramatic change is in the offing. According to the rest of § 403 of the Sarbanes-Oxley Act, by July 30, “all Section 16(a) reports shall be filed electronically, and are to be posted by the Commission and by the insider’s company (if it has a corporate website) on their respective websites by the end of the next business day following the filing of the report.” Three main changes There are really three changes of which insiders need to be aware. The first involves filing. For years, most insiders have filed forms 3, 4 or 5 the old-fashioned way: on paper. Say what one will about paper, it’s been an incredibly easy filing method. Many companies have offered electronic forms that simply automate the form-completion process. Others still use paper form copies and old IBM Selectrics. Feed the paper form into the typewriter, enter the information on the appropriate lines and voilà: The form is ready to be filed with the SEC. The good news is that the paper-filing process can still be used. The bad news? The SEC will only accept paper filings until July 30. For many, the new electronic filing requirement only codifies a process insiders have been moving toward for the past several years. These days there are automated desktop and Internet-based forms that enable users to complete forms 3, 4 and 5 easily. Once the forms have been completed online, they can be used to generate paper copies, which can then be filed with the SEC. But, as already noted, the SEC isn’t going to accept paper copies forever. This is why an increasing number of vendors are taking the next step. These companies have created, or are creating, desktop and/or online applications that enable insiders to complete and file electronically automated versions of forms 3, 4 and 5. The best of these applications enable insiders to review the results, check them for SEC filing accuracy and then press a key to submit the form electronically to the SEC’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) database. Achieving a simple, easy interface that walks users through the new electronic-filing process isn’t easy. Anyone who has had to labor over the process of trying to make an electronic filing to the SEC’s EDGAR database can attest to the frustration. Often, it’s enough to drive people back to a paper-filing process, an option they’ll have until July 30. But today there are an increasing number of products and services that take the pain out of the electronic filing process. [See sidebar.] Web posting The two other filing requirements that will be effective in late July involve the posting of recent filings on the Internet. To reiterate: The filings are to be “posted by the Commission and by the insider’s company (if it has a corporate website) on their respective websites by the end of the next business day following the filing of the report.” The first part of this requirement is of little concern to insiders. The SEC will make a copy of the filing available on its Web site, assuring insiders their transactions will be made public much more easily and quickly than ever before. The second part of this section makes it mandatory for companies with Web sites also to post the transactions on those sites no later than the next business day following the report. This requirement may be problematical for some filers, given the way they set up their sites and publish information on them. Thankfully, some of the providers have developed, or are developing, simple solutions that also enable companies to comply easily with this part of the SEC’s new requirement. For example, Bridgeway Software’s InsiderDirect will maintain an archive of a company’s filing on www.insiderdirect.com (for those using their service to make a filing). Companies can comply with the SEC’s requirement by providing a link to the InsiderDirect archive copy from the company’s own Web site. A number of vendors can offer companies tremendous assistance in complying with the new requirements, but they’re all a little different in how they work and what they offer. The good news for those looking for help is that the vendors listed here can provide it. Some good advice: Evaluate their services and choose wisely.

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