This September, the SEC announced it had brought charges against 28 directors, officers and major stockholders of reporting companies for alleged violations of the beneficial ownership reporting requirements under Sections 16 and 13(d) of the Securities Exchange Act. The SEC also brought charges against several reporting companies for alleged violations related to their insiders' failure to file timely reports (see SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings and SEC Announces Fraud Charges Against Biotech Company and Former Executive Who Failed to Report Insider Stock Sales). The announcements came as a surprise to many, because the SEC has not historically taken enforcement action against delinquent Section 16 filers or related companies, let alone in large numbers in a short period.

The enforcement initiative appears to be driven by a new enforcement philosophy articulated by SEC Chair Mary Jo White in an October 2013 address (see Remarks at the Securities Enforcement Forum). In that address, Chair White stated that, while she recognizes that the SEC has finite resources, she plans to devote a portion of those resources to identifying and pursuing minor violations of the securities laws. The thinking behind this is that authorities tend to "foster a culture where laws are increasingly treated as toothless guidelines" when they allow minor infractions to routinely go unpunished. This culture, in turn, encourages more substantial violations of the law. Chair White suggested that this new enforcement philosophy was inspired by former New York City mayor Rudolf Guliani's "broken windows" policy in the 1990s of focusing police attention on minor infractions, such as subway turnstile-jumping, to "avoid an environment of disorder that would encourage more serious crimes to flourish." Broken windows theory posits that by attending to details, including by fixing broken windows, a community sends a message to would-be offenders that disorder of any kind will not be tolerated.

In this new era of "broken windows" enforcement, reporting companies, their insiders and other large stockholders and their counsel may want to review their Section 16 and 13(d) reporting practices and compliance with fresh eyes. With this in mind, this resource:

Section 16(a) and related SEC rules require the officers, directors, and 10% or greater beneficial stockholders (referred to collectively as insiders) of companies that have a class of equity securities registered under Section 12 of the Exchange Act to file certain reports disclosing information about their ownership of, and transaction in, the company's equity securities. The purposes of this reporting regime include to:

An insider's failure to file a required Section 16 report is a violation of the securities laws, regardless of whether it was intentional or negligent. Section 16 is a strict liability provision with no state of mind requirement. An inadvertent failure to file is a violation.

A reporting company is required to disclose in its annual meeting proxy statement or Form 10-K if any of the company's insiders failed to timely file a Section 16 report (that is, Form 3, Form 4 and Form 5). The company's disclosure must be based on a review of the Forms 3, 4 and 5 filed for the most recent year. Companies have a limited obligation to research or make inquiries about completely missed filings. If any forms were filed late or the company knows a required filing was not made, the company must identify the delinquent filer and state the number of forms that were late or not filed and what transactions were not reported on time (Item 7(b), Schedule 14A, referring to Item 405, Regulation S-K). It is a violation of Section 13(a) of, and Rule 13a-1 under, the Exchange Act for a company to make inaccurate or incomplete disclosure in response to Item 405 of Regulation S-K. These provisions require reporting companies to file complete and accurate reports with the SEC.

To assist their insiders and to lessen the chance the company will need to make this adverse disclosure, many reporting companies have set up internal compliance programs under which company employees assist company officers and directors in satisfying their Section 16 reporting obligations. While nothing requires a company to set up this kind of compliance program, the SEC encourages companies to assist their insiders in making timely Section 16 filings (see SEC Release No. 34-47809 (May 7, 2003)). In the recent charges against reporting companies, the SEC has emphasized that companies that voluntarily accept certain responsibilities on behalf of their insiders and then act negligently in performing them may be liable as a cause of Section 16(a) violations by those insiders (see SEC Release No. 34-73051 (September 10, 2014)).

Section 13(d) and related SEC rules require any person or group that directly or indirectly owns or acquires beneficial ownership of more than 5% of a class of equity securities registered under Section 12 to file a report with the SEC disclosing certain information about itself and its holdings of and intentions regarding the reporting company. Filings made under Section 13(d) also must be amended under certain circumstances. Covered persons must file reports on Schedule 13D or, if they are eligible, the short-form Schedule 13G.The purpose of these filing requirements is to give other stockholders and the securities markets notice of significant acquisitions or potential changes in control of reporting companies. A covered person's failure to file a required Section 13(d) report is a violation of the securities laws, regardless of whether it was intentional or negligent. Like Section 16(a), Section 13(d) is a strict liability provision with no state of mind requirement. An inadvertent failure to file is a violation. In addition, the filing requirement is triggered by the person reaching the 5% beneficial ownership threshold, and is not dependent on the stockholder's intentions regarding the reporting company.

In light of this recent enforcement activity, Practical Law is featuring the following resources that can help reporting companies, their insiders and other large stockholders and their counsel in understanding the beneficial ownership reporting requirements of Sections 16 and 13(d), implementing effective reporting programs or reviewing the effectiveness of existing practices.