Form 4 and Form 5 Model Form 75: Estates, Inheritances, and Bequests
ILLUSTRATIVE FACTS: Randy R. Randall, a director of RST Corporation and the owner of 25,000 shares of RST common stock, was appointed executor of his mother’s estate by a probate court on September 14, 2009. The estate then held 100,000 shares of RST common stock. On September 21, Randall transferred 20,000 shares of RST common stock from the estate to his own name to fulfill a specific bequest by his mother. During the following 11 months, Randall engaged in several additional dispositions of the estate’s holdings of RST common stock. By September 14, 2010, the estate held 40,000 shares, which amounted to approximately one percent of the outstanding common stock. On September 28, 2009, Randall executed his Last Will and Testament, which bequeathed all shares of RST common stock held by him at his death to State University. RST’s fiscal year ends on December 31.
REPORTING PRINCIPLES: (1) Inheritances Reportable. Appointment of an insider as executor of an estate that holds issuer securities does not result in the insider’s acquisition of beneficial ownership of the securities held by the estate, even where the insider is named in the decedent’s will as the intended recipient of the issuer securities held in the estate. See Luce, Forward, Hamilton & Scripts (May 21, 1992); Collins & Toner (March 25, 1971). Instead, the insider does not acquire beneficial ownership of issuer securities held by the estate (during the first 12 months following the insider’s appointment as executor) unless securities are actually transferred from the estate to the insider. Accordingly, Randall was not required to report beneficial ownership of any of the estate’s RST common stock upon his appointment as executor on September 14, 2009. He was, however, required to report his September 21 acquisition of 20,000 shares of RST common stock from the estate. (2) Deferred Reporting On Form 5 Available. Acquisitions and dispositions of securities by will or the laws of descent and distribution, like gifts, are exempt from Section 16(b) by virtue of Rule 16b-5. Accordingly, they may be reported on a deferred basis on year-end Form 5. See Rule 16a-3(f). Randall therefore may report his inheritance on a deferred basis on year-end Form 5. (3) Voluntary Early Reporting On Form 4 Permitted. An insider may voluntarily report on a Form 4 filed before Form 5 is due any transaction eligible for reporting on a deferred basis on Form 5. The Form 4 may be filed without regard to the two-business-day filing deadline normally applicable to Form 4. Had Randall decided to report early, he would have noted the voluntary nature of the filing by inserting a “V” next to the transaction code for each transaction reported early. See Model Form 55. (4) Use Transaction Code “W.” Transaction code “W” (“Acquisition or disposition by will or laws of descent or distribution”) specifically applies to an acquisition pursuant to a will. Therefore, Randall has inserted a “W” in Column 3 of Table I of his Form 5. (5) Insert “$0” In The Price Column When Reporting An Inheritance Of Securities. An insider’s acquisition of securities pursuant to a decedent’s will or the laws of descent and distribution involves no payment of consideration by the insider. Accordingly, an insider should insert “$0” in the price column (Column 4 of Table I or Column 8 of Table II) when reporting the receipt of securities as a bequest or other form of inheritance. Because the “$0,” together with the use of transaction code “W,” adequately discloses that no consideration was paid or received in connection with the transaction, it is not necessary for the insider to include a footnote explaining the price terms of the transfer. Insiders may not simply leave the price column blank, because the electronic filing system will not accept a Form 4 or Form 5 that reports a transaction on a line that leaves blank any of the transaction-related columns on that line (including the price column). (6) Insider’s Execution Of Will Bequeathing Issuer Securities Generally Not Reportable. An insider’s execution of a will providing for a testamentary bequest of issuer securities is subject to change and in any case does not result in a transfer of ownership until the insider dies. Accordingly, Randall need not report his bequest of RST common stock upon execution of his will. (7) Transactions By Executor Exempted For 12 Months. Under Rule 16a-2(d)(1), transactions by an executor of an estate and by certain other fiduciaries who are insiders are exempted from reporting (and short-swing liability) during the 12 months following their appointment and qualification. The exemption is available even where an insider is both the executor and the sole beneficiary of the estate. Accordingly, Randall’s appointment as executor of his mother’s estate on September 14, 2009, and the estate’s transactions effected by Randall in his capacity as executor of the estate during the 12 months after his appointment, are not reportable, either currently or on a deferred basis. (The Rule 16a-2(d)(1) exemption is not applicable to an insider’s ownership of or transactions in inherited securities following the transfer of the securities from the estate to the insider. See Magida v. Continental Can Co., 231 F.2d 843 (2d Cir.), cert. denied, 351 U.S. 972 (1953) and Reporting Principle (1) above.) Beginning September 14, 2010, Randall would be deemed to have a reportable interest in any RST common stock held by the estate to the extent of his pecuniary interest, if any. (8) Estates Owning 10% Are Subject To Section 16. Rule 16a-2(d)(1) exempts from Section 16 only transactions by the estate. The rule does not exempt an estate that beneficially owns more than 10% of a registered class of equity security from filing a Form 3. Nor are fiduciaries or estates among the persons named in Rule 16a-1 as being allowed to exclude securities held in a fiduciary capacity from the ten percent ownership calculation. Accordingly, where an estate owns more than 10% of a registered class of equity security, both the executor and the estate will be deemed to be ten percent owners and will be required to file a Form 3 within ten days after becoming a ten percent owner. See Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, Q. 134.01 (May 23, 2007). (If the executor is already a reporting person, however, he or she need not file a new Form 3, but instead should merely check the ten percent owner box in future reports on Form 4 and Form 5. Id.) During the first 12 months after the executor’s appointment, however, neither the executor nor the trust would be required to report any transactions by the estate, and the estate’s transactions would not be subject to Section 16(b). (9) Transactions By Insider Prior To Insider’s Death Remain Subject To Section 16. The SEC staff takes the position that a deceased insider’s obligation to report transactions that occurred prior to his or her death survives the insider’s death. A deceased insider’s report on Form 3, 4, or 5 may be signed and filed by the executor of the insider’s estate or, if an executor has not been appointed (or does not have the information necessary to complete the report), by the issuer or an employee of the issuer. Whoever files the report, the deceased insider should be named as the reporting person in Box 1 of the report, and the person executing the report should sign the report in his or her own name, indicating the capacity in which he or she is signing. Transactions in issuer securities effected in the insider’s accounts after the insider’s death are not attributable to the insider and therefore are not reportable unless the person effecting the transactions is independently subject to Section 16 and has a pecuniary interest in the securities. See Peter J. Romeo and Alan L. Dye, Section 16 Treatise and Reporting Guide § 7.09 (4th ed. 2012).
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