Form 4 and Form 5 Model Form 150: Rollover of Company Stock from 401(k) Plan to IRA
ILLUSTRATIVE FACTS: On September 14, 2009, Millicent M. Mare, a senior vice president of MNO Corporation, announced her retirement, effective September 30. Mare was a participant in MNO’s 401(k) plan and held 8,431 previously reported shares of MNO common stock through the plan’s company stock fund (and directly owned an additional 1,000 shares in her brokerage account). The terms of the plan require retired employees to withdraw or transfer their plan accounts within three months after their termination of employment. Aware that the Internal Revenue Code requires employers to withhold income tax on distributions to employees of their 401(k) plan assets, Mare determined to avoid withholding by directing the plan administrator to transfer her MNO common stock from her plan account directly to Main Street Bank as custodian for Mare’s self-directed individual retirement account. The plan trustee effected the transfer on September 29. That same day, Mare sold 500 shares of MNO common stock from her brokerage account at $29 per share, pursuant to a market order.
REPORTING PRINCIPLES: (1) Open Market Sale Reportable On Form 4. An open market sale of issuer equity securities is reportable on Form 4 by the end of the second business day following the date of execution of the sale. Because Mare’s sale of 500 shares of MNO common stock was executed on September 29, she was obligated to file a Form 4 reporting the sale by the close of business on October 1. For a discussion of reporting principles applicable to an open market sale, see Model Form 58. (2) Rollover Not Subject To Section 16. A rollover from a 401(k) plan to an IRA does not involve a purchase or sale, but simply a change in the form of beneficial ownership which does not change the insider’s pecuniary interest in the transferred securities (i.e., by creating a pecuniary interest in another person). Specifically, the transaction involves a change in ownership from securities owned indirectly through the 401(k) plan to securities owned directly (or indirectly) through the IRA. See Model Form 67. As a change in form of ownership that does not affect the insider’s pecuniary interest in the subject securities, an IRA rollover transaction is exempt from Section 16 by virtue of Rule 16a-13 and therefore need not be reported, on Form 4 or Form 5. See Model Form 80. (3) Reflect Change In Form Of Ownership In Next Form 4 Or Form 5. Although a rollover transaction exempted by Rule 16a-13 need not be reported as a “line item” on a Form 4 or Form 5, a rollover affects how the shares are reported in Column 5 of Table I and the description of the form of ownership that appears in Columns 6 and 7 of Table I of the insider’s future Forms 4 and Forms 5. In Mare’s case, for example, the rollover transaction eliminated her indirect ownership of MNO common stock through the 401(k) plan and increased the number of shares she owned directly. This change should be reflected in Mare’s subsequent Forms 4 and Forms 5. In addition, while not required, it is advisable to include a footnote in the insider’s first Form 4 or Form 5 filed after the occurrence of a change in form of ownership explaining the changes, as Mare has done in her Form 4. This practice will facilitate reconciliation of subsequent reports with the insider’s prior reports. (4) Post-Termination Reporting Exemption May Be Applicable. Even if a rollover transaction were not exempt from Section 16 as a change in form of ownership, a rollover transaction effected after the effective time of the insider’s termination of service might be exempt from the reporting requirements under Rule 16a-2(b). Under Rule 16a-2(b), a post-termination transaction will not be subject to the reporting requirements, even if it is not exempt from Section 16(b), unless the transaction occurs within less than six months of a non-exempt, opposite-way transaction effected while the reporting person was still an insider. For a discussion of reporting principles applicable to post-termination transactions, see Model Forms 213 and 215. (5) IRA Holdings May Be Deemed Directly Owned. Securities held in an IRA are held in the name of the insider-beneficiary by the bank, broker, or other entity with which they are deposited. The arrangement is custodial, much like securities held in street name, and do not necessarily involve a trust or similar entity. Accordingly, securities held in an IRA may fairly be deemed to be directly owned by the insider. Since all securities owned directly may be aggregated, there is no need for Mare to show her ownership of the MNO shares rolled over to her IRA separately from her ownership of the shares she owns directly in her brokerage account. Accordingly, Mare has shown all of her direct holdings on a single line, and has not indicated separately her ownership through her IRA. If an insider wishes, however, it is permissible to treat IRA holdings as indirectly owned, in which case Column 7 of Table I of Form 4 and Form 5 should include the words “by IRA.” See Model Form 80. (6)Reports Filed By Persons Who Are No Longer Insiders Should Include A Checkmark In The Exit Box. Persons who are no longer subject to Section 16 but who nevertheless are required to file a Form 4 or Form 5 should indicate that they have exited the reporting system by checking the appropriate box in the upper left corner of the form. Because Mare was no longer an insider on the date she filed her Form 4, she has checked the exit box.
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