Q: An insider reported its holding of shares of Class B Common Stock in Table I. The insider is now converting a portion of its Class B Common Stock into shares of Class A Common Stock. Can the insider report the conversion of shares of Class B Common Stock into shares of Class A Common Stock in Table I (since its shares of Class B Common Stock were already reported in Table I)? Thank you.

RE: I suppose you could but not consistently with the form. If you want to do what the instructions call for, you could report the disposition of the B in Table I, and the acquisition of the A in Table I, and explain in a footnote that the B was previously reported, inadvertently, in Table I.
-Alan Dye, Editor, Section16.net 7/29/2020

Q: If an insider transfers company stock to trusts for the benefit of his spouse and/or children, I read Model Form 35/ Rule 16a-8 to require insider to continue reporting such shares as indirectly owned by insider. Assuming the transfers happen on 8/1, can these transfers just be reported as indirect holdings on separate lines on insider's next Form 4 in August/September (with a footnote indicating the transfer to the trust FBO spouse/children and the date of the same (does the date even have to be reported, or can it be described generically like "since the date of the reporting person's last Form 4, the insider transferred X shares of company common stock to [trust FBO spouse/children]?")), or does an 8/1 "gift" have to be reported on the next Form 4 in August/September (or on a timely Form 5, though that would make transactions between now and early next year look odd)?

RE: The transfer sounds like a reportable gift, which means it should be reported as a line item, not relocated as an indirect holding. That can be done on the next Form 4 or, as you say, on a later Form 5.
-Alan Dye, Editor, Section16.net 7/20/2020

RE: Thanks. If insider is not the trustee of the trusts, am I correct that those trusts drop off of his Forms 4 once reported as a gift (because the reporting principles in Model 35, 42 and the like only apply when the insider is trustee of such trusts)? Thanks.
-7/28/2020

RE: Yes, unless the insider is trustee, or is effectively trustee by virtue of his influence over the trustee, the insider will no longer beneficially own the securities.
-Alan Dye, Editor, Section16.net 7/28/2020

Q: Good Morning. We have been informed that our 401(k) administrators are starting to take out a $5 recordkeeping fee each quarter, which is taken proportionally from all the investments a participant owns. This is not something that our reporting persons have any control over, or ability to elect. That being said, a reporting person has a Form 4 due today, and their 401(k) shares have been sold to cover this fee (.0047 shares in 401(k) account were sold). In this specific instance, the last event where the reporting person's 401(k) shares INCREASED was in August 2019. First: Although small and immaterial, I want to be sure that this quarterly fee is exempt from short swing liability, as this could bring potential problems since it is a quarterly event. Second, when reflecting this reduction on our Form 4, is it sufficient to footnote this by saying: "Between [date] and [date], the reporting person disposed [#] shares of [Company] common stock under the [Company] 401(k) plan. " Or, do we need to explain why the shares were reduced ("due to recordkeeping fees")? Thank you as always!

RE: Because payment of the administrative fee isn't a volitional transaction by the insider, it isn't a discretionary transaction, and any transaction in a qualified plan that isn't a discretionary transaction is exempt from Section 16(a)(and (b) by Rule 16b-3(c) and Rule 16a-3(g). A footnote explaining changes in 401(k) plan isn't required, but I generally favor including one just to "reconcile" to the last report. Given the tiny change here, though, I might consider not including an explanatory footnote. If you decide to include one, whether to explain that the reduction resulting from an administrative fee, would be entirely discretionary.
-Alan Dye, Editor, Section16.net 7/28/2020

Q: Founder is currently an executive officer of company. As founder approaches retirement age, his role with company is changing and he will no longer have a policy-making function (meaning he will no longer be a Rule 3b-7 executive officer). However, founder owns a significant amount of company stock (though below 10% threshold). Is there any rationale/justification for continuing to designate founder as a Section 16/Rule 16a-1(f) officer even though he does not have a policy-making function with company, just given his ownership? Perhaps a policy argument by company to protect founder (and his family members) when he/they transact in company stock? I imagine this is not an infrequent set of circumstances, so I am curious how it is usually handled. Thanks as always.

RE: No. I don't know of a rationale for treating a retired founder, who owns less than 10%, as an insider. If the company WANTS to continue to treat him as an insider, maybe the founder could be appointed as "honorary director" or "director emeritus," and take the position that his role is similar to that of a director.
-Alan Dye, Editor, Section16.net 7/27/2020

Q: Would you amend an exit Form 4 to attach a forgotten POA? Thank you!

RE: Was the Form 4 filed solely to exit the system, and the POA was never used for prior Forms 4?
-Alan Dye, Editor, Section16.net 7/27/2020

The Form 4 was filed solely to exit the system. The POA was never used for prior Form 4s, but it was used for the exit filing. Thank you!
-7/27/2020

RE: Because the filing was voluntary, reporting something that didn't need to be reported, the absence of a "compliant" signature doesn't mean the insider failed to file a report, and the report isn't misleading. So, I wouldn't amend to add the POA.
-Alan Dye, Editor, Section16.net 7/27/2020

RE: Thank you again. I appreciate your time!
-7/27/2020

Q: Non-employee director wishes to create an irrevocable Ohio Asset Protection Trust and fund it with company stock currently held in another trust and reported as indirect ownership. Non-employee director's husband would be the beneficiary and trust protector. This would allow for non-employee director to pull back any assets placed in the trust should she decide to reverse the decision (e.g., husband predeceases non-employee director or non-employee director leaves company board). Is this reportable and, if so, how? Does it matter if the shares used to fund the trust come from another trust or direct ownership?

RE: It does sound to me like this will be reportable, probably as a gift to the beneficiaries of the OAPT. If indirectly owned shares, through the other trust, are reported separately on the director's Forms 4, then I think the withdrawal of those shares will be reportable, followed by a second line to report the contribution of those shares to the OAPT (unless the shares are transferred directly from the first trust).
-Alan Dye, Editor, Section16.net 7/24/2020

Q: We are representing an investment in an underwritten public offering. This is a "bought deal" in which the underwriter will buy with shares with no prospects to resell the shares. Following closing, they will start making some calls and try to sell the shares and get the shares off their books. It is possible that the numbers of shares purchased will be in excess of 10% of the issuer's outstanding stock. This leads to two questions of which I cannot find an answer: 1. My research does not indicate that there is an exemption for this transaction from filing either a Form 3 or a Schedule 13G. I would assume the investment bank in my transaction has to file a Form 3 and Schedule 13G. Correct? 2. Forgetting my deal for a moment, assuming the offering is for more than 10%, what precludes underwriters from filing a Form 3 or Schedule 13G in a typical underwritten offering whereby the underwriters purchase the shares but have buyers lined up to buy them shortly following closing? The underwriters actually own the shares for a short period of time, so wouldn't they otherwise have to file a Form 3 and Schedule 13G? Thanks.

RE: For Section 13(d) purposes, an underwriter usually qualifies for an exemption from filing a 13D/G under Rule 13d-3(d)(4), and therefore doesn't have to file a Form 3 either. See page 132 of the Treatise. There also is an exemption from Section 16 for an underwriter's transactions in connection with a distribution. See Rule 16a-7, discussed at pages 558-60 of the Treatise.
-Alan Dye, Editor, Section16.net 9/21/2008

RE: Do you think in the case of a bought deal where the underwriter has yet to find buyers for the shares, there is a period of time after which the underwriter's ability to rely on 16a-7 becomes questionable? Perhaps after 40 days (to take the time period used in 13d-3(d)(4))?
-8/2/2011

RE: That's a good question, and I've never seen it answered (or asked). It makes sense to me that, at some point, a sticky underwriting ceases to be a distribution, and becomes a proprietary holding of the underwriter. I don't know at what point that might occur, though, and I think I'd rely on 16a-7 in any case (as long the underwriter is seeking a buyer) and hope for the best (since no Form 3 or 4 would be filed).
-Alan Dye, Editor, Section16.net 8/3/2011

RE: Somewhat related but in the context of an ordinary firm commitment underwriting with an overallotment option, does the 40-day period from Rule 13d-3(d)(4) run from the date the underwriting agreement is executed, pursuant to which the option is granted as Rule 13d-3(d)(1) would seem to require? Or, is it the date of "acquisition", that is, the date the option is exercised? Does Rule 16a-7 trump all provided that the exercise of the option and the sale of the underlying stock is, in good faith, in connection with a distribution?
-7/23/2020

RE: I do think, based solely on the language of Rule 13d-3(d)(4), that the 40 days would begin to run only when the shoe is exercised (and closes), regarding the shoe shares only. I don't think 13(d) beneficial ownership after the 40-day period would affect the underwriter's ability to rely on Rule 16a-7, though, to avoid reporting any transactions that occur after the 40 days, assuming the transactions are still in connection with the distribution.
-Alan Dye, Editor, Section16.net 7/24/2020

Q: Insider of PubCo writes put option that obligates it to buy, upon shareholder's exercise, 100 shares of PubCo held by shareholder, at a fixed price. The 100 shares represents all of the shares of PubCo held by shareholder. Option terms provide that, to the extent PubCo pays dividends in kind on the shares, such shares will be added to the put. Under 16a-9, dividends paid in kind are exempt from Section 16 (assuming shareholder is not the only holder of shares), so shareholder generally should not have to file Form 4 for any PIKs. Further, so long as the terms of the option, as originally agreed to, provide for the automatic increase in the size of the put option for dividends paid in kind, then such automatic, non-discretionary (since PubCo chooses to pay dividend in kind) PIK transaction also should not need to be reported by insider on a Form 4 (i.e., it should not be deemed to disposition of the original option and acquisition of a new option), per SEC Release 34-28869, n. 134 (1991). What if shareholder is the ONLY holder of shares, and thus is obligated to file Form 4 for any dividend PIK, per SEC Staff Section 16 interp 117.01. Do you think this interp should carry through to the analysis of the put option and Form 4 reporting obligation for such PIK?

RE: My thinking is that, while the acquisition of additional shares by shareholder might not qualify for exemption for the shareholder if the shareholder were subject to Section 16, the impact on the insider is akin to an antidilution adjustment, like the increases in beneficial ownership referred to in footnote 4 of Release 34-28869. What do you think?
-Alan Dye, Editor, Section16.net 7/24/2020

Q: If a new executive officer signs an offer letter now with an anticipated start date of January 2021, would the Form 3 trigger be the signing of the offer letter or the start date? Should the Board officially appoint him upon execution of the offer letter, or can they wait until closer to the start date to delay these filings? We understand that the Form 8-K requirement can be delayed if we plan to make a public announcement otherwise, but would a Form 3 still have to be filed upon a fully executed offer letter? Thanks.

RE: The Form 3 must be filed within 10 days after the new hire begins to perform the functions of an executive officer. Ordinarily, that date would be the new hire's start date, not the date of signing the offer letter.
-Alan Dye, Editor, Section16.net 7/23/2020

Q: If a fund partnership is generally governed by a GP controlled by one person but there are two voting decisions (approving board members related to a public company investment or approving acquisitions by the public company that require a vote of shareholders) that require two of three members of a committee to approve (and one member is a large LP in the fund), seems like the person controlling the GP would still report beneficial ownership of all of the fund's shares in the public company and the other two members (including the LP) would not report beneficial ownership of the fund's shares in the public company (via rule of three), but would need to disclose the voting arrangement in the funds 13d. Would you report it some other way?

RE: I agree that the GP and the "one person" would remain 13(d) beneficial owners of the pubco shares held by the partnership. I think, though, based on the Huppe and Analytical Partners cases, that the partnership itself also would be a beneficial owner of the shares. And, I agree that the 13D should describe (in Item 6) the occasional participation of the other two individuals.
-Alan Dye, Editor, Section16.net 7/23/2020

Q: If an insider transfers company stock to trusts for the benefit of his spouse and/or children, I read Model Form 35/ Rule 16a-8 to require the insider to continue reporting such shares as indirectly owned by the insider. Assuming the transfers happen on 8/1, can these transfers just be reported as indirect holdings on separate lines on insider's next Form 4 in August/September (with a footnote indicating the transfer to the trust FBO spouse/children and the date of the same)? Does the date even have to be reported, or can it be described generically like "since the date of the reporting person's last Form 4, the insider transferred X shares of company common stock to [trust FBO spouse/children]?" Or, does an 8/1 "gift" have to be reported on the next Form 4 in August/September (or on a timely Form 5, though that would make transactions between now and early next year look odd)?

RE: The transfer sounds like a reportable gift, which means it should be reported as a line item, not relocated as an indirect holding. That can be done on the next Form 4 or, as you say, on a later Form 5.
-Alan Dye, Editor, Section16.net 7/20/2020

Q: Hi, Alan. An insider's 10b5-1 plan provides that 100 SARs will be exercised if the Company X stock price closes at or above $50. Following the close of markets on Monday, the insider's broker emails the insider to inform the insider that Company X stock closed at $50, triggering the exercise of 100 SARs as provided in the insider's 10b5-1 plan. The closing price of Company X stock on Monday is used to calculate the number of shares withheld to cover the SAR exercise price and to pay tax withholding obligations. The broker's email on Monday evening contains a calculation of the number of shares withheld and the number of shares remaining for sale. The broker's email on Monday evening also informs the insider that, "The exercise date is [Tuesday's date]." The remaining shares are sold in a series of transactions on Tuesday pursuant to the insider's 10b5-1 plan. In this example, is the transaction date for the initial SAR exercise Monday or Tuesday? The insider has historically relied on the broker's statement regarding the exercise date, but is questioning whether this is correct. (As a practical matter, the insider has historically filed Form 4s for similar a transaction on the 2nd business day after the broker's email [e.g., Wednesday in this example] to be safe). Thanks!

RE: It sounds to me like, under the terms of the 10b5-1 plan, the SAR is deemed to be exercised on the day the market closes at above $50, which in this case would be Monday. So, the exercise and the company's withholding of shares to pay taxes would be reportable by Wednesday. The broker's sale of the remaining (net) shares may not occur until Tuesday, meaning those sales aren't reportable until Thursday, but the exercise still occurred on Monday. If there is an interest in having the exercise occur on the same day as the sales, maybe the 10b5-1 plan could be drafted to provide that the SAR will be exercised at 12:01 a.m. on the business day following the day on which the stock price closes at $50 or more.
-Alan Dye, Editor, Section16.net 7/20/2020

Q: An Executive Officer and Section 16 reporter has an established donor advised fund (“DAF”) to which he has previously contributed issuer common stock. The insider plans to establish a charitable lead annuity trust (“CLAT”) in order to satisfy his charitable intent over a 15-year term. Issuer common stock and other equity securities will be contributed to the CLAT. The CLAT will establish an annuity and contribute cash to the insider’s DAF. A bank & trust will serve as trustee to the CLAT. An individual from the bank & trust serves as the insider’s financial advisor. The insider will have the ability to remove the trustee, but the successor trustee must be a nonsubordinate entity. The residual beneficiaries of the CLAT are the insider’s three adult children in equal shares. The CLAT is irrevocable. The insider may have a right to substitute CLAT assets, but there is no plan to substitute issuer common stock while the settlor remains an insider. If the insider does not have influence or control over the trustee’s actions, the insider should report the transfer of issuer stock to the CLAT as a gift, correct?

RE: Yes, I agree that the transfer will be reportable as a gift. I think the only issue is whether the insider remains the beneficial owner of issuer securities contributed to the CLAT, and I agree that the answer is no, so long as the insider doesn't influence the trustee's investment decisions.
-Alan Dye, Editor, Section16.net 11/25/2019

RE: Does this analysis change if the trustee is the spouse of the insider?
-7/13/2020

RE: Only in the sense that, if the insider's spouse is trustee, it is highly likely that the insider will influence investment decisions and thus be de facto co-trustee.
-Alan Dye, Editor, Section16.net 7/13/2020

RE: Thanks, Alan. A couple follow-up questions:
(1) If the insider (or Insider’s spouse) serves as trustee and the insider’s adult children are remainder beneficiaries, do all sales of the Insider’s company stock by the CLAT have to be reported, even if the insider does not have a direct pecuniary interest in the company stock held by the CLAT?

(2) If there is an obligation to report in the scenario above, other than having a third party act as trustee, is there a way to limit the “investment control” of the insider trustee that would eliminate the reporting obligation for sales of the insider company stock? For example, if there is a plan to sell the insider company stock immediately for purposes of funding the DAF.
-7/15/2020

RE: 1. Yes, I think so. The wife as trustee, with children as remainderman, means she has a pecuniary interest in the shares, and that pecuniary interest is attributable to the insider unless the spouse and insider maintain separate estates.

2. Maybe if someone other than a person residing with the insider serves as trustee?
-Alan Dye, Editor, Section16.net 7/16/2020

RE: Thanks again Alan.

If the children who are the remainder beneficiaries are adult children that do NOT share a household with the insider, does the reporting obligation still exist here?
-7/17/2020

RE: Yes, because Rule 16a-8, unlike Rule 16a-1(a)(2), attributes beneficial ownership to a trustee if any family member has an economic interest in the trust, whether or not the family member shares the insider's household.
-Alan Dye, Editor, Section16.net 7/17/2020

Q: Good morning. A client noted that on certain officer Forms 4, the exercisable date for stock option grants were incorrect. Would you recommend that they amend those Forms 4, or would that not be considered material, and should they just use the correct date going forward?

RE: With the usual caveat that the Staff has not, to my knowledge, ever said that it's okay not to correct an error in a filed report, I know that plenty of minor errors go uncorrected, and the SEC has never brought an enforcement action based on those errors. I consider a vesting date to be immaterial. In your case, I would not amend the prior reports, and would instead correct the error in the next Form 4 that reports the option.
-Alan Dye, Editor, Section16.net 7/16/2020

Q: Insider holds certain of his company shares in GRAT A, of which he is the trustee and sole annuitant, the remainder go to his children. The shares are reported on insider’s previous Forms 4 as being indirectly held. Insider’s spouse holds her company shares in a GRAT B, of which insider is the trustee, spouse is the sole annuitant, the remainder go to the children. The shares are reported on insider’s previous Forms 4 as being indirectly held in each of GRAT A and GRAT B. GRAT A and GRAT B are expiring and GRAT A and GRAT B require that an annuity payment be made back to them from their respective GRATs. The insider and his spouse would like to take some of the shares coming out of GRAT A and GRAT B as annuity payments and transfer them to newly created irrevocable trusts for each of the insider’s children who live in the insider’s home. The settlors of the newly created irrevocable trusts would be the insider and his spouse, the trustees of the irrevocable trust would be the insider, his spouse and his brother-in-law (unanimous consent would be required to take action), and the beneficiaries would be the insider’s children who live with the insider. Questions: 1. It is expected that the return of shares as an annuity payment from each of GRAT A and GRAT B would first go to the insider’s revocable trust where the insider and his spouse are settlors, trustees and beneficiaries. I am assuming that this transaction is exempt and not required to be reported, and can just be updated on a subsequent Form 4. 2. To the extent there are extra shares that are distributed to the children out of GRAT A and GRAT B, I am assuming that those shares should be reported as a gift using transaction code “G”. If the insider’s brother-in-law is the sole trustee of the irrevocable trust receiving these shares out of the GRATs for the insider’s minor children who reside in the insider’s house, I am assuming that there is a presumption that these shares should be reported on the insider’s Form 4 as being indirectly held. 3. Certain of the shares that are being returned as an annuity payment to the insider’s revocable trust will be transferred to the newly created irrevocable trusts for the children. The irrevocable trust has 3 trustees who must act unanimously, which is different from the insider’s revocable trust. Would you report the shares coming from the GRATs to the revocable trust and then to the irrevocable trusts for the children using the gift (“G”) transaction code? If so, should it be reported as a gift back to the revocable trust and then a gift to the new irrevocable trust? Or would you just report it as a gift from the revocable trust to the irrevocable trust, with FN disclosure indicating the increase in shares in the revocable trust from the prior Form 4 were due to a distribution of an annuity payment from the GRATs?

RE: 1. I agree with this conclusion. I think there is no change in pecuniary interest, so Rule 16a-13 should apply.

2. I agree that the transaction would be reportable as a gift. Perhaps the "presumption" in Rule 16a-1(a)(2) wouldn't apply in this Rule 16a-8 context, but I think that a presumption exists, as a practical matter, based on the facts and circumstances of the beneficial ownership determination (here, involving a family member who likely isn't independent).

3. Because I think Rule 16a-13 exempts the transfer from the GRAT to the revocable trust, I would report using the second of the two methodologies you describe.
-Alan Dye, Editor, Section16.net 7/15/2020

Q: If an insider is trustee of a family trust that has three sub-trusts, one for each of their three children, do you report the total shares in the trust as indirectly held on one line, or do you report each sub-trust on a separate line?

RE: If all of the trusts have the same trustee, it's acceptable to report all of the shares as owned indirectly through the master trust.
-Alan Dye, Editor, Section16.net 7/13/2020

Q: A company is issuing deferred stock (not units and not restricted stock) to owner of target as part of acquisition consideration. The target's owner will become an employee of the acquirer and the vesting of the deferred stock in contingent upon the target's owner continuing on as an employee with acquirer (deferred stock vests in equal installments on the first and second anniversary on continued employment). When the holding period starts for Rule 144 purposes, there is no additional consideration paid by target's owner; all that is necessary is continued employment, therefore, does the holding period start upon execution of the agreement?

RE: I think the Staff's position is that the holding period starts when the agreement is signed, as long as the acquisition has closed by then (and therefore isn't a condition to the issuance of the shares).
-Alan Dye, Editor, Section16.net 7/13/2020

RE: Thank you, as always, for your prompt reply!
-7/13/2020

RE: You're welcome!
-Alan Dye, Editor, Section16.net 7/13/2020

Q: Our current process is to have retirement eligible Section 16 officers pay FICA tax owed with a check, in the Nov/Dec time frame for early FICA tax withholding related to RSUs vesting in Feb of the following year. Would switching to share withholding rather than payment by check violate Section 402 of the Sarbanes-Oxley Act?

RE: No. Withholding would not violate Section 402 if vesting of the shares to be withheld is accelerated to allow withholding at the same time the company pays the tax. That’s the usual process, and the insider is deemed to pay the tax rather than “borrow” it from the company.
-Alan Dye, Editor, Section16.net 7/11/2020

Q: Payroll failed to realize that the officer had met FICA limits and withheld too many shares. We are correcting this by increasing the officer's holdings. Could this be reported on the next Form 4 with a footnote, or should we file an amended Form 4? The mistake was for about $2000 (a very small amount compared to the shares that vested).

RE: As discussed elsewhere in this forum, the Staff has never stated that an error in a prior filing doesn't need to be corrected by amendment. On the other hand, no one asks the Staff that question. In your case, if you think the error is immaterial, you'd be acting consistently with standard practice to correct the error in the insider's next Form 4, with an explanatory footnote.
-Alan Dye, Editor, Section16.net 7/9/2020

Q: An investor owns 6% of a class of equity securities of ABC Company. The investor also owns warrants to buy more shares of ABC Company, but the warrants are exercisable only to the extent that they result in the investor owning less than 10% of the class. Is this a material contingency such that the investor is not deemed to beneficially own 10% or more of ABC Company?

RE: It sounds like the warrants contain a blacker provision. Courts have upheld blockers in seven or eight cases, as discussed in the Treatise (Section 2.03).
-Alan Dye, Editor, Section16.net 7/9/2020

Q: Hi, Alan. This relief is set to expire on July 1. Do you know if it has been extended or if there are any plans to do so? Many folks are still working remotely, and it would be helpful if this relief were still in place. Thanks and best.

RE: The Commission issued a statement this week which included this paragraph: “On March 26, 2020, the Commission temporarily amended Rule 10 of Regulation S-T to provide relief through July 1, 2020 from the notarization requirements for EDGAR access requests, subject to certain conditions. The EDGAR Business Office will work with filers to continue to accept electronic and remote online notarizations.”
-Alan Dye, Section16.net 6/27/2020

RE: Hi, Alan.

I believe that the relief originally provided that we did not need to notarize Form ID (subject to some conditions), which in my mind is the difficult requirement if one is working from home. As I read this, this relief still expires on July 1, so I will need to figure out how to get my signature notarized on the document. Am I reading this correctly? Thank you.
-6/29/2020

RE: The Commission didn't say anything more than what's in the statement, unfortunately, but I read it to say that the Staff will still accommodate those having difficulty with the notarization requirement. I think it's worth a call to the Staff to see if they will tell you it's fine to continue not to get notarization now if your group is still working remotely. There must be some kind of guidelines they are following. If you choose to ask, please post your findings here.
-Alan Dye, Section16.net 6/29/2020

RE: I followed up and called Filer Support on 6/29, and was told to check the website or call back on July 1 to see if the relief has been extended.
-6/30/2020

RE: Thanks for circling back. Strange they didn't just extend the relief in the statement.
-Alan Dye, Section16.net 6/30/2020

Q: I understand the SEC's current position that a loan of stock is neither a purchase, sale nor change in beneficial ownership and thus is not reportable. However, if we have a situation where a Section 16 insider inadvertently reported a loan transaction (thus showing the subject shares on his Form 4 holdings), how should the return of those shares be reported after the loan transaction is unwound? As background, these loan shares were reported on a Form 3, so there was never a "reportable transaction" Form 4 that was filed. My assumption is a true loan is not reportable, thus we can just decrease his holdings by the loan share amount and a footnote would be advisable to describe the transaction. Any thoughts or different opinion? Thank you.

RE: I would handle the reporting exactly as you describe, by footnote in the next Form 4. The Form 3 overstated ownership, which you could correct by amendment, but I think the footnote you describe can effectively address that overstatement.
-Alan Dye, Section16.net 6/30/2020

RE: Thank you for the prompt reply and your thoughts!
-6/30/2020

Q: I believe I have a grasp on the obligations of a departing Sec 16 officer, generally, but what if that person remains a consultant of the company for another year or more? Do the 3-month Rule 144 requirement and 6-month short swing profit rule toll based on the date the person ceased being a Section 16 officer, or is it from the date they officially are no longer affiliated in any way with the company? Thank you!

RE: The Rule 144 clock for affiliate status and the Section 16 clock for post-termination reporting obligations start when the person is no longer an affiliate (Rule 144) or an "officer" (Section 16). If the person remains with the company in some other capacity (e.g., as a consultant who isn't considered an affiliate or officer), the clock still starts.
-Alan Dye, Section16.net 6/30/2020

Q: I have attached a POA to a Form 4 that I am preparing. For peace of mind, is there a way to confirm the document that is attached to the form is the correct one? Thank you.

RE: The answer depends on whose software you are using. Just in case it's the R&D Filer, someone from technical support is going to contact you directly to help solve the problem. Re-post if the problem persists, regardless of the software you are using.
-Alan Dye, Section16.net 6/29/2020

Q: Our company is preparing to pay its first ever quarterly dividend, and I was curious whether other companies permit their Section 16 officers and directors to participate in broker-assisted DRIPs. We do not have a company sponsored DRIP, but our transfer agent does offer a DRIP that we believe qualifies under Rule 16a-11. My concern is that our insiders hold shares with a number of different brokers, which makes it administratively difficult to review the dividend reinvestment programs for each of those brokers to determine whether they are "substantially similar" to our transfer agent's program, as well as to keep up with ongoing purchases for future Form 4s. A number of brokers have suggested to me that their other corporate clients do not permit their insiders to participate in broker assisted reinvestment for those reasons, but I was curious if that was a fairly common approach or if doing so is being overly conservative. Any thoughts/suggestions would be appreciated.

RE: Let's hope others can weigh in with their experience or other insights. I have known plenty of companies to disallow participation in a broker-assisted DRIP where the company does NOT have a 16a-11 DRIP, just to avoid the hassle of quarterly Forms 4. I think the Staff has been fairly expansive in considering dividend reinvestment features to be substantially similar to a 16a-11 DRIP, so I would expect virtually all broker-assisted DRIPs to qualify, but you may be right that some companies avoid the risk entirely by disallowing participation.
-Alan Dye, Section16.net 5/17/2013

RE: Wondering whether or not companies typically prohibit or discourage insiders from participating in broker-sponsored DRIPs, even where there is company-sponsored 16a-11 DRIP, simply to avoid the administrative burden of reconciling ownership with DRIP purchases every time there the insider has a Form 4 or Form 5 filing.
For those who permit participation in broker-sponsored DRIPS, how do you consider whether the plan is substantially similar?
-6/29/2020

RE: I do know of companies that prohibit dividend reinvestment through a brokerage account, but I don't know what the majority practice is. If both the DRIP and the brokerage account reinvest reasonably soon after the dividend payment date and at current market prices, I think they are substantially similar. Otherwise, I think the analysis might require a feature by feature analysis.
-Alan Dye, Section16.net 6/29/2020

Q: The CEO owns about 20% of the company and has been filing all of its Section 16(a) forms on time. However, the CEO has not filed any Schedule 13D or 13G since acquiring more than 5% of outstanding shares (which goes back many years). What is the risk of potential issues (including enforcement actions)? Do you recommend that the CEO fix this oversight and file a Schedule 13D on a going forward basis?

RE: I've run into the same issue a few times, almost always involving a founder who has been well over 5% for many years and has never filed a 13D or 13G, for reasons known to no one who is working in compliance now. In those situations, we decided to go ahead and file late. We worried that a 13D showing on the cover page that the triggering event was ages ago might provoke an inquiry, but we never heard anything. I suspect that the Staff recognizes that violations of this type are both inadvertent and, because of disclosures in Form 4 and proxy statements, inconsequential to investors.
-Alan Dye, Section16.net 6/29/2020

Q: If insider contributes issuer securities to a GRAT and the insider's spouse is the trustee, is this still exempt from Section 16 as change in form of beneficial ownership, or does it have to be reported as a gift?

RE: If the insider is the sole annuitant, and the insider is able to influence the spouse's investment decisions regarding assets held by the GRAT (which is usually the case with spouses), the transaction would not be reportable, in reliance on the Peter J. Kight letter. Regarding spouses as trustees, see the Ralston Purina letter (reconsidering an earlier letter).
-Alan Dye, Section16.net 6/25/2020

Q: Hi, Alan. Hope you are doing well. I know there is probably a mention of this previously, but would you remind me if it's mandatory to list all holdings in Table 1 if we only updated (increased) the 401K indirect holdings and had a transaction to report in Table II? We forgot to add all holdings in Table 1, but wondering if we must file an amendment now? Thank you

RE: If the only transaction reported was in Table II, and you voluntarily added a 401(k) plan "holding" to Table I, to update the total shown in the last Form 4, then there is no need to amend the Form 4 because you weren't required to complete Table I. When you report a transaction in Table I, you do need to include all holdings of the security reported in Table I (presumably common stock), including both direct and indirect holdings. It doesn't sound like that's your situation.
-Alan Dye, Section16.net 6/25/2020

RE: Whew! Thank you so much.
-6/25/2020

Q: We currently have the RSUs reflected as a derivative on Table II. The affiliate will be forfeiting a portion of these RSUs as a result of an early termination. Would you please let me know which sample forms we should refer to report this transaction?

RE: If you've been reporting the RSUs in Table II (or even in Table I), the insider's forfeiture of the shares for no value is the expiration of a derivative security for no value and therefore is not reportable. There is no need to report the forfeiture on either Form 4 or Form 5.
-Alan Dye, Section16.net 11/30/2012

RE: Can you please confirm there are no changes to this position? Thanks.
-6/22/2020

RE: No, there have been no changes to this Staff position. The Staff took the position publicly, so I think it's safe to rely on it.
-Alan Dye, Section16.net 6/22/2020

RE: Perfect, thank you.
-6/22/2020

Q: Greater than 10% owner of company A is also a shareholder of company B. Company B is acquired by company A in a merger where company B shareholders receive shares of company A in the merger. Other than claiming unorthodox transaction, any exemption available for the shareholder? Thank you.

RE: Unfortunately, no, unless the 10% owner also has a deputy serving on A's board, such that Rule 16b-3 would be available.
-Alan Dye, Section16.net 6/20/2020

Q: A director was granted RSU and options under 16b-3. Within 6 months of that grant, the director resigns and, following the resignation, the vesting of the RSUs was accelerated and the time period during which he has to exercise any vested options was extended. The director has not engaged in any other transactions in the 6 months prior to those post-resignation changes. I believe that the extension of time for the exercise of the options is treated as a cancellation and grant of a new option. I understand that there is an argument that even if that occurs post resignation, it would be covered under 16b-3, but if that is not the case, is it correct that the acceleration of the vesting of the RSUs and the amendment to the option do not need to be reported and are not subject to Section 16(b) because, even though they occurred within 6 months of an opposite way transaction that occurred prior to resignation (i.e., the granting of the RSUs and options), those transactions are exempt under 16b-3 and therefore not "subject to Section 16(b)" as that phrase is used in Rule 16a-2(b)(2)? Also, bearing in mind Rule 16b-3(d)(3), are there any restrictions on the director's ability to exercise and sell the options and also to sell the RSUs following the acceleration of the vesting of the RSUs and the extension of the period to exercise the options? Thank you.

RE: The Staff took the position in an interpretive letter that extending the post-termination exercise period of an option is not a cancellation and regrant if the plan permits the board or administering committee to take the action and the amendment does not extend the exercise period beyond the full term of the option. So, I don't think you need to worry about whether the "regrant" satisfies Rule 16b-3 (although it makes sense for other reasons to have the board or a qualifying committee approve the amendment). I'm not sure how an RSU's vesting is accelerated post-resignation, since the grant usually is forfeited at the time of resignation, but if you're planning to accelerate vesting on a "nunc pro tunc" basis, I would analyze the Section 16 issues the same way the Staff analyzes option extensions, and not report if the transaction is within the committee's authority.
-Alan Dye, Section16.net 6/17/2020

RE: Thank you. Are you referring to the Reynolds Metals NAL (3/27/92)?

In this situation, a few days following resignation of the director, the board (i) resolved that options held by the director, which would normally expire 90 days after resignation, will not expire until 6 months after resignation (which is earlier than the existing final expiration date) and (ii) resolved to immediately vest the RSUs, with effect immediately prior to resignation.

I think the former director is not required to final a Form 4 to reflect the board's actions nor does he need to restrict his trading as a result of Section 16 because:

With respect to the options, the NALs indicate that an amendment such as this is not material and therefore is neither reportable nor subject to 16(b).
With respect to the RSUs, the NALs indicate that acceleration of vesting is not material and therefore is neither reportable nor subject to 16(b).

Also, in this case, both actions by the board actually occurred a few days post resignation, so even if they were not exempt under 16b3, they are not subject to 16a or 16b in any case because, at the time of the action, the former director was no longer subject to Section 16 and the former director did not have a non exempt transaction of any kind in the prior 6 months (the only transaction in the prior 6 months was the grant of the RSUs whose vesting was accelerated by the board post-resignation).

Can you please let me know if you agree?
-6/17/2020

RE: Yes, I agree with all of your conclusions. So, no Form 4 and no 16(b) risk.
-Alan Dye, Section16.net 6/17/2020

Q: Hello. I'm filing a Form 3 for a new BOD. The Director didn't sign the POA with his full name. Is this okay? If so, under the Form 3 signature line, do I add his full name or add what is listed on the POA? Thank you!

RE: The SEC's rules allow a person to manually sign a document, including a POA, with any kind of wording or slash s/he considers to be a signature. So, I would accept the POA, and then show a conformed signature in the individual's full name, as indicated in the Form ID.
-Alan Dye, Section16.net 6/17/2020

RE: Thank you!
-6/17/2020

Q: Hi, Alan. I'd like to confirm that a transaction which occurs on Thursday, July 2 would require a Form 4 filing by Tuesday, July 7. This would be two business days after the transaction (due to the fact that Friday July 3 is a Federal holiday and not a business day). Thank you.

RE: Yes, I agree, the Form 4 would be due Tuesday, July 7.
-Alan Dye, Section16.net 6/17/2020

Q: Company A is currently in bankruptcy and in accordance with the Company's plan, all of its current equity securities will be cancelled at emergence for no consideration. The Company will emerge as a private company (we will file a Form 15 on the emergence date). Do the Company's D&O's need to file Form 4s reporting the cancellation of all of their securities at emergence even though they are not receiving value?

RE: I don't know of any exemption from reporting the "disposition" of the securities, although it makes sense to me that they shouldn't be reportable. The cancellation of a derivative security for no value isn't reportable, and acquisitions (not dispositions) of stock distributed on a pro rata basis to all holders of a class are not reportable. Maybe the Staff would take the position interpretively, or on a no-action basis, that the cancellation of common stock is not reportable, but I don't know of any authority addressing the question either way. If you find an answer, please let the rest of us know.
-Alan Dye, Section16.net 6/17/2020

Q: Hi, Alan. Is it typical or against regulations for an Affiliate to gift stock during a company blackout? I know we don't have to report the gift immediately, but if the gift executes during a closed trading window, would that be violating any rules? Thanks for your help!

RE: A gift is not a sale, so a gift can't violate Rule 10b-5 (which prohibits, among other things, a "purchase or sale" of a security while in possession of material nonpublic information. There is a possibility that a person in possession of MNPI might gift stock to another person, who then sells the stock before the MNPI is made public. The theoretical concern sometimes expressed is that the SEC or a court might try to collapse the two transactions and say the insider effectively sold the stock. To my knowledge, no one has ever tried to make that case, so many companies allow gifts during blackout periods. Others, though, prohibit gifts or gifts to persons who are not also subject to the blackout (e.g., family members). So, the answer to your question likely resided in the issuer's insider trading policy.
-Alan Dye, Section16.net 6/16/2020

Q: An investment fund (“Fund”) holds convertible preferred stock in a private company that is preparing to IPO. The preferred is currently convertible into common at the holder’s option and will convert automatically upon the IPO. Based on the number of common shares underlying Fund’s preferred and the small amount of common actually outstanding pre-IPO, Fund currently beneficially owns > 10% of the class of common stock. Accordingly, Fund and its GP will file a Form 3 on the day the IPO registration statement is declared effective. When the IPO closes a few days later, Fund will receive newly issued common shares upon the automatic conversion of the preferred. Fund also hopes to receive from the underwriters a modest allocation of common shares to purchase in the IPO. Whether or not it gets that allocation, Fund will be diluted to below 10% beneficial ownership as a result of the IPO. Question: Will Fund and its GP need to file a Form 4 to report (i) the conversion of Fund’s preferred into common and (ii) if applicable, Fund’s purchase of common in the IPO? Or, is the Form 3 the only filing that will have been necessary, given that when the IPO dust settles Fund will be below 10%? Thank you.

RE: I wish I knew a definitive answer to this question. It raises an issue similar to the one the Second Circuit addressed in Gryl v. Shire Pharmaceuticals, where the court held that an insider of an acquired company becomes an insider of the acquiring company upon the closing of the merger, the insider is an insider of the acquirer when s/he acquires acquiror securities in the merger, making Rule 16b-3 available to exempt the acquisitions. On your facts, the insider loses insider status simultaneously with the conversion and purchase. I see a good basis for the position that the transactions should not be reportable, but due to the uncertainty the R&D treatise says, at p. 730, that an insider "should, to be safe," report the conversion/purchase. Other thoughts or points of view would be most welcome.
-Alan Dye, Section16.net 6/9/2020

RE: Thank you, Alan. I suppose that one benefit of filing a Form 4 would be the opportunity to check the "Exit" box (which I know isn't the technical purpose of the box, but many funds do it to signal publicly that they're no longer subject to Section 16). In addition or as an alternative, perhaps one could insert a footnote in the Form 4 to the effect that the dilutive effect of the IPO has taken the reporting person below 10%?
-6/9/2020

RE: I think both are good points, and worth the minimal effort.
-Alan Dye, Section16.net 6/9/2020

RE: Following up on the above: The entity referred to as "Fund" is an SPV, of which various limited partnerships are the members. The Manager of the SPV is also the IA of each member partnership. The Form 3 filed upon effectiveness of the registration statement identified the reporting persons as the SPV, the direct holder, and the Manager as an indirect beneficial owner. The Form 3 also noted via footnotes the identity of the partnerships that are the SPV members, although disclaimed beneficial ownership on their part. The IPO will close shortly.

The SPV has received an allocation from the underwriters to purchase shares in the IPO (i.e., in addition to the shares the SPV will receive upon automatic conversion of the preferred it holds). In an added wrinkle, however: (i) some of the partnerships that are SPV members also will be purchasing shares directly from the underwriters; and (ii) two other partnerships advised by the Manager, who aren’t SPV members, also will be purchasing shares directly from the underwriters. The total number of shares to be received upon the preferred conversion and these purchases will be less than 10% of the common when the IPO dust settles, so the resultant Form 4 will be an exit filing.

Question: In the Form 4, will it be necessary to identify the partnerships as reporting persons — i.e., direct beneficial owners — due to their respective purchases from the underwriters? Or, would it suffice merely to report the SPV’s preferred conversion and purchase from the underwriters, with the SPV and the Manager remaining the only reporting persons? The thought behind the latter option would be that (i) the partnerships were not identified as beneficial owners on the Form 3, (ii) due to the IPO dilution occurring simultaneously with the partnerships’ purchases, those purchases perhaps could be said to occur when no one is above 10%, and (iii) the Form 4 is an exit filing in any event. If the latter approach is okay, would one want to report the Manager as indirectly owning all the shares (including those purchased by its advised partnerships), or just as indirectly holding the shares owned by the SPV? I realize this is a rather metaphysical question due to the deemed simultaneity of the preferred conversion, the purchases from the underwriters and the dilution to below 10%.

Thank you for any thoughts.
-6/15/2020

RE: It seems to me the latter approach should work just fine and be fully compliant. In fact, I can't think of why the limited partnerships that will purchase in the offering (both the SPV members and those that aren't SPV members) would file or be named as reporting persons, unless they will be members of a 13D group with the SPV or the manager. If the manager has a pecuniary interest in shares held by those entities, I agree that the manager won't need to report the acquisitions, since total shares outstanding when those acquisitions occur will dilute the entire "group" below 10%.
-Alan Dye, Section16.net 6/15/2020

Q: Reporting Person received a discretionary NQ stock option award with a 3-year vesting schedule of 1/3 vesting on the 1st anniversary of grant date and 1/3 of each on May 1st of the following two years. In footnoting Table II column 6 "Date Exercisable," is it correct to state "shares will become exercisable" or rather "options will become exercisable?" Thank you for your time.

RE: "Options" become exercisable. Upon exercise of the option, "shares" become "issuable" (or "deliverable").
-Alan Dye, Section16.net 6/11/2020

Q: X holds shares in a non-public company, ABC Corp. ABC Corporation goes public and files an 8-A in February 2019, and X now holds approximately 7% of the Company’s outstanding common stock. If X transfers all of 5 % of his common stock on December 15, 2019, and as of December 31, 2019 was below 5%, would he have to file a 13G at all? If X does have to file a 13G, would the event date be when the 8-A was filed or December 31, 2019? Y was the person that X transferred his stock to on December 15, 2019 and immediately after the transfer Y held 5% of ABC Corporation’s common stock. Y’s 13G would be due 45 days from December 31, 2019, but would the date of event — which requires filing of the 13G — be December 15th or December 31st?

RE: If X goes below 5% before 12/31/19, then X never has to file a 13D or 13G. Y, if a passive investor, has to file a 13G within 10 days after X transfers the share to Y.
-Alan Dye, Section16.net 6/10/2020

Q: Insider holds certain of his company shares in GRAT A, of which he is the trustee and sole annuitant, and the remainder go to his children. The shares are reported on insider’s previous Forms 4 as being indirectly held. Insider’s spouse holds her company shares in a GRAT B, of which insider is the trustee, spouse is the sole annuitant, the remainder go to the children. The shares are reported on insider’s previous Forms 4 as being indirectly held in each of GRAT A and GRAT B. GRAT A and GRAT B are expiring, and GRAT A and GRAT B require that an annuity payment be made back to them from their respective GRATs. The insider and his spouse would like to take the shares coming out of GRAT A and GRAT B as annuity payments and transfer them to newly created GRATs. GRAT C would have the same trustee, annuitant, and remainderman as GRAT A, and GRAT D would have the same trustee, annuitant, and remainderman as GRAT B. It is possible that there may be some delay, and the shares will temporarily be held in individual accounts of the insider and his spouse before being transferred. Questions: 1. Is a Form 4 required here, or can the insider simply report the transfers on the next Form 4 as indirectly owned by the new GRATs? Does it change the analysis at all if the shares are first transferred to an individual account before going to the new GRATs? 2. If it is required to be reported on a Form 4, which transaction code would you use?

RE: 1. The return of shares as an annuity payment is not reportable, nor is a contribution to the new GRAT. That result isn't affected by the fact that the shares are held by the insider and the spouse between those two transactions. All that will be reportable, on Form 5 or an earlier Form 4, will be the delivery of shares, if any, to the children, which will be reportable as a gift. Future reports will show the re-contributed shares as indirectly owned through the new GRATs.
-Alan Dye, Section16.net 6/10/2020

Q: An insider's spouse works for the issuer and the spouse's shares are reported on the insider's Section 16 reports. The spouse receives an annual grant of restricted stock that vests three years after the grant date. The spouse will be retiring and the restricted stock grant agreement provides that upon the grantee's retirement, a pro rata amount of the unvested restricted stock will vest on an accelerated basis, with the vesting amount to be calculated based on the number of months over the vesting period that the grantee was employed. The remainder of the unvested shares are forfeited on the retirement date. The grant agreement also specifies that, as a condition to this vesting, the grantee is required to execute and not revoke a release of claims against the issuer within 30 days of the retirement date (the “conditions”). The grant agreement does not provide any more specificity about when the shares are deemed vested (the retirement date vs. the end of the release revocation period). Shares are expected to be withheld to satisfy tax withholding obligations. I am told that the number of withheld shares will most likely be calculated based on the stock’s closing price on the retirement date, consistent with the issuer's past practice. The restricted stock was reported as acquired by the insider on Table I of Form 4 when it was granted. The forfeiture of the non-vested shares, along with the shares withheld for tax withholding purposes, are reportable events for the insider (the insider will remain employed by the issuer following the spouse’s retirement). Our question is whether these events should be reported as of the retirement date or the end of the release revocation period. It seems to me that the portion of shares that are forfeited altogether due to the retirement (i.e., the total shares of restricted stock granted less the prorated amount that may vest on an accelerated basis if the conditions are met) would likely be deemed forfeited as of the retirement date. No additional reporting is needed for the shares that vest on an accelerated basis so long as the conditions are ultimately met (other than the tax withholding reporting). If the conditions are not met, it seems that either the end of the 30-day period to sign the release (if no release is signed), or the date the release is revoked (if the release is signed but then subsequently revoked), would be the trigger date for another Form 4 to report the forfeiture of the remainder of the restricted stock that was granted. The reporting of the shares to be withheld for tax reporting purposes is a tougher question. The issuer intends to use the retirement date for calculation purposes, but arguably under the grant agreement, those shares are still subject to forfeiture until the release of claims is signed and the revocation period expires. If the retirement date is used as the trigger date for the reporting of the tax withholding, and the conditions are not ultimately met to allow for the accelerated vesting of the pro-rata portion of the grant, then a subsequent Form 4 would have to be filed essentially undoing the withholding (not sure how that would work??) and reporting the forfeiture of the remaining shares. (It seems likely that the conditions will be met, but if they are not, the reporting could get messy.) Perhaps the better approach is to report the tax withholding for the vested shares once all conditions are met, even if the share price used for the tax withholding would not match that trigger date. I look forward to hearing your thoughts. This seems more complicated than it should be. Thanks so much!

RE: I see the issue, and I think the answer depends on whether the conditions to vesting/forfeiture are viewed (by the company, at least) as material and not substantially likely to be satisfied. I agree that forfeiture of the unvested portion is reportable at retirement. If, as I suspect is the case, hardly anyone ever declines to sign the release, I think you could reasonably take the position that the conditions are not material, and report the withholding on the retirement date. Unwinding that reported transaction, if the conditions aren't satisfied, could be accomplished, I think, by an amendment to the Form 4. Alternatively, you could wait and report withholding (or forfeiture) when the outcome is known, but personally, I lean toward the former method. Please let the rest of us know where you come out.
-Alan Dye, Section16.net 6/10/2020

RE: Thank you. Does the handbook or treatise discuss the materiality of conditions to vesting/forfeiture, as it relates to decisions on timing of reporting? If so, would you mind pointing me where to look? Thanks again!
-6/10/2020

RE: Try looking at Model Form 133 in the Handbook, and Sections 3.03[4] and 11.02[2] of the Treatise.
-Alan Dye, Section16.net 6/10/2020

Q: An investment fund (“Fund”) holds convertible preferred stock in a private company that is preparing to IPO. The preferred is currently convertible into common at the holder’s option and will convert automatically upon the IPO. Based on the number of common shares underlying Fund’s preferred and the small amount of common actually outstanding pre-IPO, Fund currently beneficially owns >10% of the class of common stock. Accordingly, Fund and its GP will file a Form 3 on the day the IPO registration statement is declared effective. When the IPO closes a few days later, Fund will receive newly issued common shares upon the automatic conversion of the preferred. Fund also hopes to receive from the underwriters a modest allocation of common shares to purchase in the IPO. Whether or not it gets that allocation, Fund will be diluted to below 10% beneficial ownership as a result of the IPO. Question: Will Fund and its GP need to file a Form 4 to report (i) the conversion of Fund’s preferred into common and (ii) if applicable, Fund’s purchase of common in the IPO, or is the Form 3 the only filing that will have been necessary, given that when the IPO dust settles Fund will be below 10%? Thank you.

RE: I wish I knew a definitive answer to this question. It raises an issue similar to the one the Second Circuit addressed in Gryl v. Shire Pharmaceuticals, where the court held that an insider of an acquired company becomes an insider of the acquiring company upon the closing of the merger, the insider is an insider of the acquirer when s/he acquires acquiror securities in the merger, making Rule 16b-3 available to exempt the acquisitions. On your facts, the insider loses insider status simultaneously with the conversion and purchase. I see a good basis for the position that the transactions should not be reportable, but due to the uncertainty the R&D treatise says, at p. 730, that an insider "should, to be safe," report the conversion/purchase. Other thoughts or points of view would be most welcome.
-Alan Dye, Section16.net 6/9/2020

RE: Thank you, Alan. I suppose that one benefit of filing a Form 4 would be the opportunity to check the "Exit" box (which I know isn't the technical purpose of the box, but many funds do it to signal publicly that they're no longer subject to Section 16). In addition or as an alternative, perhaps one could insert a footnote in the Form 4 to the effect that the dilutive effect of the IPO has taken the reporting person below 10%?
-6/9/2020

RE: I think both are good points, and worth the minimal effort.
-Alan Dye, Section16.net 6/9/2020

Q: When someone exercises their stock-settled SARs, what is the fair market value? Is it the price at the time of exercise? Closing price? Highest price during the day?

RE: The answer to that question is usually provided by the SAR agreement or the plan. FMV is usually a defined term, and in my experience is usually the closing price on the date of exercise, or the average of the high and low for that day.
-Alan Dye, Section16.net 6/8/2020

Q: If the company address changes, do we simply change the address on each Insider's next Form 4 filing, or should this be handled differently? Thank you.

RE: You can amend the company's Form ID, to automatically populate the address, or you can simply override the default address in each insider's next Form 4 and continue using that address in future filings.
-Alan Dye, Section16.net 6/7/2020

Q: Issuer is going through a corporate reorg (whereby its assets will be moved to a newly-formed subsidiary, and then a newly-formed holdco will be inserted above the subsidiary, and shares of the holdco will be issued in exchange of shares of the issuer). It is not expected that any rights of the shareholders will change — all shares will simply be exchanged so that everyone will receive his/her/its pro-rata share of the new holdco — and so it seems this type of reorg falls within the SEC guidance that no Section 16 filings are required and the transactions in holdco will be matchable against opposite way transactions in the issuer within < 6 months. The question is: Do you see a risk with having the continuing officers/directors voluntarily file Forms 3 with the new holdco (which will have it's own CIK, separate from the Issuer) just to make clear that they are in fact continuing officers/directors of the new holdco? They may not have a required Form 4 for a long time, and the concern is that they will be noticeably missing from the holdco's SEC EDGAR page for Section 16 filings. Thanks, and have a great weekend!

RE: I agree that your holdco formation will qualify for non-reporting, including no new Forms 3, but I think it would be acceptable to file Forms 3 anyway, noting the holdco formation. I think pre-formation transactions will still remain subject to matching with post-formation transactions that occur within six months.
-Alan Dye, Section16.net 6/5/2020

Q: Following on Topic # 4080, if a Transaction was reported properly; however, the Amount of Securities Beneficially Owned Following [the accurately] Reported Transaction was incorrect, then for the Amendment (which the Reporting Person deemed necessary) should you include just the Title of Security (Table I, Column 1) and the corrected Amount (Table I, Column 5) and Ownership Form (Table I, Column 6); or do you repeat the entire line with the correction, including a repetition of the Transaction? (With an explanatory footnote.) Thank you

RE: Until a few years ago, the EDGAR system wouldn't accept a Form 4 that reported only a holding as opposed to a transaction. Now, though, the EDGAR system will accept a Form 4 in either case, so you can amend the prior filing either way. I think, though, that either way you will want to explain the reason for the amendment in a footnote.
-Alan Dye, Section16.net 5/28/2020

Q: Company issues Restricted Stock Units on Table II. Now due to tax issues and stock price issues, the vesting date and total number of shares is being changed (increase x2 shares) and change vested from June and December to = December. Would this be an amendment or a new Form 4, and what would you do with the old Form 4 that reported the grant?

RE: It sounds like the committee is basically doubling the size of the award, which I think is effectively a new grant of the additional RSUs. Changing the vesting date of the original grant doesn't require an amendment, based on staff guidance. I think you could report this as an award of the additional RSUs, or, if you prefer, an entirely new grant of the total number of RSUs awarded, with a footnote explaining that the grant is a replacement of or amendment to the original award. I wouldn't file the report as an amendment of the prior Form 4. Have you determined how the new terms will be accounted for (e.g., in the SCT of the proxy statement next year)?
-Alan Dye, Section16.net 5/28/2020

Q: Should Forms 4 be saved as a PDF after they have been filed with the SEC?

RE: The SEC's rules require that you (actually, the insider) keep a manually signed copy of the Form 4 for at least five years. There's no reason you can't also keep a pdf copy, though, if that's more convenient for your recordkeeping and retrieval system.
-Alan Dye, Section16.net 9/22/2009

RE: Hi, Alan.
I am trying to figure out best practices in the current situation, and what others are doing.

What are the most current regs regarding record keeping for Section 16 filings? I believe the regs require a manually signed copy to be kept for 5 years. Due to working remotely, I am presently unable to print out documents to be signed.

Additionally, in the past, I would also print out a copy of the SEC acceptance email for each filing. Is this required ? Would be interested in your thoughts.
Thank you.
-5/22/2020

RE: I think filers are relying on the staff guidance, summarized below in an excerpt from Section 16 Updates. A manually signed copy is created, but the compliance person will collect them later, after remote working is the norm. There is no requirement to print out the filing confirmation generated by EDGAR.

Rule 16a-3(i) requires that any Section 16(a) report filed with the Commission be “manually signed” and that the filer retain the manually signed copy for a period of five years. In addition, because Section 16(a) reports must be filed electronically, the filing of a Section 16(a) report must comply with Rule 302(b) of Regulation S-T, which provides that a person required to sign a report must, before or simultaneously with the submission of the report on EDGAR, “manually sign a signature page or other document authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”
As discussed in prior issues of Section 16 Updates (see, for example, the September 2015 issue at pgs. 14-15), the Commission interprets Rule 302 to require that the signatory to an electronic filing sign and keep a paper original of the report. See Release No. 33-7985, n.19 (2001). As a result, the general practice of Section 16 compliance personnel is to draft an insider’s Section 16 report, have a paper copy signed by the insider or the insider’s attorney-in-fact, and then file, or have a filing agent file, an electronic version of the report with the SEC.
Companies and compliance personnel have experienced difficulty completing this process in advance of filing deadlines, when everyone involved in the process is working remotely. To make the process of obtaining signatures easier, the SEC published on its website, on March 24, a “Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns.” The statement is a blanket “no-action” position stating that the staff will not recommend enforcement action to the Commission based on non-compliance with Rule 302(b) so long as:
• the signatory manually signs a signature page or other authenticating document, retains the manually signed page, and provides it to the filer as promptly as reasonably practicable for retention in the ordinary course (for example, when the signatory is able to return to the office); • the signatory notes on the manually signed copy the date and time the document was signed; and
• the filer establishes and maintains policies and procedures governing the process. The staff’s relief applies to all EDGAR filings, not just Section 16(a) reports. Accordingly, a company that chooses to avail itself of the relief should draft its policies and procedures to apply to all of the company’s EDGAR filings, not just insiders’ Section 16(a) reports. The staff’s relief does not have a specified expiration date, but the statement makes clear that it is intended to apply only so long as the Covid-19 pandemic affects a filer’s ability to comply with the manual signature requirement.
-Alan Dye, Section16.net 5/23/2020

Q: The Dec. 20, 1996 ABA No-Action Letter, (Qs 4(b) and (c)) regarding deferral plans, refers to a plan that "defines a class of eligible participants (e.g., all non-employee directors or all employees above a certain salary grade)." The no-action request letter specifies that the type of plan under consideration was "approved by the board of directors." This component of the ABA No-Action Letter effectively requires that the plan and eligible participants thereunder be approved by a body that has authority under 16b-3(d)(1) to exempt transactions under the plan by approving the plan, as contemplated by Note 3. Where a plan approved by the board of directors defines an eligible participant as an "Employee who is member of a select group of management or a highly compensated employees who is specified by the Compensation Committee," provided that the Compensation Committee is composed solely of Non-Employee Directors, such definition of eligible participants should be effective for determining eligible participants under the plan in a manner that satisfies the approval requirements of Rules 16b-3(d) and (e), because it ensures that an insider's eligibility to participate in the board-approved plan has been determined by a body that has authority under 16b-3(d)(1) to exempt transactions with the issuer. Agree?

RE: Yes, I agree completely.
-Alan Dye, Section16.net 5/23/2020

Q: An issuer has two classes of stock. Class A is registered and publicly traded. Class B is not registered and cannot be converted into Class A. However, when a holder of Class B wants to get liquidity, it can sell the Class B and, upon the sale, the Class B automatically converts into Class A so that the buyer receives Class A. The buyer can then sell the Class A. Do you think the holder of the Class B does not beneficially own the Class A, so that if the holder held Class Bs that were equivalent to 15% of the combined Class A and Class B, it could take the position that it wasn't subject to Section 13(d) or Section 16? Would the answer change if the Class B voted with the Class A?

RE: RE: That's an interesting issue. I do think the holder can take the position that it owns only an unregistered class, and doesn't own the A stock. Another thing to think about is whether the B represents a "right to dispose" of more than 10% of the A, on an as-converted basis.
-Alan Dye, Section16.net 5/21/2020

Q: Our client reported a grant of PSUs on Table II in May 2017 at 100% of target, with the possibility to earn up to 200%. The performance criteria were met, and the percentage of target earned was calculated at 150%. We are preparing to file Form 4s for the vesting/settlement of these units, but I'm not clear on how to report this, particularly the acquisition of the shares earned over target. How do I account for this on Table II? Thank you!!

RE: Unless the performance criterion was the achievement of a certain stock price, I would report the award in Table I only, showing the acquisition of the total shares earned, and say in a footnote that the shares represent those earned under a performance award granted on m/d/y and reported in a voluntary Form 4 filed on m/d/y.
-Alan Dye, Section16.net 5/19/2020

RE: Thank you. I took a look at how they originally footnoted the PSU grant in 2017, and here is an excerpt:
"Each PSU represents a contingent right to receive one share of common stock if predetermined levels of absolute common stock price compounded annual growth rate are achieved over a three-year performance period ending on the third anniversary of the grant date." So, it seems to me like it was solely based on the stock price.
-5/20/2020

RE: Ok, now I see why you reported the grant. I think I would report the vesting by showing in Table II the conversion of 150% of shares initially reported, and showing in Table II the receipt of the underlying shares upon conversion, with a footnote to Table II saying that the number reported represents 150% of the target number of shares reported in the Form 4 filed on m/d/y, reflecting that the number of shares earned exceeded target.
-Alan Dye, Section16.net 5/20/2020

Q: An issuer has two classes of shares outstanding, Class A and Class B. The rights of holders of both classes are identical except that holders of Class B have 10 votes per share and holders of Class A have 1 vote per share. Only the Class A is registered. A holder can, at any time, convert a share of Class B into a single share of Class A on a 1 for 1 basis. A holder of the Class B has filed a Form 3 disclosing that it is a 10% owner (on a convertible basis) of the Class A. When that holder converts some of its Class B shares into shares of Class A, I think that is exempt under 16b-6, but the conversion must be reported on a Form 4 within 2 days of the conversion. Do you know of any reason that might not be the case? That is, is there an argument that since the exchange is 1 for 1, does not involve any other consideration and the classes are identical except for the voting rights, that it isn't necessary to file a Form 4 within 2 days of conversion? I can't think of any, but I wanted to confirm that the treatment of such a conversion follows the normal rules. Thank you.

RE: No, I can't think of a basis for not filing a Form 4. The Staff has said the two classes are separate classes, and courts have agreed. I agree the conversion is exempted by Rule 16b-6(b).
-Alan Dye, Section16.net 5/19/2020

Q: Our company has reported RSUs in Table 1 and Table 2, which makes the D&O questionnaires and proxy tables complicated each year. Is it possible to clean this up by moving the unvested RSU awards to Table 2 and footnoting the change so that going forward it's consistent? Are there precedents for this?

RE: It's definitely permissible to move unvested RSUs from Table I to Table II. I don't know how common that is, but I do know companies move RSUs from Table II to Table I. See Model Form 231 (maybe 236) for a Model Form addressing that fact pattern. Your Forms 4 would be the reverse, reducing the shares reported in Table I and increasing the number in Table II, with a footnote saying unvested RSUs previously reported in Table I as common stock are now being reported instead in Table II, as RSUs.
-Alan Dye, Section16.net 5/19/2020

Q: We plan to report a charitable gift made earlier this year with the filing of a Form 4 which is separately being filed to timely report a recent acquisition. In addition to the "G" code for the gift, should "V" be checked, is this considered being voluntarily reported earlier than reporting on an end of year Form 5? Thank you.

RE: Yes, you are including the gift voluntarily, so you should insert the V. Box 3 will show the date of the transaction requiring the Form 4.
-Alan Dye, Section16.net 5/19/2020

RE: Should Box 3 (Date of Earliest Transaction) show the past date of the "Gift" or the date of the current acquisition requiring the Form 4? I will have to confirm, but it seems that our software won't allow the "V" to be checked with the earlier date of the Gift in Box 3. Thank you.
-5/19/2020

RE: Box 3 should show the date of the gift, because the staff says in a C&DI that Box 3 should show the date of the earliest transaction "required to be reported on Form 4," and a gift isn't required to be reported on Form 4. It's strange that your software won't allow the "V," but I would add the gift to the Form 4 regardless.
-Alan Dye, Section16.net 5/19/2020

RE: The software won't allow the "V" to be checked with the earlier date in Box 3; I'm not sure why it is hardcoded as an error. Therefore, my plan is to include the "earlier" date of the gift in Box 3, in Table 1 for the gift transaction include the date of the gift, transaction code G, but without the "V". Following line, I will report the recent acquisition.
-5/19/2020

RE: I see. If you prefer to adjust Box 3 than to omit the V, I think that's an acceptable workaround.
-Alan Dye, Section16.net 5/19/2020

RE: Thank you. That is how we will handle it, include the "V" and use the later date in Box 3.
-5/19/2020

Q: Dear Alan, We are in the process of negotiating attorneys' fees in a 16(b) claim. In this instance, on the same day, the Form 4 was filed showing a short swing profit, a plaintiff purchased a share in the issuer, and his attorney sent a demand letter. My question is this: because the plaintiff's trade would not have settled until 2 business days following the purchase, does he have standing to send a demand letter? I have not seen this directly addressed, but I note that Section 9.03(9)(ii)(b)(2) of the Treatise discusses that a demand letter should state the name in which the person holds record ownership; this would seem to indicate that a trade must be settled prior to submission of a demand. Thank you for your time!

RE: I haven't seen the issue addressed, either. I think there are two inter-related questions: When does a security holder become a security holder, on the trade date or the settlement date, and if a lawyer submits a demand letter but on behalf of someone who isn't a security holder, has the lawyer conferred a benefit on the company or is s/he instead an "officious intermeddler"? I think settlement date and officious intermeddler, but again I don't know of any authority either way (and I suspect your claimant doesn't either).
-Alan Dye, Section16.net 5/19/2020

Q: An officer or director engages in transactions that result in short-swing profit ("SSP") liability. Such officer/director decides to pay such liability using an equivalent value of issuer stock. So long as the board or comp committee approves that the officer/director can make the payment in stock before the payment was made, would that transaction qualify for 16b-3? Do you think that, because the SSP liability arose before the board or comp committee approval, that could weaken this argument? I would think plaintiff’s attorneys (who undoubtedly found the initial transaction that resulted in SSP liability) would jump on the chance to argue that payment of the liability in stock should not qualify for 16b-3 (assuming within 6 months of a matchable purchase), but other than the point made in the foregoing sentence, I don't know what they would argue. Thanks!

RE: I don't think Rule 16b-3 depends on the motive for the transaction in any circumstance, so I agree that the exemption should be available. Courts (and plaintiffs) have allowed payment in non-case consideration before. I agree, though, that the optics aren't great. The plaintiff's attorney will get his or her fee, though, so s/he may not care what form the disgorgement takes.
-Alan Dye, Section16.net 5/19/2020

Q: We are resolving a small Section 16(b) violation that was easily discoverable. We immediately received letters from three plaintiff law firms and insider disgorged profit the same day as filing the Form 4. Do you have any new guidance as to amount necessary to pay a plaintiff's attorney in regard to a profit disgorgement when the only work done by the plaintiff's attorney was to send a demand letter? In the past, you have said that in such a situation, you would negotiate to stay at or below 10% if possible. Also, all three firms notified us at the same time. Is it still your position that the first attorney to raise the claim is entitled to the fee?

RE: There seems to be some turmoil within the plaintiffs' bar when there are multiple claimants, but I'm not entirely sure how they are dealing with it. I'll offer a couple of thoughts, though. First, they seem to have reached agreement that they should hold out for 25% of the recovery in all cases. I don't think case law supports that percentage as a minimum, but most of the time the company decides it's less expensive to cave than to litigate. Whether only the first one in is entitled to the fee is, I believe, an issue not yet addressed by a court, but it sounds like you don't have that issue if all claims came in at the same time..
-Alan Dye, Section16.net 5/19/2020

Q: I have been asked to look further into the best way to file the new award for a potential newly appointed office. See general questions below. A non §16 person receives a grant that’s conditioned on later appointment as a §16 officer: • is the grant date the earlier date (e.g., May 27th - BOD Meeting) or the later date when the condition becomes effective (e.g., June 5)? • how is the vesting date affected by the answer to the foregoing question? A grant is deemed to happen on the same day the person becomes a §16 officer: • does the new grant require a Form 4 that’s filed immediately after the initial Form 3? • can the new grant simply be rolled into the Form 3 if you file with 2 business days? • could you wait and report it at the 10 calendar day point when a Form 3 is otherwise due?

RE: The grant will become effective, and reportable, when the condition to the board's grant is satisfied (i.e., when the person is appointed (June 5). Vesting depends on what the board said is the vesting date (which may be influenced by what the plan allows). In most cases like yours, vesting would begin on the start date (June 5).

The grant would be reportable on Form 4 within two business days of the start date and could not be included in the Form 3. The Form 3 won't be due until 10 days after the start date, but the SEC encourages insiders to file the Form 3 early, so that it precedes the Form 4. There's no requirement that you do so, though.
-Alan Dye, Section16.net 5/18/2020

Q: If an investment firm has a deputized Director seat on an issuer’s board and that Director receives an equity award from the issuer that, pursuant to the Director’s arrangement with the investment firm, must be immediately turned over to the investment firm, do you think that the Director needs to report the receipt of the equity award (or its transfer to the investment firm) if the Director does not have a pecuniary interest in the equity award? Do you have any sense of general practice in this situation from the reporting perspective of the deputized Director?

RE: Whether the director needs to report the award depends, I think, on whether the director has a pecuniary interest in the award, and I don't know of any staff guidance or directly relevant case law that addresses whether a director's contractual obligation to transfer the award to, or hold the award as agent for, the partnership means that the director doesn't have a pecuniary interest in the award (e.g., maybe because the director could breach the contract or challenge it). I do think there is a valid basis for reaching the conclusion that the director doesn't need to report the award, on either of two grounds: the director is the partnership's agent, so has no pecuniary interests, or the director has a pre-existing obligation to deliver the award to the partnership, so (again) has no pecuniary interest in the award (as in Rubenstein v. vTv). I don't know what general practice is. I do see directors file Forms 4 and disclaim a pecuniary interest, which doesn't create any concern because the acquisition is exempt and all of the other outside directors are filing at the same time, but I don't know how many directors aren't filing.
-Alan Dye, Section16.net 5/15/2020

Q: If a holder of a warrant with a blocker elects to remove the blocker from such warrant, would that be considered a material amendment such that it would be deemed to be a cancellation and re-issuance of the warrant? Would it matter if the warrant holder without the blocker would hold over 50% of the outstanding shares of common stock of the issuer?

RE: While there isn't much case law on the subject, my view is no, that amendment wouldn't constitute a cancellation and reissuance, because none of the terms relating to the number or price of shares has changed, so there is no change in pecuniary interest. The idea that amendments unrelated to the value of the equity position can result in a purchase and/or sale seems to me to be inconsistent with the purposes of Section 16. If, for example, the interest rate on a convertible note were materially amended, I wouldn't consider that to have any impact on the equity security aspect of the note, but the amendment might well be considered material. So, I would be comfortable removing a blocker and not filing a Form 4. Others might have a different view. The number of underlying shares wouldn't affect my view.
-Alan Dye, Section16.net 5/14/2020

Q: Alan, is the timing of HRC approval with regard to ratifying/approving existing grants for a new section 16 reporting person an issue if it's delayed slightly due to COVID-19, instead of occurring prior to designation of the new reporting person? Also, if that newly appointed Section 16 officer has RSUs vest before the HRC ratifies/approves the award, is the share withholding for taxes matchable against any opposite way transaction thereafter? And if after that RSU vesting occurs and shares are withheld for taxes, the new reporting person does a cashless exercise and sale, is the acquisition that occurs during the simultaneous cashless exercise/sale matchable against the share withholding for taxes from the RSU vesting? Thanks.

RE: For existing awards, which will be listed in the new insider's Form 3, there is no need to have the committee ratify the awards, before or after the insider becomes an insider, because no pre-insider transaction is subject to potential matching under Section 16(b). As to withholding transactions, however, like withholding of taxes upon vesting, or to pay the exercise price of an option, the disposition will, as you note, constitute a "sale" which may be matched with any purchase by the insider occurring within six months, unless the committee approves the withholding before it occurs.
-Alan Dye, Section16.net 5/14/2020

Q: A former director has rejoined the board 10 years later. His last Form 4 before he left his first term on the board showed him owing 5,000 shares. He now owns 1,000 shares and is rejoining the board. Do we file a Form 3 to indicate that he has rejoined the board with his current holdings, or do we file an updated Form 4 from the one filed 10 years ago and explain his holdings/dispositions in the interim?

RE: You should file a new Form 3 for the director, showing his 1,000 shares. None of his prior reporting history, or pre-reelection transactions, is relevant at this point and therefore don't need to be disclosed, in the Form 3 or a Form 4.
-Alan Dye, Section16.net 5/14/2020

Q: The Company A and Company B are entering into a merger of equals transaction where a holding company will be created (Holdco). Company A and B are public companies and Holdco will be listed on Nasdaq after the merger. In the merger transaction, all shareholders of Company A and Company B will exchange their respective shares with shares of Holdco, and Company A and B will become subsidiaries of Holdco. It is determined that Holdco will be a "successor issuer" of Company A, which is also deemed the accounting acquirer of the merger. Do the insiders of Company A have to file a Form 3 to report that they are now insiders of Holdco after the merger? Do the insiders of Company A have to file a Form 4 to report the exchange of shares? The exchange ratio is 1:1.

RE: Because the holdco is being formed in connection with a merger to two companies, I don't think it qualifies for the Staff's position that a Holdco formation doesn't require new Forms 3. So, yes, I do think all insiders of Holdco will need to file Forms 3. And, based on the Gryl case and the SEC's brief in that case, I think anyone who is an insider of Holdco before the closing of the merger/Holdco formation or who become insider's "simultaneously" with the closing should, at least under those authorities, file a Form 4 to report the acquisition of securities at the closing. What are you concluding?
-Alan Dye, Section16.net 5/8/2020

RE: We were thinking that Holdco is the successor issuer of Company A under 12g3, which is the accounting acquirer for a number of reasons. As a result Holdco would take over the Exchange Act filings of Company A. However, we are not 100% certain. So, you think Holdco is not a successor issuer?
-5/8/2020

RE: I have no problem with the conclusion that Holdco is a successor issuer for purposes of the issuer's reporting. I just don't know if the merger of two entities fits within the Staff positions articulated in the Varity Corp. and Horn & Hardart letters, where the Staff said no new Forms 3 are required where the Holdco formation was exempted by Rule 1bb-7 and involved wholly owned subs merging with the parent. Maybe take a look at those letters and see if your transaction seems to fit those facts. If not, maybe ask the Staff if being a successor issuer alone is enough to qualify for the no Form 3 position.
-Alan Dye, Section16.net 5/8/2020

RE: Ok, that makes sense. Despite this, do you think that the shares of Holdco acquired by insiders (and shares of Company A disposed by insiders) are exempt from 16(b) matching assume a Skadden resolutions was prepared and approved?
-5/8/2020

RE: Yes, I do.
-Alan Dye, Section16.net 5/8/2020

RE: One follow-up question. If we cannot avoid a Form 3 filing based on SEC's guidance, is it correct that the insider would also need to file a Form 4 for the disposition of Company A's securities, in addition to the Form 3 and Form 4 for the acquisition of Holdco's securities?
-5/9/2020

RE: Any thought on this follow-up question?
-5/12/2020

RE: Sorry, I responded to this question, but must not have hit the right button to post the response. I agree that, if the Staff's position is that a Form 3 is required, a natural consequence of that is that a Form 4 is required to report the exchange of A stock.
-Alan Dye, Section16.net 5/12/2020

Q: Where the board approves time based RSU grants on Day 1 contingent on the successful filing of a new Form S-8, scheduled to be filed on Day 4, when are the rights to the grants considered fixed such that the RSU grants are reportable? Day 1 when the grants are approved, or Day 4 when the S-8 is filed?

RE: If the filing of the S-8 is a condition to the grants, and isn't substantially certain to occur, then the grants aren't effective and reportable until the S-8 is filed. Even if the filing of the S-8 is not up in the air, I think the board's action might be considered approval of a grant to take place on a date in the future, such that the filing date could be considered the grant date.
-Alan Dye, Section16.net 5/11/2020

Q: Here is an interesting one. If a Section 16 insider is compensated for agreeing to vote a certain way, can you see that implicating Section 16? Thank you.

RE: I think I see what you're getting at, but I don't think selling a vote is the same as selling stock, so I would say no, there is no Section 16 implication for the insider. Maybe the insider and the vote-buyer could be deemed to form a group (although I see arguments against that conclusion), in which the vote buyer might need to consider the insider's holdings with its own in determining 10% ownership.
-Alan Dye, Section16.net 5/8/2020

Q: A company grants 100 shares to an executive. In order to cover taxes the executive elects to sell 30 shares immediately. Is the correct Form 4 transaction code for this sale "F" (payment of tax liability) or “S” (open market sale)? Thanks.

RE: If the sale is into the market rather than to the issuer, the transaction code should be "S."
-Alan Dye, Section16.net 5/6/2020

Q: If an insider sells 500 shares at $90.00 and then buys 1,000 shares at $50 within 6 months, is the amount owed to the company based only on the difference of the 500 shares?

RE: Yes. So, 500 x $40 = $20,000 profit.
-Alan Dye, Section16.net 5/6/2020

Q: Similar to Topic #5858. An issuer has a compensation committee meeting on day one and an annual meeting of shareholders on day two, followed on day two by a board of directors meeting. At the compensation committee meeting on day one, the compensation committee approves an equity grant to the directors of X dollar amount, to be effective at the board of directors meeting on day two. The number of shares granted would be the X dollar amount divided by the average of the high and low stock prices on day two. The grant would in effect be conditioned upon the directors being re-elected at the annual meeting of shareholders (or continuing as directors if not up for election). Following Certilman, Frederic W. Cook, the Skadden inquiry or other precedent, would it be acceptable to use day two as the transaction date for the grant for purposes of Form 4?

RE: Yes, I think Staff guidance has been clear that Day 2 is the grant date on these facts.
-Alan Dye, Section16.net 5/5/2020

Q: Within two days of a Form 4 being filed, multiple plaintiff firms sent demand letters/emails. Easy situation to spot — the company would have noticed it and made the recovery without the letters/emails. Insider disgorged profit to the company within the 60-day period, without any plaintiff attorney involvement. The company thinks plaintiff attorneys are not entitled to a fee, based on the case law. If a plaintiff firm seeks a fee, and litigates to try to obtain a fee, the plaintiff firm bears its own cost of litigation for a fee, correct?

RE: The general rule in any litigation is that each party bears its own attorney's fees, so I would expect the answer to be yes. I was involved in 14a-8 litigation years ago, where the Staff granted the company a no-action letter and the proponent sued alleging that the Staff was wrong. The plaintiff won, and to add insult to injury, the court ordered the company to pay the proponent's legal fees. My recollection is that the judge applied some doctrine saying all shareholders benefited from the proponent's lawsuit (even though 91% of shareholders voted against the proposal), so the company had to pay the proponent's legal fees. I don't know if that doctrine could be applied in 16(b) litigation, though.
-Alan Dye, Section16.net 5/5/2020

Q: Hello. I filed a Form 4 for an award release for our director in France without withholding shares for taxes. My question is concerning the amended Form 4 that I need to file. Do I report it as a "holding" line with a footnote explaining the decreased number of common stock attributed to a share withholding error? Thank you.

RE: I think the amended Form 4 should report only the withholding of shares to pay taxes (as a line item, likely using transaction code "F”), reducing the number of directly owned shares in Column 5 to reflect the withholding.
-Alan Dye, Section16.net 5/4/2020

RE: Thank you very much, Alan. Will do.
-5/4/2020

RE: Hi, Alan.

I tried to find an example of an amended Form 4, but no luck. Would you mind confirming if Box 2, 2A and 3 should have today's date if filing today?

Thanks again!
-5/5/2020

RE: I think those boxes will show the date of the original transactions. Only the signature line will have today's date.
-Alan Dye, Section16.net 5/5/2020

RE: Thank you, Alan.
-5/5/2020

Q: The issuer has informed counsel that certain officer RSUs have a vesting date that is different from the release date by up to a month. Once the shares are released, shares are then forfeited back to the company to cover tax withholding on or shortly after the release date. I am not sure why the long lag period between vesting and release, but can you confirm that the Form 4 requirement is triggered on the release date (the date that the RSU is converted/exercised for the underlying common shares) rather than on the vest date and that no Form 4 is also required to report the vesting of the RSU.

RE: It sounds like the insider may become entitled to the shares on the vesting date (so they are no longer subject to possible forfeiture), but the number to be withheld won't be determined until later, based on the value of the stock on the release date. If that's the case, from a "technical" standpoint, a Form 4 might be due on the vesting date to report conversion of the RSU into common stock (assuming the grant was reported in Table II), and another might be due upon withholding. Regardless, I suspect that others similarly situated may have concluded that nothing is reportable until the number of shares to be released is known (on the release date).
-Alan Dye, Section16.net 5/5/2020

Q: When a dissenting shareholder exercises his appraisal rights, what is the date of sale? The date by which both the price is fixed and the court confirms that the shareholder is entitled to appraisal rights?

RE: I would consider the date of court approval to be the date the rights and obligations of the parties became fixed, so yes, I would report that as the sale date (within two business days) if the insider is still subject to Section 16.
-Alan Dye 1/14/2016

RE: Two questions on the topic of appraisal rights.

I would take the position that a shareholder exercising appraisal rights is not the "beneficial owner" of those shares from a Section 13 perspective once the merger closes and therefore would not be subject to Section 16 if those are the only Section 12 securities owned by the shareholder. Those shares cannot be voted or "disposed of" post merger.

Also, on a slightly different topic, I do not think a shareholder exercising appraisal rights would have standing to bring a 16(b) claim against another shareholder (again, assuming those shares subject to appraisal rights are the only shares of the issuer the dissenting shareholder owns) once the merger closes.

Do you agree? Thanks!
-5/4/2020

RE: I agree with you on both issues. The appraisal right isn't a "security" of the issuer.
-Alan Dye, Section16.net 5/4/2020

Q: Section 16 executive officer wants to loan (non-recourse) shares to a trust for which his wife is sole trustee and their grandchildren are beneficiaries. If the stock price goes up (likely), the trust plans to sell shares, and use proceeds to pay back the loan + interest. I understand that, typically, stock loans are not reportable until default, but given that the Section 16 officer has an indirect pecuniary interest in the trust, this seems to present different challenges. I'm trying to understand how to report this, and what the short-swing profit exposure is. One way to report this, consistent with the guidance on loans but also reflecting the Section 16 officer's indirect pecuniary interest through the trust, is as follows: 1. Do not report the initial loan. To the extent the Section 16 officer files other Forms 4, footnote that certain of the shares held directly by the Section 16 officer are being loaned to the trust. 2. If the trust sells the shares, Section 16 officer should report that as a disposition of indirect pecuniary interest (via the trust). 2. When the trust repays the loan, Section 16 officer should report that as both an acquisition of indirect pecuniary interest by the trust (but since shares were already sold, the end beneficial ownership remains 0) and a disposition of direct pecuniary interest, both reported at the price at which the loan is repaid (principal + interest). Do you think the foregoing is reasonable? It seems to capture the potential for short-swing profits without ignoring the fact that the shares are being loaned (not gifted or sold) to the trust. While I suppose someone could argue that the loan is a thinly-veiled sale, the proposed reporting approach above seems to address this risk. Is there a concern that the way this is reported, the trust could look like it is engaging in a short sale (which I suppose could be addressed via footnote disclosure of the loan)? Appreciate any thoughts you may have. Thanks!

RE: Let me make sure I understand the transaction. The insider holds stock (say, 100 shares having a market price of $10 a share). The insider will transfer the shares to the trust as a non-recourse "loan," and the trust's obligation will be to pay the insider $1,000, not 100 shares? If the price of the stock goes up, the trust will sell it, pay $1,000 to the insider and keep the excess sale proceeds? And, what happens if the price goes down?
-Alan Dye, Section16.net 4/30/2020

RE: The trust owns other assets that it can use to pay back the loan. Alternatively, the Section 16 person can simply extend the loan, giving the trust additional time to realize appreciation on the shares.

I've thought about this some more, and came up with the following scenarios:

Option 1: If the loan requires the trust, at the end of the loan, to pay back the loan in cash, based on the FMV of the stock calculated on the day the loan was made, then this "loan" seems more like a sale at the time the loan is made, at a price of the FMV. While there is interest earned over the term of the loan, this interest does not seem to be captured by Section 16 if this "loan" is actually a "sale" of stock at FMV — such that the loan is actually a loan of "cash proceeds" from such "sale."

Option 2: If the loan allows the borrower to choose to repay the loan in cash or stock, I am inclined to still treat it as a sale occurring at the time of the loan. If at the term of the loan, the stock is returned, that should be treated as a purchase, with a price of the FMV at time of return.

Option 3: If the loan requires the borrower to repay the loan in stock, then this seems more like a true "loan," where there is no "sale" at the time of the loan. Of course, if the trust sells the stock (and thus buys it back to repay the loan), this would be reportable as an indirect sale (and then indirect purchase) by the Section 16 officer.

Thoughts on these approaches? Any other facts that we're missing?

Thanks as always, Alan!
-5/2/2020

RE: OK. I think I understand the transaction now, and I largely agree with your conclusions. Here are my thoughts:

Option 1: The Staff has said that selling stock in return for a nonrecourse loan is the equivalent of granting an option, and I think the Staff is right about that. So, whether the trust can repay the loan with cash or stock, I think the insider has written an option, which is the equivalent of a sale.

Option 2: I agree, if stock is used to repay the loan, that is the equivalent of the insider's purchase of the stock delivered, at FMV. I suppose there are arguments that the reacquisition is involuntary or payment of a debt previously contracted, exempting the "purchase" from Section 16(b), but I'd consider both of those arguments to have a low probability of success, especially with family members involved on all sides.

Option 3: I think the analysis of Options 1 and 2 addresses this scenario as well.
-Alan Dye, Section16.net 5/3/2020

Q: Alan, I just filed a Form 4, and I transposed one of my numbers! What can I do? Is there a way to pull back the Form, file an amendment right away, or call the SEC tomorrow and see what they can do? Is this really bad? I hope we don't have to report this in our proxy. Needless to say I am up in arms!! Thank you.

RE: There's no way to retract the Form. You might decide to amend it. Can you tell me which column the error is in, what was shown in Columns 4 and 5, and what should have been shown in each column?
-Alan Dye, Hogan Lovells US LLP 4/29/2020

RE: Column 4: Reported 296,928 shares (wrong) — Correct: 269,928 (27,000 excess shares). Column 5 is correct. Column 5 total reflects the 269,928 amount.
-4/29/2020

RE: Some might say that, if the total in Column 5 is correct and no other changes to the total have occurred since the insider's last Form 4, the error is obvious. I would lean toward filing an amendment, though. And, I wouldn't lose any sleep over the error.
-Alan Dye, Section16.net 4/30/2020

RE: Thank you, Alan. Since Column 5 is correct, our preference would be to correct in the next Form 4 and explain it with a footnote. Is this reasonable? Thanks again.
-4/30/2020

RE: Recognizing that the Staff has never, to my knowledge, waded into this area of Section 16 reporting, and likely would say, if asked, errors should be corrected by amendment. I do think that the next best approach is to correct the error in the next Form 4, by explaining it in a footnote to Column 5.
-Alan Dye, Section16.net 4/30/2020

RE: Thanks again, Alan!
-4/30/2020

Q: Hi. Our stock incentive plan allows for purchase price of options to be paid via (1.) cash, (2). swap and (3.) cashless exercise via broker-assistance (sell shares on open market). The executive officer wants to exercise and hold his options using either method 1 or 2. The issue is, he has not met his ownership requirement with the company yet, so swapping previously owned shares or a broker assisted selling of shares to pay for purchase price would potentially show optically that we are allowing him to "dispose" of shares before he actually meets his requirement. Although, we know, this is only for a brief moment as we will be giving him the shares he exercised, and his net holdings will actually increase after the transaction. Do you see this as an SEC issue or something we can easily make an exception for as a company? Or, do you see this as not being an issue at all? Thanks for the help!

RE: If I'm understanding the facts and the issue correctly, I don't see any problem or issue with allowing either form of exercise. On a net basis, the officer will be increasing the number of shares he owns, so he will be gaining on his targeted share ownership. This is only a company policy issue, not an SEC issue (unless perhaps you've said in your proxy statement that no officer can dispose of shares in any way until s/he has met a stock ownership requirement). So, if the company is willing to interpret its policy to permit this exercise, or waive the policy to permit it, I don't think there would be any adverse consequence, other than that other officers likely will ask for the same approval.
-Alan Dye, Section16.net 4/30/2020

Q: Are you aware of any SEC enforcement actions or private litigation alleging that a large financial institution was operating as if it complied with the 1998 SEC Guidance for separating businesses into different Section 13/16 filers, but that the separation was, in practice, not sufficient to satisfy the guidance? Thank you.

RE: No, I'm not. It has probably been a year or so since I last looked into disaggregation, but at that time, I couldn't find anything relating to disaggregation other than the 13D/G release and the Goldman letter. I suppose that's good news for entities that rely on the analysis, but the absence of litigation also means there isn't much guidance to rely on.
-Alan Dye, Section16.net 4/29/2020

Q: There are a few late filings by insiders, and the company will disclose the delinquent filings in the proxy statement under SK 405. However, the insiders have requested the company to add a disclosure stating that the company was preparing and filing the Section 16(a) reports on behalf of the insiders as part of its compliance program. Do you think this is a good idea? Does this disclosure increase the exposure of the company because the company implicitly acknowledges that it has failed to file the reports on time for the insiders?

RE: I have seen similar disclosures, and a few even more direct in finger-pointing, but most attribute late filings to "administrative error." That signals, I think, that the error was not the insider's fault, either in getting information to the filing agent or in submitting the filing himself/herself. If the company has in fact undertaken to make filings on insiders' behalf, presumably that would come out in an ENF investigation whether the proxy statement says so or not. The ENF actions against companies for causing violations involved fairly deficient compliance programs. Given the thousands of delinquencies disclosed each year, the likelihood that any one disclosure will lead to an ENF action is pretty slim. I understand your concern, though, and might suggest that, if the disclosure is to be included, it be pitched as a positive, not blame, maybe something like "the company generally assists its officers and directors in complying with their filing obligations under Section 16(a)."
-Alan Dye, Section16.net 4/28/2020

Q: Investor is purchasing shares in an underwritten secondary public offering such that, following the offering, the investor will own greater than 5%. Following pricing (but prior to close of the offering), the investor sells shares. 1. When would the investor be deemed to have acquired the shares in the offering — on the day of pricing/commitment of the public offering, or on the day of close? 2. If the sales made between pricing and close take the investor to below 5%, does the investor have any filing obligation? If you say that the investor acquired beneficial ownership at pricing, then the filing obligation would have arisen prior to the sales and the filing (assuming it was made prior to the sales) would not reflect the sales. If you say the trigger date is closing, then the filing has arguably not been triggered because many of the shares have been sold, or would you argue that for an instant in time following close all of the shares are beneficially owned regardless of the need to settle the shares a moment later? 3. If you say that investor has acquired beneficial ownership at pricing, how would the investor compute its percentage ownership prior to close? Could he assume that all of the shares issuable in the offering to investors are outstanding even though those shares haven't yet been issued?

RE: 1. There are conflicting views on this question, but in my view the shares aren't acquired until closing because there are material conditions to closing.

2. Because of my response to 1, I think the investor never goes over 5% so never has a filing obligation. Bear in mind the staff's C&DI regarding possible ownership of shares even after the sale if the sale follows a record date and the seller therefore has the power to vote at an upcoming meeting.

3. I would include in the denominator all of the shares to be issued in the offering. If the filer concludes that there are no material conditions to closing, resulting in beneficial ownership at pricing, then all other purchasers would also be beneficial owners. I would explain my math in the filing, which I always do in any event.
-Alan Dye, Section16.net 1/28/2014

RE: Thanks. With respect to question 2, what if the investor delivers shares acquired at closing to settle the sales made after pricing? Would you say that the investor never acquires those shares, even at close of the offering, because they are being delivered to settle the sale trade made after pricing? Or, are they deemed "owned" for a moment of time before being delivered in satisfaction of the previous sale.
-1/28/2014

RE: It seems to me the shares have to be owned before they can be delivered, even if the events happen simultaneously. I've heard the argument made, when an insider with a short position buys stock to cover the short, that the buy isn't a reportable purchase because the shares go straight to the person from whom the shares previously sold were borrowed, but I've never considered that argument persuasive. It seems to me the argument here would have a similar weakness.
-Alan Dye, Section16.net 1/28/2014

RE: Would the analysis change for #1 if it was an underwritten follow on primary public offering?
-5/13/2019

RE: I don't think so, assuming the shares to be purchased will come solely from the underwriters and consist solely of underwritten shares. If the purchase order will be executed in the open market even if the offering doesn't close, then I think the purchase might be deemed to occur on the trade date.
-Alan Dye, Section16.net 5/14/2019

RE: Similar to the above question.
Assume an issuer has 100 shares outstanding. It then sells 100 shares in an IPO. An investor who didn’t own any shares prior to the IPO buys 25 from the underwriter (or in the secondary market prior to the closing). Then, prior to the closing, the investor sells all 25 shares. At the closing, it isn’t clear to me if the shares go to the investor’s account and then immediately get sent to the buyer, or if the shares go directly to the buyer and never go to the investor’s account. Do you think the investor has an obligation to file a Form 3 and Form 4 (as well as a Schedule 13G), or could the investor take the position that it never has beneficial ownership over any of the shares and therefore not make any filings? Thanks.
-11/14/2019

RE: Won't the question depend on the mechanics of settlement of the two transactions? If a person buys shares in the when-issued market, and then sells the shares before the IPO closing, the sale may close later than the purchase, meaning the person beneficially owns the stock for a period of time. If both trades settle on the same date, though (e.g., on the IPO closing date), I think there is a strong basis for saying the person didn't own more than 5% because the ownership snapshot may be taken at the end of the trading day.
-Alan Dye, Section16.net 11/17/2019

RE: Thank you.
I thought that, but for some exceptions where the SEC has given no-action relief, if one buys 6% at 9 am and then sells 2% at 3 pm on the same day, leaving the person with 4% at the end of the day, the person is still required to file a 13G listing 4%.
Is that not the case?
-11/18/2019

RE: I'm thinking and may want to consult. Can you cite me to the letters you're referring to?
-Alan Dye, Section16.net 11/18/2019

RE: These are the no-action letters that were referenced in the prior post. Any additional thoughts on this question would be appreciated.

No-Action Letter, George K. Baum & Co. (Oct. 04, 1986)
No-Action Letter, J.P. Morgan & Co. Inc. (May 07, 1993)
No-Action Letter, Goldman, Sachs & Co. (Dec. 30, 2008)
-12/6/2019

RE: I read the no-action letters, and consulted with two lawyers who once worked in Corp Fin's Office of M&A. We all agree that the no-action letters are limited to their facts, and don't necessarily support the position that intraday trading that takes an investor over 5% (or 10%) but back under the threshold before the end of the trading day does not trigger a filing obligation. One of the lawyers believes, however, that the Staff has offered that advice internally. It makes sense to me that the Staff might take that position, for purposes of both Section 13(d) and Section 16. Have you considered asking the question, using the Staff's online form?
-Alan Dye, Section16.net 12/10/2019

RE: Can you clarify this statement: "One of the lawyers believes, however, that the Staff has offered that advice internally?” Is the advice referred to here that reporting is required, or that it is not required for mid-day acquisitions where the investor is below the threshold by the end of the day?

If an investor goes over the threshold intraday (but subsequently falls below by the end of the day), would the investor be expected to obtain the information regarding trading during the day? For example, if an investor converts a convertible note into shares of common stock, the investor may not be able to independently determine the exact time the shares go to his account. If that same investor were to also sell shares of common stock on the same day, it would be difficult to determine whether the timing of these transactions was such that the 5% or 10% threshold were exceeded during the day. Would the investor then need to obtain the detailed information from the broker in order to determine whether reporting is required, notwithstanding the fact that he was below the threshold by the end of the day?
-4/27/2020

RE: Of the two lawyers I spoke with, both of whom had been in the office of M&A at some point, one thought the internal view of the staff, during Staff discussions, was that BO'ship could be determined as of the end of the trading day. The other had not heard a similar position. I do know that some traders make the determination at the end of the day, and note the difficulties you cite in trying to determine whether at any point during the day the trader went over a threshold.
-Alan Dye, Section16.net 4/27/2020

Q: Dear, Alan. One of our directors is retiring as of May 30. In March, he sold shares on the open market. Other than this sale, he has had no other non-exempt transactions within the 6 months prior to retirement. Please confirm my understanding that post termination: 1. We must report any non-exempt opposite way transaction (i.e., a purchase of shares) within 6 months of the date of the sale, and 2. Exempt transactions (specifically, a SAR exercise) within 6 months of the sale would not be reportable. Thank you.

RE: I agree with both conclusions, based on Rule 16a-2.
-Alan Dye, Section16.net 5/10/2011

RE: To clarify further, in the fact pattern above, a purchase within the 6 months from the date of the sale could give rise to a short swing liability, correct? If this is the case, we would advise the retiring director that he would be prohibited from any purchases within the 6-month window, thereby eliminating this possibility. Does this course of action make sense to you?

In addition, under the analysis above, if the director engages in additional sales, although they would not be considered an "opposite way transaction," wouldn't a Form 144 be required? And, if so, wouldn't a Form 4 be required as well?

I would appreciate clarification of these two questions.
Thank you.
-5/11/2011

RE: Yes, a non-exempt purchase within six months of the sale would be potentially matchable with the sale. It makes sense to advise the director not to purchase any issuer securities within six months of the sale date, at least not at a price lower than the sale price.

A Form 144 would be required for sales if you consider the director to still be an affiliate. The obligation to file a Form 144 wouldn't mean the director also needs to file a Form 4. The Form 4 filing obligation is based solely on Rule 16a-2.
-Alan Dye, Section16.net 5/11/2011

RE: Dear, Alan.
I'd like to confirm that the following is still correct for a retiring director who engaged in a sale within 6 months of retirement:
1. We would be required to file a Form 4 on his behalf for a purchase within 6 months of the sale, as this would be a matchable transaction,
2. No filing would be required post retirement for a non matchable transaction (including vesting of deferred shares, a donation or additional sales) and
3. With regard to the "No Filing" certificate which you recommend, is it sufficient to obtain a certificate confirming transactions through the date of retirement, or should we request one at the date on which the window for the opposite way transaction ends (which would be a few months after the retirement date).
Thank you.
-4/27/2020

RE: Yes, all of those things are still true. What you'd like to do is either get a no filing due certificate next year or, if that's hard to do, put the company in a position of being able to say it "otherwise knows" that no filing was done. You might accomplish that by getting a confirmation from the departing director that he will inform you if he engages in an open-market or other non-exempt purchase of company stock before m/d/y (measured to be six months from the date of the sale). The confirmation could note that vesting of existing stock awards won't constitute non-exempt purchases.
-Alan Dye, Section16.net 4/27/2020

Q: Individual who is the General Partner (makes all investment decisions) (the "GP") of a Venture Capital Fund (the "Fund") that is a 15% owner of a public company (the "Issuer") buys 10,000 shares of Issuer stock for his own account. Four months after the GP buys his 10,000 shares of Issuer stock, the Fund sells 500,000 shares of Issuer stock at a higher price than the GP paid for his 10,000 shares. The GP has a 1% pecuniary interest in the Fund. The GP also may be compensated for this transaction based on a carried interest calculation. The calculation, though, of what the GP will actually get, if anything, cannot be determined for some period of time in the future. The GP gets a carried interest of 20% of the Fund's profits. However, profits are only paid after all capital is returned to Fund investors. The capital has not yet been repaid to the investors. How does the GP, when faced with a plaintiff's attorney challenge, correctly compute his short-swing liability? While there is a chance he may never receive any carried interest, it is LIKELY that he will.

RE: I had a long conversation with a client today involving that very issue, and I don't know of any court decision or staff guidance that sheds any light on the answer. I think there are two concepts at play: what is the GP's pecuniary interest, and how much is the GP's "profit realized." I think it's likely that a carried interest represents a pecuniary interest in the portfolio securities, but I'm not sure how much profit is realized where issuer stock is sold and is only part of the profits that may ultimately lead to a payout to the GP. Coming to resolution of a 16(b) claim might require an estimate of what the payout will be to the GP, and what portion of that payout is attributable to the issuer stock sale. It's a tough question.
-Alan Dye, Section16.net 2/6/2013

RE: Thank you for the quick response. If the GPs wife bought 200 shares in the last six months, are those shares matchable? He did report his wife's purchase on his Form 4 as an indirect holding and indicated those shares were held by his wife.

Again, thanks for this great Q&A service.
-2/12/2013

RE: Whether an insider beneficially owns his spouse's shares depends on the facts and circumstances, but in most cases the insider does beneficially own the shares, by virtue of both influence over the spouse's trades and the shared economic benefit if the spouse profits from securities transactions. If beneficial ownership is attributable to the insider, then the spouse's purchases would be matchable with sales by the insider or any entity through which the insider beneficially owns issuer securities.
-Alan Dye, Section16.net 2/12/2013

RE: Again, thanks for this great service. Two quick add-on questions:

1. Can the insider pay the Issuer in shares of stock, instead of cash? I have seen Morales cases which seem to say it is OK, but is it not commonly done?

2. What are the factors to determine if someone is a beneficial owner of shares owned by a limited partnership (venture capital fund)? Is it based on making investment decisions? Can someone who does not make investment decisions or the power to direct the fund to act, be deemed a beneficial owner of the shares held by the fund (i.e., a principal in a fund who does not have dispositive power or voting power regarding the acquisition or disposition of the Funds assets)?
-2/20/2013

RE: Obligation, assuming the issuer is willing to accept non-cash consideration.

2. The case law suggests that, to be a beneficial owner for purposes of 16(b), a person must have both an economic interest in the securities and some degree of control over transactions in the securities. If a person has no control (e.g., where a person is a beneficiary of a trust of which someone else is trustee), then absent some unusual circumstance, the person should not be considered a beneficial owner.
-Alan Dye, Section16.net 2/20/2013

RE: Is it possible (assuming that the securities of the issuer do not comprise more than 10% of the managed portfolio) that the 16a-1(a)(2)(ii)(C) Rule is applicable to a venture capital fund manager who makes investment decisions for the Fund and is paid with a 20% carried interest (after the Fund is profitable)? Just trying to make sure that I have thought of every avenue. I have not seen this approach with venture fund managers before.
-3/13/2013

RE: That's an interesting thought. I see the appeal of the argument, and maybe it would work. One concern would be that, in a typical fund environment, where the investment adviser isn't independent, all of the interests held by the control group, including any GP or other interest in the fund, would be counted as part of the adviser's pecuniary interest, meaning that the adviser has more of an interest than just a performance fee.
-Alan Dye, Section16.net 3/13/2013

RE: I am not sure if I understand your response. Let me provide more information. There are two individuals who each purchased .5% of the Venture Capital Fund. They are the managers of the Fund and together make all investment decisions of the Fund. In addition to their actual .5% interest in the Fund (which has increased in value) they are compensated with 20% carried interest. They also purchased 10,000 shares (5,000 each) for their own accounts. Then, the Fund starts to sell shares. Can they avoid short-swing liability for the carried-interest, as a performance related fee? Would they then still be liable for their actual pecuniary interest in the shares sold by the Fund (the .5%)?

Thanks again for this great service and your amazingly quick responses.
-3/13/2013

RE: Ok, I understand. The question really is whether a carried interest is a performance-related fee, isn't it? To avoid being performance related, the fee has to be based on capital gains, over a period of at least one year. In addition, issuer securities have to make up less than 10% of the portfolio. The carried interest seems to meet the requirements for exclusion, but I've never given the issue any thought and need to think more about it.
-Alan Dye, Section16.net 3/13/2013

RE: Further to this line of thinking, let's assume that the carried interest is performance-related (i.e., the issuer securities make up more than 10% of the portfolio). For purposes of this question, the GP is also a control person of the issuer. Upon an interim (non-liquidating) distribution-in-kind to the limited partners, the carried interest will be paid in shares. Would this crystallization of carried interest be treated as a "purchase" for Section 16(b) purposes? The GP would have reported beneficial ownership of all of the issuer securities held in the partnership previously.
-10/17/2016

RE: I don't know of any clear authority addressing this question, but for the reasons I mentioned in another post today, I think there is a strong basis for concluding that the distribution merely transfers the number of shares in which the insider had a pecuniary interest at that moment, and therefore is exempt under Rule 16a-13.
-Alan Dye, Section16.net 10/17/2016

RE: I have generally considered carried interest like that described here to be a good performance fee, but a problem I have come up against is where the GP (and therefore its controlling persons) hold an additional LP stake in the fund which creates potential matching for their pecuniary interest in those shares against their individual/personal transactions outside of the fund. Although an LP would not typically have a pecuniary interest in the partnership's portfolio securities (by analogy to Rule 16a-1(a)(2)(iii)), because the GP has control in the facts presented by the poster, that exclusion would not apply (in contrast to a GP in which investment decisions are made by an investment committee of at least three members that acts by majority with no veto rights).
-10/18/2016

RE: Thank you. In a situation where the GPs affiliates (who would be part of the reporting group) also hold an additional LP stake in the fund, if carry were to be received in shares (or a pecuniary interest attributed to the LP) and other members of the reporting group (outside of the Fund and the LP itself) sold shares within six months, based on the above, could the receipt of shares and subsequent sale be matched?
-10/19/2016

RE: Following up on this string — has there been any sort of definitive answer to the question of how to treat carried interest in a matchable transaction between PE funds? Our situation is that Fund A is already a 10% holder of Company X and Fund B would like to purchase shares of Company X and Fund A and Fund B are controlled by the same GP/person. It is possible that Fund A will need to sell shares of Company X w/in six months of when Fund B will buy them. It does not seem like either fund would have liability based on a purchase by one fund and a sale by the other, because neither fund would have BOTH a purchase and a sale. But, the GP would have liability to the extent of his pecuniary interest in each fund. His pecuniary interest is predominantly the carried interest. Is there any argument that the carried interest is not a pecuniary interest and should not be part of the calculation? Has that been tested in court? (I could not find any but thought I would ask.) If not, how do PE funds typically calculate the carried interest for disgorgement if they don't know if it will be realized or not? Disgorge whatever is definite now, and then make an additional payment later if they realize carried interest on the investment? Has that been tested in court at all? Thank you!
-1/28/2019

RE: I understand the issue and don't know of any guidance addressing it, from the SEC or a court. I have had the question come up a few times, in one case where the carried interest represented real value, and in another case where the fund had not performed well, was in liquidation mode, and the GP was unlikely ever to see any distribution based on its carried interest. Although not your issue, I've also seen a similar issue arise where a distribution is to be made "pro rata," and the question is whether a snapshot of the value of the GP's carried interest at the time of distribution is the GP's pecuniary interest, allowing application of either Rule 16a-9 or Rule 16a-13. In only one case did the issue get focus from both the plaintiff's side and the fund GP's side, and there the plaintiff's attorneys recognized the uncertainty how a carried interest should factor into the GP's pecuniary interest. Ultimately the case didn't require that either side subscribe to a theory; there was a lot going on in that case, and it settled for an amount that took into account a number of uncertainties that existed in that case.
-Alan Dye, Section16.net 1/28/2019

RE: Thanks, Alan. That is what I suspected. Follow-up question — if the fund in question switched from being a GP controlled by one person to a GP controlled by a committee of five (where you needed a majority vote), I don't suppose you would feel comfortable relying on the Rule of Three to conclude that the GP is not the beneficial owner here (if you could, then there would be no matchable transactions between Fund A and Fund B, right?) Your treatise in Section 4.06 seems to indicate that is a shaky leg to stand on but curious whether you've seen any further formal (or informal) guidance from the SEC or courts on this. Thanks again!
-1/28/2019

RE: Funny you should ask — I have that issue in a 16(b) case right now, and expect to discuss the application of the rule of three in the partnership context with the plaintiffs' attorneys later this week. That's only one of several issues arising in the case, but I expect that we'll have to deal with (1) whether there really is a Rule of Three, (2) even if there is, does it apply to the pecuniary interest test (as opposed to the 13(d) analysis, and (3) does Rule 16a-1(a)(2) attribute a pecuniary interest to a GP whether or not the GP controls investment decisions (where the GP of a fund is itself a partnership or LLC). From a planning/reporting standpoint, I am comfortable relying on the Rule of Three. But, like you, I'd feel a lot better about opposite-way trading among funds if there were case law to rely on.
-Alan Dye, Section16.net 1/28/2019

RE: Hi,Alan.

Following up on this thread, we're facing a somewhat analogous situation in which a venture fund affiliated with a director purchased shares within six months of a subsequent sale of shares by the director individually. The sale price was higher than the purchase price and, therefore, the director will have short-swing profit liability. The director owns 25% of the GP, so has 25% of the capital interest (which is 1% of the fund) and the director is entitled to a 25% share of the GP's 20% carried interest. The carried interest is payable once the capital is returned to the LPs. Is it appropriate to simply apply the math to derive the director's pecuniary interest in the fund's purchase (i.e., 25% of 1% + 25% of 20% = 5.25%) and match that to the shares he sold to derive the profit realized from the short-swing trades? As in the example above, there is no way to know for sure whether the fund will ever be in a carry position, but we are assuming it is likely in our situation as well.

I note from your response the potential need to estimate what the payout will ultimately be to the GP and determine what portion of the ultimate payout would be attributable to the matchable transaction. Can you clarify how the outcome of that estimate would be germane to the calculation of short-swing profit in this case? Does the ultimate determination of whether the fund ends in a carry position in some way impact the percentage of the Fund's purchase that would be considered to be the director's indirect pecuniary interest? In other words, does that estimate in some way result in the director having a smaller pecuniary interest in the fund's transaction than the 5.25% in my example? And, if so, how?

Thanks in advance!
-4/26/2020

RE: I do think your formula works to calculate the director's pecuniary interest in the fund, recognizing that the issue isn't really addressed in the SEC's rules and hasn't been addressed by a court. The uncertainty is, in my mind, whether the GP will ever realize the carried interest and, if it does, how much of the payout will be attributable to a rise in value of the issuer stock. Attributing the 20% carry to the "profit interest" of the GP seems more than reasonable (to the issuer or a plaintiff) to me.
--Alan Dye, Section16.net 4/27/2020

Q: Rule 13d-2(a) requires that "[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed 'material'" such that an amendment to Schedule 13D is needed. My question is about calculating the 1% for "an" acquisition or disposition. The literal reading appears to be if the 1% trigger is crossed on a transaction by transaction basis, without regard to time (not like the "2% in 365 rolling days" test under 1(d)(6)(B)). Are you aware of any guidance about collapsing multiple transactions that are close in time, or aggregating a series of related transactions, under this rule? I have checked the C&DIs, the Stephens Section 13D deskbook and other posts on this (fantastic) website, but I have not seen anything that explains the calculation in the context of multiple transactions. If useful, this is in the context of possible dispositions to lock in gains, where there would also be purchases. Thanks in advance!

RE: Let me be sure I understand your question. Say an investor holds 6% of the issuer's common. The investor then buys another 0.9%, and then the next day buys another 0.2%. Are you trying to determine whether a 13D/A is required, because neither purchase involved more than 1%? If that's the question, I see the ambiguity in the rule, but my understanding (perhaps based on my own failure to give the issue adequate thought) is that a 13D/A is required, because the investor's beneficial ownership has increased by more than 1% as compared to the investor's last filing. I will do a little looking into the question, though.

I thought your question might be whether purchases and sales may be netted. Say a 6% holder buys another 0.9%, then sells 0.5%, and then buys 0.3%. There, even though total purchases exceed 1%, the investor's beneficial ownership is never "up" by more than 1% as compared to the last filing, so I think no 13D/A would be required in that circumstance.
-Alan Dye, Section16.net 1/19/2014

RE: I am interested in either scenario (which seem related to me), although we'll likely have (1) aggregate sales exceeding 1%, followed by (2) aggregate purchases exceeding 1%. Your take that an amendment is not required if net holdings don't move 1% makes a lot of common sense to me, but I had a follow-up as to what you think the answer would be if one of the necessary transactions for the "net" amount to be under 1% happens last. For instance, if a holder of 5.7% on Day 1 sells 0.6%, on Day 2 sells another 0.6% (thus exceeding 1% in combined dispositions), then on Day 3 acquires 1.3% — so, only a net acquisition of 0.1%. On Day 2, there is no certainty that on Day 3 there will be a nettable acquisition (and if 13d-2(a) requires a transaction by transaction analysis the purchase on Day 3 would be reportable). I guess the transactions could be structured, so this is less of a concern under a netted approach (e.g., break it up into smaller sales followed by purchases, etc.), but that might just add complexity and transaction costs. Assuming the transactions are all part of a plan by the reporting person to keep aggregate holdings within 1%, they all happen within a reasonably short period of time, and in fact there is no aggregate movement up or down of more than 1%, do you think the "net" approach is reasonable regardless of the order and amount of the dispositions and acquisitions?
-1/19/2014

RE: I was hoping to find out if there has been a response to this follow-up question since it is exactly a situation I am currently facing. Thank you.
-11/5/2014

RE: I don't know of any guidance, but will ask a 13(d) guru what he thinks. I seem to recall that he told me once before that an amendment is triggered by reaching an ownership level that is more than 1% higher or lower than the last reported ownership level.
-Alan Dye, Section16.net 11/6/2014

RE: I was wondering if you ever got a firm answer to this. I have always taken the position that if the move is 1%, you file. I have also always understood it to be appropriate to use an end of day "snapshot" to determine the percentage change. Trying to do it intraday, especially at a large institution like an investment advisory firm or a banking enterprise with multiple entities, would be extraordinarily challenging. Possible, perhaps, with today's technology, but still very difficult in practice. (While I don't know for certain, I always assumed this was also the reason institutional investors were first given the exemption in 13d-1(b).)

Thus, in the scenario posted at the beginning of this thread, the investor would have crossed 1% as of the end of Day 2 and would be obligated to file "promptly." The next day, Day 3, the position changed by 1% again, triggering another amendment. I think because they occurred within 1 day (i.e., within the filing window for the first 1% move) you might be able to justify including both on one filing through careful text writing (and being sure to be "prompt"), but, analytically, you can't say that on Day 3 you were net up only 0.1% and not file anything.

Your thoughts?
-10/23/2015

RE: I agree with all of that. And, reporting both acquisitions on a single 13G/A is doable, as you suggest. There's a staff C&DI in the 13D context saying the filed amendment MUST show total ownership through the date of filing, not just ownership as of the trigger date.
-Alan Dye, Section16.net 10/23/2015

RE: I think the staff's position is that an acquisition that increases the holder's ownership by more than 1% of the class as compared to the number owned in the holder's last filing triggers the amendment. A holder could, for example, report ownership of 7%, sell down to 6.1%, and then buy 1.5% in a single transaction, taking the holder up to 7.6%, without ever filing an amendment. I am at the San Diego conference without access to my files, so I will check this position with someone else or when I am back in DC.
-Alan Dye, Section16.net 10/26/2015

RE: Thanks. I think that in general that is probably the right way to go, but in certain circumstances I could see someone (the SEC?) arguing that a purchase or sale by a 13D filer on a single day of 1.5% or 2% (or more?) could itself be material, which is why I have sometimes suggested a more conservative approach here, especially if the person's 13D indicates some real control purpose or the filer is a Section 16 insider.
-10/27/2015

RE: Understood. I will try to run down some authority, for one position or the other, later this week.
-Alan Dye, Section16.net 10/27/2015

RE: Thank you. Enjoy the conference.
-10/27/2015

RE: I was wondering if you ever heard anything further about this. I have been thinking about a situation where a 13D filer, for a number of years, has periodically increased and decreased his position, all within the 1% "band" discussed in this thread, and therefore has never had to update his 13D. However, having gone down .9% from the amount beneficially owned as of his last filing, he purchases 1.8% in a single block trade. The result will be that the filer's position will be .9% above his previous filing and therefore he would not appear to be required to file, notwithstanding that on a single day he purchased nearly 2% of the company's outstanding shares.

Thanks again.
-12/8/2015

RE: I did follow up with Joe Connolly, who agrees that the 1% change is measure against the ownership reported in the most recent 13D or 13D/A. So, if a filer reports ownership of 8%, then sells .9% to go to 7.1%, then buys 1.8% to go to 9.9%, no filing is required (unless a .9% change is material for some other reason).
-Alan Dye, Section16.net 12/8/2015

RE: Thanks again. Always appreciated.
-12/10/2015

RE: Thank you very much for the helpful guidance.

I interpret that to mean that if an investor (i) filed a 13D disclosing ownership of 7% on Monday, (ii) bought 0.5% on Tuesday, (iii) sold 0.5% on Wednesday and (iv) bought 0.6 on Thursday, it would not be required to amend its 13D, notwithstanding that it acquired 1.1% on a gross basis.

However, in SEC v Sand (902 F Supp 1149 (Cal 1995)), the court stated, "The defendants argue that a Schedule 13D amendment is not required unless the purchaser increases his net position, relative to all outstanding shares, by more than one percent. This argument is unpersuasive. Section 13(d) imposes a duty on a person who owns more than five percent of a company issuing stock. When such an owner acquires, by absolute number, an additional one percent or more of the issuer's stock, he must disclose to the SEC the acquisition. It is the amount of stock purchased, not the effect on the purchaser's ownership percentage, that triggers the reporting requirement."

Also, in the JP Morgan NAL (NAL 5/7/93) and George K Baum & Company (NAL 10/4/86) the SEC permits netting in the context of the 2% test, but in narrow circumstances.

From the case and the NALs (though the NALs are by analogy), I believe the SEC's default position is that in the case I described above, an amendment would be required. The Stephens treatise appears to agree.

I would greatly appreciate any thoughts you (or Joe) may have on this.
Thank you.
-6/4/2018

RE: Similar to this topic, under Rule 13d-2(c), an amendment to Schedule 13G is required within 10 days of the end of a month in which beneficial ownership "increases or decreases by more than five percent of the class of equity securities." If the shareholder participates in an offer to repurchase, by the issues, that is implemented on a pro rata basis across all shareholders, whereby the shareholder disposes of more than 5% of the class of securities but its percentage ownership is unchanged, would such an amendment be required? Or, could this simply be reported in the end of year Schedule 13G amendment (although 13d-2(b) also speaks only of a "change in the percent of class outstanding")?

Thank you in advance!
-4/24/2020

RE: I don't know of anything to point to for an answer to the question other than the language of the rule you've noted. I consulted with Tiffany Posil, who is taking over as my 13(d) guru now that Joe Connolly is retiring (Tiffany, too, worked in Corp Fin's Office of M&A), and her reaction was the same as mine. If the shares owned by the filer represent the same percentage of outstanding shares as before the exchange, there should be no need to file an amendment at the end of the month.
-Alan Dye, Section16.net 4/24/2020

Q: A director deferred receiving his RSUs past the time of vesting. The previous grant of the RSUs was reported in Table II of Form 4. Does another Form 4 have to be reported at the time of vesting or when upon the actual issuance of the shares which is past the time of vesting?

RE: The Staff has never provided guidance on this issue, to my knowledge, but my view is that the RSU represented a right to receive stock in the future, and the deferral means the award still represents a right to receive stock in the future. The right now has a new delivery date, but that doesn't seem to me to represent a new security, necessary triggering a need to file a Form 4. See Model Form 122.
-Alan Dye, Section16.net 8/1/2012

RE: Thanks. Quick follow-up. I understand that no new Form 4 is required now, but will a Form 4 be required at the time the RSU actually vests? Or, will a new Form 4 be required at the time the shares are actually delivered to the director?
-8/1/2012

RE: A Form 4 will be required at one time or the other, because the Table II derivative will need to convert to Table I common stock. I think you can take your pick.
-Alan Dye, Section16.net 8/1/2012

RE: Alan: We have a similar situation. Our officers were granted RSUs in Feb 2007 which vested on the third anniversary in Feb 2010. Two officers decided to defer receipt of their shares for another 3 years. Thus, the restrictions just lapsed this week. We reported the original grant of RSUs in Table II and plan to file a form 4 showing the conversion to Table I this afternoon (we did not file anything for the two officers in 2010, since their deferral continued the restriction). Do we need to make any special footnotes to explain the deferral on the Form 4?
-2/7/2013

RE: Table I and Table II should make clear what happened. There's no need to discuss that the award was deferred, although you could if you think the disclosure would be useful.
-Alan Dye, Section16.net 2/7/2013

RE: Just curious if you're aware of any update to the issue discussed in this thread? Issuer has a deferral plan pursuant to which participants can defer settlement of RSUs if properly elected. Trying to decide whether any reporting is required on the date of vesting as set forth in the RSU award agreement, if the settlement of RSUs and related dividend equivalents is deferred in accordance with the deferral plan. It seems to me that no reporting is required, since the character and features of the award haven't changed (the award still represents a right to receive stock in the future). Issuer would, of course, file a Form 4 at the end of the deferral period to report the acquisition of stock in Table I. Any different thoughts? Thanks.
-4/23/2020

RE: I don't know of any update in the way of a Staff interpretation, but I share your view that the nature of the award hasn't changed. It's a future right to stock, on a one-for-one basis. The date of settlement/delivery doesn't change that fact.
-Alan Dye, Section16.net 4/23/2020

Q: Our executives received performance based RSUs that can be certified at less or more than target. The PRSUs were not reported on the date of grant because of the performance criteria. If the PRSU pays out above or below target upon certification, is there any need to get into that detail on a Form 4?

RE: There's no need to discuss how the award was sized or even that it resulted from a performance award. All that has to be reported is the acquisition of whatever number of units vest.
-Alan Dye, Section16.net 2/23/2011

RE: Thank you. One follow-up question, upon certification we will report the acquisition of shares on Table I and use transaction code A (the original grants were duly approved). How much detail do we need in the footnote? Do we have to describe the date of and/or type (RSU, PSU) of original award?
-2/24/2011

RE: There is no need to provide any detail at all. If you want, you can just report the acquisition of common stock, on a single line, using transaction code "A." If you want to explain any part of the award, such as that it represents the payout of performance awards, you can do that. The amount of information you include is entirely voluntary.
-Alan Dye, Section16.net 2/24/2011

RE: Thank you very much.
-2/24/2011

RE: Hi, Alan.
What if we were voluntary filed in Table II at the time of grant at the target and earned over target three years later at the vest?
Can we file the earned over target PRSU in table I with A code without disclose the M code to table II?
Thanks!
-4/21/2020

RE: Yes, if you report in Table I the full number of shares earned, target plus any overage, I don't think you need to report anything in Table II. The reporting in Table II of the target award was not a report of a derivative security and therefore was meaningless.
-Alan Dye, Section16.net 4/21/2020

Q: We recently filed a Form 4 for our Directors. We discovered that on the Form 4 for one of our Directors, the line entry for the Director's beneficial ownership on Table I, Column 5 was inadvertently omitted. Are we required to file an amendment to add these shares back on the Director's Form 4, or can we wait to add the shares on his next Form 4 filing?

RE: So, you reported a transaction for the director, say in directly owned shares, but left Column 5 blank, so the report doesn't show the number of directly owned shares the insider owns? You may recall that the Staff said in a letter to the American Society of Corp Secretaries that leaving a holding out of a Form 5 isn't disclosable under Item 405 but should be corrected by amendment. That's always a safe practice, but I believe most practitioners are willing not to file an amendment if the omission is immaterial (e.g., the last Form 4 shows the total ownership, so readers can do the math on their own, and the insider will file another Form 4 soon where the error can be corrected).
-Alan Dye, Section16.net 4/21/2020

RE: In your response you referenced "Form 5". I wanted to clarify that you meant "Form 4." Also, if we choose to wait and add the direct holdings back on the next Form 4, will we need to add a footnote when adding this entry back on the Form 4?
-4/21/2020

RE: I think, but am not sure, that the Society letter involved a Form 5, but the principle is the same, so my response would have been the same either way. I don't think a footnote is necessary, unless there have been some transactions exempt from reporting that would make it impossible for someone to tie together the last three filings (counting the upcoming Form 4).
-Alan Dye, Section16.net 4/21/2020

Q: Form 83, Reporting Principle (8), states: "An insider's purchase or sale of an business entity that owns issuer securities in its portfolio involves an acquisition or disposition of issuer securities for value, but nevertheless the transaction may not be a "purchase" or "sale" of the issuer securities for purposes of Section 16." A Form 4 is required for "all transactions not exempt from Section 16(b)," so a Form 4 is generally NOT required for transactions exempt from Section 16(b) (except for transactions exempt from Section 16(b) by certain specified rules, none of which are applicable to the At Home case facts). If an insider sells a small amount of the insider's minority interest in an operating entity (assume the insider has a pecuniary interest in issuer stock held by the operating entity) that owns some issuer stock, but for which the issuer stock represents less than 1 percent of the operating entity's assets, such that the operating entity entails "appreciable risks and opportunities independent of the risks and opportunities that inhere in the stock of the issuer" (even more so than in the At Home case, since the operating entity's ownership of issuer stock is even more clearly de minimis, and the sale of interest in the operating entity is not a "vehicle for the evil which Congress south to prevent"), then assuming that such sale of interest in the operating entity is not a sale for purposes of (i.e., the transaction is exempt from) Section 16(b), such sale of operating entity interest should not require a Form 4. Correct? The insider's Forms 4 have historically reported the issuer securities held by the operating entity on an aggregate (not proportionate) basis, though I believe that the foregoing analysis applies regardless of whether aggregate or proportionate reporting has been used historically.

RE: You raise an interesting question. When the At Home case was making its way through the courts, I was wondering how the insider could avoid a conclusion that purchasing an operating entity that holds issuer securities doesn't acquire beneficial ownership of the securities. As you note, the court didn't address beneficial ownership, and instead addressed only the "purchase" and "sale" question. So, the court's opinion doesn't necessarily address whether the entity's transaction in issuer securities are reportable by the insider, or whether the insider's transactions in the operating company's securities are reportable as transfers of an indirect interest in issuer securities held by the operating company. Maybe the first issue can be avoided by having someone other than the insider control the operating company's transaction in the issuer's securities. Regarding the latter issue, it seems to me, too, that a sale of an interest in the operating company should not have to be reported, if the At Home case is clearly applicable. I recognize, though, that that conclusion isn't entirely clear from a reading of Rule 16a-3.
-Alan Dye, Section16.net 4/20/2020

RE: Thanks.

16a-3(g)(1) provides: "A Form 4 must be filed to report: [i] All transactions not exempt from section 16(b) of the Act; [ii] All transactions exempt from section 16(b) of the Act pursuant to §240.16b-3(d), §240.16b-3(e), or §240.16b-3(f); and [iii] all exercises and conversions of derivative securities, regardless of whether exempt from section 16(b) of the Act." [bracketed romanettes added as reference points] The rule indicates that a transaction that is not subject to 16(b) is covered by [i] (unless [ii] or [iii] apply), and so no Form 4 should be required.

Perhaps that is the underlying rationale of the SEC Staff's view expressed informally that changes in an insider's indirect beneficial ownership of securities through an entity which do not result from some affirmative, volitional action by the insider need not be reported on Form 4 — such a transaction in securities of an entity that holds issuer securities should not be subject to 16(b) (and [ii] and [iii] do not apply), and so does not need to be reported on a Form 4. Similarly, where a transaction in securities of an entity that holds issuer securities should not be subject to 16(b) for reasons expressed in the At Home case (and [ii] and [iii] do not apply), no Form 4 should be required.
-4/20/2020

RE: You make a good point in referring to the Staff's position regarding nonvolitional changes. There's no "rule" that exempts those transactions, either, but the staff acknowledges they aren't subject to Section 16(b) and therefore don't have to be reported. That's further support of not reporting transactions in the operating company's securities.
-Alan Dye, Section16.net 4/20/2020

Q: Hello, Alan. We have a board member who retires on the date of our annual meeting, the same date RSUs granted to him last year will vest 100%. Do you recommend we report the vesting on a Form 4 and check the termination box? Thank you.

RE: Whether the vesting is reportable depends on whether it occurs before or after the director's termination of service. If that isn't determinable, I would err on the side of caution and report the vesting and, as you say, check the exit box. There is little downside to filing the Form 4, and the burden is probably worth avoiding someone come in later and say the vesting occurred prior to retirement and should have been reported.
-Alan Dye, Section16.net 4/20/2020

RE: Alan, thank you.
I have a follow-up question: We have never checked the "exit box" in the past. Do you recommend that we do that specifically in this situation since the vesting is on the same day as the effective date of the director’s retirement? Is there any risk if we do not check the exit box in his case?
Thank you again.
-4/20/2020

RE: I would check the box, just to indicate that the director is out of the system, but I don't see any downside to not checking the box. I don't think not checking the box renders the Form misleading, and I've never heard the Staff admonish filers to check the box.
-Alan Dye, Section16.net 4/20/2020

Q: Hi. Our CEO is looking to transfer some of his Company (Direct) stock ownership to a Trust in the name of his children. Both children are older, and not a part of the "household" any longer. Also, the CEO will not be a trustee on the trusts, and will not have any controlling/pecuniary interest. Is this transfer reportable on Form 4, and if so, when/how? Also, once the shares are transferred to the trust for the kids, and shares are sold, are those transactions reportable (Form 144/4) even though the kids are not a part of the household, and the CEO does not have a controlling interest in the Trust? Thanks so much for your help.

RE: It sounds like the transfer will be for no consideration, and therefore can be reported on Form 5 (or an earlier Form 4 on a voluntary basis), as a gift exempted by Rule 16b-5. If the trustee is not the CEO or the CEO's spouse, and is not taking direction from the CEO regarding transactions in the company's stock, the CEO will not be required to report the transactions on Form 4, and the trust would not need to comply with Rule 144 unless it is an affiliate.
-Alan Dye, Section16.net 4/17/2020

RE: Thanks for your help here, Alan. One final follow up for clarification: Once the shares are transferred to the Trust, and the CEO forgoes his controlling interest, the shares need not comply with any 144 resale restrictions, even if one of the children may be "deemed" to be a household member? She is away at college, and the only thing Father pays for is tuition.
-4/17/2020

RE: That does raise a wrinkle. Rule 144(a)(2) says a trust is the same person as the affiliate if a family member sharing the affiliate's home has a greater than 10 percent interest in the trust. I think you'll need to reach a conclusion regarding the child's status as a person sharing the affiliate's home.
-Alan Dye, Section16.net 4/17/2020

RE: I agree, and that's where we get hung up. I'm trying to find clear guidance on what constitutes "sharing an affiliates home" or "member of the household." Like I mentioned, she is away at college in a totally different state, so if I take the rule literally, the answer would be "no". Didn't know if the SEC would look at it differently?
-4/17/2020

RE: I think it's a facts and circumstances analysis, and I don't think it's an issue the Staff has weighed in on or would want to weigh in on. The SEC's challenges to reliance on Rule 144 generally have involved fairly clear noncompliance.
-Alan Dye, Section16.net 4/17/2020

Q: Alan, Thanks for the great resource! Question - An insider would like to transfer shares from an entity owned by him and his wife to an entity solely owned by the insider. I read that as being a transfer that would meet the requirements of 16a-13. Assuming we don't meet 16a-13: (a) Is the entirety of the amount transferred treated as purchased & sold (at the same price) and subject to matching to purchases & sales six months pre and post? (b) Or, is only the amount of increased ownership to the insider subject to matching to purchases & sales six months pre & post? Grateful for your guidance!

RE: I think the answer to whether the transaction is exempted by Rule 16a-13 is uncertain. A transfer of jointly owned shares to the insider's sole account, or vice versa, is not reportable. Maybe the transfer you describe is the equivalent, but I don't think the Staff has addressed transfers between entities. If the transfer is reportable, I would think it would be a gift, exempt from matching by Rule 16b-5 and reportable on Form 5.
-Alan Dye, Section16.net 4/15/2020

RE: Like all good stories, there is a twist!

The two entities are corporations, and there are tax planning reasons why the transfer of shares would not be a gift and would instead be a transfer for value.

If the 16a-13 position were not to prevail and the transfer were not a gift, any thoughts on whether all or a portion would be subject to matching?

Thanks again.
-4/15/2020

Q: A client has run into a conflict whereby a performance based award has a vesting date of X, but the certification by the committee of the performance criteria was Y (several days after X). They will file the Forms 4 within two business days after Y. How should they footnote this on the Forms 4? Thank you!

RE: Whether a footnote is required depends on what and when you're reporting. Is the "vesting date" the end of the performance period (e.g., March 31), but whether the criteria were actually met, resulting in issuance of the earned shares, depending on committee certification, I would report the acquisitions as having occurred on the date of committee certification (the "real" vesting date), and include a footnote saying only that the reported acquisition represents shares earned pursuant to a performance award made on m/d/y.
-Alan Dye, Section16.net 4/15/2020

Q: Hi, Alan. For retirement eligible reporting persons, their outstanding shares that have not vested are subject to FICA taxes (guaranteed they are going to get shares and by law the Issuer needs to collect for these taxes for future shares). Is this an immediate two business day reportable event since shares have been withheld, even though the share vesting has not yet occurred, or is it otherwise reportable at the time of vesting or otherwise exempt? I'm not readily finding a model form for this scenario. Thanks.

RE: I've run into this issue a number of times in the last year, and have made a note to create a model form (thank you for making the same suggestion). I think the withholding is reportable at the time of "early vesting," even though the shares won't vest and pay out until later. An issue you might want to consider is whether your existing committee approval of tax withholding meets the conditions of Rule 16b-3(e), or instead you need a new committee approval because withholding will occur earlier than previously approved.
-Alan Dye, Section16.net 12/19/2019

RE: Hi, Alan. We are also thinking of withholding unvested shares on the retirement eligibility date. Would we report this as a disposition of a derivative, using code "F"? Thank you.
-4/10/2020

RE: Based on staff interpretive positions relating to "phantom stock," I would report the disposition of the RSUs in Table II (using transaction code "M"), the acquisition of common stock in Table I, and the disposition of the common stock, again in Table I, using transaction code "F."
-Alan Dye, Section16.net 4/10/2020

RE: In my case, these are restricted stock units that we reported in Table II as a derivative security on the date of grant. Six months after the date of grant, when they become retirement eligible and no longer forfeitable, we plan to withhold unvested RSUs, to pay for the FICA taxes due. The release would happen later on the vest dates on the first, second and third anniversaries of the grant date. So on the retirement eligibility date, how do we report that a certain number of unvested RSUs (not common stock) were withheld by the company to pay the taxes?
-4/16/2020

RE: I would report them in the same way as the vesting/withholding of RSUs--first the conversion of the RSUs, then the withholding of common stock. That seems to be the staff's favored method of reporting withholding from RSUs, based on interpretive letters issued long ago and remain "good law."
-Alan Dye, Section16.net 4/16/2020

Q: One of our clients mistakenly submitted a direct filing as opposed to an indirect filing in a Form 4. Our system allows the User to submit a Form 4a to amend the filing, but it doesn't allow the User to change the original holding record from Direct to Indirect and/or vice versa. How can my client make a correction to the original filing when there is a system limitation?

RE: Let me make sure I understand what happened. You filed a Form 4 for an insider and reported on the Form 4, on a separate line from the line reporting a transaction, "direct" holdings of X shares, but in fact the X shares were held indirectly (e.g., by spouse)? So, you tried to amend the Form 4 to report the X shares as directly owned, but the filing software you are using wouldn't allow you to submit a Form 4/A that changed the holding from indirect to direct? If that's what happened, what error code did you receive when you tried to submit?
-Alan Dye, Section16.net 4/8/2020

RE: Alan, you asked: what error code did you receive when you tried to submit? The client did not submit the amended Form 4a. As soon as she saw that she couldn't change the direct filing to indirect filing, she stopped. She was not able to make any reasonable adjustments in our software. In addition, she also saw that she couldn't include the additional rows of data that she originally reported, as the system only allowed one record to be amended. Do you have any recommendations? Should she contact EDGAR directly to update the filing? Thank you!
-4/8/2020

RE: I can't tell if the problem is with EDGAR or the software the client is using. Has the client tried submitting a Form 4/A that includes only one line item, a holding rather than a transaction, showing only directly owned shares, in Columns 1 and 5, with a footnote explaining that the filing corrects the number of directly owned shares previously reported, and drops an incorrectly reported indirect ownership?
-Alan Dye, Section16.net 4/9/2020

Q: HELP

RE: Does this response from the NASPP help?

"My recollection is that when EDGAR rejects a file, it usually provides some sort of error code, which doesn't seem to be included here. Did Debbie provide any info beyond what is in the subject line? I'm not able to see the post.

ASCII errors could be due to an invalid character (e.g., smart quotes, or en or em dashes) included in the file (EDGAR accepts only a limited set of ASCII characters) or the lines being longer than 80 characters.
-Alan Dye, Section16.net 4/7/2020

Q: Does an insider's insertion of his/her "manual" signature on a pdf of a Form 4 using DocuSign or similar application satisfy the requirement that the insider must manually sign a paper signature page before a Section 16 report is filed with the SEC?

RE: I'm not familiar with DocuSign, and after reading a little bit about it just now I still don't know the answer to your question. I don't think the staff's e-sign release five years ago provided a clear answer to questions like this. I am going to try to find out more, and maybe write a short piece on the subject for The Corporate Counsel newsletter, but here is what Dave Lynn said in response to a similar question on TCC.net:

Q: I know that Rule 12b-11(d) allowing issuers to file electronic signatures also requires issuers to retain the original manual signatures of Exchange Act filings. Since that is a 1995-era rule adopted prior to the wave of state electronic signature laws adopted five years later, do you know if 12b-11(d) was ever superseded by any overall SEC guidance regarding the validity of electronics signatures?

A: Yes, both Regulation S-T and Rule 12b-11 still apply. The SEC hasn't changed them over the year and generally has tried to avoid getting into whether EeSign applies to SEC filings.
-Alan Dye Section16.net 6/5/2014

RE: Hello. I did a search and could not find advice later than this 2014 thread. Has such been settled? Is DocuSign acceptable, or must we have manual signatures?
Thanks.
-4/2/2020

RE: To my knowledge, the staff has not changed the archaic requirement to obtain an "inked" or "wet" signature page. Maybe the temporary relief the SEC has offered during the COVID-19 pandemic will lead to a softening of that staff position going forward.
-Alan Dye, Section16.net 4/2/2020

Q: Hello. Section 16 Reporting Person was granted RSUs under the 2018-2020 long-term incentive plan in October 2018. The RSUs vest in 3 equal installments on each of April 1, 2020, April 1, 2021 and April 1, 2022. Form 4 is being prepared to reflect the 1st tranche vesting. On Table II - I am using transaction code "M" and disposing the 1st tranche and reflecting under Column 9. No. of Der. Securities Beneficially Owned Following Reported Transaction(s) only the remaining balance of the RSUs that will vest on each of April 1, 2021 and April 1, 2022 under the 2018-2020 long-term incentive plan. Can you please confirm that I am only to include the unvested RSUs under this grant and not include any other unvested RSUs held by the Reporting Person under any other long-term incentive plan? Thank you for your time.

RE: Yes, I think you can treat each award of RSUs having different vesting dates as securities of a separate class, such that Column 9 need only report the number of units subject to that award.
-Alan Dye, Section16.net 4/1/2020

Q: Insider currently reports on Form 4 company shares held in a revocable trust for the benefit of his father, of which the insider is the trustee. Insider has joint investment control and disclaims beneficial ownership. The Form 4 reflects these shares as being indirectly held. Upon the death of the insider's father, the trust became irrevocable and the insider became the beneficiary. Is a filing required for any of these changes?

RE: So, the insider was trustee of the trust, and a member of his immediate family (his father) was a beneficiary of the trust? That means the insider was required to report indirect beneficial ownership of the shares held by the trust, as he did. Now, the father has died, and therefore is no longer a beneficiary, but the insider has become "the" beneficiary, meaning the insider alone is the owner of the shares? I'm not sure if that change, resulting from an external event, would require reporting. You may recall that, some years ago, the staff, in a meeting with an ABA committee, said a GP of a limited partnership wouldn't need to report an increase in pecuniary interest resulting from a nonvolitional increase in the GP's % interest in the partnership. A similar analysis might apply here, but I'm not sure there is any definitive guidance. I think it should be sufficient to continue to report indirect ownership of the shares through the trust, and perhaps explainin a footnote that the insider became the sole beneficiary of the trust on m/d/y. If you are inclined to be more cautious in your approach to reporting, I think the increase in the insider's pecuniary interest is essentially an inheritance, reportable on Form 5 because exempted by Rule 16b-5.
-Alan Dye, Section16.net 4/1/2020

RE: Very helpful. Thank you!
-4/1/2020

Q: An insider participates in a broker-administered DRIP that is not eligible for the 16a-11 exemption, but the insider's dividend reinvestment is eligible for deferred reporting as small purchases under 16a-6. Shortly after the dividend payment date, the insider also makes an open market purchase for more than $10,000 that is timely reported on Form 4. Was the insider to report the prior dividend reinvestments with the open market purchase, or can the insider continue to rely on 16a-6 and report the dividend reinvestment on Form 5? Note that at this time, the open market purchase has been previously reported, so the aggregate of unreported purchases remains below $10,000.

RE: I think the prior, deferrable acquisition should have been reported on the same Form 4 filed to report the acquisition that brought total acquisitions over $10,000. See this reporting principle from Model Form 64: "(5) Acquisition That Exceeds $10,000 Threshold Triggers Obligation To Report All Prior Small Acquisitions. An acquisition which, when combined with all prior non-exempt, unreported acquisitions, exceeds $10,000 in value, not only fails to qualify for deferred reporting under Rule 16a-6, but also triggers an obligation to report all prior unreported small acquisitions."
-Alan Dye, Section16.net 3/30/2020

Q: In connection with the loss of foreign private issuer status, we are preparing to file a Form 3, as is required, on or before the trigger date. However, we have learned that the SEC system does not allow a filing prior to the trigger date, which leaves us with no choice other than filing on the trigger date (which is a weekday). Have you encountered this issue. If so, do you have a work-around so we can file it earlier?

RE: No, I haven't encountered that issue. Is the problem that EDGAR won't accept a Section 16 filing regarding a foreign private issuer?
-Alan Dye, Section16.net 3/26/2020

They apparently don't accept any filing with the date of event (trigger date) occurring after the date of filing. Per the support desk, they had no suggestions on how to file earlier.
-3/26/2020

RE: That surprises me, but let me see what I can find out.
-Alan Dye, Section16.net 3/26/2020

Q: If a lawyer (also an insider), as part of his practice, is a trustee for a trust that holds shares of issuer common stock and his family members are not beneficiaries, do we need to report those shares for Section 16 purposes?

RE: No, I don't think so. Rule 16a-8 deems the insider to have a "pecuniary interest" in the shares only if the insider or a member of the insider's immediate family is a beneficiary of the trust. Absent that pecuniary interest, the insider isn't required to report the trust's holdings or transactions in issuer securities.
-Alan Dye, Section16.net 3/26/2020

RE: Thanks. Do we need to be concerned about any fees received for service as trustee? I was trying to determine if the insider could benefit based on performance of the stock, and if the fees were tied to performance of the trust portfolio.
-3/26/2020

Q: Exec was awarded performance share units. When the criteria was deemed to be met, the PSUs were reported timely on a Form 4. They were reported on Table 1 as permitted since they will settle in shares only. Should the shares be included in the exec's direct holdings in the proxy beneficial ownership table even though they will not vest within 60 days of the chart date?

RE: If the awards are now RSUs, not stock, and therefore can't be voted by the holder, they should be included in the Item 403 beneficial ownership table ONLY if they will vest (that is, the restriction period will lapse) within 60 days of the date of the table (because then the holder will have a "right to acquire" the underlying shares within 60 days, under Rule 13d-3).
-Alan Dye, Section16.net 3/24/2020

RE: Thanks so much. Follow up Q — is the answer different when RSUs are vested but deferred settlement is elected, even though other rules such as 409A do not allow for settlement within 6 months of termination? Okay to include and drop a footnote?
-3/24/2020

RE: The staff's position is that shares shouldn't be included in the Item 403 table unless the person can compel delivery of shares by taking unilateral action, like resigning and requesting (if s/he has the right) delivery of shares. If the company can or must withhold shares for 6 months, then the deferred units/shares should not be included in the table.
-Alan Dye, Section16.net 3/24/2020

Q: The wrong transaction code was selected in Box 3 for a purchase of shares. It was listed as "A" instead of "P." Should an amended Form 4 now be filed? We filed the Form 4 a few weeks ago. If so, should the full line be restated with a footnote to the transaction code noting that the amended form is being filed to correct the transaction code? Thank you.

RE: I think there is room for judgement here, and reasonable people might disagree on the best approach. Ordinarily, I think, an error in a Form 4 should be corrected by amendment if the error is "material." An incorrect transaction code, suggesting the availability of an exemption from Section 16(b) when no exemption was available, arguably is material, particularly when the transaction code used might be interpreted to suggest that a nonvoltional "grant" occurred. I would be inclined to amend the report, although it might be reasonable to conclude that the error is immaterial so long as the insider didn't have a nonexempt sale within six months of the purchase, resulting in liability under Section 16(b). If you decide to amend, I would draft the Form 4 exactly as you propose.
-Alan Dye, Section16.net 3/24/2020

Q: Merger agreement provided for two tranches of earn-out shares that were payable based on either operating performance (EBITDA and FCF thresholds) or a share price formula. The third tranche is based just on a share price formula. In each case, it was a fixed number of shares upon satisfaction of the trigger. All of the earn-outs have been triggered by share price and shares issued. The guidance from the model forms (copied below) suggests to me that these earn-out shares could be deemed to have been acquired on the effective date of the merger for purposes of Section 16(b) and thus be deemed to have been acquired as part of that same initial acquisition that pushed our seller over 10%, in which case they would not be matchable. Unfortunately, the seller has not included any of the helpful language below in its section 16 reports and just reported the earn-out shares as acquired (A) on the date they were issued to the seller (although they did at least footnote they were earn-out shares). Seller is now considering an offering of shares less than six months from earn-out date issuance. Do you agree it should not be an issue to conclude the earn-out shares were acquired on the effective date of the merger for matching purposes going forward notwithstanding how the seller has already reported the shares? Thank you very much. (11) Date Of Acquisition Of Earn-Out Shares For Purposes Of Section 16(b) May Be Effective Date Of Merger. There have been only two reported decisions addressing the date on which earn-out shares are deemed to have been purchased for purposes of Section 16(b). In Booth vs. Varian Associates, 334 F.2d 1, 4 (1st Cir. 1964), cert. denied, 379 U.S. 961 (1965), the First Circuit held that earn-out shares were purchased on the date on which the number of shares issuable became fixed, at least where the number of shares issuable was based on the market value of the issuer's stock on that date. In a later case, which involved the issuance of earn-out shares based on the market value of the issuer's stock at the time of the merger, the Southern District of New York held that the acquisition of the earn-out shares for purposes of Section 16(b) related back to the effective date of the merger. See Prager v. Sylvestri, 449 F. Supp. 425, 433 (S.D.N.Y. 1978). The rationale for that decision was that the rights and obligations of the parties became fixed at the time of the merger, when the number of shares issuable was no longer subject to their control. In a case that post-dated the SEC's adoption of the new Section 16 regulatory scheme in 1991, the Second Circuit held that the post-merger issuance of shares based on the post-merger calculation of certain liabilities of the issuer as they existed on the effective date of the merger should be deemed to have occurred, for purposes of Section 16(b), on the effective date of the merger. See DiLorenzo v. Murphy, 443 F.3d 224 (2d Cir. 2006). While DiLorenzo did not involve shares earned after the effective date of the merger, the court cited Prager favorably, noting that the formula provisions of the merger agreement were sufficiently specific that the defendant insiders were irrevocably committed to receive shares in the future, had paid all of the consideration payable for the shares, and could not control the number of shares to which they would be entitled post-closing. It may be, therefore, that a court would reach the same result in a true earn-out case. Support for this position may also exist in Donoghue v. Centillium Communications Inc., (CCH) Fed. Sec. L. Rep. ¶ 93,824 (S.D.N.Y. 2006), a case involving the application of Section 16 to settlement of a prepaid forward sale contract. See Model Form 180. The decision in that case, holding that the date of sale of securities delivered at settlement related back to the date the contract was entered into, may provide a basis for arguing that any transaction occurring in the future pursuant to a contract having formulaic terms is not subject to Section 16(b) if the insider has no control over the operation of the formula and therefore no ability to exploit inside information. See the June 2006 issue of Section 16 Updates at pp. 2-6. (12) Explain In Footnote To Form 4 That Insider's Right To Earn-Out Shares Became Irrevocable On Date Of Merger. When reporting an acquisition of shares pursuant to an earn-out right, an insider should explain in a footnote that his or her rights and obligations under the earn-out right were fixed on the effective date of the merger. Such a footnote should be included whether or not the acquisition is reported using transaction code "J." While the statement would be entirely self-serving and would not bind a court to hold that the purchase of the earn-out shares occurred on the effective date of the merger for purposes of Section 16(b), inclusion of the statement might at least alert a plaintiffs' lawyer to a potential defense to an action against the insider under Section 16(b) seeking to match the acquisition of earn-out shares with a sale occurring within less than six months of the date on which the insider became entitled to the shares.

RE: I do think the purchase date for Section 16(b) purposes should be the date of the initial closing/purchase, regardless of when or how the acquisition of the earn-out shares were reported. I think the DiLorenzo case supports that conclusion, and I think the formulaic nature of the earn-outs means the purchase date should relate back under the broader analyses used by the courts in Centillium, Rubenstein v. vTv, and Rubenstein v. Liberty.
-Alan Dye, Section16.net 10/8/2018

RE: I have a similar earn-out structure, but it's based solely on share price over a 5-year period ("cliff vesting" if the stock reaches a certain price during the period). For various reasons, all of the shares will be issued to the seller at closing, and then the seller immediately will surrender a portion of the shares back to the acquiror to be held effectively in escrow. The seller will be a 10% owner even with the immediate disposition. Would appreciate your thoughts on the following:
(1) I think since the shares will be issued to the seller, the seller's Form 3 would include the entire amount.
(2) The seller would then file a Form 4 to report the disposition.
(3) The seller also would report on the Form 4 an acquisition of a "right to acquire" the same number of shares in the future because the re-acquisition of the shares is solely dependent on stock price, making the right a derivative security.
Thanks very much.
-3/22/2020

RE: I have never seen that structure for an earn-out, but I agree with your analysis. Reporting a right to acquire makes sense to me, as opposed to keeping the escrowed shares in Table I as directly owned, subject to a Table II "obligation to sell" or something along those lines. Maybe either method would be considered compliant, but I think your suggesting makes sense.
-Alan Dye, Section16.net 3/23/2020

Q: I filed a Form 4 with "/s/" in the signature line but no name following. We then refiled with the signature typed in rather than filing an amendment. Client would prefer not to make correspondence filing because that and the response are publicly viewable. Is filing a Form 4/A to the unsigned filing an option, and how would you reflect that the two filings disclose the same transaction?

RE: Let me make sure I understand what happened. Are you saying that first you filed a correct Form 4, missing the signature, and then you filed the same Form 4, with the signature included? If that is what happened, did Column 5 show the same total number of shares owned, in both Forms 4?
Alan Dye, Section16.net 3/21/2020

RE: Yes, to both. The total amount in column 5 is the same for each Form 4.
-3/21/2020

RE: I think it would have been preferable to file the second report as an amendment to the first, with a footnote explaining that the only change was to add the signature. At this point, a correct Form 4 has been filed, and an extraneous duplicate has been filed too (without a signature line). Rather than further complicate the filings, I would be inclined to leave the two filings there. Sometimes, insiders file the same (correct) report twice, due to the filing agent's error in thinking the first submission didn't go through. The staff stopped granting requests to delete the extra form years ago, so duplicates sometimes stay in the system. Here, your total in Column 5 is accurate, and most people are likely to recognize that the same Form 4 got filed twice. So, you might consider waiting until the next Form 4, and explain in that Form 4 that the total takes into account that the last Form 4 was a duplicate of the one that preceded it. If your concern is that the two Forms 4 just filed reported a significant market transaction (e.g., twice the number of shares actually sold in an open market transaction), which might mislead or scare the market, then an explanatory filing might be warranted for reasons other than compliance. In that case, I would amend the first Form 4 and explain there what happened.
-Alan Dye, Section16.net 3/21/2020

RE: Thank you for your quick response on a Saturday morning!

I appreciate the thorough explanation.
-3/21/2020

Q: A few years ago we filed a Form 4 with attorney-in-fact signing on behalf of the officer but failed to attach the POA. We now have to file another Form 4 with attorney-in-fact; shouldn't we now attach the POA to this Form? Is there a penalty for failing to attach a POA to a first use?

RE: The SEC staff's position is that the POA should be filed as an amendment to the initial filing signed by the attorney-in-fact. To my knowledge, the SEC has never sought a sanction against an insider or a company for failure to file the POA.
-Alan Dye, Section16.net 3/18/2020

RE: Thanks; would the original report be considered late because the POA was missing?
-3/18/2020

RE: No, the failure to attach the POA would not make the filing "late" for purposes of Item 405's disclosure requirement.
-Alan Dye, Section16.net 3/18/2020

Q: How can we confirm a POA was attached as an exhibit? Does it show on the SEC website as an attachment? I ask because when I print the Form 3 on the filer, the exhibit doesn't show.

RE: I would call EDGAR Filer Support and ask for confirmation that the exhibit was received.
-Alan Dye, Section16.net 3/18/2020

Q: An insider inadvertently filed a Form 4 to reflect certain convertible securities that had a floating conversion price, incorrectly using an assumed (for accounting purposes) conversion price as the actual conversion price. Is the best way to address this an amendment to the original Form 4 with an explanatory footnote?

RE: Yes, that is how I would address the error, too. I think the error may be "material" so I would fix it rather than ignore it.
-Alan Dye, Section16.net 3/18/2020

RE: Thank you. Since the reported security was not reportable, would you re-report all the information from the prior form, except with an explanatory footnote for column 2, or would you leave the other columns (other than column 1, of course) blank?

Also, if there is more than one such security and thus more than one erroneous report, would you amend each one separately or amend all on one Form 4/a?

Thanks!
-3/18/2020

RE: I assumed the security was preferred stock. I would amend the prior report by showing the instrument in Column 1 as a holding, with a "0" in Column 9, and I'd explain in a note to Column 9 that the reported security was not reportable and was reported in error. I think I would try to amend all of the reports in a single filing, maybe by a clear footnote identifying the Forms 4 being amended.
-Alan Dye, Section16.net 3/18/2020

RE: Thanks. I was looking at Form 20 in the Forms & Filings Handbook which, although it's for an inadvertent report of Common Stock on Table 1, seemed to be saying the same thing. Thanks again.
-3/18/2020

Q: Hi. We had an executive that had placed a trade that was later deemed to be an error and should not have been placed. A Form 4 was filed for the purchase of Company shares, but then the trade was rescinded by the broker. How would we account for this on a Form 4? We know we need to file an amended version of the original, but not sure a footnote describing the error is sufficient. Do we need to do anything with the original transaction line on Table 1? Set the purchase "P" amount to 0? Any information you could provide would be very helpful!

RE: Was the transaction busted through the broker's error account, such that the gain or loss on the rescission was absorbed by the broker, and the insider realized no profit or loss on the rescission? If so, you might amend Form 4 to report a corrected "holding" line for directly owned shares, along with a footnote saying the reported trade was executed mistakenly and was rescinded in the broker's error account.
-Alan Dye, Section16.net 3/17/2020

RE: It was busted and reported through the broker's error account. However, there may still be a loss incurred by the executive, but all busted trades were completely removed from Executive account. Because a loss was incurred by executive on the erroneous trade, does that need to be reported/reflected differently on Form 4/A?
-3/17/2020

RE: The application of Section 16 to "busted trades" has never been addressed by the SEC or the courts. There is old case law suggesting that a "rescinded" transaction is still subject to Section 16 if the reason for the rescission is unrelated to avoidance of 16(b) liability. Other old case law suggests that a rescinded transaction might in fact be two transactions (the rescinded transaction and the rescission transaction), but of which could be subject to Section 16. The "lore" that has developed around market transactions that are busted in the broker's error account began as a Rule 144 concept, if my recollection of history is right. I think in-house lawyers for brokers, mainly Jesse Brill and Bob Barron, took the position that, if an affiliate sold stock through broker but the sale didn't comply with Rule 144, the violation was the broker's fault, since brokers are the ones who become underwriters, so the violation can be "cured" by moving the affiliate's sale out of the affiliate's account, and moving it to the broker's error account. The sale thus becomes the broker's sale, and the broker isn't an affiliate so doesn't need for the sale to have complied with Rule 144. That concept has been carried over to the Section 16 context, with the position insiders (and companies) take being that, because the insider never experiences an economic consequence from either the market transaction or the broker's offsetting transaction its error account, the insider has no "pecuniary interest" in either trade, so neither is subject to Section 16. To my knowledge, the validity of that position has not been tested in any 16(b) litigation. I think the position is weakened if the rescission transaction results in gain or loss to the insider — e.g., if the broker sells the stock at a lower price than the purchase price, and charges the insider the difference. In that case, I would expect a plaintiff's attorney to argue that the insider had a pecuniary interest in both the purchase and the sale, since the economic consequence of busting the trade would be to effectively attribute to the insider both the purchase and the sale. Where a court would come out on the question is hard to predict, in my view.
-Alan Dye, Section16.net 3/17/2020

Q: We have a Section 16 filer who exercised some stock options and then sold some shares to cover the strike price and taxes, retaining some shares. Upon receiving the shares in his brokerage account the reporting person immediately transferred the shares into his family trust. Do we report the transfer to the trust as a gift at the time we file the Form 4 or should we report this in subsequent filings? The Trust is a family trust and the beneficiaries are the reporting person and his spouse. Alternatively, do we report the acquired shares as going right into the trust?

RE: You should report the transfer to the trust as a separate transaction. Because it sounds like a gift, you could wait and report it on Form 5, but there's no reason to delay the disclosure and have to file a separate report. It may be that the trust is a living trust, meaning the transfer to the trust wouldn't have to be reported on a separate line. If you want to pursue that possibility, you'll need to find out who is trustee and whether the trust is revocable (and if so, by whom).
-Alan Dye, Section16.net 3/17/2020

Q: We erroneously reported on an officer's Form 4 last Friday that he held issuer shares in his 401k account. We are going to file another Form 4 shortly. Is it permissible to correct the error by simply putting "0" as the number of shares held indirectly in his 401k Plan, and perhaps a footnote acknowledging that he had no shares in the 401k plan in the Form 4 filed last Friday? We really don't want to file an amended Form 4.

RE: My view is that you can correct the error as you suggest, by putting a "0" on the line for indirect ownership through 401(k) plan and explaining in a footnote that the prior Form 4 incorrectly stated that the reporting person owned shares in the plan. I don't think an amendment does any better job in correcting the error.
-Alan Dye, Section16.net 3/16/2020

Q: We have an executive that exercised in-the-money stock options in February. Shares were sold concurrently through broker assisted cashless exercise and the sales were reported using Code “S”. The exercise of the option and the acquisition of shares from that exercise are exempt pursuant to Section 16b-6(b), but the sale of the shares in the market to cover the exercise price/taxes would not be exempt. The executive is now contemplating a discretionary transaction in the Company’s 401(k) plan, moving money from another investment to the Company’s stock fund. The executive has not made any other discretionary transactions in the plan for the past six months. My read of Section 16b-3(f) would make the discretionary transaction exempt for Section 16(b) purposes and the transaction would be reported using the Code “I”. I just want to confirm that the exempt discretionary transaction purchase would not be matched against the non-exempt sale that occurred in February.

RE: I agree with all of your analysis. The only additional question I would ask is whether the insider has had, within the last six months, a "discretionary transaction," resulting in a purchase of company stock, under any issuer plan other than the 401(k) plan. If the answer is no, like you, I would clear the insider to make the 401(k) plan transfer.
-Alan Dye, Section16.net 3/16/2020

Q: We have an executive who purchased shares yesterday without a 10b-5 plan, so I need to file a Form 4 for him. This will be acquired shares. I am just not sure if I need to make a footnote and if so, how to word it? I have never had an executive purchase shares before; it’s always been to sell and with a 10b-5 plan. Also, the shares were purchased in lots at different prices. Am I still OK to combine the prices and use an aggregate of those prices to report one sale of the total shares?

RE: There is no need to say anything in the report about the nature of the transaction, other than to use "P" as the transaction code. If the sales occurred within a range of $1, you still can report all of the sales on a single line, showing the weighted average purchase price in the price column, along with the footnote described in the staff's interpretive letter to the Society for Corporate Governance.
-Alan Dye, Section16.net 3/13/2020

Q: A Form 4 was filed for a grant of restricted stock to an officer and the footnote indicated that it will vest in three installments of 1,000 shares, each of which will vest on January 31, 2021, January 31, 2021 and January 31, 2023, respectively. Obviously, the second date above should be 2022. Would you recommend that we file an amendment correcting this typo in the footnote?

RE: I agree with you that the error is obvious and that any reader will see that the year should have been 2022. Because there is no potential that a reader might be misled, I would be comfortable concluding that an amendment is unnecessary.
-Alan Dye, Section16.net 3/13/2020

Q: When aggregating multiple open market transactions within a dollar on the same date, is it acceptable to use average price instead of weighted average price?

RE: Well, that goes beyond staff guidance, so I hesitate to say that it's an "acceptable" practice. If you otherwise report in the manner prescribed in the staff's letter to the Society, showing the range of prices, I suspect it might be easy to get comfortable that the non-compliance is "immaterial."
-Alan Dye, Section16.net 3/12/2020

Q: An insider holding a convertible debt security with a fixed conversion price, which was reported on Form 4 when it was acquired, may agree with the issuer to amend the conversion terms to a floating rate conversion price (e.g., a percentage of the closing market price on business day immediately prior to the conversion date). While I have seen a significant amount of guidance on the reverse situation, i.e., a floating rate derivative changes to a fixed rate), I haven't seen any guidance on this subject. Model Form 178 and the accompanying explanation show that the voluntary amendment of the conversion price of a derivative security is reportable on Form 4. Specifically, there is a cancellation of the "old" convertible and an acquisition of the "new" convertible. However, when the change is from a reportable fixed exercise price convertible security to a floating exercise price security, which is not reportable, it would seem that only the cancellation of the fixed exercise price convertible would be reported but not the acquired floating exercise price convertible. Does that sound correct? Would it make sense to include a footnote similar to the one on Form 178 explaining that the transaction reported in Table II involved the amendment of an outstanding convertible security to change the exercise price to one based on a floating rate formula, and that the amendment is reported as the cancellation of the “old” warrant (without reporting the acquisition of the new one)? As always, thanks for this forum and the help provided.

RE: Yes, that does sound right to me. A derivative is being disposed of, but no new derivative is being acquired. I agree with your proposed reporting. A question I hope you never have to answer is whether the disposition is a "sale" for purposes of Section 16(b).
-Alan Dye, Section16.net 3/10/2020

RE: You raise an interesting question. I presume that the "new" convertible will be deemed "acquired" on the same day as the conversion of the securities, and that the holder would have lost the ability to argue that the stock acquired upon conversion was acquired for 16(b) purposes when the original fixed exercise price convertible was acquired.

If the "new" convertible is exercised within 6 months of the amendment, which would be an acquisition of the securities on that exercise date, it would appear possible that could be "matched" with the imputed "sale" of the derivative when it was amended/cancelled.

I don't know how the profit would be calculated.
-3/10/2020

RE: That's exactly how I would look at the transactions, too. I'm not sure the amendment should be deemed a "sale," but maybe it should or would be. I think Rule 16b-6(c)(2) would at least impose a cap on the recoverable profit.
-Alan Dye, Section16.net 3/11/2020

RE: Thank you. One last question on a related issue, if you don't mind. Would the amendment of a convertible debt security to extend the maturity of the instrument and/or to change certain terms of the debt obligation (e.g., interest) but not to the terms of the derivative component (e.g., conversion price) result in a reportable event? Thanks again
-3/11/2020

RE: In my opinion, no, so long as extending the maturity of the note doesn't also extend the term of the conversion feature.
-Alan Dye, Section16.net 3/11/2020

RE: If the instrument is convertible until maturity, and the conversion feature therefore extends to the new maturity date, then it is reportable? Is this the cancellation of an "old" derivative and the acquisition of a "new" derivative (similar to Form 178)?
-3/11/2020

RE: There is a case saying amendment of a convertible note to, among other things, extend the term is a cancellation and reissuance. I said in the Treatise that, at most, the transaction should be viewed as the acquisition of a new derivative for the extended term. I would be comfortable reporting the transaction that way.
-Alan Dye, Section16.net 3/11/2020

RE: Thank you. I was looking in the treatise but did not see that, but I will look again. Thanks again for all of the great resources.
-3/11/2020

RE: The case is Greenberg v. Hudson Bay.
-Alan Dye, Section16.net 3/11/2020

RE: Thanks again
-3/11/2020

Q: Dear Alan, A Section 16 officer has set up a family trust of which the officer and spouse are the trustees and beneficiaries. Starting in Sept. 2019, each release of restricted stock will go directly into said trust. Historically, we have been reporting each award in Table I of Form 4 upon grant, as directly held, and upon vesting, have reported the shares of stock withheld to cover the taxes. Is there an extra step I need to take to evidence the shares released to the trust? I've been advised by the broker number of shares in the trust will increase at each vesting by the actual number of shares released, which I did not account for. Would I need to show the number of shares released as a gift to the trust? I'd appreciate your input on how to handle and which Model Forms address this. Thank you.

RE: Unless the trust is a "living trust," and it sounds like it may not be, I agree with your tentative conclusion that the withholding should be reported as a disposition of directly owned shares, and the issuance to the trust should be reported separately as a gift to the trust.
-Alan Dye, Section16.net 2/13/2020

RE: Hi, Alan. Are there any alternative ways to report the issuance of shares to the trust? The broker has advised that upon vesting, the vested shares will be directly issued to the trust, so I'm wondering if there's a way to report an increase in the trust holdings, by say a footnote, rather than making it a gift.

The company pre-clearance policy calls for pre-clearance of gifts. I'd rather not go through this process each time there is a vesting. Isn't this technically more of a transfer? The trust is a family trust established in CA, a community property state, and the insider and spouse are both trustees and beneficiaries.
I'd appreciate any insights and which Model Form to refer to. Thank you.
-3/11/2020

RE: Is it possible that your trust is a living trust, so that you don't have to try to figure out a way to avoid treating the issuance as a direct issuance to the trust? You might want to read the Sonnenschein letter (from around 1992, I think) addressing community property transferred to a trust, to see if your insider's trust qualifies.
-Alan Dye, Section16.net 3/11/2020

RE: Where would I look for this letter?
Assuming this is not a living trust, there are no other options for reporting, correct? Thank you.
-3/11/2020

RE: That is my view, yes.
-Alan Dye, Section16.net 3/11/2020

RE: If we report the transfer as a gift, but choose to report it on a year end Form 5, should we still reduce the holdings of the directly held and increase the holdings of the trust in the next/intervening Forms 4? How do folks handle that so that the holdings are up to date? Thank you.
-3/31/2020

RE: Most filers, if filing a Form 4, would add the gift to that Form 4, voluntarily, and put a "V" in the transaction code colum reporting the gift. If you prefer to wait and report the gift on Form 5, then you would ignore the gift when filing the Form 4, and show the gifted shares in Column 5 of the "directly owned" line.
-Alan Dye, Section16.net 3/13/2020

Q: Are sales to the issuer for the payment of taxes associated with the vesting of restricted shares still exempt from short swing rules? The Restricted Stock Agreement states: the Participant shall be allowed to sell a number of shares of Restricted Stock sufficient to generate proceeds in an amount equal to the federal and state income tax liability of the Participant arising from the lapse of such restrictions with respect to the Restricted Stock, as determined by the Committee based on information provided by the Participant.

RE: If the compensation committee approved the grant of the award, with that language included, then yes, the shares withheld upon the insider's election should qualify for exemption from Section 16(b) under Rule 16b-3(e). Does the comp committee really determine the amount of the insider's tax obligation?
-Alan Dye, Section16.net 3/10/2020

RE: No, the comp committee does not determine the tax obligation, HR does. Would that disqualify the exemption?
-3/10/2020

RE: No, I think the exemption is still good. I was just curious to know if the committee really undertakes that task. I don't recall seeing that language before.
-Alan Dye, Section16.net 3/10/2020

Q: Hi Alan, We have a situation where Venture Fund I purchased shares of a public portfolio company within 6 months of a sale of shares by Venture Fund II. Fund I and Fund II are separate and distinct funds, formed at different times, with separate LP bases and separate GP entities and decisions with respect to their respective investments and dispositions are managed distinctly. However, both GPs (and, therefore, both funds) are under common control of a single managing director. Collectively, the funds beneficially own, at all relevant times, greater than 10% of the shares of public portfolio company. It seems to me that, although Fund I and Fund II, and their respective GPs, are arguably members of a 10% stockholder group and, therefore, each subject to reporting under Section 16, the only 16(b) matching of the two transactions should be at the managing director level (i.e., the profit on his derivative interest in the two transactions to the extent of the smaller of the two transactions). Do you agree? Is there any good authority for plaintiffs' lawyers to try to match the transactions to create liability on either of the funds or the GP entities? If the managing director receives a carried interest in connection with the sale, how if at all would that be considered in determining his short-swing profit? Thanks in advance!

RE: I do agree. Unless a plaintiff were to establish that the funds are a group, with one another or with the manager or managing director, the only person potentially liable would be the manager/MM, assuming they are not exempt from 10% owner status. If they aren't exempt, a plaintiff might attempt to argue that they are a group with the fund, and that the investment management agreement creates a group. Two district judges have rejected that argument, and the plaintiff in those cases has appealed the ruling to the Second Circuit, which hasn't yet ruled.
-Alan Dye, Section16.net 3/9/2020

RE: Many thanks Alan.

Just to follow up on your response, can you clarify how the existence of a group would impact the analysis? In this instance, Fund I has no pecuniary interest in Fund II or vice versa. If either or both of Fund I and Fund II were somehow a group with the Managing Member and/or were considered a group with one another, wouldn't the rationale of Section II.B.3 of Release No. 34-28869 (cited in the treatise at Section 12.02(c) of the treatise) nevertheless govern (i.e., that group members don't have Section 16(b) liability for transactions in which they have no pecuniary interest)?

Thanks!
-3/9/2020

RE: Yes, I agree, a purchase by one fund would not be matchable with a sale by the other fund, except that the manager/MM might have liability to the extent of their pecuniary interest in the funds.
-Alan Dye, Section16.net 3/9/2020

RE: Hi Alan,

If a newly appointed Section 16 officer has not had his grants pre-approved by the HRC, and he has RSUs vest say in a week. Then he decides to do a cashless exercise and sale of options he holds the week after that. Is the acquisition that occurs during the simultaneous cashless exercise/sale become matchable against the share withholding for taxes from the RSU vesting?

Also, what issues do you see if the HRC ratifies/approves this newly appointed Sec 16 officer's existing grants say in a month in order to have the exemption for matchability of those awards?

Thanks.
-5/13/2020

RE: Yes, I do agree, and I don't know of any case in which a court has matched, at the fund level, a sale by one fund an a purchase by another. In fact, courts usually note that only the GP (or RIA) can be liable in that circumstance, to the extent of its pecuniary interest.
-Alan Dye, Section16.net 5/13/2020

Q: Good afternoon, We awarded restricted stock units to directors and reported the transaction within 2 days of grant in Table II. Per her deferral election form, the director elected to defer receipt of the shares until after her resignation from the board. When the shares vested last week, I reported the vesting in Table I, because even though she hadn't received the shares, if she were to resign tomorrow, she would be entitled to them immediately. Were these reported properly or should I not have reported them? Thank you.

RE: I think you could have skipped reporting the vesting, on the theory that the units still are derivative securities and can stay in Table II. The staff allows reporting of deferred units in Table I, too. However, if the payout will be in stock and can't be in cash, so moving the units to Table I in that circumstance is equally permissible.
-Alan Dye, Section16.net 3/2/2020

RE: Thank you so much for the quick response.
-3/9/2020

Q: In early 2019, we filed Form 4s for two different restricted stock grants - a service-based restricted stock grant that will vest 12/31/21 and a performance-based grant (not related to stock price with a performance cycle that ended 12/31/19) - for certain officers and directors. These grants were approved by the Board committee in late December 2018. The filings had mid-January 2019 transaction dates which were incorrect. It appears we reported the grants too soon given the performance cycle and vesting dates. Do we still need to amend the filings just for the transaction date if the stock amounts, director/officer name, and all other information is correct?

RE: Both portions of the initial awards were reported on Form 4, even though the performance-based portion was not reportable based on the staff's position that performance awards aren't reportable until earned, an the date of grant reported in the Form 4 was incorrect (because they should have been reported as occurring in December 2018 but instead were reported as occurring in January 2019)? Whether the Form 4 should be amended depends, I think, on the "materiality" of the error, which would likely involve consideration of a number of factors.
-Alan Dye, Section16.net 3/8/2020

RE: Given that (1) the transactions covered by the Form 4 filings are exempt from Sec. 16(b) pursuant to Rule 16b-3 and (2) the only thing that’s incorrect on our Form 4 filings is the transaction date, is it really necessary to amend?
-3/8/2020

RE: I certainly wouldn't say that an amendment is "necessary" because I don't think there are clear standards for what kinds of errors necessitate an amendment, and the factors you point to are ones I too would consider relevant to an assessment of materiality. Whether a non-exempt, opposite-way transaction occurred within six months of the "real" transaction date might be another factor I would consider relevant (in case a shareholder or plaintiff wanted to challenge the 16b-3 exemption).
-Alan Dye, Section16.net 3/9/2020

Q: We recently reported market price-based PSUs as derivative securities under Table II. We now have a second reportable event, the vesting and subsequent sale-to-cover of RSUs. In the past, we've included unvested non-market based PSUs as securities beneficially owned under Table I, Column 5 since the Reporting Person has a pecuniary interest in the PSUs, and we then subsequently reported the vesting in Table I. However, I believe the recently reported market price-based PSUs should not be included in the Table I, Column 5 total since they were reported as derivative securities and should only be added once the market price conditions are met and vesting occurs. Is that correct, or should we include the additional unvested PSUs in Table I, Column 5 when reporting the RSU sale-to-cover? Thank you!

RE: If the market-based PSUs were reported, at grant, in Table II, and they are not vesting now, and instead you are reporting a Table I event (involving RSUs or common stock), I agree you should not include the market-based PSUs in Table I, Column 5. Those securities should remain in Table II until they are "earned."
-Alan Dye, Section16.net 3/3/2020

Q: A section 16 officer purchases shares a month before being terminated by the issuer. These purchases were reported timely on a Form 4. Now, the former officer has a limited window to exercise vested options. Since the acquisition of the options was exempt under 16b-3, I understand that the exercise would also be exempt from 16(b) liability and would not trigger a Form 4 filing. But if the former officer sold shares in a broker assisted cashless exercise, then the sales would trigger a Form 4 filing and be subject to section 16(b) liability (if there is a profit to disgorge). But what if the issuer agreed to withhold shares for the former insider's tax liability? Would the tax withholding disposition be matchable against the prior purchases and trigger a Form 4 filing for the former insider?

RE: A Form 4 would be required, and the withholding would be a potentially matchable sale, only if the withholding transaction is not, and hasn't already been, approved by a committee of nonemployee directors (or by the full board). So, if the award allows the insider to elect tax withholding, or the committee approves withholding prior to the exercise/sale, there should be no Section 16 consequences.
-Alan Dye, Section16.net 3/3/2020

Q: Good afternoon. We awarded restricted stock units to directors and reported the transaction within 2 days of grant in Table II. Per her deferral election form, the director elected to defer receipt of the shares until after her resignation from the board. When the shares vested last week, I reported the vesting in Table I, because even though she hadn't received the shares, if she were to resign tomorrow, she would be entitled to them immediately. Were these reported properly or should I not have reported them? Thank you.

RE: I think you could have skipped reporting the vesting, on the theory that the units still are derivative securities and can stay in Table II. The staff allows reporting of deferred units in Table I, too; however, if the payout will be in stock and can't be in cash, so moving the units to Table I in that circumstance is equally permissible.
-Alan Dye, Section16.net 3/2/2020

Q: Apparently there is a company (or several companies) in which you can buy a framed stock certificate for someone for decoration. The fact pattern goes that someone purchased 1 of these certificates (a real share) and gifted it to an insider. Is that really reportable as a gift? Assume if the answer is yes, that like outgoing gifts, it is not subject to the 2 day rule?

RE: Yes, technically, the receipt of the single share is reportable as a gift, on Form 5 or an earlier Form 4. I think a single share for decorative purposes might qualify as de minimis.
-Alan Dye, Section16.net 9/2/2014

RE: Meaning what if it is de minimis?

Further complicating matters, we don't know that the insider is aware of the gift or has accepted it. How do you date the gift?
-9/2/2014

RE: If you choose to report the transaction as a line item, you'll need to do your best to get a date. If you can't, you'd have to explain the absence of knowledge in a footnote to the date column. You might consider treating the transaction as de minimis and just boosting Column 5 of Table I by one share, without reporting a line item, and explaining in a footnote that the total includes 1 share received as a gift.
-Alan Dye, Section16.net 9/2/2014

RE: Very helpful. Couldn't you also take the position that it is really a novelty gift, meant to go on the wall, not ever to be traded and therefore not part of the insider's holdings?
-9/2/2014

RE: I think that would be a reasonable conclusion too, but mainly because I don't think anyone will ever challenge the failure to report a single share of stock, whether the acquisition/holding is reportable or not.
-Alan Dye, Section16.net 3/2/2020

Q: Alan, We currently use the below footnote or remark for Form 4 filing related to 10b5-1 plan trades, “The transactions reported were effected pursuant to a Rule 10b5-1 trading plan entered into by the reporting person effective January 29, 2020.” This footnote uses the plan adoption date. We recently looked at another company’s Form 4 filing and noticed that they use a more generic language around 10b5-1 plan trade that does not explicitly include the plan adoption date. For example, “The sales reported on this Form 4 were effected pursuant to a trading plan adopted pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.” We have seen an increased amount of 10b5-1 plans in our company and wonder if using a more generic footnote is acceptable practice as to avoid mistakes of possibly including the wrong plan adoption date in the footnote or remarks box of the Form 4. Thank you!

RE: The footnote is purely voluntary, so yes, you can make the footnote more generic. I think the reason some filings disclose the date is to show that the decision to sell was made some time ago, not based on a recent assessment of the stock price, and also to show that the decision was made during an open window period.
-Alan Dye, Section16.net 2/29/2020

Q: A Form 4 was correctly filed on October 24, 2018 for the purchase of 1,300 shares (1,000 shares in one acct and 300 in another). However, all subsequent filings did not include the 1,300 shares. Do I file an amendment to the first Form 4 that was filed after the 1,300 share transaction (which was 11/19/18)? If so, do I just report holdings for those two accounts only with the correct totals? How do I footnote?

RE: That would be one way to cure the error, and I think it is the best one. I would file a Form 4/A, reporting ONLY the holding. If the 1,300 shares are held indirectly, I'd show only that holding. If they are owned directly, I would show total direct holdings and add the 1,300 shares to that total. I'd say in a footnote something like "this amendment is being filed to correct the number of shares beneficially owned by the director as reported in the initial Form 4. The initial Form 4 inadvertently omitted 1,300 shares that the reporting person owned. [directly/indirectly]."
-Alan Dye, Section16.net 2/28/2020

RE: Thanks for your quick response. If that person's title has changed since the original filing, do I need to change the Form 4/A to reflect his title as it was on 11/19/18?
-2/28/2020

RE: I don't think the staff has ever addressed that question. I usually recommend drafting the amendment the way the initial report was or should have been drafted, but I see the appeal of updating the filer's title, and I don't think the staff would ever make an issue of it.
-Alan Dye, Section16.net 2/28/2020

Q: Due to an error in the calculation of the appropriate withholding tax obligation, a timely Form 4 was off by 147 shares on a total disposition of about 4,700 shares (the actual disposition was 147 shares smaller than reported). Can this error simply be corrected on the next filing for the reporting person, or does an amendment to the Form 4 need to be filed? Also, any thought as to whether this affects Item 405 disclosure in the Company's proxy statement? Thanks.

RE: I would file an amendment to the report. There are differences of opinion regarding whether a timely filed report that contains a calculation error is a late or unfiled report for Item 405 purposes. Even among those who say Item 405 is implicated, some would say that 147 is a de minimis number of shares and therefore does not trigger Item 405. Years ago, when the staff first suggested that a de minimis exception may apply under Item 405, I asked Peter Romeo what we should say "de minimis" means, and he suggested "any number under 100 shares." Others have higher thresholds.
-Alan Dye, Section16.net 2/27/2007

RE: What are your thoughts on rounding errors? I have noticed that an indirect holding of shares held in the Reporting Person's 401k is off by a penny. (Let's say the original number is .213. I should have originally rounded down to .21, but rounded up to .22). I view this as clearly being immaterial.

Do you see any reason to change it? (If I do change it, then I presume I would have to footnote the change, which in my opinion brings unnecessary attention to something so small.)

If I do footnote it, I think the footnote would have to indicate the original date in which I filed it, and then identify it as a rounding error, correct?

Thank you in advance.
-2/27/2020

RE: I agree, rounding pennies or shares up or down, to the right of the decimal point, is de minimis and doesn't require explanation or correction.
-Alan Dye, Section16.net 2/27/2020

Q: A company awards performance-based phantom stock units that may only be settled in cash. There is a three-year award period for the phantom stock units, and the performance goals for each one-year performance period are tied to financial metrics (not stock price). After the achievement of performance goals are determined by the Compensation Committee following the completion of a performance period, the participant is credited with phantom stock units based on the level of achievement. The phantom stock units are subject to a three-year service based vesting and do not vest and are not settled in cash until after the third year. How would you report these performance-based phantom stock units and when would they be reported?

RE: When the compensation committee approves achievement of the performance goals, thereby fixing the number of units that will vest based solely on the passage of time and continued employment, a Form 4 should be filed to report, in Table II, the insider's acquisition of the number of RSUs earned. When and if the RSUs vest, resulting in a cash payout, another Form 4 should be filed to report the insider's disposition of the RSUs.
-Alan Dye, Section16.net 2/26/2020

RE: Thank you! The awards are phantom stock units (as opposed to RSUs). Your response refers to RSUs, so I wanted to make sure your response doesn't change. Also, does the reporting change if the company issues the phantom stock units at the outset for the three years at target and then adjusts the number of units (up or down) every year based on the achievement level of the performance goals for a completed performance period?
-2/26/2020

RE: Column 1 can report the awards as RSUs, phantom stock, common stock equivalents or anything else descriptive. What do you mean by "issuance" at target? Actual shares of stock issued at the time of the initial grant, with divendend and voting rights?
-Alan Dye, Section16.net 2/26/2020

RE: Issuance wasn't the correct term. The award would be granted with the number of phantom stock units based on target. Then each year there would be a true up of units based on actual performance level. The units are cash settled so no issuance of stock when they settle.
-2/26/2020

RE: Then I don't think the issuance of target units affects the reportability of the award.
-Alan Dye, Section16.net 2/26/2020

Q: We have an individual who is a Section 13 and Section 16 filer (“Filer”) who files with sole voting control on behalf of certain funds and entities who own the securities directly; Filer will be stepping down from its management position at an investment manager (“Manager”). In the past, Filer has filed Section 13 & 16 reports in its individual capacity (under its own CIK) reporting sole dispositive and voting power. Manager is empowered with the power to vote and control the shares and wants to file Section 13 & 16 reports going forward instead of the individual Filer. Manager has always been the investment manager, however the Filer has always controlled the Manager and that is why Filer reported individually. How do we effect this change for purposes of Section 13 & 16 filings that Filer has made in the past and which Manager will make in the future? Would Filer need to exit all positions (4, 13G, 13D, 13F etc.) and have Manager file new reports in its place? Could Manager just file going forward under a new CIK and include a footnote explaining that it is stepping into the place of Filer? Would the process be different for Section 13 and Section 16 reports?

RE: It sounds like the Manager was a ten percent owner all along but just wasn't a filing person. I consulted with Joe Connolly, my go-to Section 13(d) guru, and his advice regarding the 13(d)/(g) issue is the same as the advice I'll offer regarding the Section 16 filings. I would have the Manager file a Form 3 and explain in a footnote that the Manager has assumed the status of filing person by virtue of the control person's cessation of beneficial ownership/filing person status. I don't think the control person needs to file any Section 16 report, unless it wasn’t to file an exit report. The control person should, though, file an amended 13D/G to report its exit from the 13(d) filing system, and have the Manager file its own, new 13D/G, also with an explanatory note to explain the transition.
-Alan Dye, Section16.net 2/26/2020

Q: Company A spins off Company B. However, Company A's 401(k) Plan does not transfer any assets to Company B's 401(k) Plan. As a result, Company A's 401(k) Plan, which held Company A shares as well as other investments, will now hold Company A shares and Company B shares as well as other investments. Company A's plan will hold the Company B shares for one year. Thereafter, the Trustee of the Company A plan will start to sell the Company B shares in a prudent manner (likely take it a while to sell all the shares). Do you agree that the forced sales of Company B shares held by B insiders must be reported and also won't be exempt under 16(b)?

RE: I would report the sales, as you suggest, and also advise the insiders that the sales are nonexempt. Arguably the sales are involuntary, but they aren't under "the issuer's" 401(k) plan, so I think that, technically, Rule 16b-3(f) doesn't exempt them. Maybe the staff would offer some interpretive relief, if asked, allowing the plan to be considered a plan "of the issuer" based on B's former status as part of A, but absent that relief, I would follow the cautious approach you suggest.
-Alan Dye, Section16.net 2/24/2020

RE: As a follow up, if the Spinco pays dividends on its stock (the stock that is held in the former Parent 401(k) plan) and that cash is re-invested in more Spinco shares in the former Parent 401(k) plan, are those purchases exempt from reporting and short-swing liability if Spinco maintains a DRIP?
-2/24/2020

RE: Yes, I think the staff's positions regarding dividend reinvestment have consistently said the exemption is available in private accounts so long as reinvestment occurs on terms substantially similar to the terms of a 16a-11 qualifying DRIP.
-Alan Dye, Section16.net 2/24/2020

Q: I understand the grant of a performance-based restricted stock unit is not deemed a "derivative security" and thus not reportable under Section 16(a) until the performance criteria are met (assuming criteria not tied to stock price). However, a grant of restricted stock that only vests upon the same performance criteria being met is NOT eligible for the same exemption, since the stock itself has been granted, as opposed to a derivative security. As such, a grant of performance-based restricted stock is reportable under Section 16(a), in Table I. Is that correct? And then, if the performance criteria are not met, whatever part of the restricted stock is forfeited due to failure to vest must be reported as well (no equivalent exemption for forfeiture of stock as there is for forfeiture of derivative securities under Rule 16b-6(d)). Appreciate your help. Thanks.

RE: Yes, I do think that's correct, although I think a reasonable argument can be made that even stock issued in the insider's name could be non-reportable until earned. And as you say, the forfeiture of the stock (as opposed to units) would also be reportable.
-Alan Dye, Section16.net 2/17/2018

RE: Thanks so much, Alan, particularly for responding on a Saturday afternoon of a long weekend!
-2/17/2018

RE: You're welcome! (I'm just catching up from having been out of the country the last few days.)
-Alan Dye, Section16.net 2/17/2018

RE: This conclusion seems to be inconsistent with the instructions to Model Form 118, subsection (15)
-2/22/2018

RE: I just recently posted a question for confirmation to this discussion topic and referenced Model Form 118. I should have referenced Model Form 125, sub-instruction (15). The above conclusions seem inconsistent.
(15) Grant Of Performance-Based Restricted Stock Not Necessarily Reportable. Generally, awards of stock or derivative securities that vest only upon satisfaction of performance criteria (other than the price of the issuer's stock) are not deemed acquired as of the date of the award, but instead are deemed acquired when the performance criteria have been satisfied. [ ... ] Based on general principles of beneficial ownership, however, the authors believe that insiders may instead report such awards within two business days of the date of vesting.
-2/22/2018

RE: I don't think the conclusions are inconsistent. The staff has said generally that an award that is subject to material performance conditions is not reportable until the conditions have been satisfied. I think that means a PBRSU, as well as performance-based restricted stock issued in the insider's name, may be reported only when earned. Both the Model Form and the response above, though, acknowledge that an old Rule 16b-3 letter suggests that the staff might support reporting a performance award at the time of grant if the stock is issued in the insider's name and the insider has the right to vote the stock and the right to receive dividends.
-Alan Dye, Section16.net 2/22/2018

RE: As a a follow up to this thread, if a company elects to report the grant of performance-based restricted stock on the grant date because the restricted stock holds voting and dividend rights as opposed to the date on which the satisfaction of the performance criteria is determined and the award vests, do you include the restricted stock in the insider's holdings in the beneficial ownership table?
-2/3/2020

RE: Yes, because the grantee has the right to vote the stock and therefore is a beneficial owner of the shares for purposes of Section 13(d).
-Alan Dye, Section16.net 2/3/2020

RE: Thank you. Does the answer change if you take the alternative approach of reporting the restricted stock on Form 4 on the date that the performance conditions are met? In other words, is it only after you report the restricted stock on Form 4 on the date the performance conditions are met that you would then include the restricted stock in the beneficial ownership table?
-2/3/2020

RE: I think the PRS awards belong in the Item 403 beneficial ownership table regardless of whether they are reported on Form 4 at the time of grant. There are plenty of other ways, of course, in which the Item 403 table differs from the same insider's Form 4.
-Alan Dye, Section16.net 2/3/2020

RE: This thread has been helpful (thank you).

I would like to add another layer. In practice, the issuer does not file Form 4s to report the grant of performance restricted stock, but does file Form 4s to report the vesting. My question is (and I think this is confirmed in Model Form 135), if the performance criteria is met but the performance shares do not actually vest until a later date (that is, the shares are subject to the satisfaction of continued employment for a period of time after the performance criteria is met), the satisfaction of the performance criteria triggers a Form 4 and I assume the transaction date, is the date the issuer's committee or Board determined the satisfaction of the performance criteria?
-2/21/2020

RE: Yes, I agree with that conclusion. Once the committee confirms the shares were earned, the shares at that point are solely time vesting and therefore are reportable.
-Alan Dye, Section16.net 2/22/2020

RE: This string has been very useful - Thank you. A related question, an issuer - who has historically - not reported performance shares until vesting, is considering changing this approach and reporting at the date of grant. If the issuer makes this change, will amended beneficial ownership reports need to be filed to report currently outstanding unvested (and previously not reported) performance shares?
-3/18/2020

RE: I can think of a couple of ways you might approach this change in reporting practices, and you've probably considered them already. Reporting the acquisition of the new grants is easy--the question is now to handle the prior awards. I think you could report the prior awards in the same Form 4, as line items, but Box 3 will make it look like a late report. Alternatively, you could report the new grant, and include a footnote saying the total does not include X performance shares granted on m/d/y, which will be reported when and if earned.
-Alan Dye, Section16.net 3/18/2020

Q: Hello, Just a quick check, if our new Director has no holdings, there is nothing we need to report in Table 1 or 2, correct? We do not need to choose "Common Stock" and report a zero? Thank you!

RE: Correct. The online form has a box or something similar you check to say there are no holdings to enter. Then, the submission automatically populates Table I with something like "No securities are beneficially owned."
-Alan Dye, Section16.net 2/20/2020

Q: Reg S-K Item 405(a)(1) requires disclosure of Section 16 reports that were not filed on a timely basis "during the most recent fiscal year or prior fiscal years." Instruction 2 to 405(a) provides that "[t]the registrant is only required to disclose a failure to file timely once." If a delinquent Section 16 filing occurred after the end of the reporting period but prior to the filing of the proxy statement for such reporting period, would "voluntary" disclosure on such reporting period's proxy statement obviate the need to disclose the delinquency on the subsequent proxy statement (i.e., the proxy statement for the year in which the transaction actually occurred), per Instruction 2, even though 405(a)(1) doesn't require it to be filed in the prior year's proxy statement? In other words, if a transaction that occurred on January 10, 2020 was reported late on February 10, 2020, and the registrant (which has a 12/31 fiscal year) reports the delinquency on its proxy statement for fiscal year 2019 (filed on March 10, 2020), would the registrant be required to again report the delinquency in its proxy statement for fiscal year 2020 since that's the period in which the late-reported transaction occurred? I'm aware of C&DI for Reg S-K Section 231.01 regarding a late Form 5 for a transaction that occurred the prior year, but the scenario presented above is slightly different since the transaction occurred in the same year as the late report. Thank you in advance.

RE: I see the distinction. To my knowledge, the staff has never addressed this question. It might be worth asking the question using the online submission form, since the issue is discrete and has some analogous precedent. In the absence of staff guidance, it seems to me that the staff's prior interpretation suggests that early Item 405 disclosure is better than (or at least as good as) later Item 405 disclosure, so I would be comfortable disclosing the 2020 late report in the 2020 proxy statement, and not including it again in the 2020 proxy statement.
-Alan Dye, Section16.net 2/20/2020

Q: Hello: We would like to understand if a former employee officer is required to complete D&O Questionnaire in connection with our upcoming proxy statement. If it's not required, would it be recommended? A few facts are below as background. 1. The employee has previously been an executive officer and completed a D&O questionnaire but the employee left the company in early fall of 2019. 2. The person is not currently a director, officer, or significant shareholder. 3. In our 2019 proxy statement (for 2018 compensation), such employee was a NEO and in the summary comp table. 4. We know for a fact that such employee will not be a NEO for the purpose of our 2020 proxy statement (for comp earned during 2019). 5. We have a Section 16 “exit memo” so we don’t need anything certifying as to Section 16. 6. Reviewing the last few questionnaires filled out, there have never been any related person transactions, etc. to be concerned about.

RE: I wouldn't say you are required to get a questionnaire from the former officer, especially since you can't really force the person to respond now that s/he has terminated service. It sounds like you already have most of the information you would need to determine whether there are disclosures the company might need to make regarding the former officer, although maybe not the Item 404 information. If the officer would have been required to get advance approval of an Item 404 transaction, and didn't ask for approval, I think you might get comfortable that you don't need to confirm with the former officer that s/he is not aware of any RTPs involving the former insider or members of his/her immediate family.
-Alan Dye, Section16.net 2/19/2020

Q: A Form 4 was filed reflecting the grant of RSUs in Table I. Subsequently, the number of RSUs was reduced and the vesting terms were modified. Would an amended Form 4 be required or could we update the total holdings in the next filing with a footnote explanation?

RE: Was the reduction a cancellation for no value, in which case the forfeited units would be exempt from reporting under Rule 16a-4(d)?
-Alan Dye, Hogan Lovells US LLP 2/19/2020

RE: The reduction in RSUs was done in conjunction with the modified vesting terms so that the executive would be in the same economic position.
-2/19/2020

RE: If the consent of grantees was required to revise the awards, I suppose there is a possibility the forfeiture of a portion of the award was a quid pro quo for a shorter vesting term, which could be considered "value." If that were the case, the initial award, or the forfeited portion, might be deemed "cancelled" for value and a new award granted in its place. That wouldn't create 16(b) issues, but might affect reporting of the transaction. In the absence of guidance from the staff, which you could request of course, you might consider a conservative approach and report the forfeiture, along with a footnote explaining the transaction. A less conservative approach would be to subtract the forfeited shares from Column 5 of the next Form 4, and explain the reason in a footnote to Column 5.
-Alan Dye, Section16.net 2/19/2020

Q: Hi Alan, I'm preparing a Form 4 for an officer who is exercising some options from an ISO grant. His wife, who also works at the Company, received an option grant on the same date, with the same vesting terms, expiration date, etc. We reported her grant on the Form 3. Do we need to include the wife's option grant as a holding line in Table II? Thanks!

RE: I think the answer is yes, based on the staff's interpretive position that options having the same material terms are securities of the same "class" and therefore, when the reporting person reports a transaction involving an option, the reporting person must include in the Form 4 the reporting person's other "holdings" of that option.
-Alan Dye, Section16.net 2/19/2020

Q: In connection with an ownership reconciliation, we've discovered that we've been overstating the total ownership of a Section 16 officer by 4 shares. It appears this overstatement has been reported for at least the three prior years, and we can't track the source filing when the miscalculation first occurred. How do you recommend correcting/disclosing his balance going forward?

RE: I think a 4 share discrepancy is de minimis and immaterial by anyone's standards, so I would not amend any prior reports. I would just reduce the number of shares reported in Column 5 of the insider's next Form 4 or Form 5 that reports a transaction in common stock, and maybe I would include a footnote saying something like "Reflects an adjustment to total holdings to exclude four shares incorrectly included in prior reports."
-Alan Dye, Section16.net 2/18/2020

Q: If a Section 16 filer changes brokers but the amount of shares he owns does not change, that does not trigger any filings? Thank you!

RE: No, no Form 4 or Form 5 required, because there is no change in pecuniary interest. If the insider has a Form 144 pending to cover sales over the next 90 days, the Form 144 would need to be amended to reflect the new broker.
-Alan Dye, Section16.net 2/18/2020

Q: Company engaged in a registered offering. Directors purchased securities in the offering and related disclosures were made in the prospectus. In preparing Form 4s, is the transaction an open market transaction (they paid the same price as the public) or is it a private transaction since it could be said that they didn't purchase the securities on the "open market". Your help is appreciated!

RE: Are you trying to determine what transaction code to use? If so, are you sure "P" doesn't work, regardless of whether the purchase is public or private? "P" is the transaction code to use, according to the instructions to Form 4, for any "open market or private purchase . . ."
-Alan Dye, Section16.net 2/12/2020

RE: That is correct - we used the "P" designation in reporting the acquisition. An ancillary question we had is whether the transaction could qualify for the small acquisition rule (assuming 6 month total, including the transaction in question, is less than $10k). The offering was an underwritten offering and the insiders were not party to any purchase agreement or other agreement with the Company.
-2/13/2020

RE: I see. I agree, the purchase could be reported on a deferred basis as a small acquisition. The staff has said that a purchase in an underwritten offering is not an acquisition "from the issuer."
-Alan Dye, Section16.net 2/14/2020

Q: For purposes of my question, the issuer awards the payment of 100 performance shares to an NEO subject to Compensation Committee approval. The Compensation Committee meets and approves the 100 share award at a meeting on Feb 10 and provides a designated payment date of February 15, which is the date the window opens for stock transactions under the issuers’s insider trading policy. This payment date acknowledges that for those participants who elect a cash payment for all or part of their shares, such shares will be valued during an open window period. This would also hold true for shares sold to cover tax obligations and the sale of fractional shares which are always made in cash. Thus, with this background, my question is would the issuer consider the payment date of February 15 to be the transaction date for Section 16 reporting purposes on Forms 4?

RE: Are you saying that the number of shares a grantee will earn will be determined on February 10, but the price at which some or all of the shares will be disposed of won't be known until February 15? If that's the case, why wouldn't the acquisition be reportable following the February 10 event, and the disposition be reportable based on the February 15 event?
-Alan Dye, Section16.net 2/14/2020

Q: A client (PE fund) currently has a 13D and Form 3's and 4's on file with respect to convertible securities in a portfolio company. There are seven funds at the "bottom" that directly hold the securities, and the beneficial ownership reporting chain goes all the way up to the CEO. They are in the process of an internal restructuring and want to add a "Co-CEO" of their top entity. The current CEO is listed as the main reporting person in box 1 of their current Form 3 and Form 4's, with footnotes to explain the chain of beneficial ownership up to him. Does the new Co-CEO need to file a Form 3 of his own to disclose being at the top of the beneficial ownership chain? Or does there need to be a Form 4. Maybe a Form 3 and amendment to the current 13D is the safest approach, but it seems strange to need to do that every time the leadership at the top of a PE fund changes with all of the investments in which they file beneficial ownership forms.

RE: While I don't think the staff policies decisions like this, and I also think practice varies, I believe the "best" approach is to have the new co-CEO file a Form 3, and thereafter to join in Forms 4 on a joint basis. The next best alternative would be to have the new co-CEO get EDGAR codes and then just start joining in Form 4 reports, with no Form 3, but there's something about having no Form 3 on file that doesn't feel right (to me).
-Alan Dye, Section16.net 2/13/2020

Q: Dear Alan, A Section 16 officer has set up a family trust of which the officer and spouse are the trustees and beneficiaries. Starting in Sept. 2019, each release of restricted stock will go directly into said trust. Historically, we have been reporting each award in Table I of Form 4 upon grant, as as directly held, and upon vesting, have reported the shares of stock withheld to cover the taxes. Is there an extra step I need to take to evidence the shares released to the trust? I've been advised by the broker number of shares in the trust will increase at each vesting by the actual number of shares released, which I did not account for. Would I need to show the number of shares released as a gift to the trust? I'd appreciate your input on how to handle and which Model Forms address this. Thank you.

RE: Unless the trust is a "living trust," and it sounds like it may not be, I agree with your tentative conclusion that the withholding should be reported as a disposition of directly owned shares, and the issuance to the trust should be reported separately as a gift to the trust.
-Alan Dye, Section16.net 2/13/2020

Q: A director wants to transfer shares to a trust of which he is the sole beneficiary. His father, also a director, is the trustee. Do both directors need to report on Form 4, and what transaction code should be used?

RE: The father definitely will need to report the acquisition of beneficial ownership, because Rule 16a-8 says that an insider has a pecuniary interest in shares held by a trust if the insider is trustee of the trust and a member of the insider's immediate family is a beneficiary. I think the transfer will be reportable as a gift, using transaction code "G," assuming the trust will not pay any consideration for the shares. The sone will report the disposition of beneficial ownership, also using transaction code G, and will no longer beneficially own the shares unless the father shares the son's household or takes direction from the son regarding investment decisions by the trust.
-Alan Dye, Section16.net 2/12/2020

Q: Company engaged in a registered offering. Directors purchased securities in the offering and related disclosures were made in the prospectus. In preparing Form 4s, is the transaction an open market transaction (they paid the same price as the public) or is it a private transaction since it could be said that they didn't purchase the securities on the "open market". Your help is appreciated!

RE: Are you trying to determine what transaction code to use? If so, are you sure "P" doesn't work, regardless of whether the purchase is public or private? "P" is the transaction code to use, according to the instructions to Form 4, for any "open market or private purchase . . ."
-Alan Dye, Section16.net 2/12/2020

Q: I’m reviewing the following CDI: Section 219. Rule 16a-11 – Dividend or Interest Reinvestment Plans 219.01 A dividend reinvestment plan that is sponsored by a broker-dealer and available only to customers of that broker-dealer does not provide for "broad-based participation" within the meaning of Rule 16a-11. Accordingly, Rule 16a-11 is not available to exempt dividend or interest reinvestment transactions pursuant to such a plan. However, if a dividend reinvestment plan sponsored by a broker-dealer essentially mirrors a dividend reinvestment plan sponsored by the issuer that satisfies the conditions of Rule 16a-11, acquisitions pursuant to dividend reinvestment under the broker-dealer sponsored plan would be exempted by Rule 16a-11. See interpretive letter to Merrill, Lynch, Pierce, Fenner & Smith (Mar. 16, 1994). [May 23, 2007] Is it your understanding that there would be no exemption if the issuer does not have a DRIP or similar plan? Our company does not offer a dividend reinvestment plan but the broker-dealer where most of our Section 16 officers hold stock does offer this feature. Is it right to assume based on this CDI that if a Section 16 officer or director participated in this feature it would be considered an open market purchase and not exempt from 16a or 16b? Thank you for your time.

RE: Yes, that is my understanding of the staff's position, as expressed in the Merrill Lynch letter. A broker's plan is not "broad based," in the staff's view.
-Alan Dye, Section16.net 5/30/2014

RE: I understand there are generally two types of DRIP plans – (1) Registered Plan – is sponsored by the issuer and registered with the SEC and a (2) Bank Plan – is sponsored and administered by a bank, like Computershare. Could a bank sponsored plan meet the conditions of Rule 16a-11?
-1/17/2017

RE: Yes. If the plan meets all the conditions of Rule 16a-11, including being broad-based (as bank or transfer agent-sponsored plan generally are), then Rule 16a-11 should exempt reinvestments.
-Alan Dye, Section16.net 1/17/2017

RE: Would it be customary or required for an issuer to get Board approval for the implementation of a bank-sponsored plan that meets the requirements of Rule 16a-11? The plan permits reinvestment by existing stockholders and acquisitions via voluntary contributions for new and existing shareholders. All acquisitions under the plan would be open-market, since the issuer won't be registering the plan, but issuer intends to prohibit Section 16 insiders from acquiring shares via voluntary contributions.
-1/30/2017

RE: I don't know of any legal or other "requirement" that the board approve a bank-sponsored arrangement. I don't know what standard practice is, but perhaps another member can shed light on that question. I would think that informing the board would be sufficient.
-Alan Dye, Section16.net 1/30/2017

RE: I would like to confirm that this analysis has not changed. One of our Section 16 officers had two very small acquisitions during 2017 through a broker's dividend reinvestment plan. Our company does not have a DRIP. I assume that these purchases are subject to short swing, and that we can report them on a year end Form 5, since they were so small. Is there a model form that I can use for guidance regarding reporting, the code to be used, etc.? Thank you.
-1/23/2018

RE: I agree with your conclusions, if the acquisitions are under $10,000 and there have been no disqualifying dispositions. You might look at Model Forms 64 and 184.
-Alan Dye, Section16.net 1/23/2018

RE: Dear Alan,

I have a further question on this topic. A Section 16 Officer had two small dividend reinvestments during 2017, which totaled less than one share, with a total value of less than $75. These are through a broker account, and the issuer does not maintain a DRIP.

Can you advise if we should file a Form 5 to report this, or if there is a de minimus exception? If so, how would you suggest we handle this?
Thank you.
-1/25/2018

RE: Here is a way you might think about what you should do. The staff has said, informally (at a conference many years ago), that some "reporting delinquencies" may be so insignificant (some recall "immaterial" or "de minimis") that they may not warrant disclosure under Item 405. From that, people have reached various conclusions about what constitutes a de minimis delinquency. Most, I think, would consider your two to be de minimis. So, you might conclude that the two acquisitions, whether reported or not, will not require disclosure in the proxy statement. The staff's de minimis statement related to Item 405, and the staff didn't say (nor was it asked) that the delinquency doesn't need to be "cured." If you decide that your transactions don't require disclosure under Item 405 (which is where I think I would land), actually reporting the transactions doesn't have much of a downside. So, you could consider adding them to the insider's next Form 4, or adjusting the insider's total holdings in Column 5 and saying in a footnote that the total includes X shares resulting from automatic dividend reinvestment pursuant to the terms of a brokerage account.
-Alan Dye, Section16.net 1/25/2018

RE: Dear Alan,
In speaking with the broker who handles most of the Section 16 officers accounts, they analyzed this differently. They feel that their DRIP plan is “broad based”, since it is offered to all shareholders. They also feel that since the date of the dividend reinvestment is not chosen by the individual, the transaction is not “discretionary”. They feel that the reinvestment is therefore not subject to short swing.

I believe that their analysis is incorrect, based on Model Form 219 and other discussions of dividend reinvestment on this site. If the Issuer doesn’t have a DRIP, then the broker’s plan is not considered “broad based”. The fact that the insider doesn’t pick the date of the DRIP really has no impact, based on principle 7 of Form 219.

I believe the reinvestments are reportable (although may be deferred) and are subject to short-swing. Please let me know if I am missing anything, or if there are other questions I should be asking to analyze this correctly.
Thanks.
-2/6/2018

RE: I agree with your analysis, at least based on the staff's guidance provided in the Merrill Lynch letter, which said that a broker's plan doesn't qualify as a 16a-11 plan. I do think that a plan administered by, e.g., ComputerShare, in which the issuer participates and which is offered to all shareholders, qualifies under 16a-11. If you learn anything more, I'd be interested in hearing any alternative analysis (even if simply that the broker disagrees with the staff). Thanks.
-Alan Dye, Section16.net 2/6/2018

Re: Dear Alan,
One of our Section 16 officers had two small dividend reinvestments in 2019 which we were just made aware of. They total less than one share with a value of around $115. My understanding is that we can report these two purchases on Form 5 using code L and they will not be considered late filings. They also would not be reportable in the proxy as late Section 16 filings. However, they would be matchable against a purchase within 6 months from the latest purchase date.
Can you confirm that my understanding is correct?
If the officer were to sell shares within the 6 months, considering the low value of the drip purchase, what would the implications be?
Thank you.
-1/24/2020

RE: I agree with those conclusions. If the insider sells stock within six months of either acquisition, and sells at a higher price, the amount of profit will be recoverable, but the amount would be so small that it shouldn't deter the insider from selling. The only issue will be whether to ask the insider to pay the profit, to avoid having a plaintiff's lawyer demand that it be recovered.
-Alan Dye, Section16.net 1/24/2020

RE: To follow up on the ramifications of a sale within 6 months, can you clarify reporting principal (10) on Model Form 64 (Non-exempt disposition terminates right to defer reporting)? It seems to be saying that if a sale were made within 6 months of the small acquisition, the right to report previously unreported small acquisitions is lost. I'm unclear what this means, as we will report the small acquisitions (which were made in Sept. and November) on a Form 5 prior to Feb. 14.
Thank you.
-1/27/2020

RE: Dear Alan, Per your response above on 1/25/2018, is there an argument to be made that we don't need to report these two small purchases on a year end Form 5, but can just add the amount to the next Form 4 filing in 2020 with a footnote? I think at this point we do need to report on Form 5 using code L, but just want to confirm. Thanks!
-2/11/2020

RE: The rationale for not reporting is based on an analogy to an informal staff position relating to Item 405, so it's at risk of being wrong. The consequences of being wrong are not likely to be significant. If there is 16(b) liability based on the trades, I would report them fully. And I agree that reporting on Form 4, using transaction code L, is the preferred approach.
-Alan Dye, Section16.net 2/11/2020

RE: The small purchases took place during the fall of 2019, so wouldn't we report these on a Form 5 using code L? I'm unclear why you suggested reporting them on Form 4.
-2/11/2020

RE: Sorry, that was a typo, I meant Form 5.
-Alan Dye, Section16.net 2/11/2020

RE: Alan - As a follow-up to your prior guidance above, if a Company does not have a registered DRIP but instead permits a DRIP through its transfer agent (e.g., Equiniti) that provides for participation by all registered shareholders and does not discriminate in favor of employees, would that suffice under Rule 16a-11 to be considered an issuer sponsored plan?

If yes, would a separate DRIP conducted through the company's broker for shares acquired under employee plans (i.e., incentive and stock purchase plans) as well as some open-market transactions by certain key Section 16 officers therefore also be exempt from reporting under Rule 16a-11 if its substantially similar to the transfer agent's DRIP?

We would greatly appreciate your insight on this! Thank you.
-5/11/2020

RE: Yes, the exemption is available under a TA-sponsored plan. The staff said as much in a letter to the Securities Transfer Association. Any brokerage account or employee plan that provides for dividend reinvestment on similar terms should also be exempt, even if (in the brokerage account context) dividends are reinvested in open market purchases. Is there another kind of open market purchase you had in mind?
-Alan Dye, Section16.net 5/11/2020

RE: Many thanks, Alan! That answers my question. I meant to refer to dividend reinvestment on shares that were originally acquired directly by the Section 16 officer through open-market purchase as opposed to an equity grant by the issuer. Do you have the cite to the SEC letter to the STA for further reference?
Thanks again for this very helpful resource.
-5/12/2020

RE: Look at STA, 9/14/95 and Computershare, 7/26/10
-Alan Dye, Section16.net 5/12/2020

Q: Executive previously established an irrevocable trust for the benefit of family members, and he serves as trustee of the trust. The trust currently holds shares of the company where executive is employed. The executive would like to have the trust exchange company shares for (a) a lesser number of company shares, plus (b) cash held by the executive ((a) and (b) in aggregate would be equal in value to the company shares to be transferred from the trust). Do you have any thoughts as to how this would be reported?

RE: If I'm understanding the transaction, the executive will cause the trust to transfer X shares to the executive, and in exchange the executive will transfer to the trust a lesser number of shares (Y shares) and cash equal to the value of the number of shares represented by X - Y. If that's the case, I think there are at least a couple of ways you could report the transaction. Because the executive is, it sounds like, acquiring a number of shares that exceeds his pecuniary interest in the shares held by the trust, I would consider reporting, on one line, the executive's acquisition of shares from the trust, showing in Column 5 the number of shares owned by the executive following the exchange, and including a footnote to both that number and the lower number of shares reported in Column 5 as owned indirectly through the trust, to explain the terms of the transfer.
-Alan Dye, Section16.net 2/10/2020

RE: I think there are several ways you could report the transaction, and I don't know which if any have ever been countenanced by the staff. As long as all of the information is included, I think any of the methods should satisfy Section 16(a). If you report the transfer to the trust, I would use transaction code J, and explain that the transfer is effectively a change in form of ownership of those shares. I think the transfer could be deemed a purchase of shares (but only to the extent that X exceeds Y, despite Quintiles).
-Alan Dye, Section16.net 2/10/2020

RE: Thank you, I really appreciate the feedback. One last question. If the executive exchanges X number of company shares from the trust for an identical number of company shares from his personal brokerage account (there may be a tax benefit in doing so, by moving shares with a lower tax basis into the trust), would that be reportable on a Form 4, and would there be any "purchase" for purposes of the short-swing profit rules? It sounds from your previous emails like there would be no "purchase" if the number of shares exchanged is equal, but I wanted to confirm. Thank you
-2/11/2020

RE: I agree, there would be no purchase or sale. There would be no change in the insider's pecuniary interest in shares, just a reassignment of tax basis from one account to the other.
-Alan Dye, Section16.net 2/11/2020

Q: Dear Alan, We have a Section 16 reporting person that plans to move shares directly held in his individual name into his revocable trust. The trust was formed in North Carolina, and the reporting person and his spouse are the trustees and beneficiaries. The trust is titled: John Doe, Jr. Revocable Trust DTD xx/xx/xxxx, John Doe, Jr., Grantor, AND Jane Doe and John Doe, Jr., Trustees. Please advise how this should be reported. Thank you.

RE: There may be a supportable position that the trust is the equivalent of a "living trust," such that the transfer of shares to the trust is not reportable. The staff's position on living trusts, though, refers to a trust of which the insider is sole trustee and sole lifetime beneficiary. If you want to be on the safe(st) side, you would report the transfer as a gift of directly owned shares, and show as a holding indirect ownership of the gifted shares through the trust. I would include a footnote explaining what happened.
-Alan Dye, Section16.net 11/27/2018

RE: Thank you very much.
Also, is there a Model Form I may refer to so that I can get an idea of an explanation for the footnote?
-11/27/2018

RE: Model Form 70 shows "two line" reporting in a similar circumstance, but discussed "one line" reporting in the reporting principles. The footnote would say something like the reporting person contributed, for no consideration, X directly owned shares to a trust for the benefit of the reporting person and his/her spouse. The reporting person remains the beneficial owner of the shares, which are now reported as indirectly owned through the trust.
-Alan Dye, Section16.net 11/27/2018

Re: Alan,
We have an insider who purchased company stock through his two trusts. On his first trust, he has 100% voting and investment power and his children are the beneficiaries. On his second trust, he and his wife have 100% voting and investment power and he and his wife are the beneficiaries (First to die transfers to the other spouse). He is the trustee for both trusts. I have reported the trusts as Indirect ownership. Is this correct? I have also footnoted each with the name of the trusts. Do I need to footnote? and how detailed should the footnote be? I thank you in advance as this will be very helpful. Thank you.
-6/14/2019

RE: Yes, it seems clear to me that the insider beneficially owns the issuer securities held by the trusts, and that his ownership is indirect. The instructions to the form call for the names of the trusts to be included, which can be done in column 7, or in a footnote. Some filers just say in Column 7 something like "by family trust," without giving the name of the trust. I don't think the staff would ever complain about that practice, but it's not fully compliant with the instructions.
-Alan Dye, Section16.net 6/14/2019

Re: Thank you Alan. Quick question, what do you mean not fully compliant with the Instructions?
-6/14/2019

RE: See Instruction 4(b)(iii) to Form 4 regarding the specificity required.
-Alan Dye, Section16.net 6/14/2019

RE: I have a very similar scenario as described in this discussion topic. I have a reporting person who wants to transfer her shares into her inter vivos revocable trust. She is the sole trustee, sole grantor, and sole beneficiary. She has also confirmed she has sole control and pecuniary interest in the shares held in the trust.

In your response to the original question in this discussion, it seems to me that the scenario I have described above does not have to be treated as a gift, and would rather be treated as a change in ownership (simply reported as an indirect holding in the reporting persons next required Form 4 with a footnote explaining the scenario). Would you agree? If you still think the safest practice is to file as a gift to her living trust, I have no issue with that either.

Thank you in advance for your guidance!
-2/10/2020

RE: No, I don't think you need to file a Form 4 or Form 5 to report the transfer. I think the trust you describe should qualify as a living trust, such that the transfer results in only a change in form of ownership. I try to be cautious when addressing any set of facts that differs from what the SEC staff has explicitly addressed, but I agree that it's consistent with what the staff seems to have said to treat this transfer as exempt.
-Alan Dye, Section16.net 2/11/2020

Q: The executive officer did not file a Form 3 and multiple Forms 4 for many years because there was a mistaken understanding that she was not a Section 16 officer. After the mistake was identified, the company filed one Form 3 and one Form 4 that includes all transactions (approximately 20 transactions). For the proxy statement under "Delinquent Section 16 filings", does not the company need to disclose every single transaction or can it just say that there were "multiple transactions" that were late?

RE: Item 405 calls for the number of late reports, and the number of transactions reported late, so I think the company will need to say 20 transactions were reported late. One of the SEC's enforcement ctions in September 2014 charged a CAO will failing to file Section 16 reports, based on facts similar to yours. You might look back and see what that insider filed after consenting to the cease and desist order, and what the company said in its proxy statement.
-Alan Dye, Section16.net 2/10/2020

Q: We have a dual class company with Class A Common (1:1 voting power) and Class B Common (10:1 voting power). The CEO has beneficial ownership of less than 10% of Class A alone, and less than 10% of Class A and Class B together (as converted). However, the CEO holds only Class B Common shares at the present time, and because of the supervoting power of the Class B, his voting power is currently in excess of 10%. Should we check the 10% owner box on the front of Form 4/5?

RE: No, I don't think so. So far, the courts have held that a person is a ten percent owner, as "defined" in Section 16(b), only if the insider owns more than 10% of a registered class (or securities that are substantially the same so should be considered a single class). Total voting power has been deemed irrelevant. It sounds to me like your two classes of common are distinct classes, so I would not check the 10% owner box.
-Alan Dye, Section16.net 2/7/2020

Q: Insider held shares in his 401(k) account and we reported that as indirect holding. Insider sold those shares. What are the filing requirements on that? Thank you!

RE: The sale is reportable on Form 4 within two business days. If the shares were held in a company stock fund, the transaction is a Discretionary Transaction, possibly exempted by Rule 16b-3(f). If the shares were held in a self-directed account, the sale is likely a nonexempt sale, reportable using transaction code "S."
-Alan Dye, Section16.net 2/6/2020

Q: Two individuals are the co-owners of an investment vehicle that holds various assets, including > 10% of PubCo. Accordingly, the two individuals and investment vehicle file Section 16 reports jointly for PubCo shares held by the investment vehicle. One of the individuals is retiring, and the other individual will buy him out, becoming the sole shareholder/owner of the investment vehicle. Should either or both individuals need to report this on Form 4, or can the retiring individual simply stop filing on the future joint Forms 4 by the remaining sole owner and investment vehicle? This technically seems like a change in pecuniary interest for both individuals, and since the retiring individual is being bought out, it seems like a plaintiff's attorney could argue that the transaction is a sale by the retiring individual and purchase by the remaining individual (but no change in pecuniary interest of the investment vehicle, so it should not have 16(b) exposure). However, given that there is no actual trade in the shares themselves (notwithstanding that the value of the buyout will, in part, be based on the value of the shares held by the investment vehicle), it seems like a reasonable filing approach to not report the buyout as a "transaction" on Form 4 by the individuals. Thoughts? Thanks!

RE: Both insiders will experience a change in their pecuniary interest in issuer securities, so I think both will need to file a Form 4. Take a look at Model Form 83 and see if you find it helpful/persuasive.
-Alan Dye, Section16.net 2/6/2020

Q: Hello, We acquired Company A and one of our Officers held a few shares in Company A. Now those shares are our shares Company B. Do we have to file a Form 4 for the new shares within two days of the acquisition or can we wait until our next Form 4 and mention them? Thank you!

RE: If the shares were issued to the officer as merger consideration, the acquisition should be reported on Form 4 within two business days.
Alan Dye, Section16.net 2/5/2020

RE: Thank you! They were not part of the merger. He just happened to own a few in his portfolio and they were automatically converted through his broker.
-2/5/2020

RE: Hi Alan,
Actually the acquisition was a stock-for-stock deal. We are paying for the merger using our equity. Our stock is being issued to all the holders per the exchange ratio. Should we file in two days?
Thank you,
-2/5/2020

RE: Yes, I do think the acquisition is reportable on Form 4 within two business days of the closing of the acquisition.
-Alan Dye, Section16.net 2/5/2020

Q: The Company issued performance shares that are subject to TSR and EPS conditions. The HR Committee will meet and confirm the number of shares that should be issued based on the Company’s TSR and EPS performance for the 3 year period. The number of shares that will be issued to the officer will be reduced for tax withholding. For Form 4 filing purposes, can the Company just reflect the net shares issued (after tax number), or does the Company have to reflect the gross number of shares issued with code A and show the number of shares withheld for taxes with code F. Thank you.

RE: Given the way the staff has directed insiders to report SAR exercises, I think "net" reporting is not favored, and that your transaction should be reported first as an acquisition, then separately as a withholding of shares.
-Alan Dye, Section16.net 2/5/2020

Q: The Form ID FAQs indicate (at 4(g) - Signature, fourth bullet) that individuals may have a power of attorney sign ("Signing Individual") on their behalf and the power of attorney document ("POA") must be attached to the notarized Form ID application. I read this to suggest that notarization is needed for the Signing Individual's signature on the Form ID application, but notarization is NOT needed for the actual applicant's signature on the POA granting authority to the Signing Individual to sign the Form ID application. Do you read the requirements differently and/or expect this approach would create an issue with acceptance or timely review of the Form ID? Thank you

RE: I read the rules the same way you do. I have forwarded your question to some EDGAR experts, though, so we can see what they say.
-Alan Dye, Section16.net 2/5/2020

Q: An insider timely reported an acquisition of directly held securities on Form 4, but inadvertently omitted an indirect holding that had been correctly reported on all prior filings. The number of shares held indirectly would not be considered de minimis. The omission was discovered after the end of the issuer's fiscal year, but within the 45 day window for a Form 5. Is it accurate to conclude that the omitted holding: (i) can be reported on either Form 4/A or Form 5; and (ii) would not trigger an Item 405 disclosure based on the guidance provided by the American Society of Corporate Secretaries, SEC No-Action Letter (January 24, 1992)? If reported on Form 4/A, we would include only the holding line without repeating the acquisition originally reported on that form. If reported on Form 5, what would be the best way to approach the report? To include both holdings and add a footnote on the indirect line to explain that they were inadvertently omitted on the reporting person's prior Form 4? Thank you in advance.

RE: I think the staff's 1992 letter to the American Society of Corporate Secretaries effectively addresses these issues. I agree with your conclusions, except that I don't think adding the omitted holding by Form 5 was contemplated by the letter. The letter said, I think, that a holding omitted from a Form 4 or Form 5 can be added by amendment to the form from which it was omitted. So, in your case, I think the holding would be added by Form 4/A. If you reach a different conclusion, please repost.
-Alan Dye, Section16.net 2/4/2020

Q: Do the provisions of Section 16(c) prohibit a holder of more than 10% of a company's common stock from entering into a total return equity swap (assume for a term of one year) with respect to such shares of common stock? Or, is such a total return equity swap similar to a put equivalent position that is exempt from Section 16(c) by operation of Rule 16c-4?

RE: I think the swap would qualify for Rule 16c-4 treatment, provided that the swap relates to no more shares than the insider owns. You may want to keep an eye out for the staff's response to a pending no-action letter relating to variable-price, pre-paid forward sale contracts, which may address the short sale issues raised by those contracts. The staff's guidance may be equally applicable to swaps.
-Alan Dye 7/2/2002

RE: Alan -- I realize this is an old thread but this situation came up recently. Isn't the answer here that Section 16(c) doesn't apply to swaps? thanks
-11/16/2011

RE: Because a swap is a derivative security, I think an insider's entry into a naked swap violates 16(c). Peter Romeo thinks, though, that Dodd-Frank's amendment of 16(a)( and (b) to provide that they cover swaps, without also amending 16(c), means the Act exempts swaps from 16(c)'s coverage. Is that your view, too? I have difficulty accepting that the Act's failure to prohibit insider's from shorting swaps means that an insider's entry into a swap can't constitute a short sale of the underlying security. Given your view and now Peter's, though, I'm going to look into the issue and see if I can find an answer.
-Alan Dye, Section16.net 11/16/2011

RE: Thanks Alan. Yes, my view is consistent with Peter's, though I got there only after quite a bit of second guessing for the reasons you cite.
-11/17/2011

RE: Hi Alan. Are you still of the view that short swaps are outside of 16(c)? And if for some reason you think they are covered, do you think having a long swap of the same quantity would comply with 16c-4's requirement to otherwise own the security or do you think you would have to own the security referenced by the swap? Thank you.
-2/3/2020

RE: Hi. It's interesting to revisit this old thread. While Peter and the person who posted the last question were both of the view that Section 16(c) doesn't treat a short TRS as a short derivative security position, and they may be right, I still have a hard time accepting that shorting a swap doesn't constitute the establishment of a put equivalent position, making it a short sale under Rule 16c-4 and exempt only if the conditions of Rule 16c-4 are met. Peter always wrote the short sale chapter of the Section 16 Treatise, and he updated that chapter for the 2019 edition, but I went behind him and re-wrote large portions of it, including the 16c-4 subchapter. That experience makes me think the rule was intended to cover short swaps, but again Peter may be write that Dodd Frank may have unintentionally removed swaps from Section 16(c)'s coverage.
-Alan Dye, Section16.net 2/3/2020

RE: I do see what you are saying. But if that were the case, do you think having a long swap of the same quantity would comply with 16c-4's requirement to otherwise own the security or do you think you would have to own the security referenced by the swap? Seems it would be fair then that the long swap should count, although it doesn't give you any right to acquire the shares. Then again the short swap doesn't give you any obligation to actually deliver shares.
-2/3/2020

RE: I see your point, and it does seem like having a long swap that won't expire before the short swap does should satisfy the requirements of the exemption. Maybe the staff would give an interpretive position to that effect, given the no-action letters the staff has issued under the rule.
-Alan Dye, Section16.net 2/3/2020

Q: I understand the grant of a performance-based restricted stock unit is not deemed a "derivative security" and thus not reportable under Section 16(a) until the performance criteria are met (assuming criteria not tied to stock price). However, a grant of restricted stock that only vests upon the same performance criteria being met is NOT eligible for the same exemption, since the stock itself has been granted, as opposed to a derivative security. As such, a grant of performance-based restricted stock is reportable under Section 16(a), in Table I. Is that correct? And then, if the performance criteria are not met, whatever part of the restricted stock is forfeited due to failure to vest must be reported as well (no equivalent exemption for forfeiture of stock as there is for forfeiture of derivative securities under Rule 16b-6(d)). Appreciate your help. Thanks.

RE: Yes, I do think that's correct, although I think a reasonable argument can be made that even stock issued in the insider's name could be non-reportable until earned. And as you say, the forfeiture of the stock (as opposed to units) would also be reportable.
-Alan Dye, Section16.net 2/17/2018

RE: Thanks so much, Alan, particularly for responding on a Saturday afternoon of a long weekend!
-2/17/2018

RE: You're welcome! (I'm just catching up from having been out of the country the last few days.)
-Alan Dye, Section16.net 2/17/2018

RE: This conclusion seems to be inconsistent with the instructions to model form 118, subsection (15)
-2/22/2018

RE: I just recently posted a question for confirmation to this discussion topic and referenced model form 118 - I should have referenced model form 125, sub-instruction (15). The above conclusions seem inconsistent -
(15) Grant Of Performance-Based Restricted Stock Not Necessarily Reportable. Generally, awards of stock or derivative securities that vest only upon satisfaction of performance criteria (other than the price of the issuer's stock) are not deemed acquired as of the date of the award, but instead are deemed acquired when the performance criteria have been satisfied. [ ... ] Based on general principles of beneficial ownership, however, the authors believe that insiders may instead report such awards within two business days of the date of vesting.
-2/22/2018

RE: I don't think the conclusions are inconsistent. The staff has said generally that an award that is subject to material performance conditions is not reportable until the conditions have been satisfied. I think that means a PBRSU, as well as performance-based restricted stock issued in the insider's name, may be reported only when earned. Both the Model Form and the response above, though, acknowledge that an old Rule 16b-3 letter suggests that the staff might support reporting a performance award at the time of grant if the stock is issued in the insider's name and the insider has the right to vote the stock and the right to receive dividends.
-Alan Dye, Section16.net 2/22/2018

RE: As a a follow up to this thread, if a company elects to report the grant of performance-based restricted stock on the grant date because the restricted stock holds voting and dividend rights as opposed to the date on which the satisfaction of the performance criteria is determined and the award vests, do you include the restricted stock in the insider's holdings in the beneficial ownership table?
-2/3/2020

RE: Yes, because the grantee has the right to vote the stock and therefore is a beneficial owner of the shares for purposes of Section 13(d).
Alan Dye, Section16.net 2/3/2020

Thank you. Does the answer change if you take the alternative approach of reporting the restricted stock on Form 4 on the date that the performance conditions are met? In other words, is it only after you report the restricted stock on Form 4 on the date the performance conditions are met that you would then include the restricted stock in the beneficial ownership table?
-2/3/2020

RE: I think the PRS awards belong in the Item 403 beneficial ownership table regardless of whether they are reported on Form 4 at the time of grant. There are plenty of other ways, of course, in which the Item 403 table differs from the same insider's Forms 4.
-Alan Dye, Section16.net 2/3/2020

Q: An investor wrote a put option, pursuant to which, if the price of a share of stock of company X is below $10 on February 1, the investor will be required to buy 10 shares of that stock at $10/share on February 1. On January 31, the share price is $2/share. As a result, it seems almost certain that the investor will be required to buy 10 shares of that stock at $10/share on February 1. While I understand that normally, if a condition to obtaining stock is outside the control of an investor, the investor does not have beneficial ownership over that stock, are you aware of any guidance that in a case such as this, where it is almost certain that the condition will be satisfied, the investor should be deemed to be the beneficial owner of the 10 shares of stock on January 31 (or even before)? Do you think it would make a difference if the put option would be automatically exercised on February 1 if the stock price was below $10 on that date (rather than the holder of the put option having the right to exercise it)?

RE: No, I don't know of any guidance suggesting that an option represents ownership of the underlying stock just because it is deeply in the money for the holder. And the answer should be the same, in my view, whether the option exercises automatically or only by election.
-Alan Dye, Section16.net 1/31/2020

Q: A former Section 16 officer retired 3 months ago. The person just exercised options that were reported at grant on Form 4 while the person was a Section 16 filer. The person exercised in cash and is holding--no other transaction has occurred. Is this required to be reported on Form 4? Seems like the answer is "no" and it'd be an exempt transaction since no sale is occurring but wanted a sanity check.

RE: I agree, the exercise will not require a Form 4. Because the exercise will be exempt from Section 16(b) under Rule 16b-6(b), the exercise will be exempt from reporting under Rule 16a-2.
-Alan Dye, Section16.net 1/28/2020

Q: I’m reviewing the following CDI: Section 219. Rule 16a-11 – Dividend or Interest Reinvestment Plans 219.01 A dividend reinvestment plan that is sponsored by a broker-dealer and available only to customers of that broker-dealer does not provide for "broad-based participation" within the meaning of Rule 16a-11. Accordingly, Rule 16a-11 is not available to exempt dividend or interest reinvestment transactions pursuant to such a plan. However, if a dividend reinvestment plan sponsored by a broker-dealer essentially mirrors a dividend reinvestment plan sponsored by the issuer that satisfies the conditions of Rule 16a-11, acquisitions pursuant to dividend reinvestment under the broker-dealer sponsored plan would be exempted by Rule 16a-11. See interpretive letter to Merrill, Lynch, Pierce, Fenner & Smith (Mar. 16, 1994). [May 23, 2007] Is it your understanding that there would be no exemption if the issuer does not have a DRIP or similar plan? Our company does not offer a dividend reinvestment plan but the broker-dealer where most of our Section 16 officers hold stock does offer this feature. Is it right to assume based on this CDI that if a Section 16 officer or director participated in this feature it would be considered an open market purchase and not exempt from 16a or 16b? Thank you for your time.

RE: Yes, that is my understanding of the staff's position, as expressed in the Merrill Lynch letter. A broker's plan is not "broad based," in the staff's view.
-Alan Dye 5/30/2014

RE: I understand there are generally two types of DRIP plans – (1) Registered Plan – is sponsored by the issuer and registered with the SEC and a (2) Bank Plan – is sponsored and administered by a bank, like Computershare. Could a bank sponsored plan meet the conditions of Rule 16a-11?
-1/17/2017

RE: Yes. If the plan meets all the conditions of Rule 16a-11, including being broad-based (as bank or transfer agent-sponsored plan generally are), then Rule 16a-11 should exempt reinvestments.
-Alan Dye, Section16.net 1/17/2017

RE: Would it be customary or required for an issuer to get Board approval for the implementation of a bank-sponsored plan that meets the requirements of Rule 16a-11? The plan permits reinvestment by existing stockholders and acquisitions via voluntary contributions for new and existing shareholders. All acquisitions under the plan would be open-market, since the issuer won't be registering the plan, but issuer intends to prohibit Section 16 insiders from acquiring shares via voluntary contributions.
-1/30/2017

RE: I don't know of any legal or other "requirement" that the board approve a bank-sponsored arrangement. I don't know what standard practice is, but perhaps another member can shed light on that question. I would think that informing the board would be sufficient.
-Alan Dye, Section16.net 1/30/2017

RE: I would like to confirm that this analysis has not changed. One of our Section 16 officers had two very small acquisitions during 2017 through a broker's dividend reinvestment plan. Our company does not have a DRIP.
I assume that these purchases are subject to short swing, and that we can report them on a year end Form 5, since they were so small. Is there a model form that I can use for guidance regarding reporting, the code to be used, etc.?
Thank you.
-1/23/2018

RE: I agree with your conclusions, if the acquisitions are under $10,000 and there have been no disqualifying dispositions. You might look at Model Forms 64 and 184.
-Alan Dye, Section16.net 1/23/2018

RE: Dear Alan,

I have a further question on this topic. A Section 16 Officer had two small dividend reinvestments during 2017, which totaled less than one share, with a total value of less than $75. These are through a broker account, and the issuer does not maintain a DRIP.

Can you advise if we should file a Form 5 to report this, or if there is a de minimus exception? If so, how would you suggest we handle this?
Thank you. -1/25/2018

RE: Here is a way you might think about what you should do. The staff has said, informally (at a conference many years ago), that some "reporting delinquencies" may be so insignificant (some recall "immaterial" or "de minimis") that they may not warrant disclosure under Item 405. From that, people have reached various conclusions about what constitutes a de minimis delinquency. Most, I think, would consider your two to be de minimis. So, you might conclude that the two acquisitions, whether reported or not, will not require disclosure in the proxy statement. The staff's de minimis statement related to Item 405, and the staff didn't say (nor was it asked) that the delinquency doesn't need to be "cured." If you decide that your transactions don't require disclosure under Item 405 (which is where I think I would land), actually reporting the transactions doesn't have much of a downside. So, you could consider adding them to the insider's next Form 4, or adjusting the insider's total holdings in Column 5 and saying in a footnote that the total includes X shares resulting from automatic dividend reinvestment pursuant to the terms of a brokerage account.
-Alan Dye, Section16.net 1/25/2018

RE: Dear Alan,

In speaking with the broker who handles most of the Section 16 officers accounts, they analyzed this differently. They feel that their DRIP plan is “broad based”, since it is offered to all shareholders. They also feel that since the date of the dividend reinvestment is not chosen by the individual, the transaction is not “discretionary”. They feel that the reinvestment is therefore not subject to short swing.

I believe that their analysis is incorrect, based on Model Form 219 and other discussions of dividend reinvestment on this site. If the Issuer doesn’t have a DRIP, then the broker’s plan is not considered “broad based”. The fact that the insider doesn’t pick the date of the DRIP really has no impact, based on principle 7 of Form 219.

I believe the reinvestments are reportable (although may be deferred) and are subject to short-swing. Please let me know if I am missing anything, or if there are other questions I should be asking to analyze this correctly.
Thanks.
-2/6/2018

RE: I agree with your analysis, at least based on the staff's guidance provided in the Merrill Lynch letter, which said that a broker's plan doesn't qualify as a 16a-11 plan. I do think that a plan administered by, e.g., ComputerShare, in which the issuer participates and which is offered to all shareholders, qualifies under 16a-11. If you learn anything more, I'd be interested in hearing any alternative analysis (even if simply that the broker disagrees with the staff). Thanks.
-Alan Dye, Section16.net 2/6/2018

RE: Dear Alan,
One of our Section 16 officers had two small dividend reinvestments in 2019 which we were just made aware of. They total less than one share with a value of around $115. My understanding is that we can report these two purchases on Form 5 using code L and they will not be considered late filings. They also would not be reportable in the proxy as late Section 16 filings. However, they would be matchable against a purchase within 6 months from the latest purchase date.
Can you confirm that my understanding is correct?
If the officer were to sell shares within the 6 months, considering the low value of the drip purchase, what would the implications be? Thank you.
-1/24/2020

RE: I agree with those conclusions. If the insider sells stock within six months of either acquisition, and sells at a higher price, the amount of profit will be recoverable, but the amount would be so small that it shouldn't deter the insider from selling. The only issue will be whether to ask the insider to pay the profit, to avoid having a plaintiff's lawyer demand that it be recovered.
-Alan Dye, Section16.net 1/24/2020

RE: To follow up on the ramifications of a sale within 6 months, can you clarify reporting principal (10) on Model Form 64 (Non-exempt disposition terminates right to defer reporting)? It seems to be saying that if a sale were made within 6 months of the small acquisition, the right to report previously unreported small acquisitions is lost. I'm unclear what this means, as we will report the small acquisitions (which were made in Sept. and November) on a Form 5 prior to Feb. 14. Thank you.
-1/27/2020

Q: Company has issued 100,000 RSUs to an executive officer with 25,000 of the total RSUs vesting on (i) achievement of ROE targets, (ii) achievement of cost-savings targets, (iii) achievement of sales targets and (iv) increase in share price. Each vesting criteria will be measured at end of 2nd year. Achievement of all 4 is not required for vesting of any one or more of what are effectively sub-grants -- so it is possible that the only vesting condition met is the share price increase, resulting in vesting of 25,000 of the 100,000 RSUs. Is a Form 4 filing required within 2 days following the grant as to 25,000 RSUs -- the only portion of the grant tied directly to share price?

RE: In my opinion, yes. There is no material condition to the vesting of that portion of the award.
-Alan Dye, Section16.net 1/24/2020

RE: Thanks, Alan.

Do you think it's advisable to include an explanatory footnote describing the situation? The aggregate amount of the award was disclosed in an 8-K (not the sub-amount attributable to each of the criteria) and it might raise a question as to why the Form 4 and 8-K don't match.
-1/24/2020

RE: Would your answer re: immediate filing change if the stock price vesting trigger was based not solely on an increase in the issuer's stock price generally but based on not only an increase but an increase relative to a peer group (of competitors) or a recognized benchmark (industry sector performance)? It seems like that would be an additional material condition and take it outside the "solely" related to market price concept (e.g., Equifax letter).
-1/24/2020

RE: Yes, I do think that would be advisable, and standard practice, I think, when only a portion of an award is currently reportable.
-Alan Dye, Section16.net 1/24/2020

RE: I agree that stock price relative to a peer group would change the answer, and would be a material condition to vesting.
-Alan Dye, Section16.net 1/24/2020

Q: An investor acquires 12% of an issuer's stock and, in connection with, and on the same day as, the acquisition, the investor is appointed a director of the issuer. If the documents are not clear regarding whether the acquisition occurred prior to, or simultaneous with, the appointment as director, do you think there is a significant risk that if the investor sells the stock within 6 months, there will be a match with the 12% acquisition, on the basis that the acquisition was not exempt since it occurred either simultaneous with, or immediately after, the appointment as director?

RE: If the 12% position is acquired in a single purchase, but before the investor becomes a director, the purchase will not be subject to Section 16(b), right, under Foremost McKesson, and also won't be subject to matching as a pre-election transaction by a director based on Rule 16a-2. If the purchase is deemed to occur after the investor is elected a director, the transaction can be exempted under Rule 16b-3 if the purchase is made directly from the issuer. If the purchase isn't directly with the issuer, then I agree that, if the purchase occurs after election to the board, the purchase would likely be subject to matching with the sale within six months. If the documents aren't clear, presumably the sequence of events would examined by a court, if a 16(b) action were initiated, and the court would make findings of fact based on whatever other evidence might be available, including the testimony of participants in the transaction/election. If the purchased shares are reported on Form 3 rather than Form 4, the likelihood that a plaintiff would ever be aware of a potential claim would be remote, I think.
-Alan Dye, Section16.net 1/24/2020

Q: Assume that on January 1st an investor acquires 11 shares out of the 100 shares outstanding at a price of $10 per share. On February 1st, that investor acquires 1 additional share at $11. On March 1st, that investor sells 5 shares at $12. As I understand the guidance on how to calculate short-swing profits, the amount subject to disgorgement here would be limited to $1, since the initial acquisition would be exempt in accordance with Foremost-McKesson and, of the remaining transactions, the only matchable transaction consists of the purchase and sale of one share with a profit of $1 (that is, since there is no non-exempt purchase for the other 4 shares sold, they are not subject to matching). Do you agree?

RE: Yes, I agree completely, based on Foremost McKesson as well as Rule 16a-2(c).
-Alan Dye, Section16.net 1/23/2020

Q: Two members of a 13(d) group are co-trustees of a family education trust, the beneficiaries are the grandchildren of the members parents. The trust is going to be dissolved and 14 new trusts will be created, one for each of the beneficiaries. The co-trustees of the new trusts (all members of the 13(d) group and reportable) will be a parent of each child, and one uncle who has no children. Is this a Form 4 or Form 5 filing? What would be the transaction code for this transfer to the new trust, “J”? Also, for the co-trustees who are parents, will this be a direct holding? And, the uncle who has no children, indirect? Thanks for your help.

RE: If these will be discretionary distributions, for no consideration, I think the transfers will constitute gifts, and therefore can be reported on Form 4, using transaction code "G." If they can't fairly be characterized as gifts, I would think a Form 4 filing, using transaction code "J," would be appropriate. For a parent/insider, I think a trust holding will be indirect through the trust. For the uncle, I don't think he will have a pecuniary interest, because the beneficiary isn't a member of his immediate family.
-Alan Dye, Section16.net 1/23/2020

Q: The reporting person became a Section 16 officer on January 13, 2020. Monday, January 20, 2020 was a holiday and the SEC was closed. Does that mean that the 10 day reporting deadline is pushed out to January 24 instead of January 23? Thank you!

RE: The Form 3 would be due ten calendar days after January 13, right, which would be January 23? Because January 23 was not a holiday or weekend day, the Form 3 would have been due that day, regardless how how many weekend days and holidays were between January 13 and January 23. You still have a few hours left to get it filed!
-Alan Dye, Section16.net 1/22/2020

Q: An executive officer is a trustee of a family trust (along with three other family members) and the trust owns shares of the executive officer's company. The executive officer is also a remainderman under the trust. Is the executive officer deemed to own the shares held by the trust for Section 16 purposes? Notwithstanding the "Rule of Three", would the officer be deemed to "share investment control" such that under Rule 16a-8(c) his remainder interest would require him to report the shares held by the trust?

RE: The executive would be deemed to have a reportable interest in the securities based on his remainder interest, based on Rule 16a-8(c), but I think the Rule of Three, if applicable, would mean the executive doesn't have sufficient investment power to be deemed a beneficial owner of any shares held by the trust. The staff's no-action letter on which the Rule of Three is based involved 5 trustees of an employee benefit plan trust. Whether the rule is available depends, of course, on both the trust documents and the way the trustees actually make investment decisions.
-Alan Dye, Section16.net 1/21/2020

RE: Hi, Alan.
Can you describe how the should be reported on the Form 4? Many thanks.
-1/22/2020

RE: If you're reporting the trust's holdings for the first time, I'd show common stock in Column 1, total shares in the trust in Column 5, "I" in the direct/indirect column, and "By XYZ trust" in Column 7. I'd include a footnote saying "the reporting person is a trustee of the XYZ trust and also has a remainder interest in the trust. The reporting person disclaims beneficial ownership of the issuer securities held by the trust except to the extent of his pecuniary interest therein."
-Alan Dye, Section16.net 1/22/2020

Re: Can you confirm which transaction code we would use to report this? Thanks.
-1/24/2020

RE: Is the insider reporting a purchase, or appointment as trustee? And is consideration being paid for shares?
-Alan Dye, Section16.net 1/24/2020

RE: We are reporting the appointment as a Trustee to a revocable trust account holding 1000 shares of the Company's stock.
-1/24/2020

RE: I would use transaction code "J," and explain in a footnote that the reporting person became trustee of a trust holding issuer securities, and I would disclaim beneficial ownership except to the extent of the reporting person's pecuniary interest in the shares held by the trust.
-Alan Dye, Section16.net 1/24/2020

Q: Hi Alan, i am trying to determine if my client's benefit plan (the "Plan at Issue") will qualify as an excess benefit plan. It seems to meet the qualifications generally, however, a participant in the connected 401K plan could contribute a smaller percentage of income to the 401K plan than to the Plan at Issue. This could result in the participant not reaching the 401K limit but still contributing to the Plan at Issue. In my view, this would not disqualify the Plan at Issue from being an excess benefit plan, based on the 1996 fn which says that transactions need to be in tandem with each other. A colleague does not agree. He believes that a plan can only be an excess benefit plan if the 401k limits must be exhausted before participation in the Plan at Issue can begin. Your thoughts?

RE: Hi Alan,

In my prior note, the reference to the FN is the 1996 release, which actually said that transactions from the 401K plan and the Plan at Issue do NOT have to be in tandem. thanks.
-5/20/2009 RE: Peter Romeo writes the 16b-3 chapter of our Treatise, so I asked him to respond to your question. Here is his response:

I am doubtful that the requestor's plan would qualify as an Excess Benefit Plan for two reasons: (1) it doesn't really provide for "excess" benefits if the participant doesn't have to exhaust the benefits of the related Qualified Plan that it operates in conjunction with, and (2) it seems to permit the participant to determine the amount of issuer securities that can be acquired under the plan (as contrasted to having the amount determined on the basis of an objective measure derived from the Code), which the SEC said in American Bar Association, Q.2(c) (February 10, 1999) is not allowable under an Excess Benefit Plan.
-Alan Dye, Section16.net 5/20/2009

RE: Alan, the ABA excess benefit plan letter from 1999 says that ... the following plans, even if operated in conjunction with a Qualified Plan, are not Excess Benefit Plans. This is because the amount of issuer securities acquired will be determined based on the amount of salary the officer or director chooses to defer, rather than an objective measure derived from the Internal Revenue Code.

Any non-qualified plan that permits participants to defer a portion of their compensation into the plan (a "non-qualified deferred contribution plan"); and

Any supplemental plan that provides an employer matching contribution based on the employee's deferral of salary into a non-qualified plan.

Suppose a company has a supplemental 401(k) plan that spills once the 401(a)(17) comp limit is reached, the eligible employee can decide how much to contribute to that plan (independent of the underlying 401(k) plan) and the employer makes matching contributions on the deferral in stock units (replacing up to the maximum match allowed under the 401(k) plan). Is this design ok? Is the SEC referring to a third plan (e.g., savings plan, supplemental savings and then another deferred comp plan?)
-1/20/2020

RE: I'm not ignoring this question, I'm just trying to get to an answer. This question, and what the staff meant in the ABA letter, has been a mystery to me and many others for a long time. Two members of the ABA task force that asked the question initially were (and still are, to me) the plan experts who crafted the question and then were puzzled and troubled by the answer. One of those two has retired, but I'm trying to get input from the other.
-Alan Dye, Section16.net 1/23/2020

RE: Six years ago a benefits lawyer who was on the ABA committee, but who didn't participate in drafting the 1999 letter, said this to me in an email. I would credit her, but I don't have her permission to attribute this to her. She was responding to a question from me regarding whether the ABA should ask the staff to clarify the 1999 letter, which some say effectively took away the exemption for excess benefit plans. So, FWIW:

"I believe that the language in the 1999 ABA letter is unfortunate and is misleading. What I think the staff intended to say was that a non-qualified plan allowing an independent election to defer compensation into it will not qualify as an "excess benefit plan" even if it is operated in conjunction with a qualified plan. However, I agree the language can be read as broader than that. Read more broadly, it would disqualify most typical "soak up" plans from being "excess benefit plans" under Rule 16b-3.
"I think that broader reading was not intended. I believe the rule should be that a plan that operates in conjunction with a qualified plan, where executive merely makes one deferral election (i.e., the 401(k) plan election), will qualify as an excess benefit plan for Rule 16b-3. This is the typical type of "soak up" plan. Example: An executive making $300,000 elects to defer 15% of pay ($45,000) into the 401(k) plan. Various Code sections apply to limit his deferrals into the 401(k) plan to $11,000. A non-qualified plan picks up the additional $34,000 deferral. I believe this kind of non-qualified plan should qualify as an excess benefit plan under Rule 16b-3.

"The reason (in my view) the language of the 1999 letter got so off track is that the incoming letter involved a situation with two non-qualified plans. One (the "Soak Up Plan") was like the typical "soak up" plan described above. The other ("NQDC Plan") was a separate non-qualified deferred compensation arrangement that allowed a separate deferral election (separate from the 401(k) deferral election). This NQDC Plan was coordinated in its operation with the Soak Up Plan, which, of course, operated in conjunction with the qualified plan.

"As an example of how the two plans operated, assume the same facts as above, except that, in addition to the 15% deferral election into the 401(k) plan, the executive also elects to defer $200,000 into the NQDC Plan. Because 401(k) plans essentially consider only taxable pay, the executive now has only $100,000 of pay under the 401(k) plan. His 15% deferral election would thus allow deferral of only $15,000, of which $11,000 would go in the 401(k) plan and $4,000 would go in the Soak Up Plan. The incoming ABA letter asked, in essence, whether the additional $30,000 that would have gone into the Soak Up Plan if the Executive had not deferred $200,000 into the NQDC Plan could still go into the Soak Up Plan without causing the Soak Up Plan to lose its status as an "excess benefit plan" for Rule 16b-3. The answer was yes. Then there was the gratuitous additional sentence that - I believe - was intended to say that the NQDC plan could not be an "excess benefit plan" even if it operated in conjunction with a qualified plan. Unfortunately, the language swept broadly enough to pick up the Soak Up Plan too.

"So now we're all living with the ambiguity. We have emphasized to the staff on behalf of a client that an interpretation of the 1999 ABA letter to deny "excess benefit plan" status to what I described above as a "typical" soak up plan will come as a great shock to the greater practitioner community."
-Alan Dye, Section16.net 1/23/2020

Q: Hello, RSA was awarded in 2005 with 1/3 of shares being released/taxed every five years. In 2017, remaining unreleased 1/3 were processed for taxation due to there no longer being substantial risk of forfeiture. Upon release of those shares in Jan 2020, they were errantly taxed again - with shares covering taxes. Form 4 was filed with code F to report the transaction. Need to file a form 4C as shares will be returned to section 16 officer - what would be the best wording of the footnote?

RE: I would say something like "This amendment is being filed to withdraw the original report, which mistakenly reported that X shares were withheld to pay taxes due upon vesting of a restricted stock award. The total in Column 5 of this amendment corrects the number of shares of the issuer's common stock owned by the reporting person as of the date of the original filing."
-Alan Dye, Section16.net 1/20/2020

Q: Just to confirm: If an officer of a company exercises a stock option before an IPO, and reports the stock (but not the option) on her Form 3, she would still have to report the exercise on any Form 4 that comes due within 6 months after the exercise? And if she failed to report the exercise on such a Form 4 that comes due within 6 months after the exercise, she must file a Form 5 as a delinquent Form 4 reporter?

RE: That is my understanding, too. Unlike post-termination transactions, pre-registration transactions become reportable even if exempt from Section 16(b).
-Alan Dye, Section16.net 1/16/2020

Q: After over a decade of reporting, I have one insider who recently reported that they have had 2,000+ shares in an IRA they had forgotten about and one insider who noted their spouse's holdings have been over reported by 500 shares. How would one go about fixing the decade of incorrect reports?

RE: You have at least a couple of alternatives available to you, but I think I would add the IRA holding by Form 5 (if the shares were omitted from a Form 3) or by late Form 4 if the shares were purchased after the Form 3 was filed but never reported. I would adjust the over-reporting of the spouses shares in the next Form 4 (or Form 5) and explain it in a footnote.
-Alan Dye, Section16.net 1/14/2020

Q: Form 142 (relating to a multi-fund non-qualified deferred compensation plan), notes the different treatment of a voluntary cash withdrawal from a Phantom Stock Account (reporting principle 19) vs. from an Issuer Stock Fund (reporting principle 20). In the context of a non-qualified deferred compensation plan, what is the difference between a phantom stock account and an issuer stock fund?

RE: You raise a good question. I just looked back at the December 1996 ABA letter and it does seem to say that, but I'm not sure why. I will give the issue some thought. Or have you arrived at a rationale already?
-Alan Dye, Section16.net 1/8/2020

RE: I had looked at the 1996 ABA letter, and combined with the complexity and arcane terminology of 16b-3 as it applies to benefit plans, my head just spun on this issue.

Thinking about it further, I don't know if they were trying to distinguish unitized vs. non-unitized 401(k) company stock investments [Maybe they viewed a non-unitized structure as not providing for a disposition to the issuer, so no 16b-3(e) exemption? That kind of focus on a technical difference in form, when the substance of the transaction would be essentially the same for an insider, would be a little maddening, but maybe that was what they were focused on.]; if there was a benefit plan issue that existed in 1996 and made the distinction substantively sensible then, but that is no longer applicable; or if I am otherwise just missing something.
-1/9/2020

RE: It may take me a little time, but I will try to reconstruct what was going on in 1996. I know some of the people who worked on those parts of the letter.
-Alan Dye, Section16.net 1/9/2020

Q: Hi Alan, The board of directors for one of our clients resolved to issue DERs to holders of RSUs on 10/17 under its existing plans. The rights accrued when and as dividends were paid on 10/17. Should those transactions have been reported on Form 4 instead of Form 5? It appears that the compliance chart and another Q&A post states Form 4 - under what circumstances (if any) can DERs be reported on a Form 5 instead? Separately, we previously reported the RSUs in Table I. Presumably the DERs get reported also in Table I under transaction code A as the transactions were approved in accordance with Rule 16b-3(d)? Thanks for your help.

RE: If the company has a DRIP for shareholders that complies with Rule 16a-11 (as almost all DRIPs do), the DER accruals would be exempt under Rule 16a-11 based on staff interpretations, and would not be reportable at all upon issuance/acquisition.
-Alan Dye, Section16.net 1/7/2020

RE: And yes regarding the manner of reporting you propose.
-Alan Dye, Section16.net 1/7/2020

RE: Thanks for the quick reply, Alan. The company does not have a DRIP. In this case, would the DERs need to then be reported on Form 4? Any circumstances where they could file on a Form 5?
-1/7/2020

RE: I can't think of an exemption that would allow them to be reported on Form 5, sorry.
-Alan Dye, Section16.net 1/7/2020

Q: We have requested signed Section 16 compliance/no form 5 due certifications from our directors and section 16 officers for many years now. Since the certification is for our internal records - and it is 2020 - is it reasonable to have directors reply by return email only (advise or confirm No filing due). Appreciate your view. Happy New Year.

RE: Funny, I've never been asked that question, but my thought is the same as yours. Item 405 calls only for a "written representation" that no Form 5 is due. I don't think that means a person has to ink a signature on paper. The representation could come by email, as you suggest, I think, or in an online completion of a D&O questionnaire.
-Alan Dye, Section16.net 1/6/2020

RE: Thank you!
-1/6/2020

Q: Originally, upon the 2017 performance awards grant, it was communicated that the performance awards would vest on 1/24/20. However, our Compensation Committee will not certify the performance conditions until after this date. Based on my review, it is my understanding that the vesting date should be the date of acquisition of the performance awards, which is the date of committee approval of these performance conditions. Would this would mean that the Form 4s would be due two business days after committee approval, regardless of what was communicated at grant?

RE: Yes, it sounds to me like it would. It sounds like the award agreements say the awards will vest on 1/24/20, if targets are met for an earlier time period, say 12/31? If payout requires committee certification/approval, though, vesting in that context means either the grantee gets the payout, if any, if employed on the vesting date, or vesting means nothing from a Section 16 standpoint because payout is still conditional.
-Alan Dye, Section16.net 1/6/2020

Q: The Form 4 will report two transaction--one is a gift that occurred couple of months ago and an option grant that occurred two days ago (which is the required filing). What date should be used for Box 3 as the Date of Earliest Transaction? The gift transaction (which is voluntary filing) or the date of the grant?

RE: The date of the grant, because only the grant is "required to be reported on Form 4." The staff gave advice, in a FAQ issued shortly after Sarbanes-Oxley imposed a two-day reporting deadline, saying Box 3 should show the date of the earliest reported transaction required to be reported on Form 4. A gift can be reported on Form 5.
-Alan Dye, Section16.net 1/6/2020

Q: Good morning, Section 16 Reporting Person’s parent died in December and was informed recently that he inherited company stock as part of the estate. Would this be a Form 4A filing? If so, what would the effective date be? Thank you.

RE: Under Rule 16b-5, the receipt of stock as an inheritance is exempt from Section 16(b). Under Rule 16a-3, the acquisition can be reported on Form 5 (or any Form 4 filed before the due date for Form 5). The effective date of the gift likely would be the date the probate court enters an order approving the executor's proposed distribution of the estate.
-Alan Dye, Section16.net 1/6/2020

RE: Thank you for the clarification of disclosure of the inherited shares on a Form 5 and not a Form 4A.

In reviewing your forms book, I will use transaction code "W" and have no need for a footnote unless you have suggested language. Again, thank you.
-1/6/2020

RE: I agree with your selection of a transaction code, and I see no reason to add a footnote. The transaction code says it all.
-Alan Dye, Section16.net 1/6/2020

Q: A debt holder negotiates with the issuer to exchange debt for equity (at a fixed ratio) in an aggregate amount exceeding 10% of the equity. They agree today that the debt holder will have the right at any time after 30 days from today to effect the exchange. I think that when the agreement is entered into today, the debt holder would acquire beneficial ownership over more than 10% of the equity. When it actually effects the exchange, I think it would be an exempt conversion in the same manner as an option with a fixed exercise price. That is, I think the agreement turns the debt into a derivative security with a fixed exchange ratio and when the investor enters into that agreement it "acquires" the equity into which it can convert the debt so that when it actually effects the conversion, the equity it acquires on conversion is not treated as "acquired" on that date. Can you please let me know if that makes sense to you? Thank you.

RE: I agree completely. When the agreement is signed, I think the debt holder should file a Form 3 reporting the debt in Table II as a derivative security. When the holder elects to convert, the acquisition of stock will be reportable, but exempt by virtue of Rule 16b-6(b).
-Alan Dye, Section16.net 12/31/2019

Q: If a current reporting person's job responsibility changes (i.e. his job title) and he will remain a reporting person, is it necessary to file a Form 4 to indicate the title change or is it only necessary to change the title with the next form filing. Thank you.

RE: No, no amendment or new report is required when an officer moves to a new insider position or assumes different duties. See Rule 16a-3(b)(2).
-Alan Dye, Section16.net 12/31/2019

Q: An investment manager tells an investor that the investment manager believes a specific company is a good investment and if the investor provides the investment manager the money, the investment manager will but the stock of that company in for the investor's account. The investment management agreement for the account provides that the investment manager has complete discretion to vote the shares in the account and whether to dispose of the shares. It also provides that the IMA cannot be terminated on less than 61 days' notice. The investment manager buys more than 10% of the company for the investor's account. Do you think that the investor has beneficial ownership over the shares in the account and would need to file a Form 3? I'd like to take the position that the investor does not have beneficial ownership over the shares since it does not have voting or investment control and cannot terminate the IMA on less than 61 days' notice. However, I wonder if the investor would be viewed as having a "veto" right over the investment such that it would have beneficial ownership. Can you please let me know your thoughts? Thank you.

RE: I agree that, if the investor contributes cash to the account for use in buying over 10% of a company's stock, the investor is not necessarily the beneficial owner of the shares for purposes of determining ten percent owner status, if the IMA is appropriately worded and the manager is free to sell the stock any time it likes, without consulting with the investor. Beneficial ownership is a question of fact, of course, so the investor needs to be able to establish that, despite the size of the holding, the manager could and would sell it without seeking the investor's input (which is sort of the veto right you refer to). Also, if the agreement provides that, if the portfolio is liquidated, the manager will return the sale proceeds to the investor instead of reinvesting it, the arrangement could be considered a "parking" arrangement, resulting in attrition of the shares to the investor under Rule 13d-3 as a scheme to evade..
-Alan Dye, Section16.net 12/30/2019

Q: Are there any volume limits on a Section 16 officer purchasing shares of an Issuer in the open market during a trading window and/or under a 10b5-1 plan? Any volume purchasing limits on family members or affiliated trusts and nonprofits? Any issues of concern?

RE: Nothing in Section 16, or Rule 10b5-1, limits the number of shares an insider may purchase. Rule 10b-18 can restrict purchases by an "affiliated purchaser" if the issuer has an ongoing stock repurchase program. If total transactions in a day or month exceed the thresholds in Rule 13h-1, the insider will be a "large trader" and have to make appropriate filings under the rule. The HSR Act imposes a filing requirement on anyone who purchases securities that push total holdings over a certain dollar amount, currently around $90 million, I think.
-Alan Dye, Section16.net 12/28/2019

Q: An investor holds 15% of the stock of an issuer and agrees to sell all 15% to a buyer. However, the buyer and the seller agree that the seller will never sell to the buyer an amount of stock that would result in the buyer holding more than 9.9%. The buyer is obligated to tell the seller once a month or some other period the amount of shares that it can buy without violating that rule and, upon that notification, the seller will sell the appropriate number of shares to the buyer. Do you think that arrangement works as a blocker to prevent the buyer from becoming subject to Section 16, or do you think that because the arrangement is with a stockholder, rather than the issuer, and the arrangement is not included in the organizational documents of the issuer that a court might not respect it? Thank you.

RE: My recollection is that, while the SEC said in an amicus brief that a blocker is more likely to be effective if included in organizational documents, courts have upheld blockers that were purely contractual. I don't recall whether any of the cases involved a blocker in a document with a stockholder rather than the issuer, but it seems the principle should be the same.
-Alan Dye, Section16.net 12/27/2019

Q: Parent and Child serve as directors of PubCo. Parent has established a Trust holding PubCo shares where Parent is Settlor, Trustee and Lifetime Beneficiary. Child purchased a Remainder Interest in Trust assets several years ago, but has no investment control over such interest. Parent and Child currently report all PubCo shares held in Trust on their Section 16 filings (and disclaim beneficial ownership in excess of their pecuniary interest). Parent is dissolving Trust, and Child will receive her purchased Remainder Interest, with remaining assets going to Parent. Should this qualify as a change in form, exempt under Rule 16a-13, even though Child will be only now be acquiring investment control over shares? Does it hurt the Rule 16a-13 argument since Parent and Child historically reported all PubCo shares held by Trust on their Section 16 filings, and going forward will only report the PubCo shares they receive in the distribution upon dissolution of the Trust? Thank you!

RE: If the child had no investment control or influence, then the shares likely weren't beneficially owned, even though reported, and it would have been fine to report them anyway. If the child didn't beneficially own shares, though, the acquisition would not qualify for the exemption, and likely would be reportable by the child as a gift. For the parent, the 16a-13 exemption likely applies, but that may depend on how the number of shares distributed to each was determined.
-Alan Dye, Section16.net 12/27/2019

Q: It is common for investment management agreements to provide that the investor can terminate the IMA on no less than 61 days' notice. That is so that the investor can take the position that it does not have beneficial ownership over the securities in its account over which a third party manager has investment and voting discretion (rather, only the third party has beneficial ownership over the shares in the account). If that investor provides notice of termination, which is effective 61 days after the date of the notice, do you think that the investor, one day after providing the notice, has beneficial ownership over all of the securities in the account since, 60 days later, control over the account will revert to the investor? Or is there an argument that because the investment manager retains investment control for 60 days, and in that period may sell some or all of the shares in the account, the investor doesn't have beneficial ownership since it doesn't have the "right" to receive any particular shares (and it would only obtain beneficial ownership on the date that the IMA terminates).

RE: I have run into this issue, and once had to address it in discussions with some plaintiffs' attorneys in a case that involved this issue and many others. I argued, and believe, that if the IMA allows the adviser to continue to managed the investments, and there isn't a provision saying the investor can direct the adviser to stop trading and deliver the portfolio in 61 days, the investor doesn't have a right to the securities in the account until the end of the 61 day period.
-Alan Dye, Section16.net 12/26/2019

RE: Thanks a lot. Was the plaintiff's attorney convinced? Do you think there is sufficient uncertainty to try to avoid the issue? Even if you think one should try to avoid the issue to avoid a 16b lawsuit, do you think it would be a reasonable reporting position to, if the account holds more than 10% of an issuer, not file a Form 3 when the notice of termination is provided, but only once the termination is actually effective)?
-12/26/2019

RE: We settled the case w/o trying to agree on any of the issues on which we had differing views. I do think it's reasonable to report, on 13D and Form 3, assuming ownership of the shares was acquired on the 61st day.
-Alan Dye, Section16.net 12/26/2019

Q: Two investors each own less than 1% of the stock of an issuer. They jointly enter into an agreement with the issuer pursuant to which each agrees that each will acquire 5% of the stock of the issuer in 30 days. Assuming that the issuer's obligation to sell the shares to the investors is not subject to any conditions other than the passage of time, I believe each investor becomes the beneficial owner of the 5% that they have the right to acquire as soon as the agreement is entered into. At that point, as well, I believe the "group" that owns more than 10% will be formed and the investors would be required to file Form 3s. I would like to think that when the shares are actually acquired by the investors from the issuer (on the 30th day following the entry into the agreement), that such "acquisition" is exempt as the transaction that makes them 10% owners, but I wonder if the formation of the "group" when the agreement is signed is the transaction that makes them 10% owners and that the actual acquisition would not be exempt. Can you please let me know your thoughts? Thank you very much.

RE: I don't think there is sufficient case law to answer the question with absolute certainty, but my thought is that, as you've concluded, the investors likely form a group when they enter into the joint agreement to buy. (There is case law saying, though, that investors who buy under a single agreement in a private placement don't necessarily form a group, because they don't share a common objective--could you have them sign separate purchase agreements?) If a group is formed, and there are no conditions to the closing, I agree that the investors likely have a right to acquire the stock within 60 days and therefore are 10% owners. I also think, though, and this is where the case law may not be sufficiently clear, that if there are no conditions to closing, the rights and obligations of the parties become fixed and irrevocable when the agreement is signed, so the "purchase" occurs on that date. I would consider filing the Form 3 within ten days of signing the agreement, reporting ownership of the underlying common stock.
-Alan Dye, Section16.net 12/26/2019

RE: Thank you.
If the group is formed when the agreement is entered into, do you think that when the shares are actually issued by the issuer to the investors, that acquisition is non exempt such that the investors would have a matchable trade if they sold within 6 months of the actual purchase? Or do you think that the since the formation of the group and the actual acquisition relate to the same shares, the actual acquisition would be treated as part of the transaction that made them 10% owners and therefore is exempt?
-12/26/2019

RE: If there are no conditions to closing, I think there is a very good argument that the entry into the agreement is the "purchase" for purposes of Section 16. Payment and delivery of the shares are, at that point, ministerial acts. I just don't know of definitive case law addressing these facts squarely--just general principles addressing when a purchase is deemed to occur
-Alan Dye, Section16.net 12/26/2019

Q: A partnership owns 15% of the stock of an issuer. The partnership agreement give the general partner sole authority to determine sales and distributions and the Fund and GP have filed a 13G and Form 3. The partnership has a single investor who separately owns 0.5% of the issuer's stock. The investor and the general partner agree that the general partner will cause the partnership to distribute all of the stock to the single investor on a set date in the future. Do you think that such an agreement would result in the partnership and the investor becoming a "group" such that when the actual distribution occurs, it is a matchable acquisition for the investor since (i) as a result of the agreement with the general partner, it became a 10% owner prior to the distribution (noting that it owned 0.5% separately) and (ii) the distribution isn't exempt under 16a-9 as a result of the CDI on distributions to single investors. I think the agreement with the general partner should not result in the investor becoming subject to Section 16 since it is similar to when one investor agrees to buy 15% of an issuer from an existing holder. I think that isn't viewed as a group since the purchaser and seller don't agree to act together, and that this is similar to this fact pattern, but would appreciate your thoughts.

RE: Maybe there are more facts and circumstances that would be relevant to the analysis, but it sounds like maybe the "agreement" involves a disposition by the partnership and an acquisition by the GP. There is case law saying that a buyer and seller don't form a group by entering into a buy/sell agreement because the two don't share a common objective relating to the issuer. Both want to transfer stock, but they don't have a common mission regarding the issuer.
-Alan Dye, Section16.net 12/23/2019

Q: Hi Alan, We have a situation where a 10% stockholder has engaged in 16(b) non-exempt sales pursuant to a 10b5-1 plan that are matchable with non-exempt purchases approximately six months ago. Pursuant to the rationale of Stella, the first day that they could trade and avoid disgorgement (i.e., six month anniversary of purchase minus one day) is tomorrow. The stockholder is already facing plaintiff's lawyers seeking disgorgement of profits pursuant to legitimate 16(b) claims in any event, but we are trying to assess the likelihood that a plaintiff's lawyer would seek disgorgement of profit from tomorrow's trades (which under Stella should not be subject to disgorgement). Is it foreseeable that a plaintiff's lawyer would pursue that disgorgement and potentially even seek to litigate over that? Balancing that risk against risks of just terminating the 10b5-1 plan. Thanks in advance

RE: I have not seen a plaintiff's attorney disagree with the six month measuring period calculation. You would want to make sure, though, that the trade isn't executed before that first day after the end of the shortswing period.
-Alan Dye, Section16.net 12/21/2019

Q: Where an insider is appointed as the executor (and is a beneficiary) of the estate of a decedent that is not a greater than 10% beneficial owner, does Section 16 apply to transactions made by the insider as executor occurring more than 12 months after the appointment of the insider? Rule 16a-2(d)(2) states that transactions after the 12-month period has expired are subject to Section 16 only where the estate is a greater than 10% beneficial owner. Prior to its amendment in 1996, Rule 16a-2(d)(2) also contained a reference to Rule 16a-8(a)(1)(ii), which related to situations where an insider was serving as a trustee of a trust, with investment control over trust securities and a pecuniary interest in those securities. Because that reference has now been removed, the rules appear to be clear that, as long as the estate is not a >10% beneficial owner, Section 16 would not apply to these transactions even if they occur more than 12 months after the insider was appointed as executor.

RE: After 12 months, the estate must report its transaction if the estate is a 10% owner, and the insider/executor must report the estate's transaction if the insider/executor has a pecuniary interest in the estate's shares.
-Alan Dye, Section16.net 12/20/2019

Q: Hi Alan, for retirement eligible reporting persons, their outstanding shares that have not vested are subject to FICA taxes (guaranteed they are going to get shares and by law the Issuer needs to collect for these taxes for future shares). Is this an immediate two business day reportable event since shares have been withheld, even though the share vesting has not yet occurred? Or is it otherwise reportable at the time of vesting or otherwise exempt? I'm not readily finding a model form for this scenario. Thanks.

RE: I've run into this issue a number of times in the last year, and have made a note to create a model form (thank you for making the same suggestion). I think the withholding is reportable at the time of "early vesting," even though the shares won't vest and pay out until later. An issue you might want to consider is whether your existing committee approval of tax withholding meets the conditions of Rule 16b-3(e), or instead you need a new committee approval because withholding will occur earlier than previously approved.
-Alan Dye, Section16.net 12/19/2019

Q: Director gifts shares in a corporation they are a director of to an irrevocable trust. The trustee is the settlor’s spouse, and the trustee makes all investment decisions. The primary beneficiary is the spouse. However, if the spouse dies before the settlor, the settlor’s adult, independent children are the beneficiaries. Can this be reported with the next Form 4 as just a change in form of ownership or must it be reported at the time of the transaction?

RE: Because the gift shifts a pecuniary interest, I think it needs to be reported as a line item. It's a gift, though, so it can be reported after the end of the FY, on Form 5. You could instead wait until the insider's next Form 4, if that's before the Form 5 due date, and include the gift in that Form 4, as a line item, putting a "V" in the transaction code column.
-Alan Dye, Section16.net 12/19/2019

Q: We recently discovered that an officer of a client for whom we file Section 16 filings reported incorrect holdings on his Form 3, filed in 2016. He initially reported shares held indirectly in an LLC, shares held directly, and shares held indirectly in a 401k. In fact, he did not own shares in a 401k at that time (nor does he now) and held more shares directly than reported. We discovered this because he sold shares recently that we weren't aware that he owned. We finally have all information (historical and current) for this filer, but we are unsure as to what we should amend. Would we amend the Form 3 and all subsequent Form 4s? All of his filings contain incorrect information. Thank you!

RE: There may be more than one acceptable approach here, but I think one approach would be to amend the Form 3, and explain in a footnote how the changes affect future reports (e.g., reporting person is amending to omit mistakenly reported 401k plan holdings, which also were mistakenly included in subsequent reports). The next Form 4 could also include a similar explanation.
-Alan Dye, Section16.net 12/19/2019

RE: Thank you - this is the answer I was hoping for!
-12/19/2019

Q: Given that Rule 30h-1(b) states that the rules under Section 16 applies to any duty, liability or prohibition imposed with respect to transactions in registered closed-end company securities, does it follow that the exemption from "beneficial ownership" under Rule 16a-1(a)(1) should apply, or because that exemption goes towards determining if a person is a "beneficial owner", as opposed to a "transaction", does the language in Rule 16a-1(a)(1) exempting certain shares from counting towards the 10% "beneficial ownership" threshold not apply for purposes of Section 30(h)? Thanks!

RE: I think all of the exemptions under Rule 16a-1(a)(1) should apply under the 1940 Act as well. Maybe post an example of what's giving rise to the issue, so I can understand the issue a little better?
-Alan Dye, Section16.net 12/18/2019

RE: If an RIA, acting on behalf of an insurance company it manages, acquires more than 10% of a class of shares of a closed-end fund (other than short-term paper) in the ordinary course of its business, without a control purpose or effect and held for the benefit of third parties or in fiduciary or customer accounts, such RIA should not have to count those shares towards its "beneficial ownership" for calculating the 10% threshold for Section 30(h) purposes? I ask because I have seen examples of persons who seem eligible to rely on this exemption (e.g., regulated entities that file 13G under Rule 13d-1(b)) still file Forms 3 and 4.
-12/18/2019

RE: Hmmm, I'm certainly no expert on the 1940 Act, but looking again at Section 30(h) and Rule 30h-1, I don't see any reason why the RIA in that circumstance could not rely on Rule 16a-1(a)(1).
-Alan Dye, Section16.net 12/18/2019

Q: An issuer is going through a reorganization. As a result, there will be a successor entity that will have a different CIK number than the issuer pre-reorganization for which Section 13 and Section 16 filings have been made. Would any Section 13 and Section 16 filings from and after the reorganization be filed as a Schedule 13D/A and Form 4 using the successor entity's CIK code?

RE: Yes, that is my understanding too.
-Alan Dye, Section16.net 12/18/2019

Q: A master limited partnership intends to restructure as a corporation. Upon completion of the restructuring, the corporation intends to file a Form 8-K under Rule 12g-3(f) as the successor to the partnership. The relative interests of the shareholders of the corporation will not be the same as they were with respect to the partnership. We understand reporting persons are required to (i) file Forms 4 as reporting persons of the partnership to report the disposition of partnership units and to indicate by checking the box in the reports that the reporting persons are no longer subject to Section 16 with respect to partnership units and (ii) file separate Forms 4 as reporting persons of the corporation to report the acquisition of common stock of the corporation. Please confirm whether our understanding is accurate. In addition, would it be necessary for the reporting persons to file Forms 3 with respect to the successor corporation and, if so, would it be prudent to file new powers-of-attorney as well? Thank you.

RE: That sounds right, based on your description of the conversion I've seen conversions that didn't result in new Forms 3 and POA's. You might confirm our shared conclusions by looking at the filing history for a company that converted in a manner similar to your conversion.
-Alan Dye, Section16.net 12/13/2019

Q: Alan, We're reporting some early grants on a Form 3 where the exercise price is exceptionally low ($0.00002). Given EDGAR won't let us go beyond 4 decimal places, how would you recommend reporting? Thanks!

RE: I would report a penny a share, or maybe .0001. At that price level, which is probably based on par value of the stock, I don't think the "overstatement" of the exercise price is material..
-Alan Dye, Section16.net 12/13/2019

Q: Insider will transfer directly owned shares to an LLC of which he is the sole manager and 100% owner, and these shares of the issuer constitute a minority of the assets of the LLC. Shortly after the transfer, insider will gift minority interests in the LLC to spouse and dependent children. I don't think the transfer to the LLC should be reportable but is the gift of minority interests in an entity that holds a minority of its assets in the issuer's securities reportable? In what form?

RE: Yes, generally a transfer of equity interests in an entity that owns issuer stock is reportable. Here, I would use transaction code "G," because the transfers are a gift.
-Alan Dye, Section16.net 12/12/2019

Q: Is there a limit of number of footnotes you can have on a form 4?

RE: I am not aware of any limit on the number of footnotes. There is a character limit within any individual footnote, however.
-Alan Dye, Section16.net 12/11/2019

RE: A call to Donnelly informed me that there is a limit of 99 footnotes. -12/11/2019

Thanks for posting that info. I can't imagine how anyone would ever hit that limit, but I will add the info to an appropriate Model Form when I update the Section 16 Forms and Filings Handbook, which I hope to do next year.
-Alan Dye, Section16.net 12/11/2019

Q: We are planning to accelerate the vesting of a portion of RSUs for purposes of covering Federal, State and FICA taxes for 2 retirement eligible Section 16 officers. The grant agreement allows for accelerated vesting of the RSUs. The original grant of the RSUs was reported as a derivative security on Table 2 and footnoted that the RSUs would cliff vest three (3) years from the date of the grant. The reporting person(s) will not receive any of the underlying common shares that will be accelerated - they will all be cash settled for paying the tax/FICA obligations. How should this be reported on the Form 4? What code is used to move the RSUs that are accelerated to Table 1? Is Code F used to show the shares then withheld for state and federal taxes? Any net shares after taxes will then be cash settled to cover the FICA obligations. The reporting person will not receive any common shares.

RE: Table II should show the disposition of RSUs, using transaction code M, and Table 1 should show the acquisition of the same number of shares, using the same transaction code. All shares withheld should be reported as disposed of in Table I, using transaction code F.
-Alan Dye, Section16.net 12/11/2019

RE: Only the portion of RSUs that are being accelerated are disposed using transaction code M on Table 2 and shown on Table 1 as acquired using the same transaction code? The remaining RSUs from the original grant will vest at this time. Will a footnote that the shares are being accelerated be sufficient or do we need further explanation? Will a footnote that the shares are being withheld for tax obligations sufficient for each of the transactions on Table 1? Thanks, Alan!
-12/11/2019

RE: I thought only a portion of the original grant was vesting, and only because of acceleration. Whatever number of RSUs are vesting, I agree that the disposition of those RSUs and the acquisition of the underlying common stock should be reported, using transaction code M. A footnote saying vesting is being accelerated should be sufficient.
-Alan Dye, Section16.net 12/11/2019

Q: Investor is purchasing shares in an underwritten secondary public offering such that, following the offering, investor will own greater than 5%. Following pricing (but prior to close of the offering) the investor sells shares. 1. When would the investor be deemed to have acquired the shares in the offering- on the day of pricing/commitment of the public offering or on the day of close? 2. If the sales made between pricing and close take the investor to below 5%, does the investor have any filing obligation? If you say that the investor acquired beneficial ownership at pricing, then the filing obligation would have arisen prior to the sales and the filing (assuming it was made prior to the sales) would not reflect the sales. If you say the trigger date is closing, then the filing has arguably not been triggered because many of the shares have been sold- or would you argue that for an instant in time following close all of the shares are beneficially owned-regardless of the need to settle the shares a moment later? 3. If you say that investor has acquired beneficial ownership at pricing, how would the investor compute its percentage ownership prior to close? Could he assume that all of the shares issuable in the offering to investors in the offering are outstanding even though those shares haven't yet been issued?

RE: 1. There are conflicting views on this question, but in my view the shares aren't acquired until closing, because there are material conditions to closing.

2. Because of my response to 1, I think the investor never goes over 5% so never has a filing obligation. Bear in mind the staff's CDI regarding possible ownership of share even after the sale if the sale follows a record date and the seller therefore has the power to vote at an upcoming meeting.

3. I would include in the denominator all of the shares to be issued in the offering. If the filer concludes that there are no material conditions to closing, resulting in beneficial ownership at pricing, then all other purchasers would be beneficial owners too. I would explain my math in the filing, which I always do in any event.
-Alan Dye, Section16.net 1/28/2014

RE: Thanks. With respect to question 2, what if the investor delivers shares acquired at closing to settle the sales made after pricing? Would you say that the investor NEVER acquires those shares, even at close of the offering, because they are being delivered to settle the sale trade made after pricing? Or are they deemed "owned" for a moment of time before being delivered in satisfaction of the previous sale.
-1/28/2014

RE: It seems to me the shares have to be owned before they can be delivered, even if the events happen simultaneously. I've heard the argument made, when an insider with a short position buys stock to cover the short, that the buy isn't a reportable purchase, because the shares go straight to the person from whom the shares previously sold were borrowed, but I've never considered that argument persuasive. It seems to me the argument here would have a similar weakness.
-Alan Dye, Section16.net 1/28/2014

RE: Would the analysis change for #1 if it was an underwritten follow on primary public offering?
-5/13/2019

RE: I don't think so, assuming the shares to be purchased will come solely from the underwriters, and consist solely of underwritten shares. If the purchase order will be executed in the open market even if the offering doesn't close, then I think the purchase might be deemed to occur on the trade date.
-Alan Dye, Section16.net 5/14/2019

RE: Similar to the above question. Assume an issuer has 100 shares outstanding. It then sells 100 shares in an IPO. An investor who didn’t own any shares prior to the IPO buys 25 from the underwriter (or in the secondary market prior to the closing). Then, prior to the closing, the investor sells all 25 shares. At the closing, it isn’t clear to me if the shares go to the investor’s account and then immediately get sent to the buyer, or if the shares go directly to the buyer and never go to the investor’s account. Do you think the investor has an obligation to file a Form 3 and Form 4 (as well as a Schedule 13G), or could the investor take the position that it never has beneficial ownership over any of the shares and therefore not make any filings? Thanks.
-11/14/2019

RE: Won't the question depend on the mechanics of settlement of the two transactions? If a person buys shares in the when-issued market, and then sells the shares before the IPO closing, the sale may close later than the purchase, meaning the person beneficially owns the stock for a period of time. If both trades settle on the same date, though (e.g. on the IPO closing date), I think there is a strong basis for saying the person didn't own more than 5% because the ownership snapshot may be taken at the end of the trading day.
-Alan Dye, Section16.net 11/17/2019

RE: Thank you. I thought that, but for some exceptions where the SEC has given no-action relief, if one buys 6% at 9 am and then sells 2% at 3 pm on the same day, leaving the person with 4% at the end of the day, the person is still required to file a 13G listing 4%. Is that not the case?
-11/18/2019

RE: I'm thinking and may want to consult. Can you cite me to the letters you're referring to?
-Alan Dye, Hogan Lovells US LLP 11/18/2019

RE: These are the no-action letters that were referenced in the prior post. Any additional thoughts on this question would be appreciated.

No-Action Letter, George K. Baum & Co. (Oct. 04, 1986)
No-Action Letter, J.P. Morgan & Co. Inc. (May 07, 1993)
No-Action Letter, Goldman, Sachs & Co. (Dec. 30, 2008)
-12/6/2019

RE: I read the no-action letters, and consulted with two lawyers who once worked in Corp Fin's Office of M&A. We all agree that the no-action letters are limited to their facts, and don't necessarily support the position that intraday trading that takes an investor over 5% (or 10%) but back under the threshold before the end of the trading day does not trigger a filing obligation. One of the lawyers believes, however, that the staff has offered that advice internally. It makes sense to me that the staff might take that position, for purposes of both Section 13(d) and Section 16. Have you considered asking the question, using the staff's online form?
-Alan Dye, Section16.net 12/10/2019

Q: Do you think that signing an agreement or public commitment to follow the voting recommendations of an environmental, social and governance (ESG) advocacy organization, where the ESG organization does not itself own any shares, could nevertheless make you a group with other investors who have similarly agreed with the ESG organization (but not with you) to follow the ESG organization’s voting recommendations? For purposes of this hypothetical, assume that the investors have not reached any agreement with each other, but, because the ESG organization publicly lists all of the parties who have signed on to such a commitment, they will know that other investors have similarly committed to follow the ESG organization’s recommendations. Are you aware of any support for the position that an investor has not formed a group in this type of situation? Separately, in the same context, do you think that it is helpful to the position that a group has not been formed if such a commitment is a blanket one without respect to the securities of any specific issuer? For example, assume that the investor agrees to sign on to a public statement committing to vote against the director slate of every issuer that it invests in so long as that issuer does not sign on to the ESG organization’s recommended conflict minerals policy. Given that Rule 13d-5 speaks to acting together with respect to the equity securities of “an issuer,” does a blanket commitment with respect to all issuers support the position that, because no agreement has been reached with respect to any specific security, there is no agreement to act together as a group with respect to any specific security?

RE: I see the issue, and groupness is always a question of fact (meaning courts can pick and choose the facts they deem relevant), but it seems to me that there is no agreement between or among the shareholders in this context, and I'm not sure there is any "agreement" at all, just individual expressions of an intention to support a particular agenda at any and all companies. And, as you say, the "agreement," if there is one, does not relate to an identified "issuer," at least not until the issue arises at a particular issuer. For filing purposes, I'm not sure how anyone would know who else is a member of the group, or how many shares they own.
-Alan Dye, Section16.net 12/8/2019

Q: Dear Alan, If a Section 16 reporting person donates shares to his family foundation, and then the foundation sells the shares, is the sale reportable on Form 4? Or just the donation? Also please point me to a model form for this transaction. Thanks for your help.

RE: Only the contribution of company stock to the foundation is reportable by the insider. See Model Forms 52 and 233.
-Alan Dye, Section16.net 12/5/2019

Q: An officer who recently resigned had ESPP shares that would have been reported in her next due Form 4. I assume there's no need to file a Form 4 solely to reflect the ESPP shares addition in light of her resignation, and these would only be reflected in her b.o. if a Form 4 is otherwise required during the six months following her resignation?

RE: Yes, exactly. If the acquisitions were exempt, there is no need to file a Form 4 to report them or the holding.
-Alan Dye, Section16.net 12/4/2019

Q: How do you count for the short swing profit? All I've read states matching purchase or sale within six months or any period less than six months. So if a Sec 16 filer purchased shares on 6/15/19, does the six month end on December 14? Can he sell on Dec 15 or 16 without hitting the short swing rule? Thank you.

RE: Count six months forward and then one day back to determine the first date on which it is safe to trade. So, if a purchase occurs on June 15, the first date the insider can sell outside the short swing period is December 14.
-Alan Dye, Section16.net 12/3/2019

RE: Thank you!!! I reviewed Model Form 65 (Section16.net) and did the numbers. Thank you so much for your confirm.
-12/3/2019

Q: Issuer has a non-qualified deferred compensation plan with a rabbi trust which currently provide executives the opportunity to receive a choice of mutual fund investment returns. Issuer wants to add an opportunity to invest in common stock. The issuer would have the rabbi trust purchase the common stock and the executive would be treated as holding the phantom stock units. The executive would receive distributions in cash and not stock. Executives may transfer all or some of their current investment from the mutual funds to the common stock fund and there is no new money in this plan. I have read Forms 124-131 but was hoping for some confirmation on the following two aspects of this arrangement: 1. The transfer into the stock account of existing funds (not new money) strikes me as a Discretionary Transaction and therefore 16b-3(f) would be the relevant exemption, if applicable. Even if the compensation committee were to specifically approve the transaction it would be a Discretionary Transaction as a volitional intraplan transfer. This is the result whether or not the executive agrees that funds invested in phantom stock are not eligible for intra-plan transfer. 2. The executive will then receive his payout under one of 3 scenarios: a. Pursuant to a pre-determined schedule (in-service or post-service): i. No intra-plan transfers allowed (single fund): In this circumstance, if the distribution is approved by the compensation committee as part of the initial approval of the plan (or the plan amendment) or is subsequently specifically approved by the compensation committee, then the distribution and “sale” of common stock would be exempt under 16b-3(e) (and you would use reporting codes M and D in Tables I and II) ii. Plan allows for intra-plan transfer (multi-fund): This is a discretionary transaction. The election to cash out the phantom stock is deemed to occur on the date of pay-out, not the date on which the executive initially elected the pay-out dates and you must see if there is an opposite-way election under the plan or any other plan of the issuer within 6 months. 1. If there wasn’t an opposite-way election exempt under 16b-3(f) and report on one line with code I. 2. If there was an opposite-way election not exempt under 16b-3(f) and report in Tables I and II with codes X and S. b. Change of control (payout immediately upon transaction, not in connection with termination): i. No intra-plan transfers allowed (single fund): In this circumstance, if the distribution is approved by the compensation committee as part of the initial approval of the plan (or the plan amendment) or is subsequently specifically approved by the compensation committee prior to the closing of the transaction then the distribution and “sale” of common stock would be exempt under 16b-3(e) (and you would use reporting codes M and D in Tables I and II) ii. Plan allows for intra-plan transfer (multi-fund): Is this a discretionary transaction for which you would follow the analysis above or is it not “volitional”? Are there exemptions available? c. death, disability, retirement or termination of employment: i. No intra-plan transfers (single fund): In this circumstance, if the distribution is approved by the compensation committee as part of the initial approval of the plan (or the plan amendment) or is subsequently specifically approved by the compensation committee prior to the distribution, then the distribution and “sale” of common stock would be exempt under 16b-3(e) (and you would use reporting codes M and D in Tables I and II) ii. Plan allows for intra-plan transfer (multi-fund): This is not a discretionary transaction and will be exempt under 16b-3(e) if approved in advance by the compensation committee. The initial plan approval will be sufficient if the distribution is pursuant to the initial pay-out election or the compensation committee could later approve the payout election specifically. I understand there is somewhat of an open issue as to whether the sale by the issuer of the common stock in the rabbi trust to close out the phantom stock position is a Form S-3 transaction by the issuer or a Form 144 transaction by the affiliate, but what are people doing here in practice? Thanks in advance for your assistance.

RE: 1. I agree with this conclusion.

2.a.i. I agree.

2.a.ii I agree with this analysis, provided that the election is revocable until executed. The election is deemed made when it becomes irrevocable.

2.b.i. I agree.

2.b.ii. I think that, even though the cash-out here would not be "volitional" in the ordinary sense, the fact that the insider goes into the plan knowing of the possibility makes the transaction a discretionary transaction. I based that on this staff C&DI:

223.01 If, pursuant to the terms of a plan, a transaction to re-balance holdings among accounts other than the issuer equity securities account results in a transfer of assets into or out of an issuer equity securities account, the transaction will be a Discretionary Transaction, subject to Rule 16b-3(f). [May 23, 2007]

c. I agree.

Because the stock is owned by the issuer, not the insider, I don't think Rule 144 applies. I think the staff leans toward S-3, but I also think the issuer community isn't focused on the issue and often complies with neither, treating the trust as independent

-Alan Dye, Section16.net 11/8/2008

RE: A couple of additional twists:

1. If the phantom units are to be settled in stock instead of cash then the settlement seems like it would either be exempt under 16b-6(b) (and potentially 16b-3(d)). The plan (as approved by the Compensation Committee) would have an irrevocable choice between cash and stock payout at the time that the phantom stock fund is added as an option under the plan. Assuming that someone elects stock, how would this be reported considering the intraplan transfer into the phantom stock fund is a discretionary transaction? I was thinking of simply reporting at the time of the intraplan transfer in Table I using Code I and then not reporting settlement. Does that work? Alternatively it seems I could report the initial intraplan transfer in Table II (Code I) and then settlement in Table I and Table II (Code X or M?). American Bar Association (December 20, 1996) Q.4(d)(3)

2. If the plan (as approved by the Compensation Committee) states that all compensation exceeding a certain amount will be deferred into the phantom stock fund as new money, I would think this meets the requirements of Instruction 3 to 16b-3 to be an exempt transaction under 16b-3(d) and therefore could be reported in Table I using Code A. A couple of complications in that the plan may be approved mid-year and therefore the election may not be made before the year in which the compensation to be deferred will be paid. Also, the payout schedule may not be fixed at the time of the plan approval, but I read the ABA letter to state that this is relevant only to the 16b-3(e) disposition exemption which isn’t relevant given that the units will be stock settled.
-11/19/2008

RE: 1. Because payout will have to occur in stock, I would report the acquisition in Table I, as you describe. This assumes that the insider can't transfer the company stock balance into an alternative investment prior to payout.

2. I agree. Unfortunately, the staff's response to the ABA letter sets forth the conditions/restrictions in a way that sometimes makes it difficult to comply to the letter. I don't think a mid-year plan runs afoul of Rule 16b-3(d), though.
-Alan Dye,Section16.net 11/19/2008

RE: Can you qualify for the 16b-3(f) exemption if the rabbi trust trustee purchases the shares in the open market?
-11/26/2008

RE: Yes, I think so (but I understand the concern). The insider's transfer is merely a book-entry transaction, because the plan is unfunded and the shares in the trust belong to the issuer, not the insider. So, the insider's election to transfer isn't a sale by the insider into the open market.
-Alan Dye, Section16.net 11/26/2008

RE: Based upon the previous responses in this topic:

1. Assuming open market purchases of common stock, how should the price be reported in Table I (Code I) for the related stock-settled phantom stock unit? Would the purchase price reporting be similar to Model Form 126 (weighted average) only we would use Table I instead of Table II as used in Model Form 126.

2. In addition, given that this transaction may have multiple same-day, same-way open market purchases, do you think that the same rules as outlined in the Society of Corporate Secretaries & Corporate Governance Professionals: No Action Letter (June 25, 2008) would apply to an irrevocable intraplan transfer into a phantom stock fund? Also, what are your thoughts if the purchases fell outside the 100 cent window in this scenario?
-12/3/2008

RE: Because the transactions by the rabbi trust are for the issuer's account, not the insider's, and are for the purpose of establishing a single price and an aggregate number of shares for the insider, I think the insider's acquisition of phantom stock is reportable on one line, as a single purchase, and therefore is not covered by the staff's letter to the Society.
-Alan Dye, Section16.net 12/3/2008

RE: If an issuer common stock investment alternative (a rabbi trust would acquire shares) is added mid-year (the addition would be approved by a compensation committee consisting solely of non-employee directors) to an existing non-qualified deferred compensation plan, and an insider (who made an irrevocable election prior to the start of the year to defer compensation under the plan) then elects mid-year to begin to allocate a portion of the insider's contributions (new money) to the issuer common stock investment alternative, would the subsequent periodic "new money" acquisitions be exempt under 16b-3(d)? I think that is the what reporting principle (17) of Form 141 indicates, but would like your thoughts. [Form 141. . . (17) Election To Change Level Of Contributions To Phantom Stock Fund Has No Section 16 Consequences. An insider's election under a deferred compensation plan to allocate more or less of the insider's plan contributions to the phantom stock fund, like the initial election to participate in the plan (see Reporting Principle (1) above), is not reportable, does not constitute a discretionary transaction for purposes of Rule 16b-3(f), and otherwise has no consequences under Section 16.]

Assuming that deferred amounts deemed invested in the company stock will not be eligible for intra-plan transfers out the company stock fund alternative, and that distributions could be made only in company stock, could the investments then be shown in Table I as company stock, and in that case would the distributions of company pursuant to the plan NOT require a Form 4?
-12/2/2019

RE: I think the answer is yes to both questions you raise.
-Alan Dye, Section16.net 12/2/2019

Q: A major law firm has suggested that approval of a share withholding policy (approved by the compensation committee) that directs that the company withhold shares upon the vesting of restricted stock in order to cover taxes is a practical, albeit belts and suspenders, approach to deterring litigation on this topic. The company in question already has compensation committee approved equity award agreements that provide that the award holder can elect to have shares withheld to cover taxes. Your thoughts on the practical benefits (any detriments?) of adoption of such a share withholding policy?

RE: If the committee's action will have the effect of making withholding automatic, and override the provision of award agreements providing that insiders can elect withholding, then the committee's action does avoid the arguments the plaintiffs have been making. I don't think there is much risk in allowing insiders to elect withholding. The "problem" provision is one that allows "the company" to decide whether to withhold shares, or that "the company" can override an insider's election. The only downsides to automatic withholding are (1) the insider can't elect to pay cash, and hold more company stock instead (e.g., to meet stock ownership guidelines) and (2) the company has to come up with its own cash to pay the withholding.
-Alan Dye, Section16.net 11/26/2019

Q: A company has had a practice of reporting RSU awards net of taxes. So, rather than reporting the number of shares awarded, then disclosing the number withheld for taxes, it was just reported as one number with a footnote that it is the net number of shares after the estimated tax withholding. This has been done for years. What do you suggest to correct this?

RE: The withholding wouldn't be known until vesting, right, so the company must have been reporting the full number of shares at grant, and the question you're asking relates to the reporting ov vesting? Or is the initial award being reported on a net basis, say holding back X% of the award and explaining the netting in a footnote? -Alan Dye, Section16.net 11/26/2019

RE: Most of these awards vest 1/4 on the award date, then annually on the next 3 anniversaries.

The award is reported at time of grant/first vesting and is reported as a net amount. For instance, if the grant was for 3,500 shares, the amount reported is 2,000, with a footnote stating the amount is shown net of the number of shares expected to be withheld to cover the estimated income taxes due on vesting. The full number of the grant is never reported.
-11/26/2019

RE: There are a lot of ways the past reporting deficiencies might be addressed. One way, of course, would be to amend all of the prior filings to report the gross number of shares, and to file a later (and late) Form 4 reporting the actual withholding. I suspect no one has an appetite for that level of correction, recognizing both the immateriality of the information at this point and the fact that even "full" reporting only sets the record straight, and doesn't cure the fact that the insider has failed to report timely. Among the other alternatives might be to correct the reporting of RSUs prospectively. In that event, the first Form 4 filed for each insider might (or might not) include a footnote indicating that prior reports of RSU awards omitted a total of X RSUs that were withheld to pay taxes upon vesting. There is no easy or single answer to the question how best to address the situation, and you may have better ideas than the ones I've suggested.
-Alan Dye, Section16.net 11/26/2019

Q: An Executive Officer and Section 16 reporter has an established donor advised fund (“DAF”) to which he has previously contributed issuer common stock. The insider plans to establish a charitable lead annuity trust (“CLAT”) in order to satisfy his charitable intent over a 15-year term. Issuer common stock and other equity securities will be contributed to the CLAT. The CLAT will establish an annuity and contribute cash to the insider’s DAF. A bank & trust will serve as trustee to the CLAT. An individual from the bank & trust serves as the insider’s financial advisor. The insider will have the ability to remove the trustee, but the successor trustee must be a nonsubordinate entity. The residual beneficiaries of the CLAT are the insider’s three adult children in equal shares. The CLAT is irrevocable. The insider may have a right to substitute CLAT assets, but there is no plan to substitute issuer common stock while the settlor remains an insider. If the insider does not have influence or control over the trustee’s actions, the insider should report the transfer of issuer stock to the CLAT as a gift, correct?

RE: Yes, I agree that the transfer will be reportable as a gift. I think the only issue is whether the insider remains the beneficial owner of issuer securities contributed to the CLAT, and I agree that the answer is no so long as the insider doesn't influence the trustee's investment decisions.
-Alan Dye, Section16.net 11/25/2019

Q: An insider indirectly beneficially owns in excess of 10% of his company's shares through various irrevocable trusts (none of the trusts individually hold 10% or more) for which he is a co-trustee with a family member and the beneficiaries are his independent, adult children. He will soon be replaced as co-trustee by an unrelated third party (the same third party will be a co-trustee on each of the trusts), so he wouldn't have investment control over the shares. I would appreciate your view of a few reporting issues. 1. The insider's resignation as a trustee itself is not reportable. 2. The insider should continue to report the shares as indirectly held, because his wife will be a trustee, although he may choose to clarify the trustee arrangements in a footnote. 3. A Form 3 could be filed for the trusts as a group holding in excess of 10% of the shares. We do not expect any formal agreement for the trusts to act together, and perhaps their future sales will not be coordinated, but given the overlapping trustees and likelihood that they will act in parallel, reporting would be the safe approach. 4. If the trusts file, the trustees should do so as well, but the new co-trustee who does not own any shares directly, could report no securities are beneficially owned.

RE: 1. I do agree. To my knowledge, the staff has never addressed this question, but Peter Romeo and I have said in our publications that we think no Form 4 is required in this circumstance.
2. I agree.
3. That's certainly a conservative and safe position, but I don't think it's necessarily the only reasonable conclusion to reach. I think the question is whether the trustees will agree to cause the trusts to act together to pursue a common objective relating to the stock.
4. I agree, if the new co-trustee is not a beneficiary of the trust, directly or through family members.
-Alan Dye, Section16.net 11/22/2019

Q: Is 16(b) applicable to all sales within 6 months prior to or after a small acquisition, or is the potential 16(b) liability only with respect to sales occurring AFTER a small acquisition? The R&D materials suggest that there is no 16(b) exemption at all for 16a-6 acquisitions, but the language of the rules seems to only apply 16(b) to sales occurring after the 16a-6 acquisition. Thanks.

RE: I believe a small acquisition is matchable with any sale occurred within six months before or after the small acquisition. Only a sale within six months after the small acquisition terminated the reporting deferral, but I think the rationale there is that the insider doesn't need the reporting deferral once a non-exempt disposition occurs, because the insider has file a Form 4 anyway to report the sale.
-Alan Dye, Section16.net 11/22/2019

Q: A master limited partnership (MLP) and its general partner (GP) are both publicly traded reporting companies. A director (Section 16 insider) of the GP buys limited partner units of the MLP. The director is not an officer or director of the MLP, after the transaction owns less than 5% of the MLP's outstanding limited partner units and historically has not been considered a Section 16 insider for the MLP. Is the purchase of the MLP limited partner interests by the director required to be reported?

RE: If the director is not functioning as an officer or director of the MLP, then the directo doesn't need to report transactions in LP units, at least not at the MLP level. If the LP units are convertible into shares of the GP, though, the LP units may be "derivative securities" of the GP, making transactions in the LP units reportable by the director at the GP level (as with Up-C's).
-Alan Dye, Section16.net 11/21/2019

Q: Issuer granted RSU that can be settled only in cash only. Each RSU entitles the reporting person to a cash amount equal to one share of common stock on the vesting date. The initial grant of such RSU was reported in Table II as a derivative security. The award agreement provides that the RSU will be settled within 2 weeks of vesting. How should we report vesting and settlement? Do we need to report a disposition of the derivative security in Table II upon vesting of the RSU and acquisition of common stock in Table I, and to report the disposition of common stock upon settlement, or can we skip reporting the vesting and just file a Form 4 upon settlement to show disposition of RSU in table II?

RE: In my view, cash-settled RSUs remain derivative securities until the service condition has been satisfied AND the price payable to the insider is knowable. If, in your situation, the price the insider will receive is based on the market price of the stock on the date of vesting, then a Form 4 would be due (reporting, as you say, the disposition of the RSUs and the acquisition and disposition of common stock), within two days of vesting. If pricing won't occur until settlement, though, I don't think a Form 4 is due until settlement. There would be no obligation to report the "vesting" as a disposition of RSUs and acquisition of common stock, followed later, on the settlement date, by another Form 4 reporting the disposition of the common stock.
-Alan Dye, Section16.net 11/21/2019

Q: Is there any de minimis exception for requiring an amended Form 4, for example if the sale price is off by a penny but all other information is correct?

RE: Misstating the price involved in a transaction can be a problem, or at least enter into gray areas, but I would treat a one-cent error as clearly immaterial, and would not amend the report, if the transaction is not matchable with a non-exempt, opposite way transaction within the prior or succeeding six months.
-Alan Dye 2/3/2005

RE: Is there a de minimis amount that doesn't require a report to be amended? Assume the transaction is not matchable with an opposite way transaction within the prior or succeeding 6 months. Thank you!
-1/24/2007

RE: The staff has said that a de minimus error in reporting may not be disclosable as a delinquency under Item 405, but they haven't said that the report does not need to be amended. Nevertheless, minor errors in totals often are corrected in the insider's next Form 4, with a footnote explaining the adjustment. I suspect that opinions as to what's a small enough number to excuse an amendment are all over the lot.
-Alan Dye 1/24/2007

RE: Do you have any thoughts regarding whether over reporting by 100 shares on a total of approximately 40,000 shares would be considered de minimis and could be handled on the next Form 4 by correcting the total and dropping a footnote, or if an amendment is required/is the better practice? Thank you.
-11/19/2019

RE: In my view, an error of 100 shares is de minimis in this context (and most others).
-Alan Dye, Section16.net 11/19/2019

Q: A 10% owner agrees to buy shares from the issuer at $15/share and the purchase is subject to shareholder approval. At the time the 10% owner agrees to buy the shares, the shares are trading at $15/share. Prior to shareholder approval, the 10% owner assigns that obligation to buy the shares to another person. At the time of the assignment, the shares trade at $17/share. The 10% holder never buys the shares (since, after receipt of shareholder approval, the other person does). Do you think that the 10% owner entering into the agreement and then assigning the obligation could be viewed as a purchase and sale? Would it matter if the 10% holder was paid consideration for the assignment? I think that since the agreement to buy shares is subject to a contingency outside of the 10% holder's control, neither the agreement to purchase nor the assignment to the other person should be viewed as a purchase and sale, even if the 10% holder receives consideration for the assignment. I would greatly appreciate your thoughts. Thank you.

RE: I think this fact pattern, which isn't all that unusual, raises some difficult issues, similar to those raised when a 10% owner of a SPAC buys and sells SPAC warrants just before stockholders approve the acquisition that makes all the warrants exercisable. There is a strong basis, in my view, for treating the agreement in this case as not a reportable interest in an issuer security, such that the contract may be entered into and sold (or assigned) without having to file a Form 4. If an issuer or shareholder ever bought a 16(b) action, though, I don't know if the court might be persuaded that the contract was a derivative security, or represented a purchase and sale despite the existence of material conditions to closing. Maybe you or others have a point of view to share.
-Alan Dye, Section16.net 10/20/2019

RE: Thank you. I believe that generally, if an insider has a right to purchase shares that are subject to a contingency outside of its control, the insider is viewed as not having a pecuniary interest in those shares until the contingency occurs (which would then be viewed as a purchase), but I think that is based on case law, not a rule (but please correct me if I am wrong).

I would like to think that general rule would apply here, but I have some concern that if the insider is actually paid to assign the right, it looks like disgorgeable profit.
-10/20/2019

RE: I see the issue, and the current state of the law, as you do.
-Alan Dye, Section16.net 10/20/2019

RE: Assuming that if a Section 16 insider agrees to buy equity of the issuer only if an event outside of the insider's control occurs (e.g., stockholders approve a deal or a deal receives regulatory approval), the entry into the agreement is not a reportable or matchable transaction (for the reasons described above), is the insider deemed to acquire those shares both for reporting and pecuniary interest purposes once the condition is satisfied? Thank you.
-11/18/2019

RE: For reporting purposes, yes, the acquisition is deemed to occur when the condition is satisfied (assuming there are no other conditions to closing). Whether that also will be the date of purchase for Section 16 purposes is uncertain under case law, in my view. It's possible the purchase date might relate back to the date the conditional agreement was entered into.
-Alan Dye, Section16.net 11/18/2019

RE: As you note, frequently in SPACs the founders own warrants that become exercisable only after the completion of an acquisition (and the acquisition requires shareholder approval). In that situation, if the closing of the acquisition (or, more technically, the approval of the shareholders and the satisfaction of the other conditions to the acquisition) is considered a non-exempt purchase of the shares into which the warrant can be exercised, does that mean that if the founders exercise the warrants and sell the shares received upon exercise within 6 months of the closing, they could have short swing profit disgorgement (i.e., the deemed purchase of the shares underlying the warrants when the acquisition occurs and the sale of those shares)? Is a way to avoid this by having he issuance of the warrants approved under Rule 16b-3?
-11/19/2019

RE: Yes, I do think there's a risk that a court would say that the satisfaction of the conditions to exercise results in a "purchase." (I also think a court might say the date of the purchase relates back to the date of acquisition of the warrants, based on case law in other contexts, but still the risk of a different outcome exists.) If the warrant holder is a director or officer of the SPAC, though, I do think the "purchase," whenever it is deemed to occur, can be exempted under Rule 16b-3.
-Alan Dye, Section16.net 11/19/2019

Q: The company granted certain RSUs to officers under a stock performance program, and such program includes dividend equivalent rights (DER). The DER will accrue on the dividend payment date, at which time the company will grant additional RSU (subject to the same vesting schedule) to the officers based on the value of the dividend accrued. The initial RSUs were reported in Table I as they were settled only in stock. The company determined that a Form 4 for the DER will be required on the dividend payment date as there are no applicable exemption, and such DER will be reported in Table I. What code should be used for this purpose? "J"?

RE: If the accrual of DERs was approved in accordance with Rule 16b-3(d), as is usually the case, the transaction code would be "A." (See the Note to Rule 16b-3 regarding "subsequent transactions" that don't require another approval.). If the accruals don't qualify for the exemption, I agree that "J" is appropriate
-Alan Dye, Section16.net 11/18/2019

Q: An insider hold cash settled equity swaps. The swaps settle at maturity. However, prior to the maturity date, the parties reset the interest rate on a monthly basis. Does the reset of the interest rate create an interim event that is reportable?

RE: Not in my opinion. Assuming the reset isn't designed to disguise a repricing or early settlement of the swap, I don't think the amendment is "material" to the terms of the swap from a Section 16 standpoint. There is some case law on when an amendment to a derivative constitutes a cancellation and reissuance, but I don't think the case law provides much guidance on your question.
-Alan Dye, Section16.net 11/18/2019

Q: Investor is purchasing shares in an underwritten secondary public offering such that, following the offering, investor will own greater than 5%. Following pricing (but prior to close of the offering) the investor sells shares. 1. When would the investor be deemed to have acquired the shares in the offering- on the day of pricing/commitment of the public offering or on the day of close? 2. If the sales made between pricing and close take the investor to below 5%, does the investor have any filing obligation? If you say that the investor acquired beneficial ownership at pricing, then the filing obligation would have arisen prior to the sales and the filing (assuming it was made prior to the sales) would not reflect the sales. If you say the trigger date is closing, then the filing has arguably not been triggered because many of the shares have been sold- or would you argue that for an instant in time following close all of the shares are beneficially owned-regardless of the need to settle the shares a moment later? 3. If you say that investor has acquired beneficial ownership at pricing, how would the investor compute its percentage ownership prior to close? Could he assume that all of the shares issuable in the offering to investors in the offering are outstanding even though those shares haven't yet been issued?

RE: 1. There are conflicting views on this question, but in my view the shares aren't acquired until closing, because there are material conditions to closing.

2. Because of my response to 1, I think the investor never goes over 5% so never has a filing obligation. Bear in mind the staff's CDI regarding possible ownership of share even after the sale if the sale follows a record date and the seller therefore has the power to vote at an upcoming meeting.

3. I would include in the denominator all of the shares to be issued in the offering. If the filer concludes that there are no material conditions to closing, resulting in beneficial ownership at pricing, then all other purchasers would be beneficial owners too. I would explain my math in the filing, which I always do in any event.
-Alan Dye 1/28/2014

RE: Thanks. With respect to question 2, what if the investor delivers shares acquired at closing to settle the sales made after pricing? Would you say that the investor NEVER acquires those shares, even at close of the offering, because they are being delivered to settle the sale trade made after pricing? Or are they deemed "owned" for a moment of time before being delivered in satisfaction of the previous sale.
-1/28/2014

RE: It seems to me the shares have to be owned before they can be delivered, even if the events happen simultaneously. I've heard the argument made, when an insider with a short position buys stock to cover the short, that the buy isn't a reportable purchase, because the shares go straight to the person from whom the shares previously sold were borrowed, but I've never considered that argument persuasive. It seems to me the argument here would have a similar weakness.
-Alan Dye 1/28/2014

RE: Would the analysis change for #1 if it was an underwritten follow on primary public offering?
-5/13/2019

RE: I don't think so, assuming the shares to be purchased will come solely from the underwriters, and consist solely of underwritten shares. If the purchase order will be executed in the open market even if the offering doesn't close, then I think the purchase might be deemed to occur on the trade date.
-Alan Dye, Section16.net 5/14/2019

RE: Similar to the above question. Assume an issuer has 100 shares outstanding. It then sells 100 shares in an IPO. An investor who didn’t own any shares prior to the IPO buys 25 from the underwriter (or in the secondary market prior to the closing). Then, prior to the closing, the investor sells all 25 shares. At the closing, it isn’t clear to me if the shares go to the investor’s account and then immediately get sent to the buyer, or if the shares go directly to the buyer and never go to the investor’s account. Do you think the investor has an obligation to file a Form 3 and Form 4 (as well as a Schedule 13G), or could the investor take the position that it never has beneficial ownership over any of the shares and therefore not make any filings? Thanks.
-11/14/2019

RE: Won't the question depend on the mechanics of settlement of the two transactions? If a person buys shares in the when-issued market, and then sells the shares before the IPO closing, the sale may close later than the purchase, meaning the person beneficially owns the stock for a period of time. If both trades settle on the same date, though (e.g. on the IPO closing date), I think there is a strong basis for saying the person didn't own more than 5% because the ownership snapshot may be taken at the end of the trading day.
-Alan Dye, Section16.net 11/17/2019

RE: Thank you.
I thought that, but for some exceptions where the SEC has given no-action relief, if one buys 6% at 9 am and then sells 2% at 3 pm on the same day, leaving the person with 4% at the end of the day, the person is still required to file a 13G listing 4%. Is that not the case?
-11/18/2019

RE: I'm thinking and may want to consult. Can you cite me to the letters you're referring to?
-Alan Dye, Section16.net 11/18/2019

Q: Does a distribution by an LLC to its members in a liquidation qualify for the Rule 16a-9 exemption for those members who are receiving the distribution and are subject to Section 16, even though Rule 16a-9(a) on it face appears to only capture stock splits and stock dividends? Please assume that (i) there are 50 LLC members and (ii) the distribution in the liquidation is effected pro rata based on the LLC members' respective LLC interests. Thank you.

RE: Yes, I do think insiders' receipt of issuer securities upon liquidation of the LLC will qualify for the Rule 16a-9 exemption. See this discussion on page 539 of the treatise:

"As adopted in 1991, Rule 16a-9(a) did not exempt a stock dividend consisting of securities of a different issuer. As a result, a “spin-off” in which an issuer declared a dividend consisting of the securities of a subsidiary or a portfolio company was not exempted by the rule. In 1996, the Commission expanded the exemption to cover “a stock dividend in which equity securities of a different issuer are distributed.” 12 The Commission’s rationale for expanding the exemption was that spin-offs are motivated by “business purposes” and merely give stockholders direct ownership of an asset that they owned indirectly prior to the dividend.13 As a result of the 1996 amendment, an insider of a spun-off entity can rely on Rule 16a-9(a) to exempt the receipt of securities pursuant to the spin-off, provided that the securities are received in a pro rata distribution to all holders of the class on which the spin-off dividend is paid.14"
-Alan Dye, Section16.net 8/26/2019

RE: Thank you for your quick response. Is there a risk that a distribution upon liquidation would not qualify under Rule 16a-9, though?
-8/26/2019

RE: I suppose there's always some risk that a court would reach a different conclusion in the absence of any case law addressing the subject, but I would be very comfortable advising the insider not to report the acquisition.
-Alan Dye, Section16.net 8/26/2019

RE: How should the LLC report the distribution? I believe that while there isn't a rule providing that the distribution is a non-exempt disposition, it should be treated as one? Would you use code J and describe what happened? Thank you.
-11/18/2019

RE: Yes, that's exactly how the transaction should be reported. For an example, see Model Form 189 in the Handbook.
-Alan Dye, Section16.net 11/18/2019

Q: We will be filing Form 4s for insiders simply to disclose the number of shares withheld to satisfy tax obligations related to recent stockholder vestings. For those insiders who contribute to the issuer's 401k plan, is it necessary to also report the shares indirectly held in their 401k plan? (We have typically only done this if they receive an award or if they make an open market transaction). I'm guessing the answer is "no".

RE: Yes, if you are reporting the withholding of shares in Table I, then any other Table I shares (presumably common stock) beneficially owned must be included as a "holding." Shares held in a 401(k) plan are usually reported as indirectly owned through a 401(k) plan.
-Alan Dye, Section16.net 11/18/2019

Q: If an insider has several cash-settled swaps with the same maturity date but different reference prices, can the insider report swaps with reference prices within a one dollar range on one line with the average reference price in column 4 of Table II and a footnote setting forth the lowest and highest prices that make up such average reference price?

RE: The staff's guidance to the Society, allowing "aggregate reporting," was expressly limited to open market transactions through a broker.
-Alan Dye, Section16.net 11/18/2019

Q: When completing a Form 144 would shares of stock sold back to the company to pay associated payroll taxes on vested grants be listed in Table II?

RE: I forwarded your question to Bob Barron, a guru who answers Rule 144 questions in the Rule 144 Q&A Forum on thecorporatecounsel.net. Here is his response:

With regard to your question on SEC Form 144, I have the following thoughts:

(1) It seems to me that it is the better practice that such prior non-public sales should be set forth in Table II of the Form 144 covering the subsequent Rule 144 sale

. (2) My analysis is as follows:

(A) See Q&A 133.07 in the May 16, 2013 Update to the Rule 144 C&DIs of the SEC staff, where it states, in part, that: a non-public sale by an affiliate back to the issuer is excludable when calculating the amount of securities that may be sold under Rule 144. "This would include an affiliate's non-public sales of securities back to the issuer. (May 16, 2013)

(B) Q!&A 133.07 does not expressly deal with the question of Table II which has been asked, but, in my view, it suggests that the SEC staff might be open to the argument that such a prior non-public sale(back to the issuer) need not be included in Table II.

(C) It is my recollection, however, that the SEC staff has previously taken the position that such a non-public sale should be reported in Table II. As I recall, we looked into the matter and were told that the staff position was based on the language in the instructions on the Form 144. That language, as it refers to table II, is as follows:

"Table II--Securities Sold During The Past 3 Months" and

"Furnish the following information as to all securities of the issuer sold in the past 3 months by the person for whose account the securities are to be sold."

The fact that the instructions refer to all securities of the issuer may have led the staff to take its position referred to above

(D) I am not sure that the staff position on Table II is still the same , and you may want to confer with the staff in order to obtain its view.

(E) Absent such a change in the staff's position, it would seem that the better practice would be to include any such non-public sale in Table II.
-Alan Dye, Section16.net 11/17/2019

Q: We have a client that granted awards to insiders and 50% of the award is time-based vesting that vests over 5 years and 50% of the award is based on performance criteria that is not tied to the share price of the stock which vests over 3 years. The insiders have the right to vote the performance shares but are not entitled to receive the dividends. The client also does not pay a dividend at this point but if they did they are not entitled to the dividends. Is the performance portion of the award reportable within 2 business days of the grant (which is July 23rd) or can we report the vesting of the performance awards when the committee deems the performance criteria are satisfied?

RE: This award falls within the gray area created by the staff's general position on performance shares and its position relating to performance-based restricted stock providing for both voting rights and dividend rights. The staff said the latter type of award could be deemed "acquired" on the date of grant for purposes of a six-month holding period that existed under a prior version of Rule 16b-3. Practice varies regarding the latter type of award. I think you'd be safe either way here, given that varied practice and the uncertainty created by those two staff positions. Apparently the staff hasn't challenged either practice--reporting at grant, or reporting only upon "vesting."
-Alan Dye, Section16.net 7/24/2019

RE: Thanks
-7/24/2019

RE: If an issuer chooses to report the performance share award within 2 business days of the grant, would it report the grant in Table I? And then if the performance goal is not attained, should the issuer report the forfeiture (since it had previously reported the grant, even if not required to do so)?
-11/13/2019

RE: If the award will pay out only in stock, and can't pay out in cash, I think it could be reported in Table I. It also could be reported in Table II, instead. Reporting the forfeiture would be voluntary, since the award is a derivative security, at most, and the staff has said that the expiration or cancellation of a derivative security for no value is not reportable, even if the award was reported in Table I.
-Alan Dye, Section16.net 11/13/2019

RE: Thanks for the quick response! -11/13/2019

Q: A section 16 insider exercised SARs pursuant to a 10b5-1 plan. It's a dual class company, so in Table I, we have reflected the sale of Class A common stock under the 10b5-1 plan under codes C and S. For Table II, we plan to report the SAR and Class B common stock (which is convertible to Class A) under code M, and 2 additional rows of Class B common stock under codes D and C. The question is whether we need to enter the price used for the calculations in column 8 on Table II or should we use $0 similar to Model Form 120? What happens to the disposition of the shares that are still on Table II? Model 120 is not a dual class stock form so the disposition is on Table I and the price used to calculate the withholding is shown, which is why we're wondering if we should be entering the price in column 8 vs. using $0 like how Model Form 120 does. Thanks for your help in advance.

RE: I think you will show $0 on the first line, showing the disposition of the SAR, but on line two, showing the acquisition of the Class b stock, you will show the strike price of the SAR. Column 9 will show all of the shares subject to the SAR. On the third line, showing the conversion of the Class B stock into Class A stock, you will show $0 again, and Column 9 will show whatever number of B shares the reporting person owns after the conversion. Make sense?
-Alan Dye, Section16.net 11/13/2019

RE: Thanks so much, Alan. Very helpful. Do we need to show the price used to calculate the withheld shares anywhere in the form 4? Thanks again.
-11/13/2019

RE: Yes, in Table II, where you report the "withholding" of shares, you will report the price used to determine the number of shares withheld.
-Alan Dye, Section16.net 11/13/2019

Q: We have an executive who rebalanced his 401(k) account at the beginning of the year. The result of this is that his indirect holdings of our stock in that 401(k) decreased from his last filing in January - from 110 shares to 85 shares - due to the plan administrator following the new allocation for his continued contributions. We came across this today as we are preparing a normal course Form 4 for this executive. He has had no opposite way non-exempt transactions in the last few years. I believe this falls under the exemption for discretionary transactions under 16b-3(f). Do you agree? Do you have any recommendations for how to footnote this difference? Thanks.

RE: Yes, I do agree. Because the staff takes the position that rebalancing transactions are Discretionary Transactions (as you have concluded, too), technically the disposition is reportable as a line item. If you're going to reduce the number in Column 5 instead, I think the footnote should say something to the effect of "reflects an adjustment to the number of shares owned through the 401(k) plan do to a rebalancing of the reporting person's investment allocations on m/d/y."
-Alan Dye, Section16.net 11/12/2019

Q: Hi Alan, I received notice from a board member today that his financial advisor purchased shares of our company stock on the open market for him without his knowledge in 2018 on two different dates and on one date earlier in 2019. I now need to report these three acquisitions late on a Form 4, as well as increase his beneficial ownership Do you have any suggestions for language to include in the FN? The director had no knowledge of these acquisitions and the investment advisor did not have his account coded as a Section 16/144 insider of our company. I plan to file all three on one Form 4 with the first acquisition in 2018 as the date of transaction. Is that okay? Thank you very much for your help.

RE: You can find a few examples if you search the EDGAR database. Usually it's something like:

The transactions reported in this Form 4 were executed by the reporting person’s investment advisor in a managed account as part of the investment advisor’s implementation of a large-cap investment strategy involving the securities of multiple issuers. The reporting person was unaware of the transactions at the time they occurred.
-Alan Dye, Hogan Lovells US LLP 11/11/2019

RE: Alan,
Thank you for your fast reply and an example of footnote language. I will search EDGAR as well. I just received more details and the number of shares purchased for our director without his knowledge, by his investment advisor, as follows for three separate open market purchases: 2 shares, 7 shares and 3 shares. Could these acquisitions fall under the “de minimis” threshold? I will do more research. but if yes, are these still considered being reported late?
Thank you
-11/11/2019

RE: I do think the transaction can fairly be characterized as de minimis. The staff's de minimis position, which appears nowhere in any official SEC statement, relates to Item 405, not Section 16(a) reporting requirements. You could report the purchases as line items, but you could consider reporting the missed acquisitions in a footnote to the next form 4, saying something like "includes a total of 12 shares acquired in purchases by the reporting person's investment advisor for the reporting person's account on three different days in 2018, which the reporting person inadvertently failed to report on Form 4."
-Alan Dye, Section16.net 11/11/2019

Q: The shareholder beneficially owns about 15% of outstanding shares of common stock and is a Section 16 filer. The shareholder will sell shares to common stock equal to about 3% of outstanding shares (so its ownership will drop to 12%). Within six months of such sale, the shareholder will purchase, in a private placement, such number of warrants to purchase the same number of shares of common stock (i.e, 3% of outstanding shares of common stock). The warrants are not listed or traded on any exchange. Here are the questions: (1) Will the sale of common stock and purchase of common stock warrants within 6 month a matchable transaction under Section 16(b)? Is the answer different if the shareholder sells more shares of common stock such that its ownership will drop BELOW 10% after such sale? (2) If the two transactions are matchable under Section 16(b), how do you calculate the profit to be disgorged?

RE: Yes, a sale of common stock by a ten percent owner, following within less than six months by the insider's purchase of a warrant, will result in matchable transactions, and a recovery by the issuer if the two trades resulted in a profit. If the initial sale dropped the insider below 10% ownership, though, then the purchase would not be matchable with the prior sale, because the purchase would occur when the person was no longer a 10% owner. I'm assuming the person isn't a director or officer.

The amount of profit would depend on a lot of factors, including the exercise price of the warrant. All that is certain is that the recovery can't exceed the difference in market price of the common stock on the date of purchase and the date of sale. See Rule 16b-6(c)(2).
-Alan Dye, Section16.net 11/9/2019

RE: Thank you. If the exercise price of the warrant is not fixed and instead it uses formula and may fluctuate, does it change the analysis on whether the purchase of the warrant is matchable under 16(b)?
-11/9/2019

RE: Probably so. A warrant with a price that is not "fixed" is not a derivative security, based on the exclusion in Rule 16a-1(c)(7).
-Alan Dye, Section16.net 11/10/2019

RE: Thank you. Is it possible to rely on Section 16b-3(d) to argue that the issuance of the warrants is a transaction with the issuer and they are approved by the board or a committee of non-employee directors, assuming that we can obtain such approval?
-11/11/2019

RE: Rule 16b-3 would definitely be available to exempt the transaction if the ten percent owner is also an officer or director. The rule is available only to transactions between the issuer and an officer or director.
-Alan Dye, Section16.net 11/11/2019

Q: An investment fund (“Fund”) currently holds somewhat less than 10% of the outstanding shares (“Shares”) of a closed-end registered investment company (the “RIC”). The Fund is contemplating soon purchasing more Shares, in an amount that would push the Fund’s beneficial ownership of the Shares above 10%. Historically, the Shares were listed on Nasdaq. However, the RIC is now planning to liquidate and then dissolve under state law. In that connection, the RIC has just filed a Form 25 to de-list the Shares and de-register the Shares under Section 12(b). The RIC has stated that it will remain registered under the ’40 Act until its state law dissolution becomes effective, at some point in the future. Am I correct that: (1) The Shares technically will remain registered under Section 12(b) until the 90th day following the RIC's Form 25 filing? I.e., the RIC is like any other issuer that regard? (2) Independently of Section 12(b), Section 30(h) of the ’40 Act would continue to apply to the RIC’s 10% insiders until the RIC has formally terminated its ’40 Act registration when the state law dissolution occurs? (3) As a result, if Fund does buy enough Shares to push it over 10% beneficial ownership prior to BOTH the 90-day anniversary of the Form 25 and the RIC’s ’40 Act de-registration, the Fund: (A) would need to file a Form 3 to reflect its 10% insider status; and (B) would remain subject to reporting under Section 16(a) and the prospect of profits disgorgement under Section 16(b) until both such 90-day anniversary and such ’40 Act de-registration had occurred? Finally, if all of the above is correct—and this is not a legal question—do you think the Fund would be an outlier in adhering to the Section 16 / Section 30 reporting regime in the interim between the RIC’s Form 25 filing and ’40 Act de-registration? Thanks very much for any thoughts.

RE: I agree with your conclusions about the duration of Section 16"s and Section 30(h)'s application to insiders of the issuer. I don't have any basis for assessing whether anyone is ignoring compliance, though--I don't work with many closed-end RICs, and it's hard to know who should be filing but isn't. Maybe someone who works with 40 Act registrants can post something useful.
-Alan Dye, Section16.net 11/11/2019

Q: An investor enters into an investment management agreement (IMA) with an investment manager. Pursuant to the IMA, the manager has the sole discretion to select securities for the investor's account, to vote those securities and to dispose of the securities. However, the IMA provides that any acquisition of securities by the investment manager for the investor's account must comply with general investment guidelines that are a part of the IMA (e.g., not more than 30% of the value of the account can be in any single industry), unless the investor approves the divergence from the investment guidelines. The IMA cannot be terminated by the investor on less than 61 days notice and the investor cannot redeem any securities on less than 61 days notice. Do you think the existence of the general investment guidelines or the ability of the investor to approve divergences from the investment guidelines would result in the investor being deemed to "share" beneficial ownership (with the manager) over any of the securities in the investor's account? I think the existence of the guidelines, so long as they are general and do not name any particular security, should not result in the investor having beneficial ownership over any of the securities in the account. However, I am less sure about whether the manager seeking the investor's approval to acquire securities that would violate the investment guidelines would result in the investor having "shared" beneficial ownership over at least that security (if the investor approves the acquisition). I think if the investor is not told the specific security when its approval is sought (but rather is told the issuer's industry), the investor should not be deemed to have beneficial ownership even if the manager acquires the security for the investor's account following the investor's approval, but am less certain if the investor can avoid beneficial ownership of a specific security if the investor approves the manager buying that specific security for the investor's account (if the investor's approval is requires because buying that security would violate the investment guidelines). If the investor is deemed to have beneficial ownership over the specific security whose acquisition it approved, I wonder when that beneficial ownership would end. I'd appreciate any thoughts you have. Thank you very much.

RE: I agree that investment guidelines governing the RIA should not result in attribution of the portfolio securities to the owner of the account. almost all IMAs, in my experience, impose guidelines (large cap, small cap, a particular industry), but that still leaves the IMA a lot of flexibility regarding the stocks to choose. If the account owner is asked to approve an acquisition of a specified issuer, I agree that's a harder question. In that case, the account owner's consent is required for the purchase to occur, and therefore the shares acquired may be attributable to the account owner for purposes of the ten percent owner calculation. Practically speaking, that shouldn't be a problem in most circumstances, because the account owner won't own enough of the same stock to put it over 5% or 10%. If the owner does go over 5% or 10%, I'm not sure when beneficial ownership would terminate, probably not until the RIA sells the stock.
-Alan Dye, Section16.net 10/23/2019

RE: Thank you very much.

Do you agree that if the RIA didn't tell the investor the name of the specific security when it sought the investor's consent to acquire the security in violation of the investment guidelines (but rather just asked for a waiver of a guideline), the investor should not have beneficial ownership? Thank you.
-10/23/2019

Yes, I do agree.
-Alan Dye, Section16.net 10/24/2019

RE: If, when the investment manager seeks a waiver of the investment guidelines from the investor, the manager discloses the name of the company for which it is seeking a waiver to the investor, but the investor is required to approve/reject the waiver request based on objective tests, such as the investor’s aggregate exposure to the company in all investment managers to which it has allocated a portion of the investor’s aggregate portfolio, do you think there is a reasonable position that the investor doesn’t have beneficial ownership since the investor can’t exercise subjective discretion to approve/reject the waiver request? I suppose the requirement that the investor approve/reject the request based on those criteria could be included in the management agreement with each investment manager (though I acknowledge that it would be hard for the investment manager to test the investor's compliance with that requirement).

I think it's a close call, but think the investor probably has a reasonable position. Can you please let me know your thoughts. Thank you.
-11/7/2019

RE: These issues haven't been addressed with any granularity in case law, to my knowledge, but I do agree the investor has a reasonable position. That position is supported by the fact that the investor presumably wouldn't be involved in any subsequent investment decisions relating to the security, which the manager could decide to sell at any time.
-Alan Dye, Section16.net 11/8/2019

Q: A typical convertible bond becomes convertible upon the occurrence of certain events (related to price of the bond or certain fundamental transactions). Also, they typically contain a provision providing for settlement of a conversion in cash or in stock. Since the issuer can pay in cash, shouldn't the holder not be deemed to beneficially own the underlying shares for 10% calculation until the issuer elects to pay in stock, regardless of whether the conditions to conversion have been met?

RE: Yes, if the bond is payable upon conversion in cash or stock, at the issuer's election, and there is at least a reasonable possibility that the issuer might pay cash, then the holder of the bond should not be deemed to have a "right to acquire" stock and therefore would not be the beneficial owner of the stock for purposes of the ten percent owner calculation. The same analysis comes up when OP units of an UPREIT may be paid in cash, or when phantom stock units may be paid in cash.
-Alan Dye, Section16.net 6/3/2013

RE: Thanks. If the holder is otherwise a 10% holder without counting the shares underlying the bond, would a purchase or sale of the bond be matchable for Section 16 purposes? I would think not because the bond is not technically convertible at the option of the holder. Could it be deemed a derivative security?
-6/19/2013

RE: The purchase of a bond would be a purchase of a derivative security, and matchable with non-exempt sales occurring within six months, if the insider's ability to convert the bond is not subject to a material condition beyond the insider's control that is unrelated to the price of the issuer's securities. So, whether the bond is a derivative security will require an analysis of the conditions that would have to be satisfied before the insider could convert it.
-Alan Dye, Section16.net 6/19/2013

RE: Thanks Alan. As described above, the bond would be convertible upon the occurrence of certain events but even if those conditions were triggered, the issuer could elect to settle in cash instead of shares. My question is whether the ability of the issuer to settle in cash means this is not a derivative security under any circumstances bc the election of the issuer to settle in cash or stock is beyond the control of the holder.
-6/19/2013

RE: If the amount of the cash payment is based on the value of the stock that would otherwise be deliverable, the issuer's ability to pay in cash would not prevent the bond from being deemed a derivative security, because the value of the bond would still be tied to the value of the stock. SARs that pay out only in cash are derivative securities, as the Commission noted in the adopting release for the current rules.
-Alan Dye, Section16.net 6/19/2013

RE: Are you aware of any guidance of the position that if the company has the right to satisfy a conversion in cash or stock, the holder of of the convertible bond doesn't beneficially own the stock? Thank you.
-11/4/2019

RE: This is a staff interpretation, appearing in the March 1999 Supplement to the Telephone Interpretations Manual:

2S. Item 403 of Regulation S-K

A caller asked whether phantom stock units held in a nonqualified deferred compensation plan are reportable in the 403(b) table. If the units can be settled in stock at the holder's election, so that if the holder were terminated currently he or she would get the underlying stock without the need to satisfy any additional vesting requirements, the units should be reported. This is because the holder would have the right to acquire the underlying stock within 60 days (see Exchange Act Rule 13d-3). However, the phantom stock units should be presented in a manner that distinguishes them from stock owned outright – e.g., pursuant to a clear and succinct footnote explanation.

In contrast, if the phantom stock units can be settled in stock only at the company's discretion, they should not be reported because the holder does not have a right to acquire the underlying stock within 60 days. Similarly, if the phantom stock units can be settled solely in cash, they should not be reported because the holder has no right to acquire the underlying stock.
-Alan Dye, Section16.net 11/4/2019

RE: Based on the responses above, it seems that if a section 16 insider holds a security convertible in equity only if stockholders of the issuer approve a transaction (as in a SPAC), the security is not treated as a derivative security in which the insider has a pecuniary interest (so it isn't reportable and isn't subject to short swing liability). By contrast, if the section 16 insider holds a security convertible into equity if the stock price increases above a threshold, the security is treated as a derivative security in which the insider has a pecuniary interest. Since both the stockholder vote and the stock price are conditions outside of the control of the insider, what is the reason for the divergent treatment?Thank you.
-11/7/2019

RE: I think the difference is that the value of the security that is exercisable only if the stock reaches a certain price is based solely on the value of the underlying stock, and therefore is a derivative security as defined in Rule 16a-1(c). Just as an underwater option is still considered a derivative security.
-Alan Dye, Section16.net 11/7/2019

Q: Where an investor holds convertible notes that are convertible into a greater than five percent position, but the conversion rights are contingent upon events that are outside of the investor's control (e.g., the stock must trade at a specific value for greater than a prescribed number of days), it is my understanding that the investor will not be deemed to have been a greater than five percent owner for the 60 days prior to the date on which the conditions are met, and this position would hold even for investors who hold notes with an activist position (since the material condition prevents the investor from having a right to acquire within 60 days). In other words, where the conditions have not been met, Rule 13d-3(d)(1) does not kick in for activist investors in this situation to give them beneficial ownership today. Do you agree with that assessment? If that is the case and, assuming the terms of the notes state that the issuer will give notice to investors when the material conditions are met, do you think that an investor can rely on such notice for filing purposes or should they also conduct their own daily calculations to determine whether the conditions have been met?

RE: Yes, I do agree with your assessment. I think a person might be deemed a beneficial owner of the underlying shares if the person could, through reasonable diligence, determine whether the condition has been met. It's hard to know if a court would expect a holder to keep track of the stock price, but if the holder were engating in short-swing trading, I would apprise the holder of the risk and suggest keeping track of the stock price and ceasing short-swing trades when the price gets close.
-Alan Dye, Section16.net 11/4/2019

RE: I believe that whether or not an investor acquires a convertible security with control intent is relevant to determining whether the investor has beneficial ownership of the underlying security only if the convertible security can be converted upon the passage of time (e.g., if an investor with control intent acquires a convertible security that can be converted in a year, the investor has beneficial ownership of the underlying security today even though it can't be converted for a year). By contrast, if the convertible security could be exercised only if a condition outside of the investor's control occurs (e.g., the trading price of the underlying security hitting a threshold), the investor does not have beneficial ownership of the underlying security until the condition is satisfied even though the investor control intent. Do you agree with that? I'm asking because CDI 105.02 seems to muddle it a little bit. Thank you very much.
-11/5/2019

RE: Yes, I agree with that conclusion, despite the CDI. Rule 13d-3(d) provides that a person beneficially owns securities the person has a right to acquire within 60 days by exercising rights under any of 4 specified instruments/arrangements, one of which is an option, warrant or right. The rule goes on to say, though, that a person who acquires one of those four instruments while having a control purpose is deemed to beneficially own the underlying securities immediately upon acquisition of the instrument. The existence of a control purpose results in attribution of beneficial ownership only in the limited context of (d), meaning that a control purpose creates an exception to the non-attribution of beneficial ownership that ordinarily results from ownership of an option that can't be exercised within 60 days. The exception does NOT apply, at least not by its terms, to the general rule applied by the SEC and the courts that a person who acquires a security that becomes exercisable only upon the occurrence of a material condition beyond the person's control does not beneficially own the underlying securities unless and until the condition is satisfied. You'd want to be sure, of course, that the condition is material and beyond the holder's control.
-Alan Dye, Section16.net 11/5/2019

RE: Thank you. Is that CDI the best guidance for the position that if an investor has the right to acquire a security only upon the satisfaction of a condition outside of the investor's control, the investor does not have beneficial ownership of that security? Thank you.
-11/6/2019

RE: Additional authorities are cited and discussed in the Section 16 Treatise and Reporting guide, in Section 2.03[5][j].
-Alan Dye, Section16.net 11/6/2019

Q: In reviewing several discussion topics relating to whether transfers to living trusts are reportable, I saw that Topic #6760 came out differently than the others, wherein the response was that a transaction from an insider to a living trust (in the names of both the insider and his wife, for which he and his wife were beneficiaries and co-trustees) was reportable on Form 5 due to the wife "acquiring a pecuniary interest." However, other discussion topics (e.g. #9320--CALIFORNIA, #8213) come out differently and say such transactions are not reportable under Section 16. Can you please provide what the distinguishing factor is between these scenarios? Is it because in Topic #9320 and Topic #8213 the living trusts with spouses as co-trustees were in community property states (and presumably, the contribution of stock earned by one spouse as an insider is "community property" wherein both spouses already have a pecuinary interest vs. an inheritance that would be "separate property")? Or is it because Topic #6760 did not specify whether the insider had sole power to revoke the trust or dispose of the contributed shares?

RE: Yes, the distinguishing factor was that living trusts in community property states can (and maybe must) provide that the spouse has rights over community property contributed to the trust, and the contributing spouse must be able to revoke separate property contributed to the trust. That said, I'm not sure there is a lot of clarity surrounding what makes a living trust a living trust as the SEC staff thinks of one. I think the living trusts the SEC dealt with, including in the 1981 Q&A release, involved simply an insider contributing stock to a revocable trust, having the ability to distribute trust assets however s/he pleased, and having the ability to revoke the trust without anyone's consent. Some practitioners may have expanded the staff's position where a spouse is a named beneficiary, on the theory that the trustee always has the ability to make distributions to a spouse and anyone else. The Sonnenschein letter addresses community property states, and because I'm not in a community property state, I have to look back at the letter every time I need to think about whether a trust in a community property state is a "living trust."
-Alan Dye, Section16.net 11/5/2019

RE: Thanks. As follow-up, does that mean the key question to ask of the insider (or contributing spouse) with a revocable trust in a community property state is:

a) Do you have a unilateral right to revoke the trust (i.e. no consent of non-insider spouse trustee is required)?
b) Do you have unilateral investment/disposition power with respect to these shares you are contributing (i.e. no consent of non-insider spouse trustee is required... noting that sometimes certain community property assets such as a home may require consent of both spouses to dispose of vs. liquid assets that either can dispose of unilaterally)?

If the answer to BOTH (a) and (b) is "no," then I would guess the contribution is likely reportable since the non-insider spouse would be acquiring a pecuniary interest upon that transfer of shares.
-11/5/2019

RE: Yes, I agree that's a fair reading of the staff's guidance.
-Alan Dye, Section16.net 11/5/2019

Q: We have an insider who decided to reallocate "old money" in his 401(k) plan to an issuer stock fund. The stock fund is unitized and the number of issuer shares per unit fluctuates based on activity. It is pretty clear to us that a Form 4 is required because this is a discretionary transaction and we are planning to report the number of units held (as opposed to issuer shares) because we cannot calculate the number of shares owned by the insider. However, what is the best practice for reporting price in this situation? Should we report the price per unit (which is approximately 50% of the market price for the issuer's shares) or should we report an average of the high and low price for the date of the transaction? Thank you.

RE: I would use the market price of the issuer's stock on the transaction date. I've seen the closing price used, and the average of the high and low, as you suggest. I think either works. While the fund is unitized, the meaning of the reported price can be explained in the footnote that usually accompanies holdings in a unitized plan.
-Alan Dye, Section16.net 11/5/2019

Q: Hi Alan: One of our directors contributed shares held directly to a CRUT. He does not have investment authority over the trust and he and his spouse are the only non-charitable beneficiaries. The receiving institution intends to sell the shares as soon as possible. Do I report the gift as a disposition of direct shares and on a second line as an acquisition of shares indirect? Is the sale okay to proceed with and do I need to report the sale on the directors Form 4? Thank you!

RE: Yes, you will need to report the transfer of the shares to the CRUT, as a gift. If the insider does not control the trustee's investment decisions, then the insider will no longer beneficially own the shares and therefore will not to to carry them on future Forms 4 or report the sale. If the insider is directing the trustee to sell the shares, that might be viewed as control over the shares, warranting a Form 4 by the insider to report the sale. That sale would, though, be matchable with any nonexempt purchase of issuer securities within six months before or after the sale.
-Alan Dye, Section16.net 11/5/2019

Q: An insider has a married long call and short put with an expiration date more than six months after it was written but the options can be exercised at any time. The insider exercises the long call within less than six months which has the effect of cancelling the short put. I seem to recall that there is case law saying that the short put is not deemed to have expired or been cancelled within less than six months such that the premium is recoverable. Is that correct? I am having trouble finding that case law. Thank you.

RE: Are you thinking of Olagues v. Icahn? See the last paragraph of the blog about the case from 2017:

August 7, 2017

Second Circuit Affirms Dismissal of 16(b) Claim Alleging Hidden “Premium” in Put/Call Agreements
The Second Circuit has affirmed the dismissal of three Section 16(b) complaints filed against Carl Icahn and entities under his control based on their transactions in “Put and Call Agreements” relating to the securities of three issuers–Herbalife, Hologic, and Nuance Communications. See Olagues v. Icahn.
The terms of the agreements are described in my blog about the district court’s opinion. In a nutshell, the defendants went “long” in the stock of the targeted issuers by entering into put and call agreements, each of which provided for two options: an American-style call option allowing the defendants to purchase a specified number of shares at a specified exercise price by a specified date (which ordinarily was less than six months later), and a European-style put option allowing the counterparty to sell to the defendants the same number of shares at the same exercise price on the call’s expiration date. The agreements were, in effect, stock purchase agreements under which the defendants were obligated (or entitled) to purchase the underlying stock at the specified “exercise” price (which approximated the market price of the stock on the date of entry into the agreement, less the premium paid for the call). The put options existed to assure that, if the defendants didn’t exercise the calls, the counterparty could force the purchase anyway. Given that limited purpose, the agreements provided that the put option would expire automatically if the defendants exercised the call. Moreover, while the amount of the call option premium varied with the market price of the underlying stock and the exercise price of the option, the put option premium was always a penny a share.
The defendants exercised their call options, resulting in the cancellation of the related put options within six months of their writing. Because Rule 16b-6(d) allows an issuer to recover the “premium received” for writing a put option that expires within six months, the defendants disgorged the penny-a-share premiums. The plaintiff challenged the profit calculation, arguing that, based on market data showing the price at which “similar” puts and calls were trading on options exchanges, the defendants were underpaying for their calls and undercharging for their puts, effectively concealing the “true premium” received for the puts by applying all but a penny of the premium to reduce the cost of the calls.
The Second Circuit affirmed the district court’s dismissal of the complaints, holding that, while Rule 16b-6(d) would allow recovery of consideration an insider received for writing an option, whether or not the consideration were “labelled” a premium, here there was no such consideration other than the penny a share specified in the agreements. The plaintiff’s allegation that similar options traded at different values on the options exchanges was not indicative of the value of the defendants’ options because the defendants’ options were intertwined, with the exercise of one cancelling the other. Moreover, the court noted, the plaintiff had not alleged that options covering the number of shares the defendants were purchasing were available on the options exchanges.
More importantly (in my view), the court recognized that the agreements “effectively required Icahn to buy all of the shares covered by the options at a fixed price on or before the expiration date,” such that the puts “fall outside the scope of the SEC’s central concern when it promulgated Rule 16b-6(d), which was to stop an insider from receiving and retaining a premium for an option ‘knowing, by virtue of his inside information, that the option will be not be exercised within six months’ and hence that no shares will exchange hands.” Instead, the two options served to assure that the defendants would purchase a specified number of shares at an agreed-upon price.
Interestingly, the court concluded by “emphasizing” the “limited nature” of its holding. The court said that it was holding only that the complaint did not state a claim “because it relied exclusively on comparisons to options traded on the open market that had no meaningful similarities to the options at issue here.”

The court’s decision is noteworthy for at least three reasons. First, the court looked at the economic reality of the transactions to conclude that they were effectively purchases of stock, not transactions in derivatives that allowed for speculative trading in options. Given some of the theories plaintiffs have advanced for calculating profits when matching transactions in derivative securities, based on the notion that Rule 16b-6 is formulaic without regard for “actual profit,” it is encouraging to see courts analyze the economics of a transaction and the extent to which a proposed profit calculation methodology would serve the purposes of Section 16(b) (as the SDNY did recently in Rubenstein v. Liberty Media.)

Second, the court’s opinion suggests that, had the complaint alleged that options “with meaningful similarities” were trading on an exchange, the court might have allowed expert testimony to establish the values of the put/call options. The district court had noted that one of the SEC’s purposes in adopting Rule 16b-6 was to avoid the need for expert testimony to determine the profit realized when matching transactions in derivative securities. The Second Circuit’s opinion might be read to leave open, for plaintiffs and defendants alike, the possibility of introducing expert testimony to establish the value of derivative securities or the amount of recoverable profits.

Third, the court noted that the defendants’ put options were “technically cancelled” and therefore the defendants were “technically required” to disgorge the penny-a-share premium. While no one was contesting the point, it’s open to question whether the defendants would have been deemed to have received a premium at all if the agreements had not characterized the transactions as involving a premium paid for puts.
-Alan Dye, Section16.net 11/4/2019

RE: Thank you. Although this seems to stand for the idea that the premium is recoverable (to the extent you received a premium). Do you agree?
-11/4/2019

RE: Yes, I do agree. I can't recall any authority to the contrary.
Alan Dye, Section16.net 11/4/2019

Q: If Company grants award to a position (to be filled by an officer in the future) on 1/1, and Officer is later appointed to such position on 2/1, is it defensible to report the award as a holding on Officer's Form 3? If so, would you footnote that it was awarded prior to Officer's start date? It seems like a Form 4 with a transaction/grant date of 2/1 would not be accurate. Thanks in advance for any thoughts here.

RE: I see your point, but it seems to me that the committee isn't making a grant on 1/1, but is authorizing a grant effective upon the company's hiring of a person to fill the designated position. So, the grant is effective at the same time the person is hired, which means the award would not show up in the Form 3, but instead would be reported on Form 4. Let me know if you think I'm misunderstanding the issue.
-Alan Dye, Section16.net 11/1/2019

Q: An investor purchased convertible preferred stock with a fixed conversion price that is mandatorily convertible when the issuer's stockholders vote to approve the transaction (and is not convertible before then). The investor sold common stock within six months prior to the purchase. I would appreciate your thoughts on few questions: (1) Are the two transactions matchable immediately, regardless of the material condition that is outside of the investor’s control? (2) If yes, would it make any difference in the analysis if the parties agreed that the conversion could not occur until after a set date that was outside the matching window, say 75 days from the date of issuance? (3) If not, could the parties attempt to take retroactive steps to block matchability, such as changing the terms of the preferred to be non-convertible until the parties mutually agree otherwise or until some set date outside the matching window, or changing the conversion price to a floating rate until after the matching window has expired?

RE: I've thought about your first issue many times, and I don't think the case law offers a definitive answer. I do think there is sufficient analysis of derivative securities in general to support a conclusion that the preferred isn't a derivative security until the condition is satisfied, so the acquisition of "convertible" preferred would be reportable upon shareholder approval. If that occurs more than six months after the sale of common stock, though, I don't think the case law clearly establishes that the purchase, too, occurs on that date, or instead might relate back to the date on which the preferred was purchased (on the theory that the insider became irrevocably committed on that date). I don't think the date on which a derivative becomes convertible affects the determination of the purchase date (e.g., a grant of an option that vests ratably over a period of years is acquired on the date of grant). Your third issue is complicated by there being no sure answer to your first one. Amending a derivative can itself be viewed as involving a reportable disposition of the security and the acquisition of a new one. Since the preferred isn't a derivative security until the condition is satisfied, maybe amending it as you suggest would not be reportable, so no one would ever ask the question whether the initial purchase is matchable.
-Alan Dye, Section16.net 10/31/2019

Q: Hoping for some clarification around whether voluntary early Form 4 reporting is permitted for small acquisitions under $10,000 within a 6-month period which are exempt under Rule 16a-6 from current reporting on Form 4 & may be deferred to year-end Form 5 reporting. Item (11) of Model Form 64 notes that "Reporting small acquisitions earlier than required by Rule 16a-6 is not 'voluntary.'" So, does this mean that if insider's broker purchased 20 shares in insiders name (appx. market value of $2,500) in March 2019 through a tax advantaged fund, the insider must wait to report the purchase on either: (i) Form 5 at the end of the FY; (ii) a Form 4 that causes reporting of the purchase of the 20 shares to become required because the insider makes another purchase that pushes the market value within the 6 month period to over $10,000, resulting in both the March 2019 purchase & the current purchase to become reportable; or (iii) a Form 4 that causes reporting of the purchase of the 20 shares to become required because the insider sells all 20 or some portion of the 20 shares purchased in March, resulting in both the March 2019 purchase and the current sale to become reportable? Or may the insider voluntarily file a Form 4 in April or May (or any time before reporting the transaction becomes required)? Additionally, if this is in fact the case, and insider cannot voluntarily report the small purchases on a Form 4, if insider has an exempt transaction in May 2019 (let's say an annual equity grant from the Company of restricted stock units) that still would not require reporting of the small March 2019 acquisition, should the 20 shares from the small March 2019 acquisition be included in the insider's total holdings number on that Form 4 required to report the May 2019 grant? And if the 20 shares should be included in the total holdings number, should an explanation re: how the total holdings jumped by 20 shares be provided by footnote?

RE: It is perfectly acceptable to report a small acquisition earlier than the Form 5 deadline, regardless of whether total acquisition exceed $10,000 or a disqualifying disposition occurs. A Form 4 could be filed any time, to report the small acquisition alone, or to report a reportable transaction and include the small acquisition. I will try to make that clearer in the next update of the Handbook.
-Alan Dye, Section16.net 4/18/2019 10:57:18 AM

RE: While reporting another reportable transaction on a Form 4, we are also voluntarily reporting a small acquisition early. Should the 'Date of Earliest Transaction' reflect the date of the small acquisition (which occurred about a month ago) or the date of the transaction we are required to file the Form 4 for?
-10/30/2019

RE: The small acquisition isn't "required" to be reported on the Form 4, so I would use the date of the transaction that triggered the requirement to file.
-Alan Dye, Section16.net 10/30/2019

Q: Hi. We have a senior level associate (non-Section 16) who will have NQ options expiring in the middle of this month (during our current blackout period, that doesn't end until the end of the month). Our insider trader policy prohibits transacting on any stock while in possession of any material, non-public information. We've incorporated blackout periods for those associates that "could" be in possession of non public, company info before earnings release. This was also a 7 year term option. One of these associates is asking for an exception to be made to the policy in order for him to exercise and HOLD the options, during a current blackout, before they are canceled. Is this an internal decision to make this exception or would it be a violation of Sarbanes Oxley 2002 to allow this associate to exercise options during a blackout? Any other repercussions? Thanks so much for the help.

RE: Whether the prohibition on transacting during a blackout appears in an insider trading policy, an ethics policy, or elsewhere, a waiver of the policy would not involve a "senior officer" and therefore would not trigger an 8-K as a waiver of an ethics rule. A waiver would not result in a violation of Rule 10b-5 or any other insider trading rule, because the transaction would be with the company, which has equal access to information, and would occur pursuant to pre-established terms anyway. If the company is aware of material negative information that is unknown to the employee, then the company might need to consider that disclosure issue. I can't think of any other reason the waiver can't be granted.
-Alan Dye, Section16.net 10/8/2019

RE: Thanks Alan. Would allowing them to exercise in the blackout create any type of expense/award modification for accounting purposes to your knowledge?
-10/30/2019

RE: Not by my knowledge, but I say that only because I've never heard the question raised. If you have insight, please share it here. In the meantime, I will ask around to see if anyone else knows the issue.
-Alan Dye, Section16.net 10/30/2019

Q: In the scenario where convertible preferred stock with voting rights is issued, and there is a 9.99% blocker in place to prevent the individual from owning more than 9.99% of common stock, how does this work for beneficial ownership calculations? Normally, after giving effect to the conversion, if you owned more than 9.99% of common, then you cannot convert anything beyond that blocker, and you are not a beneficial owner due to being under 10%. And looking forward 60 days, you would include only shares within that threshold for conversion. Does making the convertible preferred have voting rights affect that analysis though? Or does putting a 9.99% blocker on the individual (assuming they cannot convert all of the voting preferred to common due to that blocker) still mean that they are not a beneficial owner for Section 16 reporting, even though they have voting rights on all the preferred?

RE: The only relevance of the voting rights is that, if the preferred is registered under Section 12 of the 1934 Act, then ownership of more than 10% of the preferred (regardless of the number of shares of underlying common stock) makes the holder a ten percent owner subject to Section 16. The voting rights don't have any effect on the effectiveness of the blocker in preventing the holder from being deemed a ten percent owner of the common stock.
-Alan Dye, Section16.net 10/30/2019

Q: We have a director who defers shares and we report those in the form 4 when granted. When the deferred shares get distributed (2 years later), do we need to report?

RE: How are you reporting the deferred shares when they are acquired--in Table II as a derivative security (required if they may be settled in cash), or in Table I as common stock (permitted if they will settle only in stock and can't be settled in cash)? If the acquisition is reported in Table II, payout is reportable on Form 4. If the acquisition is reported in Table I, payout is not reportable.
-Alan Dye, Section16.net 10/29/2019

Q: A reporting person has a brokerage account in which 2 shares of company stock were sold in error on 10/22 to cover a fee debit in the reporting person's IRA account, without the reporting person's knowledge. The error was discovered today (10/28) and cancelled and his account reflects the correct balance as before the error. Please advise if this is a reportable transaction and how it should be reported if it has been cancelled as if it did not occur? Thank you.

RE: There is hardly any law or SEC guidance regarding rescinded/reverse/erroneous transactions. An unauthorized transaction by a broker, or a broker's mistaken transaction in an insider's account, if reversed with no economic consequence to the insider, seems to me (and Peter Romeo, as we've said in our publications) to involve transactions in which the insider has no pecuniary interest, such that the insider does not need to report them, and they have no 16(b) consequence. This is especially true where the reversing trade occurs in the broker's error account. On the other hand, an authorized transaction that the insider learns of and regrets is likely reportable by the insider, even if the insider instructs the broker to reverse the transaction by buying or selling an equal number of shares.
-Alan Dye, Section16.net 10/28/2019

Q: We submitted and received new CIK codes for a newly hired Section 16 reporting person. The Reporting Person provided her maiden name for "Company". We were just notified that the Reporting Person's maiden name is not currently her legal last name but will be within the next 2 months. We have already received the new CIK codes with the incorrect "Company" name. Are we required to change the "Company" name or can we use her maiden name.

RE: I've asked a couple of people whom I consider to be EDGAR experts whether the staff has ever addressed this issue, and they are thinking about it. In the meantime, I will at least offer an observation. I've seen insiders switch from a maiden name to a married name, or from a pre-marriage name to a hyphenated name, and then need to file a Section 16 report before anyone thought to file an amended Form ID. I don't think filing under a pre-existing name should affect the validity of the filing or require an amendment to the filing. So, subject to what I hear from the experts, I would be inclined to stick with the insider's maiden name, for the current report and future reports.
-Alan Dye, Section16.net 10/28/2019

RE: Here is someone else's best guess:

. "The instructions aren't crystal clear but you may want to analogize to the Form D context. When filing a Form D, all of the information has to be accurate as of the date the Form D is signed (meaning we have to identify who all of the officers/directors are - even if that is going to change in a couple weeks). I would follow that same logic and would change the incorrect "Company" name on the SEC's website prior to the filing to be what her legal name is on the date the Form 4 is signed, have her sign using her current legal name and file it. After her legal name changes to her maiden name is the time to change the SEC's website (prior to the next filing) so that her maiden name would show up on the next filing."

I'm told this doesn't require an amendment to the Form ID. Here is that advice:
"Whoever has the full set of EDGAR codes will log into the "backpage" of the SEC's site: https://www.edgarfiling.sec.gov/Welcome/EDGARLogin.htm and enter the CIK and Password for either the filing agent or the "Company" (it doesn’t matter – you just need to get “in”. Then you click on the "Retrieve/Edit Data" link on the left side of the page.

After that, another screen comes up that says “Retrieve/Edit Data” at the top and you enter the “Company” CIK and CCC. This is the page that contains a bunch of links where you can view all of the historical submission information, you can find out if there is an account balance, you can request the return of unused funds, etc. By clicking on the “Retrieve Company Information” link you get a screen where you can edit any of the information about the “Company." Any of the info on that page can be updated, including the Company Name.

One thing to know is that even though you successfully update the Company Name, it doesn’t show up on the SEC’s website until the next filing occurs."
-Alan Dye, Section16.net 10/28/2019

Q: An insider reported the acquisition of preferred shares in table I because the preferred shares were only convertible upon the satisfaction of a condition precedent outside the control of the insider. The condition precedent has now been satisfied and the preferred shares now become convertible at the option of the insider. Should the insider now file a Form 4 to report the fact that the preferred shares are now a derivative security that belong in table II? If so, how should this be reported?

RE: I think satisfaction of the condition creates an acquisition of a derivative security and, for purposes of Section 16(b), the underlying common stock. So, I would file a Form 4 to report the acquisition of the preferred in Table II, and explain in a footnote that the preferred was originally reported in Table I.
-Alan Dye, Section16.net 10/24/2019

RE: Thank you. Under what transaction code would you report this in table II?
-10/24/2019

RE: I would use a "J." I think there is an argument that the transaction is not a matchable "purchase" because the insider doesn't control the occurrence of the condition.
-Alan Dye, Section16.net 10/24/2019

RE: Also - please assume the same facts with the only difference that the Preferred Shares become convertible within 30 days of the satisfaction of the condition precedent (rather than upon satisfaction of the condition precedent). Is the Form 4 triggered upon the satisfaction of the condition precedent or on the 30th say thereafter? Thank you.
-10/25/2019

RE: I think the trigger is the satisfaction of the condition precedent. After that, exercisability depends solely on the passage of time, which the staff has said is not a material condition preventing an instrument from being deemed a derivative security.
-Alan Dye, Section16.net 10/25/2019

An investor enters into an investment management agreement (IMA) with an investment manager. Pursuant to the IMA, the manager has the sole discretion to select securities for the investor's account, to vote those securities and to dispose of the securities. However, the IMA provides that any acquisition of securities by the investment manager for the investor's account must comply with general investment guidelines that are a part of the IMA (e.g., not more than 30% of the value of the account can be in any single industry), unless the investor approves the divergence from the investment guidelines. The IMA cannot be terminated by the investor on less than 61 days notice and the investor cannot redeem any securities on less than 61 days notice. Do you think the existence of the general investment guidelines or the ability of the investor to approve divergences from the investment guidelines would result in the investor being deemed to "share" beneficial ownership (with the manager) over any of the securities in the investor's account? I think the existence of the guidelines, so long as they are general and do not name any particular security, should not result in the investor having beneficial ownership over any of the securities in the account. However, I am less sure about whether the manager seeking the investor's approval to acquire securities that would violate the investment guidelines would result in the investor having "shared" beneficial ownership over at least that security (if the investor approves the acquisition). I think if the investor is not told the specific security when its approval is sought (but rather is told the issuer's industry), the investor should not be deemed to have beneficial ownership even if the manager acquires the security for the investor's account following the investor's approval, but am less certain if the investor can avoid beneficial ownership of a specific security if the investor approves the manager buying that specific security for the investor's account (if the investor's approval is requires because buying that security would violate the investment guidelines). If the investor is deemed to have beneficial ownership over the specific security whose acquisition it approved, I wonder when that beneficial ownership would end. I'd appreciate any thoughts you have. Thank you very much.

RE: I agree that investment guidelines governing the RIA should not result in attribution of the portfolio securities to the owner of the account. almost all IMAs, in my experience, impose guidelines (large cap, small cap, a particular industry), but that still leaves the IMA a lot of flexibility regarding the stocks to choose. If the account owner is asked to approve an acquisition of a specified issuer, I agree that's a harder question. In that case, the account owner's consent is required for the purchase to occur, and therefore the shares acquired may be attributable to the account owner for purposes of the ten percent owner calculation. Practically speaking, that shouldn't be a problem in most circumstances, because the account owner won't own enough of the same stock to put it over 5% or 10%. If the owner does go over 5% or 10%, I'm not sure when beneficial ownership would terminate, probably not until the RIA sells the stock.
-Alan Dye, Section16.net 10/23/2019

RE: Thank you very much. Do you agree that if the RIA didn't tell the investor the name of the specific security when it sought the investor's consent to acquire the security in violation of the investment guidelines (but rather just asked for a waiver of a guideline), the investor should not have beneficial ownership?
-10/23/2019

RE: Yes, I do agree.
-Alan Dye, Section16.net 10/24/2019

A limited partner does not have beneficial ownership of common stock in portfolio company of a limited partnership. This limited partner is not a manager or general partner of the limited partnership and does not have any special economic rights or interests in the limited partnership. After an in-kind pro rata distribution of the common stock of the portfolio company from the limited partnership, I would expect that if the limited partner itself becomes a greater than 10% holder as a result it must then report insider status on a Form 3 and subsequently report purchases and sales on a Form 4. My question is if the limited partner then sells the common stock immediately after becoming an insider, could that sale be matchable against any purchases made by the limited partnership within prior six month period? Assume that the distribution itself wouldn't be considered a matchable purchase though there may not be direct SEC guidance on that point. Thank you.

RE: I don't think the limited partnership's transactions would be reportable by or matchable with transactions by the limited partner after becoming a ten percent owner. The new insider had no control over the partnership's transactions and therefore didn't have a pecuniary interest in those transactions within the meaning of Rule 16a-1(a)(2). The same would be true of post-distribution transactions by the new insider. If the insider were to purchase shares after becoming a ten percent owner, and then the partnership were to sell shares within six months, I don't think the two transactions would be matchable with one another.
-Alan Dye, Section16.net 10/24/2019

Several funds managed by same ultimate GP own more than 10% of public issuer and the funds are considering purchasing additional shares of issuer. However, one of the funds will have near term expiration (within 6 months) where LPs are able to redeem their % of the securities of public issuer if they do not wish to extend in the fund. It's completely within the LP's control and not up to the fund/GP whether they redeem or continue. Would the redemption from the fund be considered a matching sale for purposes of the fund? It seems like it should not be for 16b purposes as the redemption doesn't bear any indicia of a sale but curious whether there was any new case law on point or what level of comfort the funds could take that there would be no risk of matching transaction from 16b if they buy now.

RE: I don't know of any case law on the subject, but courts generally have held that a transaction that is "involuntary" is not subject to matching under Section 16(b). And this redemption sounds to me like it's involuntary. The transaction also doesn't result in any payment to the partnership, and other LPs can't profit from the redemption, so there seem to be several reasons why the redemption shouldn't be a sale.
-Alan Dye, Section16.net 10/21/2019

RE: Is that via unorthodox transaction exception? You need all three factors for that right? It's def not cash for stock, and the fund cannot control whether the LPs redeem. Although the fund does have a director on the board - I'm not sure that makes these redemptions susceptible to the exploitation of inside information given the fund is not making a decision re redemption. The funds would still need to report the redemptions via 16a right though (transaction code J)? -10/21/2019

RE: Yes, this is effectively the unorthodox transaction exception. The redemption here is at least as involuntary as many of the transactions courts have considered involuntary, as discussed in the Treatise (at around p. 1000). And yes, the transaction would still be reportable, using transaction code "J."
-Alan Dye, Section16.net 10/22/2019

Several funds managed by same ultimate GP own more than 10% of public issuer and the funds are considering purchasing additional shares of issuer. However, one of the funds will have near term expiration (within 6 months) where LPs are able to redeem their % of the securities of public issuer if they do not wish to extend in the fund. It's completely within the LP's control and not up to the fund/GP whether they redeem or continue. Would the redemption from the fund be considered a matching sale for purposes of the fund? It seems like it should not be for 16b purposes as the redemption doesn't bear any indicia of a sale but curious whether there was any new case law on point or what level of comfort the funds could take that there would be no risk of matching transaction from 16b if they buy now.

RE: I don't know of any case law on the subject, but courts generally have held that a transaction that is "involuntary" is not subject to matching under Section 16(b). And this redemption sounds to me like it's involuntary. The transaction also doesn't result in any payment to the partnership, and other LPs can't profit from the redemption, so there seem to be several reasons why the redemption shouldn't be a sale.
-Alan Dye, Section16.net 10/21/2019

On a Form 4 for an individual who serves as manager of two trusts and is the indirect beneficial owner of the securities held by such trusts, when reporting a conversion of a derivative security held indirectly by one of these trusts ("Trust A") in Table II, should Table II also include the derivative securities held by the second trust ("Trust B")?

RE: Yes, if the second trust holds a derivative security of the same class as the derivative security converted by the first trust. The instructions to Forms 4 and 5 say that, when reporting a transaction in a security, list the insider's holdings of all securities of the same class as the security involved in the reported transaction, both direct and indirect. Here, the insider would indirectly own the same derivative security, through the second trust.
-Alan Dye, Section16.net 10/21/2019

A 10% owner agrees to buy shares from the issuer at $15/share and the purchase is subject to shareholder approval. At the time the 10% owner agrees to buy the shares, the shares are trading at $15/share. Prior to shareholder approval, the 10% owner assigns that obligation to buy the shares to another person. At the time of the assignment, the shares trade at $17/share. The 10% holder never buys the shares (since, after receipt of shareholder approval, the other person does). Do you think that the 10% owner entering into the agreement and then assigning the obligation could be viewed as a purchase and sale? Would it matter if the 10% holder was paid consideration for the assignment? I think that since the agreement to buy shares is subject to a contingency outside of the 10% holder's control, neither the agreement to purchase nor the assignment to the other person should be viewed as a purchase and sale, even if the 10% holder receives consideration for the assignment. I would greatly appreciate your thoughts. Thank you.

RE: I think this fact pattern, which isn't all that unusual, raises some difficult issues, similar to those raised when a 10% owner of a SPAC buys and sells SPAC warrants just before stockholders approve the acquisition that makes all the warrants exercisable. There is a strong basis, in my view, for treating the agreement in this case as not a reportable interest in an issuer security, such that the contract may be entered into and sold (or assigned) without having to file a Form 4. If an issuer or shareholder ever bought a 16(b) action, though, I don't know if the court might be persuaded that the contract was a derivative security, or represented a purchase and sale despite the existence of material conditions to closing. Maybe you or others have a point of view to share.
-Alan Dye, Section16.net 10/20/2019

RE: Thank you. I believe that generally, if an insider has a right to purchase shares that are subject to a contingency outside of its control, the insider is viewed as not having a pecuniary interest in those shares until the contingency occurs (which would then be viewed as a purchase), but I think that is based on case law, not a rule (but please correct me if I am wrong).

I would like to think that general rule would apply here, but I have some concern that if the insider is actually paid to assign the right, it looks like disgorgeable profit.
-10/20/2019

RE: I see the issue, and the current state of the law, as you do.
-Alan Dye, Section16.net 10/20/2019

An investor who is subject to Section 16 holds a warrant with a fixed price and the warrant is convertible in a year. After the warrant has been held for 8 months, the issuer agrees to amend the warrant so that it is convertible today (4 months early). Since the warrant has a fixed exercise price, when it is exercised, it should not be viewed as a sale of the warrant and a purchase of the stock received upon exercise (that is, I believe the exercise of the warrant is exempt from 16b, though it should be reported). Do you think there is any risk of the amendment being viewed as a sale of the old warrant and a purchase of the new for 16b purposes? Even if not, would the amendment itself require reporting? Thank you.

RE: I don't think this precise issue had been addressed by a court. The SEC staff has said that an amendment to the vesting provisions of an employee stock option doesn't need to be reported, which indicates to me that the staff believes (and I certainly think) that an amendment accelerating the date on which a warrant may be exercised is not reportable and therefore is neither a purchase nor a sale for purposes of Section 16.
-Alan Dye, Section16.net 10/20/2019

Under the company's Performance Stock Program, the executive officer was granted certain Performance Shares that will vest upon achievement of certain performance goals, including EPS, TSR and ROE goals. In addition, the Performance Shares include Dividend Equivalent rights, such that on the date of dividend payment, the Company will credit the officer's account with a Dividend Equivalent in the form of an additional Performance Share with a value measured equal to a fraction of common stock that can be purchased assuming the offer own a share of common stock instead of Performance Share. The Company does not have a DRIP that would cover this issuance of Dividend Equivalent. Question: If the Company filed a Form 4 on the date of grant of the Performance Shares to report such grant, does the issuance of Dividend Equivalent (in the form of additional Performance Share) in the dividend payment date trigger another Form 4 to report such issuance of Performance Share? We are talking about a small number of shares but the small acquisition exemption under 16(a)-6 does not appear to be available because it is a direct issuance of securities by the issuer to the reporting person?

RE: Are shares actually issued, with voting rights, or are performance shares merely a right to receive shares that will be issued when and if the performance metrics are achieved? If the latter, neither the initial award nor the DER accruals were reportable. The fact that the company voluntarily reported the initial awards doesn't bind the company to report DERs voluntarily as well.
-Alan Dye, Section16.net 10/15/2019

RE: Actually the DER based Performance Shares were issued without any additional performance criteria and will be a time-vest Performance Shares, similar to time-vest RSUs. If so, should the Company report it on a Form 4?
-10/15/2019

RE: Yes, if the DERs are not subject to ANY performance criteria, I agree they should be reported at the time they are issued.
-Alan Dye,Section16.net 10/16/2019

A Rule 13d-1(c) 13G filer purchased shares of an issuer in its initial public offering directly from an underwriter. After purchasing shares from the underwriter the filer’s beneficial ownership percentage went above 5% based on the post-IPO shares outstanding. Subsequently, on the same day as closing, the filer sold shares in the market thereby decreasing its beneficial ownership percentage below 5%, again based on the post-IPO shares outstanding. Would this be a reportable event on a Schedule 13G because they were over 5% or would this not be reportable because by the time the initial public offering closed they were below 5%?

RE: I do think a 13G filing is required, because the investor acquired stock that took it over 5% after the effective date of the company's Section 12 registration. While I suspect some people ignore the filing requirement in this situation, I think the rules require the investor to file a 13G and disclose in the 13G that, as of the time of filing, the investor is no longer over 5%.
-Alan Dye, Section16.net 10/10/2019

RE: Isn't there an argument that you don't beneficially own the shares until the IPO closes (because the closing of the IPO is subject to conditions outside of your control) and that by that time you had already disposed of the shares so you never had voting or investment power over more than 5%.
-10/15/2019

Re: Yes, and I think that's a very strong argument. Here, it sounds like the filer will acquire shares in the IPO, triggering a filing obligation, then sell stock to go below 5%.
-Alan Dye, Section16.net 10/15/2019

Company granted its executive officers Performance Based Restricted Stock Units with vesting conditioned upon achievement of stock price targets. Achievement of any stock price target during the term triggers a ninety-day "Continued Service Period;" at the conclusion of the Continued Service Period, Units will vest and common shares will release to grantee at the following rate: upon achievement of the first stock price goal ("Threshold Goal"), common shares equal to 50% of the number of Units granted; upon achievement of the second stock price goal ("Target Goal"), another 50%; and upon achievement of the third stock price goal ("Stretch Goal"), another 100%. For clarity, if all three goals are achieved during the term, a grantee will receive a number of common shares equal to 200% of the number of Units granted. At time of grant, executive officer grantees reported the grant of Units on Table II of Form 4. In Column 7 of Table II, the number of underlying shares was reported at the 100% level (i.e., the amount that would vest upon achievement of Threshold Goal and Target Goal and completion of associated Continued Service Periods), and a footnote explained the three goals and clarified that the actual number of shares issuable could be 0%, 50%, 100%, or 200% of the number reported in Column 7, depending upon achievement of the goals. Threshold Goal has now been achieved. Does each executive officer grantee have a reporting obligation (i) prior to the completion of the Continued Service Period, (ii) at the conclusion of the Continued Service Period (i.e., upon vesting and release of shares), or (iii) both? Company believes that achievement of Threshold Goal and completion of the Continued Service Period will lead to partial "conversion" (transaction code M) of each Unit, but each Unit must remain outstanding for the remainder of the term unless all goals are achieved. How should the Units be reported on Table II, since Units are only partially "converting?" (e.g., should Table II of grantee's Form 4 list all Units as remaining outstanding, with an explanatory footnote?) Finally, is there any impact on responses to the above if Company withholds a portion of shares to satisfy tax liability? Thank you in advance for your insight.

RE: I don't think I've had occasion to report an award of this type. I'm understanding the terms correctly, an officer receives a target award of, say, 3,000 units. That means the officer will earn 0, units, 1,500 units, 3,000 units or 6,000 units. How many units are earned depends on both stock price and the passage of time, so the award is a reportable derivative security. Can you tell me the basis on which the initial Form 4 reported on the target award (3,000 in my example) rather than 6,000?

Regardless of the number reported at grant, it seems to me that the "earning" of an award isn't reportable, and is just the first to two required vesting events. After the passage of 90 days, though, I would report the conversion of that portion of the award, as s disposition of the RSU and, in Table II, the acquisition of the underlying stock. I would show in Column 9 of Table II the number of units remaining subject to earning/vesting requirements. If units are withheld to pay taxes, I would show the withholding of common stock, in Table I, presumably using transaction code "F" (assuming Rule 16b-3(e) is applicable).
-Alan Dye, Section16.net 10/13/2019

A parent company has two wholly owned subsidiaries: (1) a registered broker dealer and (2) registered investment advisor. The parent company itself is a corporation but not one of the enumerated "qualified institutional investor" listed in Rule13d-1(b)(1). However, the two subsidiaries are "qualified institutional investors" under Rule13d-1(b)(1). The parent company and the subsidiaries both directly invest in a public company, so that after the investment, the parent company owns directly 8% of the company and the subsidiaries own 3% of the company. Because parent company controls the subsidiaries, it will be deemed to beneficially own 11% of the company. There are no other relationship between the entities. Can the parent company qualify to file a Schedule 13G as a "qualified institutional investor" assuming they have no control intent?

RE: I don't think the parent would be able to piggyback on the qualified institutional investor provisions applicable to the two subsidiaries. The rule allows a parent company to piggyback when it owns less than 1% of the company's stock outside the qualified institutions, but this parent doesn't seem to qualify for the provision. The parent could file on 13G as a passive investor, though.
-Alan Dye, Section16.net 10/10/2019

A section 16 reporting person reports shares that he holds in trust, as trustee, for his children (with a disclaimer of beneficial ownership). The reporting person has agree to terminate the trust and distribute the shares to his children, but on the condition that they grant him an irrevocable proxy to continue to vote the shares. So, he continues to have Section 13(d) "beneficial ownership" over the shares (via the voting power), although his children can sell the shares at any time (so they are now Section 13(d) beneficial owners as well). Question: When does the Section 16 reporting person report the disposition on his Form 4: upon distribution to the children (at which point it is clear he no longer has a pecuniary interest in the shares), or when the children sell them (since the Section 16 reporting person continues to have Section 13(d) "beneficial ownership" over the shares, he could technically still report them and disclaim beneficial ownership - consistent with what he's done historically). It seems more reasonable to report the distribution of the shares to his children on the Form 4, rather than trying to keep track of when his children sell the shares and filing then (which he would know, since he'd lose his vote, but not necessarily fast enough to timely file a Form 4), particularly since it is quite clear that, once the kids can sell the shares, he no longer has a pecuniary interest. Thanks.

RE: I think the insider can and should report the disposition of the shares when they are distributed by the trust. The insider's ability to vote the shares prior to their sale does not represent a continuing pecuniary interest, so the proxy doesn't change the analysis of when the disposition occurs.
-Alan Dye, Section16.net 10/8/2019

Q: Hi. We have a senior level associate (non-Section 16) who will have NQ options expiring in the middle of this month (during our current blackout period, that doesn't end until the end of the month). Our insider trader policy prohibits transacting on any stock while in possession of any material, non-public information. We've incorporated blackout periods for those associates that "could" be in possession of non public, company info before earnings release. This was also a 7 year term option. One of these associates is asking for an exception to be made to the policy in order for him to exercise and HOLD the options, during a current blackout, before they are canceled. Is this an internal decision to make this exception or would it be a violation of Sarbanes Oxley 2002 to allow this associate to exercise options during a blackout? Any other repercussions? Thanks so much for the help.

RE: Whether the prohibition on transacting during a blackout appears in an insider trading policy, an ethics policy, or elsewhere, a waiver of the policy would not involve a "senior officer" and therefore would not trigger an 8-K as a waiver of an ethics rule. A waiver would not result in a violation of Rule 10b-5 or any other insider trading rule, because the transaction would be with the company, which has equal access to information, and would occur pursuant to pre-established terms anyway. If the company is aware of material negative information that is unknown to the employee, then the company might need to consider that disclosure issue. I can't think of any other reason the waiver can't be granted.
-Alan Dye, Section16.net 10/8/2019

Q: This question is a follow-up to your responses in Topics 8940 and 7413. A revocable trust for the benefit of an insider of an issuer and his spouse (and for which the insider and his spouse serve as trustees and were settlors) (the “Insider Trust”) contributed shares to a Limited Partnership. In exchange, the Insider Trust received a 99% limited partnership interest and a 1% general partnership interest. The Insider Trust then transferred the 1% general partnership to an LLC whose membership interests were and have been at all times held exclusively by the insider and his spouse. Concurrently, the Insider Trust transferred the limited partnership interests to irrevocable trusts for the benefit of the insider’s adult, financially independent, children partially in exchange for a note (with a portion of the transfer of the LP interests constituting a gift). The insider and his spouse serve as trustees of the irrevocable trusts. Now, in order to satisfy the obligations under the notes, a separate limited partnership (but with an identical structure) proposes to distribute shares held by it to the LLC as GP and to the irrevocable trusts as LPs on a pro rata basis sufficient to pay off the notes. The irrevocable trusts will then use the now appreciated stock to pay off the principal and interest obligations under the notes and the irrevocable trusts will transfer the issuer shares to the Insider Trust. The insider has at all times had a pecuniary interest with respect to all of the shares at issue by virtue of Rule 16a-8(b)(2)(ii) and would continue to have a deemed pecuniary interest in all the shares after the distributions in satisfaction of the notes. We read your prior advice to indicate that a credible argument exists that the transactions I have described above are substantive gifts structured as they are for tax purposes but that the plaintiffs’ bar would likely disagree. In this particular case, the insider had an open market sale within six months, and the stock price has since appreciated such that the potential short-swing liability would be material. I also note the Quintiles case from the late 90s on similar facts with a GRAT. Please let us know if you see anything distinguishable about the fact pattern we laid out above and our conclusions. Thank you for your assistance.

RE: I don't have anything to add to your very good analysis and my prior posts on this subject. After not hearing anyone raise these issues (or less complex Quintiles-type issues) for a couple of years, I've had the issue come up three times in the last few months, usually involving a structure much like yours (although I hadn't heard of the use of a second limited partnership to get shares to the children's trusts for use in paying off the notes). I also searched the EDGAR database and found a significant number of Forms 4 reporting similar transfers. Maybe I'm wrong that the plaintiffs' bar would challenge these transfers as a sale of stock to the trusts, and the transfer of stock back to the insider as a purchase, but the Quintiles case seems to offer them a good tool for scaring an insider into a settlement. I feel like a judge should conclude that these are effectively gift transactions, not purchases and sales, because "the context otherwise requires." I don't know how to offer an insider much comfort, though, and I share your frustration.
-Alan Dye, Section16.net 9/30/2019

Q: Is a Form 3 still required when a new Section 16 filer is receiving a grant and filing for the first time, as they will be filing a Form 4 to report the grant (if they previously held no securities). If so, should the Form 3 be filed first, followed by the Form 4.

RE: Yes, a Form 3 is required of every new insider. In your case, the Form 3 should report no securities owned, or whatever the insider owned prior to the grant accompanying the insider's promotion. The Form 3 can be filed after the Form 4, but the SEC "encourages" insiders to file the Form 3 first.
Alan Dye, Section16.net 10/2/2019

Q: Are you aware of any support for the position that a rights agreement that has built in features designed to deter anyone from acquiring more than 5% can effectively be treated as a valid blocker such that options or warrants that would otherwise give you the right to acquire more than 5% of the outstanding class do not result in beneficial ownership of greater than 5%? Do you think there is a point at which such provisions could be so punitive as to have that effect or do you think that, like options or warrants that are out of the money, the economics are irrelevant to questions of beneficial ownership?

RE: I think I understand the concept. The restrictions would make it economically irrational to exercise, I take it, but wouldn't limit ownership to X% by virtue of an ownership limit, as in REIT charters?
-Alan Dye, Section16.net 9/29/2019

RE: That's right. In this case the shares are subject to a rights agreement with a poison pill that is intended to deter 5% or greater acquisitions so as to preserve the issuer's NOLs.
-9/29/2019

RE: The position you're suggesting makes sense (to me), but like you, I'd be afraid to advise someone that it's a winning argument, given the staff's position that a deeply out of the money option represents beneficial ownership.
-Alan Dye, Section16.net 9/29/2019

Q: We have an individual who has been a director of a subsidiary of the registrant and has filed a Form 3 several years ago for that role. The Form 3 is filed under the Registrant’s CIK. The individual was just appointed to the board of the registrant. This individual is now on the board of the Registrant and the subsidiary. Does this require a second Form 3 filing or does the first Form 3 filing satisfy the Form 3 requirement?

RE: It sounds like either no Form 3 was required initially, because the director was not a director of :the issuer," or the subsidiary is a Section 12 registrant and the Form 3 was filed using the wrong EDGAR codes. Either way, the insider should file a new Form 3 showing that s/he became a director of the Registrant. If I'm misunderstanding the facts, please re-post.
-Alan Dye, Section16.net 9/26/2019

Q: Hi Alan, We currently report awards of Restricted Stock Units for our Reporting Persons on Table I. We have an officer of the company who has been with us for several years and has acquired awards of RSU’s during his tenure, and has recently been designated as a Reporting Person of the company (effective next week). I see in the Model Form 29 that the above is reportable in Table I in Forms 4 and 5, but does not specify this reporting approach is acceptable in a Form 3. For clarification sake, can I report RSU's on Table I on a Form 3, as we have done for our Forms 4 and 5 reporting? If this is prohibited, what Form may I reference for proper reporting? Thank you in advance!

RE: Yes, the staff's position is that RSUs that will settle only in stock (not cash) on a one for one basis may be reported as common stock under Section 16(a). That means the RSUs can be reported in Table I of Form 3 as well as Form 4 and Form 5.
-Alan Dye, Section16.net 9/25/2019

Q: The CEO resigned from such position effective Date X. He will remain employed with the company through Date X + 30. The board determined that he was no longer a Section 16 officer as of immediately following his resignation. The former CEO signed a release of claims in favor of the company in connection with his resignation as CEO. The release will be effective Date X + 8 days. Under the terms of his separation agreement, upon the effectiveness of the release of claims, the former CEO will be granted an RSU that will vest, if at all, upon a change in control occurring within 6 months after Date X. Because the RSU grant will be made post-insider status, I don't believe it would be reportable. However, is it reportable because the grant was agreed to in his separation agreement entered into in connection with his resignation as CEO (and arguably while he was still an insider)?

RE: I don't think the grant is a reportable derivative security, because it vests only upon the occurrence of a material condition beyond the insider's control. If it were a reportable derivative security, I think it would be appropriate to treat the award as made post-termination, and eligible for exemption under Rule 16b-3, even though the insider would no longer be an officer eligible to rely on Rule 16b-3. As an exempt grant occurring post-termination, it would not be reportable.
-Alan Dye, Section16.net 9/24/2019

Q: We just found out that shares were transferred to an existing trust form last June 2019. What is our obligation for reporting currently, do we file a form 4-A or can we update the trust and the direct ownership at the next reportable transaction?

RE: Did the insider transfer directly owned shares to a trust? If so, how is trustee of the trust and who are the beneficiaries?
-Alan Dye, Section16.net 9/20/2019

RE: The reporting person is sole co-trustees of the trust, which is a revocable family trust. and currently sole beneficiaries of the trust.
-9/24/2019

RE: Take a look at the section of the Treatise (linked at the toolbar at the top of the home page) for the discussion of "living trusts." Then determine, based on who are trustees and beneficiaries, who can revoke the trust and on what conditions (if any) and whether the insider is in a community property state. That may enable you to determine whether the contribution was not reportable (because the trust is a "living trust") or instead should be reported as a gift.
-Alan Dye, Section16.net 9/24/2019

Q: Are the shareholders of an investment manager eligible for the Rule 16a-1(a)(2)(iii) safe harbor from pecuniary interest? They dont seem to fit squarely within the safe harbor because the Section 12 securities at issue are not portfolio securities held by the manager - they are held by the underlying fund entity. Further, the safe harbor requires that such shareholders not "have or share investment control over the portfolio." It seems that even if such shareholders do not have direct investment power over the Section 12 securities, they will only be deemed beneficial owners because of their control over the manager, which likely will be deemed a beneficial owner because it has investment control. So even if this scenario can be covered by the safe harbor, I'm not sure whether practically it is ever available for shareholders of an investment manager. Separately, my reading of the Rule 16a-1(a)(2)(ii)(C) exception would only seem to apply to hedge funds, where a performance fee is paid on capital appreciation over time, unlike a private equity fund where the incentive fee/carried interest is paid upon realization of each transaction. Grateful for your thoughts on these two points.

RE: I agree that the safe harbor doesn't literally apply, because the securities are not portfolio securities of the manager. I think, though, that general concepts of beneficial ownership might support not treating the shareholders as beneficial owners, if in fact no individual could cause a purchase or sale. By analogy to the rule of 3 in the 13(d) context, lack of investment control might mean only the manager, and no shareholder, beneficially owners the fund's shares.

I agree with your analysis of the performance-related fee.
-Alan Dye, Section16.net 7/31/2012

RE: Do you think that the fact that most hedge funds pay performance fees upon redemptions by investors (not only end of the year), which could be in the middle of the year, would preclude reliance on the safe harbor, which requires that the calculation is only yearly? -7/31/2012

RE: I have pondered that issue several times, together with others who advise hedge funds. I don't think the issue has ever been addressed by the SEC or the courts. I think hedge funds assume the availability of the safe harbor and on that basis don't report a pecuniary interest despite the potential for early payment, but are aware that the issue could (but won't likely) come up and be resolved unfavorably. Since the fund doesn't control the timing, and in any case only the early portion of the fee doesn't qualify, it seems like a minimal risk. Maybe you or others can post their analysis here.
-Alan Dye, Section16.net 7/31/2012

RE: Just wanted to follow up on this comment and see if your views on the reliance of the safe harbor for performance fees that are calculated yearly, but have the potential for early payment, has changed and whether you are aware of any case law or additional guidance issued since the original post?
-9/23/2019

RE: Funny, I was just discussing a similar issue with someone else today. I don't know of any additional guidance, and I still think funds consider themselves not to have a reportable pecuniary interest. I think funds also take the position that, if a portfolio security is distributed, the distribution is pro rata even though the adviser's distribution amount includes a carried interest that doesn't fix until the time of distribution.
-Alan Dye, Section16.net 9/23/2019

Q: Hi Alan, I understand that Rule 16a-8(b)(2) requires insiders to include trust holdings in their Section 16(a) reports where the insider is trustee and the insider or a member of the insider's immediate family has a pecuniary interest in securities held by the trust (e.g., as beneficiary). In the case of an irrevocable trust where the insider and his spouse are the settlors and serve as co-trustees, and the beneficiary is the adult child of the insider (no longer resides in the insiders household and the son is economically independent), would the insider be required to include such trust’s holdings in his Section 16(a) reports?

RE: Yes, I think the insider would be deemed to have a reportable interest in the trust's holdings under Rule 14a-8. The only potential nuance here is that the spouse is co-trustee. Perhaps if the spouse directed a transaction, without the insider's consent, and the transaction benefited only children, not the spouse or the insider, there would be an argument that the insider does not need to report the transaction.
-Alan Dye, Section16.net 9/20/2019

Q: We have a director for whom we did not have information about gifting of shares about which we just found out. These gifts go back to 2011. Two lines of thought and question: If the director has a reportable transaction prior to our fiscal year end, in filing the form 4 I'd expect we'd reflect the gifted shares and get our balance correct. In that instance, we'd list each gift separately with appropriate date in column 2 and code in column 3. What footnoting, if any, would be required or recommended to call out the late reporting? If the director does not have a reportable transaction prior to our fiscal year end, when filing the form 5 to update the balance, we would list each of the gifts with gifting date in column 2 with appropriate gifting transaction code in column 3. What footnoting, if any, would be required or recommended to call out late reporting?

RE: I agree with your proposed approach to bringing the director's Section 16(a) reporting up to date. Whichever filing you include the gifts in, though, I don't think you need to call out the lateness of the gifts, by footnote or otherwise. It will be obvious from the dates of the gifts that they are being reported late.
-Alan Dye, Section16.net 7/1/2019

RE: In this case, would the Gifts be considered late and a notation in the Proxy be required?
-9/17/2019

Q: HYPOTHETICAL FACT PATTERN: Company's registration statement went effective on Monday 10/1 and Forms 3 for officers, directors and 10% holders were filed same day (Monday 10/1). Company issues option grants to non employee directors contingent of an effective registration statement; we prepare Forms 4 for non employee directors - showing the option grants in table II -- due before Wednesday, 10/3 (effective 10/1 plus 2 days - 10/3) IPO CLOSING is to be held on Thursday 10/4 --- Form 4s showing all preferred converted into common (in table II and new common shares - are reported in Table I) These are due on or before Monday10/8. Correct??

RE: Yes, I think that's correct, despite the odd position the staff expressed in its amicus brief in Bruh v. Bessemer. So the option grants weren't subject to closing of the IPO? I think your reporting is fine either way.
-Alan Dye, Section16.net 9/16/2019

Q: An insider made gifts in December 2012 and elected to have such gifts deferred to a Form 5 filing by the February 14th due date. If the insider now has a reportable Form 4 transaction to be filed within two days, can I include the gifts on his Form 4 now rather than having to file a Form 5? Would the gifts be coded as "voluntary" gifts since they are being reported prior to the deadline?

RE: Yes, you can add the Form 5 transactions to an earlier filed Form 4, even if the Form 4 is filed after the end of the fiscal year. You would, as you indicate, put a "V" in the transaction code column, to indicate that Form 4 reporting is voluntary.
-Alan Dye, Section16.net 1/24/2013

RE: Thank you. If, however, an insider has a sale transaction from 2012 which he neglected to report within the two days required, and he also has another Form 4 reportable transaction now, can I also report the delinquent sale transaction on his Form 4 or should I file a Form 5 now to reflect the delinquent sale in 2012 and then file a Form 4 for his current transaction within the two-day deadline?
-1/24/2013

RE: You can add the delinquent transaction to the Form 4 being filed to report the post-FYE transaction. And, you can still include the gifts in the Form 4. Box 3 will show the date of the delinquent transaction.
-Alan Dye, Section16.net 1/24/2013

RE: To clarify - If the insider does not have another current transaction to report on Form 4, could the insider report the delinquent transaction from 2016 on a Form 4 now (FYE is 12/31/16)? Or since we have passed the FYE date, is the only option to report the delinquent transaction on Form 5 before 2/14/17? Thank you in advance!
-1/9/2017

RE: You can report now, on Form 4, the transaction that should have been reported on Form 4 some time during 2016. The staff's position is that a transaction during the FY that should have been reported on Form 4 may still be reported on a Form 4 (rather than on a Form 5 covering that FY) so long as the Form 4 is filed before the deadline for filing Form 5.
-Alan Dye, Section16.net 1/9/2017

Q: I have an insider who will transfer securities to a trust to retire a loan. Is this transaction reportable? The insider is the Trustee and his children are the beneficiaries of the trust. I view this transaction as a transfer and not reportable since he is considered to beneficially own the securities before and after the transaction. Am I correct to report this transaction as a transfer?

RE: Is your circumstance that the insider owns shares directly and also has issued a promissory note to the trust, and will now use the shares to pay off the note? If that is the case, and the insider's children are the beneficiaries of the trust, I think a pecuniary interest is being created in the children, requiring that the transfer be reported on Form 4.
-Alan Dye, Section16.net 12/20/2016

RE: Yes the insider owns shares directly and will pay off the note with the transferred shares. If the insider is currently reporting the trust holdings on his form (holds shares not related to this transaction in the trust) this transaction will still create an additional pecuniary interest in his children?
-12/20/2016

RE: Yes. Currently, the insider has 100% of the economic interest in the shares. After the transfer, the insiders children will have the pecuniary interest.
-Alan Dye, Section16.net 12/20/2016

RE: Even though he is the trustee and has an indirect ownership through the beneficiaries? -12/20/2016

RE: Yes. The staff has been quite clear on that point.
-Alan Dye, Section16.net 12/20/2016

RE: Thanks. Is it best to report the transaction as a private sale using the "P" code or the "J" code?
-12/20/2016

RE: I think either would be appropriate, so long as, if you use transaction code J, you explain the transaction in a footnote.
-Alan Dye, Section16.net 12/20/2016

RE: Hi Alan, As a follow-up to the above scenario, would the transfer to forgive the loan be considered a matchable transaction for purposes of the short swing profit rules?
-9/11/2019

RE: I think you would have to assume the answer is yes, but in my experience these transfers to and from family trusts to pay off a note are estate planning transactions that are all documented at one time. I think an argument can be made in many cases that the transactions really are just tax-driven ways for insiders to make gifts to family members. I'm confident the plaintiffs' bar would be willing to challenge that argument, though, so I wouldn't advise an insider to rely on it if the dollars were significant.
-Alan Dye, Section16.net 9/11/2019

Hi Alan, Simple question today: if our captive broker files Form 144 for our insider's trades electronically, are they visible to the public? I have not been able to find any 144 forms on the SEC's website but may be searching wrong. Thank you!

I think paper filings of Form 144 are filed in the SEC's public reference room, and are available to anyone who asks to see them. Some vendors assemble the information and report them on websites or in newsletters.

Edgar filings show up on Edgar right away. Paper filings show up at the SEC when they get it - and then sits in a filing cabinet in the SEC's library.
-Alan Dye, Section16.net 9/11/19

Hi Alan - An issuer filed Forms 4 for restricted stock unit awards that were to vest based on relative TSR compared to an index over a three year period in Table I at the time of grant, reporting the target share amount. I understand this approach is inconsistent with historical staff advice, but wanted to see if there have been any additional development or tales of caution with this practice and how strongly you recommend that the issuer file a "true-up" Form 4 indicating actual achievement at the time the performance achievement is approved/certified by the compensation committee? Thank you!

I don't know of any additional guidance. I do hear that a fair number of companies report the awards at the time of grant, and don't true up when awards are earned unless the number of shares earned exceeds the reported "target." Given that the staff doesn't appear to have shown an interest, I have a hard time saying that companies are at risk if they report only at the time of grant. It just isn't what I would do, because the only staff guidance I'm aware of suggests (to me) that a Form 4 is due on the date the award is earned.
-Alan Dye, Section16.net 9/9/2019

Q:An accounting error resulted in a miscalculation in a distribution allocation report resulting in the number of shares reported received by an insider in a distribution was underreported. I.E. The insider reported receiving 150,000 shares as a part of a group and then the group sold those shares, resulting in holding 0 shares. When the accounting error was discovered it was determined that an additional 9,000 shares had been distributed to the insiders group and these additional distributed shares have not been sold. I assume this discrepancy be reported on a Form 4/A, as opposed to reporting the issue in the next filed Form 4? If so, the 4/A should amend the initial Form 4 with the erroneous reporting on the number of shares distributed, but how would you reflect that the holdings after the reported sales (which were reported on a subsequent Form 4) should be 9,000?

RE: Yes, I agree, if the insider's acquisition of the shares was reportable, then the Form 4 should be amended to report the correct number of shares acquired (or only the additional 9,000 shares), in either case with an explanatory footnote. I think you could show in Column 5 the total owned at the time, or the total owned today. I would show the total owned today, and explain that in the same footnote.
-Alan Dye, Section16.net 9/4/2019

Q: An option time vests but can be early exercised at the discretion of the holder. Should I disclose early exercisability in the vesting schedule footnote. Thank you

RE: Are you saying that, despite vesting provisions that require the passage of time for the award to become exercisable, the grantee can exercise the award at any time? If so, what gives the optionee that right?
-Alan Dye Section16.net 9/2/2019

RE: OK, I see. This is not a topic on which the staff has provided reporting guidance. I would be comfortable reporting only the time-based vesting provisions, and not describing the early exercise provision. The insider has to remain employed through the vesting dates to enjoy the economic benefits of the option.
-Alan Dye Section16.net 9/3/2019

Q: Hi Alan, I have two questions related to trading plans for Section 16 insiders I am hoping you can help with: 1. Can a footnote be added to Form 144 to state that sales were effected under a plan? We have received advice that this is not legal. We do add a footnote to Forms 4. 2. Can charitable donations/gifts be included in trading plans? I have one broker who says yes and another who says no since it is not a purchase or sale. I understand this may be a difference in internal policies but also wonder if there is room to push back on the broker saying they are not allowed. Thank you very much.

RE: 1. I don't know of any reason why you can't add a footnote or other statement saying the intended sale is pursuant to a Rule 10b5-1 plan. It isn't a required disclosure, but if you can find room for it on the Form 144, I'm confident it isn't "illegal."

2. I agree with the broker that a Rule 10b5-1 plan isn't necessary for gifts, because a 10b5-1 plan serves as a defense under Rule 10b-5, and Rule 10b-5 is violated only by a purchase or sale. I still think a gift could be structured to occur pursuant to a pre-arranged plan that is patterned after a 10b5-1 plan. Maybe the broker doesn't want to undertake the inconvenience of modifying the firm's 10b5-1 plan to refer to gifts rather than purchases or sales.
-Alan Dye, Section16.net 9/1/2019

Q: If a company were to issue phantom stock units that are cash-settled on a full value basis based on the company's stock price, but with a max value per unit (i.e., each unit will pay out in cash at the stock price on the vesting date, up to a maximum of $50 per unit), would the imposition of the max value change the analysis as to whether the awards are derivative securities requiring a Form 4 filing? Seems like they would need to be reported, but wanted to ask.

RE: Yes, I agree, I think the value of the units is derived from the value of the common stock, so I think the units are derivative securities. The cap on value might affect the profit calculation if the acquisition of a unit were matched with a sale of common stock, though.
-Alan Dye, Section16.net 8/29/2019

RE: Thank you for the quick reply! I'm not sure I follow the note about the profit calculation, so long as the board approves them, wouldn't the awards be exempted?
8/29/2019

RE: Yes, if the grants are exempted by Rule 16b-3, the profit calculation issue never arises. I was only surmising that, where there is a cap on the amount of profit from a "purchased" security, that should affect the 16(b) profit calculation on a match. Say the current value of common stock is $10, the cap on appreciation for the grantee is $15, and the insider sells stock for $20. Should the recovery be $10 a share, or maybe only $5 a share?
-Alan Dye, Section16.net 8/30/2019

Q: If a pre-IPO “grandfathered” investor eligible to file a Schedule 13G (under 13d-1(d)) acquires a control intent before the Schedule 13G due date, must the investor file a Schedule 13D within 10 days of acquiring such intent? I don’t think so and C&DIs 103.08 and 103.09 seem inapposite. Thank you.

RE: "A grandfathered person under Rule 13d-1(d) will only lose that status if the person trips the 2 percent within 12 months test (i.e., the grandfathered person acquires the now Section 12 registered equity and that purchase when aggregated with all other acquisitions during the prior 12 month period ( which would include the time period when the company was not yet a public company) aggregates to be more than 2 percent of the outstanding. A Rule 13d-1(d) Schedule 13G does not have a passivity certification so the reporting person can have a control intent and still file on 13G."
-Alan Dye, Section16.net 6/1/2015

RE: Do you think the same rule applies if the investor is required to file a Schedule 13G under 13d-1(d) by virtue of a stock buy back? That is, assume an investor bought 4.5% five years ago. This year, the company does a buyback, which resulted in the investor becoming a 5.5% owner. As indicated by an SEC CDI, the investor is required to file a Schedule 13G after year end pursuant to Rule 13d-1(d). I believe that if it buys more shares, it does not lose the ability to file under Rule 13d-1(d) until it has acquired more than 2% in any 12 month period. Once it has acquired more than 2% in any 12 month period, it must then evaluate if it can file a Schedule 13G under Rule 13d-1(b) or 13d-1(c). If it can, it can file pursuant to the applicable rule. If it can't, it must file a Schedule 13D.

The SEC CDI indicates that is the case if the person was required to file a Schedule 13G under Rule 13d-1(d) by virtue of being a pre-IPO greater than 5% owner. While the CDIs don't indicate if the same 2% rule applies to an investor who is required to file a Schedule 13G under 13d-1(d) by virtue of s stock buy back, I think it would apply to that situation as well. Can you please let me know if you agree? Thank you very much.
-8/29/2019

RE: I do agree.
-Alan Dye, Section16.net 8/29/2019

Q: Does a distribution by an LLC to its members in a liquidation qualify for the Rule 16a-9 exemption for those members who are receiving the distribution and are subject to Section 16, even though Rule 16a-9(a) on it face appears to only capture stock splits and stock dividends? Please assume that (i) there are 50 LLC members and (ii) the distribution in the liquidation is effected pro rata based on the LLC members' respective LLC interests. Thank you.

RE: Yes, I do think insiders' receipt of issuer securities upon liquidation of the LLC will qualify for the Rule 16a-9 exemption. See this discussion on page 539 of the treatise:

"As adopted in 1991, Rule 16a-9(a) did not exempt a stock dividend consisting of securities of a different issuer. As a result, a “spin-off” in which an issuer declared a dividend consisting of the securities of a subsidiary or a portfolio company was not exempted by the rule. In 1996, the Commission expanded the exemption to cover “a stock dividend in which equity securities of a different issuer are distributed.” 12 The Commission’s rationale for expanding the exemption was that spin-offs are motivated by “business purposes” and merely give stockholders direct ownership of an asset that they owned indirectly prior to the dividend.13 As a result of the 1996 amendment, an insider of a spun-off entity can rely on Rule 16a-9(a) to exempt the receipt of securities pursuant to the spin-off, provided that the securities are received in a pro rata distribution to all holders of the class on which the spin-off dividend is paid.14"
-Alan Dye, Hogan Lovells US LLP 8/26/2019

RE: Thank you for your quick response. Is there a risk that a distribution upon liquidation would not qualify under Rule 16a-9, though?
-8/26/2019

RE: I suppose there's always some risk that a court would reach a different conclusion in the absence of any case law addressing the subject, but I would be very comfortable advising the insider not to report the acquisition.
-Alan Dye, Section16.net 8/26/2019

Q: Dear Sir/Madam: Insider's transaction are listed below. Since the purchase amount and date are the same for both transactions, can I combine them? I was told not to since this is not an open market purchase but rather a private one. Please advise. Thank you! 1. First transaction – Private sale of 275,862 shares at $3.00/share on August 16, 2019 2. Second transaction – Private sale of 67,549 shares at $3.00/share on August 16, 2019

RE: Yes, you can combine these on a single line, because they are both purchases, they occur on the same day, and they occur at the same price.
-Alan Dye, Section16.net 8/26/2019

Q: Does the Rule of Three apply when you have a board with an even number of directors and a person controls half of the directors? While that person can't pass any resolution on its own, it does have a veto right. Thank you.

RE: I don't think the Rule of Three would apply, if I'm understanding the facts correctly, because the Rule of Three assumes that a transaction could occur over the objection of the person deeming itself not to be a beneficial owner. A veto right makes a person a beneficial owner.
-Alan Dye, Section16.net 8/22/2019

Q: If a swap contract provides that it can be settled in cash or stock, it is clear to me that when electing cash settlement the insider would have an exempt exercise and then a non-exempt purchase or sale (depending on whether it is a long or short swap). If the insider elects stock settlement, it the settlement exempt entirely, or does having the cash option in some way change that? Thank you.

RE: I agree that settlement for cash would constitute a non-exempt sale, subject to the possibility that, if the insider elects cash settlement at the time the sway is entered into, or maybe even if the election is made more than six months prior to settlement, there may be an argument that the sale is essentially exempt, under a Centillium-type analysis. If the insider elects stock settlement, I think the transaction is exempt, whether or not there was a cash election feature that wasn't used.
-Alan Dye, Section16.net 8/15/2019

Q: 10% holder of Company X entered into a warrant in April 2019 with Company X. Warrant has a defined exercise price and number of shares, and warrant must be exercised in April 2020 pursuant to terms of purchase agreement (i.e. no control over timing or price of exercise). Is the "purchase" deemed to be at the time of entering into agreement (April 2019), or exercise of warrant (April 2020)?

RE: Because the warrant has a fixed exercise price and a specified number of underlying shares, it is a "derivative security" as defined in Rule 16a-1(c). That means the insider's acquisition of the warrant was a "purchase" of the underlying common stock as of that date, for purposes of Section 16(b)--see Rule 16b-6(a). The acquisition is reportable as a purchase of the warrant, though. The exercise in 2020 will be exempt from Section 16(b) under Rule 16b-6(b), assuming it is in the money, so that "purchase" will not be matchable with any sales that may occur (or have occurred) within six months of the exercise.
-Alan Dye, Section16.net 8/8/2019

Q: Insider sold minimal shares (6) in June at $35 per share and recently placed a purchase order for a larger number (3000) of shares at a price $0.40 lower than the sale price. Should the transaction go through is the amount the insider owes the company $2.40 (6x.40) or the difference on the entire 3000 shares (3000x.40 = $1200)?

RE: There are only 6 shares on the purchase side, so only 6 of the shares sold can be matched with that purchase, for total profits of $2.40.
-Alan Dye, Section16.net 8/6/2019

RE: The Form 4 reporting the sale will appear on the same form as the purchase. Should a footnote be added stating that the insider will reimburse the company the difference earned on the four shares?
-8/7/2019

RE: Reasonable minds might differ on that issue, but I would be inclined to say nothing, on the theory that the profit is so small no plaintiff will inquire, and even if one does, s/he wouldn't challenge your assertion that the insider has already agreed to pay, all in the hope of collecting a %of $2.40. In fact, the amount is so small, you might conclude that it isn't worth bothering to collect it, but I realize that it can be unsettling not to enforce Section 16(b).
-Alan Dye, Section16.net 8/7/2019

Q: We report PSUs early -- that is, when they are approved by the Compensation Committee and the metrics are established. Historically, as part of this, we provide a description of the vesting schedule in a FN. E.g., "these PSUs will vest by reference to the company's next revenue for 2019 - 2021". Can we omit some/all of that detail?

RE: I think you need to provide some amount of information to describe the "date exercisable" and the "date of expiration," but I don't hink youi need to indicate the nature of the performance criterion (net revenue). You might say something like "these PSUs will vest only if certain performance conditions are satisfied during 2019-21."
-Alan Dye, Section16.net 8/6/2019

RE: would the period of time be critical, in your estimation?
-8/6/2019

RE: I'm not sure how else to describe the date exercisable. What do you have in mind?
-Alan Dye, Section16.net 8/6/2019

RE: Good point. We would still put the vesting date -- so, vests on June 1, 2021, subject to the satisfaction of certain performance metrics.
-8/6/2019

RE: I think that's adequate. It identifies the actual vesting date.
-Alan Dye, Section16.net 8/6/2019

Q: In a public master limited partnership, the holders of LP interests seem to file Section 13/16 reports if they own more than 5/10% of the outstanding LP interests.

RE: Are persons who own more than 10% of the LP interests filing as 10% owners, or are officers/directors of the GP filing as officers/directors, and reporting ownership of LP interests?
-Alan Dye, Section16.net 8/6/2019

RE: 10% owners, not just officers and directors. Consistent with that, they also file 13G/Ds when over 5%. Does that surprise you?
-8/6/2019

RE: Surprised might be a bit too strong, but I am curious to know how they reached the conclusion that LP interests are voting securities, maybe it's for the reason you stated. There must be matters on which a vote is required (maybe liquidation, change of purpose), and the company has concluded that, since LPs vote on those matters, LP interests are voting securities. I'm not aware of a staff position on the question.
-Alan Dye, Section16.net 8/6/2019

Q: Section 12 Parent acquires in a merger a non-Section 12 company (“Target”) in a transaction that results in Target becoming a majority-owned subsidiary of Parent as well as certain employees of Target having the right to sell to Parent shares of Target stock that employees acquired prior to the merger. For various reasons, the acquisition was structured such that Parent acquired the substantial majority of Target securities in the merger, with a small amount of Target shares that were acquired by employees of Target pre-merger remaining outstanding post-merger. As noted above, the former Target employees, one of which is now a Section 16 insider of Parent, have the right to sell to Parent such Target shares based on a formula that is tied to the current market price of Parent stock. Is there any Section 16 consequence to the Section 16 insider of Parent selling her Target shares to Parent? Asking because I wasn’t sure if the Target shares could be a derivative of Parent stock given that the acquisition price for Target shares is tied to the current market price of Parent stock. Thanks.

RE: It sounds like Target employees who still hold Target stock have a right to put their Target stock to Parent at a price that isn't fixed, and instead is based on the market price of Parent's stock at the time the put is exercised. If that's the case, the Target stock is not a derivative security, and therefore exercise of the right would not be exempted by Rule 16b-6(b). The insider's acquisition of issuer stock could be exempted by Rule 16b-3, though, if the board or a committee of nonemployee directors approved the right, or approves the exercise of the right before the insider exercises it.
-Alan Dye, Section16.net 7/31/2019

RE: Thanks. Note that here, there is no Parent /issuer stock to be issued--Parent would pay all cash for any Target shares that are put to the Parent by Target employees. So, it appears to me that there is no Section 16 consequence to the exercise of the Target stock put right. Agree?
-7/31/2019

RE: Ok, so how is the Target stock valued for purposes of the right to cash? If, for example, one share of Target stock can be cashed out for the price of a share of Parent stock, the Target stock might be a derivative security, like phantom stock, because it derives its value from Parent stock.
-Alan Dye, Section16.net 7/31/2019

RE: The Target stock is valued based on a combination of Parent's VWAP over set number of days prior to a Target employee's exercise of the put right, which VWAP is then plugged into a negotiated formula that is set forth in the acquisition agreement between Parent and Target. The resulting value is the value that is paid in cash for the Target stock.
-7/31/2019

RE: I agree no Section 16 consequences to exercise of put right, assuming the formula isn't also based on Parent stock price.
-Alan Dye, Section16.net 7/31/2019

RE: The total formula does include the VWAP of Parent stock over set number of days prior to a Target employee's exercise of the put right. So, you first calculate the VWAP of Parent stock over the requisite number of days prior to the exercise, then take that VWAP and plug into the formula set forth in the acquisition agreement, which then results in the value to be paid in cash for the Target stock.
-7/31/2019

RE: understood. I think the key is how the "formula" in the agreement works.
-Alan Dye, Section16.net 7/31/2019

RE: It's complicated, but the gist is that the formula is such that if Parent's stock increases after the merger closing (as measured by the VWAP), then the cash purchase price for the Target shares would proportionately increase, and vice versa. If you do believe that Target stock (or the right to put Target stock to Parent for cash) is a derivative security, how would you report the settlement when insider exercises the put right? Thanks again!
-7/31/2019

RE: In that case, I would report the conversion of the Target stock into Parent stock, showing the disposition of the Target stock in Table II and the acquisition of the Parent stock in Table I, using transaction code "C" in both cases.
-Alan Dye, Section16.net 7/31/2019

Q: Section 12 Parent acquires in a merger a non-Section 12 company (“Target”) in a transaction that results in Target becoming a majority-owned subsidiary of Parent as well as certain employees of Target having the right to sell to Parent shares of Target stock that employees acquired prior to the merger. For various reasons, the acquisition was structured such that Parent acquired the substantial majority of Target securities in the merger, with a small amount of Target shares that were acquired by employees of Target pre-merger remaining outstanding post-merger. As noted above, the former Target employees, one of which is now a Section 16 insider of Parent, have the right to sell to Parent such Target shares based on a formula that is tied to the current market price of Parent stock. Is there any Section 16 consequence to the Section 16 insider of Parent selling her Target shares to Parent? Asking because I wasn’t sure if the Target shares could be a derivative of Parent stock given that the acquisition price for Target shares is tied to the current market price of Parent stock. Thanks.

RE: It sounds like Target employees who still hold Target stock have a right to put their Target stock to Parent at a price that isn't fixed, and instead is based on the market price of Parent's stock at the time the put is exercised. If that's the case, the Target stock is not a derivative security, and therefore exercise of the right would not be exempted by Rule 16b-6(b). The insider's acquisition of issuer stock could be exempted by Rule 16b-3, though, if the board or a committee of nonemployee directors approved the right, or approves the exercise of the right before the insider exercises it.
-Alan Dye, Section16.net 7/31/2019

RE: Thanks. Note that here, there is no Parent /issuer stock to be issued--Parent would pay all cash for any Target shares that are put to the Parent by Target employees. So, it appears to me that there is no Section 16 consequence to the exercise of the Target stock put right. Agree?
-7/31/2019

RE: Ok, so how is the Target stock valued for purposes of the right to cash? If, for example, one share of Target stock can be cashed out for the price of a share of Parent stock, the Target stock might be a derivative security, like phantom stock, because it derives its value from Parent stock.
-Alan Dye, Section16.net 7/31/2019

RE: The Target stock is valued based on a combination of Parent's VWAP over set number of days prior to a Target employee's exercise of the put right, which VWAP is then plugged into a negotiated formula that is set forth in the acquisition agreement between Parent and Target. The resulting value is the value that is paid in cash for the Target stock.
-7/31/2019

RE: I agree no Section 16 consequenes to exerice of put right, assuming the formula isn't also based on Parent stock price.
-Alan Dye, Section16.net 7/31/2019

RE: The total formula does include the VWAP of Parent stock over set number of days prior to a Target employee's exercise of the put right. So, you first calculate the VWAP of Parent stock over the requisite number of days prior to the exercise, then take that VWAP and plug into the formula set forth in the acquisition agreement, which then results in the value to be paid in cash for the Target stock.
-7/31/2019 11:23:50 AM

RE: understood. I think the key is how the "formula" in the agreement works.
-Alan Dye, Section16.net 7/31/2019

RE: It's complicated, but the gist is that the formula is such that if Parent's stock increases after the merger closing (as measured by the VWAP), then the cash purchase price for the Target shares would proportionately increase, and vice versa. If you do believe that Target stock (or the right to put Target stock to Parent for cash) is a derivative security, how would you report the settlement when insider exercises the put right? Thanks again!
-7/31/2019

RE: In that case, I would report the conversion of the Target stock into Parent stock, showing the disposition of the Target stock in Table II and the acquisition of the Parent stock in Table I, using transaction code "C" in both cases.
-Alan Dye, Section16.net 7/31/2019

Q: Assume a director owns 100 shares of issuer stock that is restricted stock. It directs its broker to sell 50 shares short. The broker borrows 50 shares and immediately sell them for $10/share (i.e., it effects the short sale). Five days later the share price has decreased to $7/share. The director covers the short by directing its broker to buy 50 shares at $7/share and return the shares to the lender. The director has earned $150 ($3 x 50 shares). Are you aware of any exemption from profit recapture for such a transaction or would the director be required to pay $150 to the issuer.

RE: I don't see any basis for exempting either the open market purchase or the open market sale, so I think profit would be recoverable by the issuer under Section 16(b) (in the amount you've calculated).
-Alan Dye, Section16.net 7/31/2019

Q: A company has 80 shares outstanding. It also issued 10 investors a warrant, each of which is convertible into 10 shares of stock at a price of $100/share, so each investor can exercise the warrant, pay $1000 and receive 10 shares. The stock is trading at $5/share. It seems obvious that no warrant holder would ever exercise its warrant (since if it did so, it would pay $1000 for $50 worth of stock). Notwithstanding that no warrant holder would exercise, I believe each would be subject to Section 16 since each holds 11.1% of the stock using the 13d-3 test (80 + 10 / 90). Simply put, I am not aware of any guidance permitting an investor, for purposes of determining if it is subject to Section 13(d) or Section 16, to ignore it's right to exercise a warrant or option or to convert convertible debt just because it is way out of the money. Can you please let me know if you agree? Thank you.

RE: I do agree. I've confronted the issue before, and I have been told that the staff considers a warrant to represent a right to acquire, even if the warrant is out of the money.
-Alan Dye, Section16.net 7/31/2019

Q: Thank you for posting the Obasi case and pointing out its relevance to the question of whether a board observer is subject to Section 16. I thought the dissent made a good point by pointing out the language in the 1981 SEC release that stated that a person's title should not determine whether it is subject to Section 16, but, rather, the focus should be on "whether the person performs duties likely to make him privy to inside information." Given that language, I would have thought a board observer, who sits in board meetings and therefore has access to information provided to a director, would be subject to Section 16. If so, do you know why the practice is generally not to treat observers as subject to Section 16?

RE: I think the reason is that access to inside information, alone, isn't sufficient to make someone subject to Section 16. If it were, most employees subject to blackout periods would be subject to Section 16. Instead, a person has to be performing the functions of a director or officer, and board observers don't generally perform the function of directors.
-Alan Dye, Section16.net 7/31/2019

Q: Dear Alan, The company I recently joined received the following advice about an incorrect Form 4 filed a few months ago. Do you agree that this is correct? " but generally speaking, non-material discrepancies in the numbers of shares can be corrected and footnoted on the next Section 16 filing." And what is considered non-material discrepancies? Thank you

RE: Yes, I do agree with the principle expressed in the advice you refer to. I don't think the staff has ever said, or would ever say, that errors in reports don't need to be corrected promptly, but I also don't think the SEC is likely to bring an enforcement action against an insider for an unintentional and immaterial error in a report. The greater difficulty is in the second question you pose, regarding how to determine whether an error is immaterial. That analysis requires consideration of the extent to which the error might be expected to have significance to a reasonable reader of the report. If you search for similar questions int his forum, you might find some useful analyses others have undertaken.
-Alan Dye, Section16.net 7/31/2019

Q: We have a client with a recently retired director (within the last month). He would like to do either a sell-to-cover exercise of stock options, or a cashless exercise. The company also recently (within 6 months) went through a transaction whereby there was an option conversion that converted the options into shares of the company that are restricted from trading. Would the former director's contemplated transactions be matchable to the acquisition of those restricted shares? It was my initial thought that these would be exempt transactions, and not matchable, but I want to make sure I'm not missing something. Thank you!

RE: Whether the acquisition of stock in the option conversion was (or was not) exempt likely depends on whether the acquisition was exempt under Rule 16b-3(d), which exempts a transaction between the company and a director (or officer) that was "specifically approved" by either the board of directors or a committee of non-employee directors. If the conditions of Rule 16b-3 were satisfied, then the acquisition would not make the post-retirement sale of stock reportable or otherwise subject to Section 16.
-Alan Dye, Section16.net 7/30/2019

RE: Great - that's what I was hoping to confirm. Thank you!
-7/30/2019

Q: We just reported stock options for a client and were just told that the valuation used in determining the number of options to grant changed slightly. The strike price increased by 0.02 and each insider received additional options. Does this change require an amendment or can we just note the change in the next required form? We feel this is not a cancellation of the original option and a grant of a new option. Somehow we were provided with an outdated valuation report.

RE: I agree that these facts don't seem to suggest a cancellation and regrant, just a miscalculation of the number of options awarded and therefore erroneous numbers in the Form 4. Whether the error warrants an amendment is a matter of judgment, and I think the analysis most filers undertake is whether the error is "de minimis" or perhaps "material" in the context of the information that a Form 4 is intended to convey.
-Alan Dye, Section16.net 7/30/2019

RE: Thanks. I think we will just add a footnote to the next set of required forms explaining the error.
-7/30/2019

Q: When an investor determines whether it is 10% owner, do restricted stock units held by another person count as "outstanding?" If the other person held options that were not exercised, they would obviously not count. RSUs are similar in effect, but I don't know if they have a different result for determining the outstanding shares.

RE: No, RSUs held by other persons would not count as shares outstanding for purposes of a person's ten percent owner calculation. They are, in effect, as you note, similar to options. Of course, as soon as another person's RSUs vest, resulting in the company's issuance of stock, the issued shares increase the number of shares outstanding.
-Alan Dye, Section16.net 7/29/2019

RE: Thank you. While that makes sense logically, do you know of any support for that? Do you know if when companies disclose their outstanding shares on the cover of their filings, they include or exclude them?
-7/29/2019

RE: Also, do you have a different view as to restricted stock? I think RSU represent the right to shares that have not yet been issued, while restricted stock is stock that has been issued but is subject to forfeiture.
-7/29/2019

RE: Section 13(d)(4) says the denominator is the number of shares "outstanding." RSUs do not represent outstanding stock, they are a "right to acquire" stock in the future. Restricted stock is issued and outstanding, so it counts in the denominator (and is reported as outstanding on the cover of Form 10-K/Q.
-Alan Dye, Section16.net 7/29/2019

Q: Dear Alan, We filed a Form 4 with a signature by an attorney in fact via a POA, and then discovered a POA had never been filed with the SEC for this reporting person (as one has for all other reporting persons for the company). What is the best way to correct this? We will file a POA for this reporting person with the next filing due.

RE: Well, the answer to this question is a little difficult. In a nutshell, the POA is supposed to be filed no later than the first time a report is filed with the attorney-in-fact's signature. The staff took the position that, if the POA was omitted, it should be added by amendment to the initial report. For a time, after reports had to be filed electronically, someone on the staff advised filers that it would be acceptable to file the POA with a subsequent report. Later, that advice was either retracted or disavowed, but in any case, unless the staff has changed it's view since then, my understanding is that the staff is of the view that the POA should be filed by amendment.
-Alan Dye, Section16.net 7/26/2019

RE: I have a follow up question. We also want to file updated POAs for each of our reporting insiders. Do we have to sign as attorney-in-fact to attach a POA, or , can we attach a POA to a filing the reporting person signs in order to have one on file for future use?
-7/26/2019

RE: You can file a POA before the attorney in fact actually signs a report.
-Alan Dye, Section16.net 7/27/2019

Q: We have a client that granted awards to insiders and 50% of the award is time-based vesting that vests over 5 years and 50% of the award is based on performance criteria that is not tied to the share price of the stock which vests over 3 years. The insiders have the right to vote the performance shares but are not entitled to receive the dividends.
The client also does not pay a dividend at this point but if they did they are not entitled to the dividends.
Is the performance portion of the award reportable within 2 business days of the grant (which is July 23rd) or can we report the vesting of the performance awards when the committee deems the performance criteria are satisfied?

RE: This award falls within the gray area created by the staff's general position on performance shares and its position relating to performance-based restricted stock providing for both voting rights and dividend rights. The staff said the latter type of award could be deemed "acquired" on the date of grant for purposes of a six-month holding period that existed under a prior version of Rule 16b-3. Practice varies regarding the latter type of award. I think you'd be safe either way here, given that varied practice and the uncertainty created by those two staff positions. Apparently the staff hasn't challenged either practice--reporting at grant, or reporting only upon "vesting."
-Alan Dye, Section16.net 7/24/2019

Q: I misstated the amount of shares purchased in the first of several transactions reported on a Form 4, and intend to: (i) file a Form 4/A only restating that first transaction with the correct information (without restating the subsequent transactions to correct the amount of shares in column 5) and (ii) upon filing a new Form 4, explain the discrepancy in a footnote to column 5. Can you please confirm whether this is acceptable?

RE: I think you can and should correct the error in the amendment, in a way that obviates the need to say anything in a future Form 4. You can do that, can't you, by filing a 4/A which restates the first transaction and then, in Column 5, shows the number of shares owned after taking into account all of the transactions reported in the initial Form 4, with a footnote to that mber explaining that it states a corrected total ownership after taking into account all of those transactions?
-Alan Dye, Section16.net 7/24/2019

Q: Company A and Company B are both publicly traded companies subject to Section 16. Company A will acquire Company B in a merger, after which Company B will be a wholly owned subsidiary of Company A and be delisted from NASDAQ. Immediately following the merger, certain executive officers and directors of Company B will become executive officers and directors of Company A. Questions: (1) Does Company A need to disclose the delinquent Section 16(a) filings by these executive officers and directors while they were at Company B, in the Company A's next proxy statement? (2) If there were unreported transactions during the fiscal year while the executive officers and directors were at Company B, do they need to report these transactions in a Form 5 to be filed AFTER the Merger? I do not believe so but want to check.

RE: 1. No. A "registrant" is required to disclose the delinquencies of its own insiders only, based on their reporting of the "registrant's" securities. The predecessor doesn't count at the registrant.
2. Yes, insider's of Company B need to report any transactions they engaged in while insiders of B, even if the deadline falls after the date of the merger.
-Alan Dye, Section16.net 7/23/2019

Q: Dear Alan, A Section 16 reporting person plans to transfer shares held directly into a revocable family trust. The trust is a living trust, formed in California, and the reporting person and his spouse are the trustees and beneficiaries. Please advise how this should be reported on Form 4. Must it be reported as a transaction (a gift), or can we simply update the total of his directly held shares, add a line for the total shares held indirectly by the family trust, and indicate the transfer in a footnote? Also please point us to a model form which would cover these principals. Thank you.

RE: California is a community property state, isn't it? If so, you might want to read the staff's interpretive letter to Sonnenschein, Nath and Rosenthal, which explains the staff's rationale for treating transfers to living trusts as non-reportable even though the spouse of the insider is a beneficiary and maybe even has the ability to revoke the trust as to the spouse's portion of the assets. If reportable, the transfer would be reportable using transaction code "G," as you suggest. Take a look at Model Form 43 and see if it addresses your situation.
-Alan Dye, Section16.net 5/10/2016

RE: If we treat it as a reportable transaction and indicate a gift to the trust, does the reporting person continue to report the shares as indirectly held by the trust?
-5/10/2016

RE: Yes, I would show the shares being gifted from direct ownership to indirect ownership through a trust.
-Alan Dye, Section16.net 5/10/2016

RE: Assuming the fact pattern remains the same, would the reporting analysis also remain the same? Just confirming that nothing has changed in the analysis since we looked at this in 2016, and that this could still be reported as a gift on a voluntary Form 4 or a year end Form 5. And would we still look at Forms 41-43 and 70 as a model?
-7/18/2019

RE: Yes, reporting would remain the same as suggested in the prior posts. Coincidentally, the June 2019 issue of Section 16 Updates, currently being printed, has a model form addressing the reporting of an insider's gift of company stock to a family trust.
-Alan Dye, Section16.net 7/18/2019

Q: We followed Model Form 93, in reporting the grant of PSO since the criteria was achieving a certain price for a for 20 consecutive trading days. We reported as a grant of a derivative security within 2 days. Instructions say there is no need to report the vesting, but it does not say whether the cancellation of the option due to non-achievement within the performance period needs to be reported. Could you please provide guidance? Thanks so much.

RE: There is no need to report the cancellation/forfeiture of the award due to failure of the performance conditions. The cancellation is exempted from Section 16(b) under Rule 16b-6(d), which exempts the cancellation of a long derivative security position for no value. Any transaction exempted by Rule 16b-6(d) is also exempt from reporting, by virtue of Rule 16a-4(d).
-Alan Dye, Romeo and Dye's Section16.net 7/15/2019

Q: 1. Is a warrant that has no exercise price still reportable as a warrant in Table II (as opposed to the underlying security itself in Table I)? The holder still has to give up the warrant upon exercise, so it seems similar to a convertible security and thus still a derivative security. 2. Is a warrant that gives the holder the right to acquire 10% of the shares outstanding at the time of exercise, based on the amount of shares outstanding at the time of exercise, reportable as a derivative security, in part based on the Jenny Craig no-action letter from 1992? Should it be reported in Table II, with the figure in Column 7 (amount of underlying securities) equal to the amount of securities that represents 10% of the shares outstanding at the time the warrant is acquired (and include a footnote explaining the terms of the warrant)? Then, upon exercise, should it be reported as the exercise of the warrant in Tables I and II, plus an acquisition (assuming the shares outstanding increases) in Table I? The distinction from Jenny Craig is that, there is a potential downside if the shares outstanding decreases - in which case, should it be reported as a conversion of the amount of shares outstanding, and then the remaining warrant would be deemed to expire (and thus not reportable under 16b-6)? Thanks.

RE: I don't think the warrant would be a "derivative security" and therefore don't think the holder, if the holder is a Section 16 insider, would be reportable. I understand the comparison to a convertible security, but even a convertible security is reportable only if its conversion price is fixed. (I do, though, think the warrant represents beneficial ownership, for purposes of Section 13(d), of whatever number of shares it can be exercised for at any given time. See the Editek case.) I think the warrant in Jenny Craig was different from this warrant. The JC warrant was exercisable at a penny a share. Both this warrant and the JC warrant have provisions that may result in a reset of the number of shares subject to the warrant, but a reset feature in a fixed-price warrant doesn't prevent the warrant from being deemed to have a fixed exercise price.
-Alan Dye, Romeo and Dye's Section16.net 7/12/2019

RE: Thanks for the prompt response Alan. Just so I understand, is the argument that, because the warrant exercise price is $0, it does not have "an exercise or conversion privilege at a price related to an equity security" and also does not have "a value derived from the value of an equity security" since it is based on the number of shares outstanding, and thus is not a "derivative security" as defined in Rule 16a-1(c)? Does it matter that the warrant is being acquired in exchange for an equity security (i.e., in exchange for an equity security)? Thanks again.
-7/12/2019

RE: Maybe I misunderstood the terms of the warrant. Is it exercisable for $0, meaning the insider can call for the shares at any time (or after the passage of time), and receive the stock underlying the warrant on that date? I assumed, maybe incorrectly, that the insider would have to pay the market price for the shares.
-Alan Dye, Romeo and Dye's Section16.net 7/12/2019

RE: Yes - exercisable for $0 - so holder can simply request to be converted into however many shares equate to 10% of the shares outstanding, at any time, without having to pay anything.
-7/12/2019

RE: Then I DO think the warrant is a derivative security, effectively phantom stock, although I think it's fair to report it in Table II as a warrant. I would show the number of shares it is exercisable for in Columns 5 and 7, but explain in a footnote that the number of underlying shares is subject to adjustment.
-Alan Dye, Romeo and Dye's Section16.net 7/12/2019

Q: SPAC has two classes of common stock - Class A Common Stock (public) and Class B Common Stock (held by the SPAC's sponsor and certain individuals, including several directors/officers of the SPAC). The Class B Common Stock will automatically convert to Class A Common Stock on a one-for-one basis at the closing of the initial business combination. Is this conversion an exempt transaction under Section 16(b)? Note that although the Class B Common Stock only represents ~20% of the SPAC's voting power on an as-converted basis, the holders of Class B Common Stock effectively decide when to consummate the business combination because they control the Board.

RE: On reflection, you probably can't satisfy the 85% requirement in Rule 16b-7. The unorthodox transaction exemption probably protects the "purchase" of the A or the B. If you're looking for a rationale to support a conclusion that the purchase of the A occurred when the B was purchased, take a look at the SEC''s amicus brief in Bruh v. Bessemer. The fixing of the conversion price was deemed to be the purchase date, even though conversion was subject to the occurrence of an IPO.
-Alan Dye, Romeo and Dye's Section16.net 3/16/2018

RE: Hi Alan:
I had a separate question, but it is based on the same facts as the original poster. SPAC has two classes of common stock – Class A common stock (registered under Section 12) and Class B common stock (not registered under Section 12).
The shares of Class B common stock will automatically convert into shares of Class A common stock at the time of the closing of the initial business combination on a one-for-one basis, subject to adjustment. In the case that additional shares of Class A common stock, or equity-linked securities, are issued related to the closing of the business combination, the ratio at which shares of Class B common stock will convert into shares of Class A common stock will be adjusted so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common stock outstanding upon the completion of the IPO plus all shares of Class A common stock and equity-linked securities issued in connection with a business combination. If, at the closing of the SPAC IPO, the SPAC’s sponsor only holds shares of Class B common stock and does not hold any shares of Class A common stock that were issued in the IPO and the SPAC’s sponsor is not a director (although prior to the consummation of the business combination, only holders of the Class B common stock will have the right to vote on the election of directors) or an officer of the SPAC, does the SPAC’s sponsor become subject to Section 16 upon the SPAC becoming a Section 12 company? In other words, does the SPAC’s sponsor have to file a Form 3 to report his holdings of shares of Class B common stock (presumably, under Table II as a derivative security).
I think the answer is NO because the shares of Class B common stock are subject to a material condition that is outside of the SPAC’s sponsor’s control. Would you agree?
Thanks!

RE: Yes, I do agree. the existence of the material condition means that the sponsor does not own more than 10% of the class A stock, and the sponsor's ownership of more than 10% of the class B stock doesn't make the sponsor a ten percent owner, because the class B stock isn't registered under Section 12.
-Alan Dye, Romeo and Dye's Section16.net 7/11/2019

Q: A director was granted RSUs last year. He has put in place a Nominee Agreement so that upon vesting of the RSUs, they will be issued to an LLC (of which he is affiliated with). The grant was previously reported in Table 1. How should this be reported? As a G/J transaction, then a separate line for the indirect ownership? Thank you.

RE: Yes, I would report the vesting as a gift of shares to the LLC. If the director is the only member of the LLC, I don't think the transfer would be reportable at all, by virtue of Rule 16a-13.
-Alan Dye, Romeo and Dye's Section16.net 7/11/2019

RE: Thank you, Alan. He is not the only member, so I will report accordingly.
-7/11/2019

Q: A Section 16 insider wants to write a call option, or buy a put option. Pursuant to Rule 16c-4, the Section 16 insider owns at least as many shares as are underlying said option, and continues to own them for the duration of the option. When the Section 16 insider exercises the put option, or is assigned on the call option, can the Section 16 insider use borrowed shares to make delivery? Or does the SEC guidance about using "owned" securities to make delivery on a short sale against the box equally apply to making delivery on options? Thanks!

RE: Where the insider gets the shares delivered against the option doesn't affect the availability of the Rule 15c-4 exemption. So, using borrowed shares will not turn the put equivalent position into a short sale.
-Alan Dye, Romeo and Dye's Section16.net 7/10/2019

Q: The range is within $1.00. Would you say trade made between $10.99 and $11.99 are within the $1 range. Or would you break it down and have a range of $10.99 to $11.98 and then $11.99 - $12.98??

RE: I think, to be "within" a $1 range, they would need to be, e.g., within a range of $10.99 to $11.98, inclusive.
-Alan Dye, Romeo and Dye's Section16.net 7/9/2019

Q: I believe there are two typos in Table I of Model Form 173 - based on the narrative and explanation for this hypothetical, Column 2 in Table I should read 3/15/2011 and Column 4, "Amount", in Table I should read 250,000. I am mentioning this not to be pedantic but to make sure I am not misunderstanding the Form and the Explanation. Thank you very much!

RE: Wow, you'd think I could at least make Table I consistent with Table II. On things I co-author with Peter Romeo, I blame all errors on him, but I have no excuse here--I write the Handbook alone. thanks for the corrections. I will fix the mistakes in the next edition.
-Alan Dye, Romeo and Dye's Section16.net 10/20/2014

RE: Hi Alan - I think the typo identified in Table 1, Column 4, still persists. It should be revised from 350,000 to 250,000. In addition, should the "D" in the column next to the "Amount" in Table I be an "A"?
-7/9/2019

RE: Yes, I haven't corrected the posted version, which is a duplicate copy of the print edition. I plan to update the print edition by early next year, and then replace all of the posted Model Forms. Thanks.
-Alan Dye, Romeo and Dye's Section16.net 7/9/2019

Q: Hello, Reporting Person has informed us that his spouse is going to be purchasing stock in the near future (after receiving counsel's approval to do so). I understand that when the spouse does purchase stock that the Reporting Person will need to list the holdings, going forward, on Table 1 on a separate line as "indirect" with the explanation "by spouse". My question: Does the Form 4 need to be filed within 48 hours of the spouse's purchase or simply the next time the Reporting Person transacts? If within 48 hours, do I also list the Reporting Person's holdings as well as the spouse's? Thank you for your time.

RE: It sounds like you've concluded that, under Rule 16a-1(a)(2), the insider will have a pecuniary interest in the spouse's shares, which is the same conclusion almost everyone reaches when dealing with a spouse who shares the insider's household. In that case, you should file a Form 4 within two business days of the spouse's purchase, to report the purchase. Column 5 of Table I would show the total shares purchased by the spouse, Column 6 will show "I," and Column 7 will say something like "by spouse." All future reports will show the indirect holding, on a separate line from the insider's direct holdings.
-Alan Dye, Romeo and Dye's Section16.net 7/8/2019

RE: Thank you for the information. My only other question is: "Do I also need to report, on a separate line, the current "Direct" shares that are held by the Reporting Person or just the "indirect" by spouse?" Again, thank you!
-7/8/2019

RE: Any time to report common stock in Table I, you need to include all of the insider's holdings of common stock, both direct and indirect. So, yes, you will need to list the insider's direct holdings in the Form 4 filed to report the spouse's purchase.
-Alan Dye, Romeo and Dye's Section16.net 7/8/2019

Q: Hi Alan - I recently filed Form 4s and there were three forms that had inadvertently listed Exhibit 24 - POA although I did not attach a POA because it was not needed (the POA was still in effect for the individual who signed the Form 4). Am I required to File an Amended Form 4 because the Forms indicated Exhibit 24 under Remarks but was not attached? Thank you

RE: I would not amend the reports. It's true that they contain an "error," but not an error that is material to any of the information the reports are intended to convey. A power of attorney is on file, and presumably the person who signed the reports had authority to sign by virtue of the POA, so the reports meet the signature requirements, and there is nothing missing that needs to be fixed.
-Alan Dye, Romeo and Dye's Section16.net 7/2/2019

We have a director for whom we did not have information about gifting of shares about which we just found out. These gifts go back to 2011. Two lines of thought and question: If the director has a reportable transaction prior to our fiscal year end, in filing the form 4 I'd expect we'd reflect the gifted shares and get our balance correct. In that instance, we'd list each gift separately with appropriate date in column 2 and code in column 3. What footnoting, if any, would be required or recommended to call out the late reporting? If the director does not have a reportable transaction prior to our fiscal year end, when filing the form 5 to update the balance, we would list each of the gifts with gifting date in column 2 with appropriate gifting transaction code in column 3. What footnoting, if any, would be required or recommended to call out late reporting?

RE: I agree with your proposed approach to bringing the director's Section 16(a) reporting up to date. Whichever filing you include the gifts in, though, I don't think you need to call out the lateness of the gifts, by footnote or otherwise. It will be obvious from the dates of the gifts that they are being reported late.
-Alan Dye, Romeo and Dye's Section16.net 7/1/2019

Q: Hi Alan We need to submit a Form ID application to obtain new filing codes for a new Section 16 insider. We want to use a POA for the Form ID application so that we get our signature notarized when it is submitted and not have to bother the reporting person with getting their signature notarized. Our plan is to use our standard form of POA that we use for filing Forms 3/4/5, and file the same POA with the Form ID application and then again with the Form 3. Is this acceptable or does the language in the POA need to be revised to include a Form ID in addition to Forms 3/4/5? Thanks for your help

RE: I don't know how much attention the staff pays to the language of powers of attorney attached to Forms ID, but if you can, you might consider having your standard power cover more than just Section 16 reports, but also Form ID and other beneficial ownership reports (like the form available on this website). If your form power doesn't do that, maybe you can find language in the form that says something like "and to execute and file any and all such other forms as may be required." Then you could point to that language if the staff raises a question. In any case, I agree that one POA should work, filed first with the Form ID and then next with the first Section 16 report.
-Alan Dye, Romeo and Dye's Section16.net 6/29/2019

Q: We have a situation where directors retired, a new slate of directors were elected and the new slate of directors voted to amend the director compensation plan to award shares of company stock at the end of each board term as part of their compensation starting with the previous board term. Do we need to report a share award on a Form 4 for the directors who receive the shares after they have retired and have no other transactions to report past their retirement date? Thanks.

RE: No, a retroactive award to a former director would not be reportable. Rule 16a-2 has the effect of exempting from the reporting requirements all transactions exempt from Section 16(b). I would consider the award to be exempted by Rule 16b-3(d), as approved by the board of directors. I recognize that Rule 16b-3 applies to transactions with an officer or director, and may not necessarily apply to a former officer or director, but I believe the better view is that compensatory transactions relating to a former director's service as a director should qualify for the exemption.
-Alan Dye from Romeo and Dye's Section16.net 5/16/2019

Q: Fact pattern: Section 16 reporting person wishes to purchase 100 shares of Issuer's Mandatory Convertible Preferred Stock. Stock will convert automatically on specific date into between a minimum conversion rate and a higher rate of common shares, subject to anti dilution adjustments. If a holder chooses to convert prior to the specific date, the Preferred Shares will convert to common shares at the minimum conversion rate. Is this considered a derivative security with a fixed conversion price, which would be reported in Table II? If so, can I use the sample for Model Form 168 as a guide? I assume that in column 2 of Table II, I'd drop a footnote and spell out the info set forth above regarding the conversion terms? What do you suggest for column 6? Thank you.

RE: I think Model Form 170 is likely a better guide. I do think the preferred is a derivative security, given that it is convertible into a fixed number of shares at the fixed "minimum price."
-Alan Dye from Romeo and Dye's Section16.net 5/16/2019

Q: The power of attorney executed by the insider gives the attorneys in fact the full power of substitution and resubsitution. If an attorney in fact exercises this power to add a new attorney in fact who signs the insider's Section 16 filing, does a new POA or any other written evidence of the substitution need to be filed with the SEC? Many thanks.

RE: Yes, the insider needs to file the document showing that the new attorney-in-fact is authorized to sign. That would mean the form executed by the attorney-in-fact, substituting the new attorney-in-fact, would need to be filed as an exhibit.
--Alan Dye from Romeo and Dye's Section16.net 4/4/2011

RE: I have a follow-up to the above question. If a new power of attorney is filed to substitute a new individual with power of attorney for the insider, does that new power of attorney need to be signed by the insider, or can it be signed by the current individual with power of attorney?
--8/6/2014

RE: If the original power of attorney authorized the attorney in fact to delegate his/her authority to others, such as by providing for a power of substitution, then the attorney in fact can sign the new power.
--Alan Dye from Romeo and Dye's Section16.net 8/6/2014

RE: The POA that we use for Section 16 reporting has full power of substitution. One of the three persons named as attorney-in-fact has left the company. We would like to name a new person, but want to avoid preparing an updated POA which each Reporting Person will have to sign, and would appreciate your guidance. As a current attorney in fact, do I have the ability to appoint the new person? She would be replacing the person who has left, and the other two attorneys-in-fact would remain. Do you have any samples of what this would look like in the Model forms, i.e., do we need to do a POA which I sign, or can we use some type of confirming statement? I assume that I would need to file this document, as well as the original POA, on the next filing for each Reporting Person? Thank you.
--5/16/2019

RE: Yes, if you are a named attorney in fact and the POA allows substitution, you can appoint a new person to serve as a substitute as attorney in fact. I don't have a model document for that (but have made a note to add one), but I think you can easily modify the model POA to effect the new appointment. And yes, you would then file the document as an exhibit to the insider's next report.
--Alan Dye from Romeo and Dye's Section16.net 5/16/2019

Q: Does an insider have a reportable interest in issuer shares owned by an LLC if the insider is only the manager and not a member of the LLC? The LLC is a family LLC established by the insider’s sibling for the benefit of the sibling’s family. The LLC membership interests are owned by the insider’s sibling, the sibling’s trust and another member of the siblings’s immediate family (who is not also member of the insider’s immediate family). As manager, the insider has voting and investment power over the issuer shares owned by the LLC, but they do not appear to share in the profits of the LLC’s transactions in issuer stock. I think the answer is no reportable interest, as long as neither the insider nor a member of the insider’s immediate family living in the insider’s home has a pecuniary interest in the LLC. Am I thinking about this correctly? Thanks in advance.

RE: Yes, I do agree that's a fair reading of Rule 16a-1(a)(2). It seems odd to me that the SEC provided in Rule 16a-8 that an insider-trustee has a reportable pecuniary interest in the trust's portfolio securities if a member of the insider's immediate family is a beneficiary of the trust, but in all other controlled "entity" contexts seems to require that the family member share the insider's household, but again that seems to be a fair reading of the rules. I don't think the issue has come before a court.
--Alan Dye from Romeo and Dye's Section16.net 5/15/2019

Q: We had a previous Form 4 that incorrectly stated the earliest transaction date in line 3 as 2081 instead of 2018. Given this is a big discrepancy is this something that should be amended?

RE: Do you mean the 2081 date appeared in Box 3? If Column 2 of the table reflected the correct date, I would consider the error in Box 3 to be immaterial, on the basis of being obvious for the following reasons: (1) 2081 can't be right, (2) the error likely juxtaposed two numbers (8 and 1) that were correct but incorrectly sequenced, and (3) Column 2 shows the earliest date as being in 2018. If those are your facts, I would be comfortable ignoring the error. The date is materially wrong, but I don't think anyone will be misled by it.
--Alan Dye from Romeo and Dye's Section16.net 5/15/2019

RE: Correct. Column 2 also correctly reflects the correct date.
--5/15/2019

RE: It's always fine to correct an error, so I don't want to discourage you from filing an amendment if the existing error is troubling you. I just think you are already sufficiently compliant with the reporting requirements that an amendment is unnecessary.
--Alan Dye from Romeo and Dye's Section16.net 5/15/2019

Q: We have performance based RSUs that vested but have a one year post vest hold on the distribution of the shares. I am looking for a Form 4 sample of this type of transaction. Otherwise I am looking for confirmation that the Vest would not reportable until distribution (one year from vest)? Thanks

RE: For the earning of RSUs upon satisfaction of the performance targets, see Model Form 134. The earned RSUs can be reported in Table II (see Model Form 129) or, if they may be settled solely in stock, in Table I (see Model Form 134).
--Alan Dye from Romeo and Dye's Section16.net 5/15/2019

RE: Thanks Alan. Since there is a mandatory post vest hold on the stock settled RSU award, we did not intend to deliver shares until the 1 yr hold is met (similar to a deferral under deferred comp plan). The Performance award was originally reported on Table II at grant. Is there any reporting obligation for the vesting if the shares are subject to the post vest hold and not distributed at this time? Thanks
--5/15/2019

RE: I see. The earning of the shares is reportable. If the award was reportable at grant, and you reported it in Table II, the earning/vesting should be reported as the conversion of the performance units, in both Table I and Table II. The deferred delivery isn't reportable or disclosable in a footnote. If you'd prefer to treat the deferred share as a derivative security, that would be acceptable, but then you'd need to file a Form 4 to report the delivery.
--Alan Dye from Romeo and Dye's Section16.net 5/15/2019

Q: We have an insider who sold shares (at an agreed price) in a private transaction to two current directors of the issuer. If the transaction is private but includes a letter of instruction to a broker to transfer the shares would we need to file a Form 144.

RE: No, the transfer is being made in reliance on the Section 4(a)(1 1/2) exemption, not 4(a)(1), because the sale is private rather than public. A Form 144 is required only for a public sale, in a "broker's transaction" as defined in Rule 144. The broker's participation here, which is limited, is not a "broker's transaction" within the meaning of the rule.
--Alan Dye from Romeo and Dye's Section16.net 5/14/2019

Q: Investor is purchasing shares in an underwritten secondary public offering such that, following the offering, investor will own greater than 5%. Following pricing (but prior to close of the offering) the investor sells shares. 1. When would the investor be deemed to have acquired the shares in the offering- on the day of pricing/commitment of the public offering or on the day of close? 2. If the sales made between pricing and close take the investor to below 5%, does the investor have any filing obligation? If you say that the investor acquired beneficial ownership at pricing, then the filing obligation would have arisen prior to the sales and the filing (assuming it was made prior to the sales) would not reflect the sales. If you say the trigger date is closing, then the filing has arguably not been triggered because many of the shares have been sold- or would you argue that for an instant in time following close all of the shares are beneficially owned-regardless of the need to settle the shares a moment later? 3. If you say that investor has acquired beneficial ownership at pricing, how would the investor compute its percentage ownership prior to close? Could he assume that all of the shares issauble in the offering to investors in the offering are outstanding even though those shares haven't yet been issued?

RE: 1. There are conflicting views on this question, but in my view the shares aren't acquired until closing, because there are material conditions to closing. 2. Becaue of my response to 1, I think the investor never goes over 5% so never has a filing obligation. Bear in mind the staff's CDI regarding possible ownership of share even after the sale if the sale follows a record date and the seller therefore has the power to vote at an upcoming meeting. 3. I would include in the denominator all of the shares to be issued in the offering. If the filer conlcudes that there are no material conditions to clsoing, reseulting in beneficial owernship at pricing, then all other purchasers would be beneficial owners too. I would explain my math in the filing, which I always do in any event.
--Alan Dye from Romeo and Dye's Section16.net 1/28/2014

RE: Thanks. With respect to question 2, what if the investor delivers shares acquired at closing to settle the sales made after pricing? Would you say that the investor NEVER acquires those shares, even at close of the offering, because they are being delivered to settle the sale trade made after pricing? Or are they deemed "owned" for a moment of time before being delivered in satisfaction of the previous sale.
-- 1/28/2014

RE: It seems to me the shares have to be owned before they can be delivered, even if the events happen simultaneously. I've heard the argument made, when an insider with a short position buys stock to cover the short, that the buy isn't a reportable purchase, because the shares go straight to the person from whom the shares previously sold were borrowed, but I've never considered that argument persuasive. It seems to me the argument here would have a similar weakness.
--Alan Dye from Romeo and Dye's Section16.net 1/28/2014

RE: Would the analysis change for #1 if it was an underwritten follow on primary public offering?
-- 5/13/2019

RE: I don't think so, assuming the shares to be purchased will come solely from the underwriters, and consist solely of underwritten shares. If the purchase order will be executed in the open market even if the offering doesn't close, then I think the purchase might be deemed to occur on the trade date.
--Alan Dye from Romeo and Dye's Section16.net 5/14/2019

Q: Portfolio company (who is no longer a foreign private issuer and we are a reporting 10% owner) is converting all of its ADS's to Ordinary Shares prior to being acquired by a foreign purchaser. Does this conversion of the ADS's into Ordinary Shares need to be reported under Section 16?

RE: The answer probably should be based on how you reported ownership of the ADRs. Many holders of ADRs report ownership of the underlying shares, in Table I, instead of treating the ADRs as derivative securities, reportable in Table II ) (much as some holders of voting trust certificates report the underlying shares in Table I). If you've reported in Table II in the past, you might report the "conversion" in Table II and Table I. You could instead treat the transaction as a change in beneficial ownership exempted by Rule 16a-13, which would require that you be comfortable that the exchange does not constitute the conversion of a derivative security, which is the type of change not exempted by Rule 16a-13.
--Alan Dye from Romeo and Dye's Section16.net 5/13/2019

Q: If an issuer is engaged in a stock buyback program, and the executive officers that from time to time are involved in the decision-making regarding when/how much to buy under the program also from time to time sell their own shares in the market, would the insiders' sales be matched with the issuer's purchases? My first thought is no, since they do not have a direct or indirect pecuniary interest in the issuer's repurchase transactions, but the situation does seem like it could be problematic.

RE: This question has come up from time to time in academic discussions (i.e., whether the insiders of a company beneficially own issuer stock repurchased by the company), but I know of no court that has held that an issuer's transactions in its own stock can be attributed to an insider.
--Alan Dye from Romeo and Dye's Section16.net 9/20/2005

RE: Has your view of this question changed in any way since this posting first appeared in 2005? Are you aware of any contrary guidance, or more recent case precedent or academic discussion, suggesting that an issuer's transactions in its own stock can be attributed to an insider?
--5/13/2019

RE: No, I don't know of any guidance or authority that addresses the question. I'm still of the view that no purchase or sale of issuer stock by the issuer itself should be attributed to any insider for purposes of Section 16.
--Alan Dye from Romeo and Dye's Section16.net 5/13/2019

Q: Rule 16a-1(f) provides that the term "officer" include the principal accounting officer "or, if there is no such accounting officer, the controller." What if a company has a controller that is currently a Section 16 reporting person and will have a chief accounting officer who will report to the controller. Since the controller is already a reportable insider, would the chief accounting officer also be subject to Section 16 reporting? Thank you.

RE: Because the rule says that a CAO is always a Section 16 officer, I think the answer is yes.
--Alan Dye from Romeo and Dye's Section16.net 5/10/2019

Q: Several of the prior Q&As suggest, while noting that it is not free from doubt, that an in-kind distribution for no consideration, by a partnership to its limited partners, is neither a purchase nor sale. In such a situation, are you of the view that a partnership that is a 10% owner should still file a Form 4 and, if so, that it should identify the distribution by transaction code J?

RE: While I don't think a partnership's distribution is a "sale" by the partnership, the distribution still is a "change in beneficial ownership" within the meaning of Section 16(a). I don't' know of any exemption from the reporting requirements applicable to a distribution, so I think the transaction is reportable, and I agree that "J" is the best transaction code to use.
--Alan Dye from Romeo and Dye's Section16.net 5/9/2019

Q: An officer will be retiring and acceleration of his earned and unvested PSUs will occur based upon his severance agreement. The earned and unvested PSUs consist of PSUs from two grants, one which was made in 2017 and one which was made in 2018. The 2017 grant was reported in Table II of a Form 4 and we further reported the 2018 vesting of a portion of the PSUs (as well as the sale to cover tax withholding obligations) with a footnote that an additional portion will vest on the first anniversary of the certification of the event by our Compensation Committee. The 2018 grant was not reported at the time of grant as our current practice is to report PSUs when exercisable if the PSUs are not based on time or market price. We did file a Form 4 for the vesting of the first portion of the 2018 grant earlier this year (as well as the sale to cover tax withholding obligations) because the performance requirement was met. The Form 4 also included a footnote that an additional portion will best on the first anniversary of the certification of the event by our Compensation Committee. Based on our understanding of the facts and similar situations posted on this Forum, the acceleration itself is not a reportable event but because we reported the original 2017 grant in Table II and did not voluntarily report the 2018 grant when the first occurred, we will need to report via a Form 4 both accelerated vestings. Is that understanding correct, and at what point does the reportable event occur? Thank you!

RE: Yes, I agree with both of those conclusions. The 2017 award was reported, and it sounds like reporting may not have been required, and even if reporting was required, the award was reported in Table II, so in all cases the vesting of the award on an accelerated basis will the reportable. The 2018 award likewise will be reportable (in Table I) as an acquisition of stock. The Form 4 will be due within two business days after the taking of whatever action needs to be taken for vesting to occur--maybe compensation committee approval?
--Alan Dye from Romeo and Dye's Section16.net 5/9/2019

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