SEC Adopts Rules Implementing Sarbanes-Oxley Changes to Section 16 Reporting Requirements

On August 27, 2002, the SEC adopted rules implementing Section 403 of the Sarbanes-Oxley Act of 2002, which amended the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) includes a requirement that officers, directors and ten percent shareholders of most domestic public companies file reports of changes in beneficial ownership of the company’s equity securities (including the purchase or sale of security-based swap agreements involving such equity securities). Section 403 of Sarbanes-Oxley amended Section 16(a) by requiring that changes in beneficial ownership be reported “before the end of the second business day following the day on which the subject transaction has been executed, or at such other time as the [SEC] shall establish, by rule, in any case in which the [SEC] determines that such 2-day period is not feasible.”

Prior to the effectiveness of the Sarbanes-Oxley amendment to Section 16(a), all changes in beneficial ownership resulting from transactions that were not exempt from the short-swing profit provisions of Section 16(b), as well as exercises or conversions of derivative securities (such as the exercise of stock options), were required to be reported on a Form 4 within ten days following the month in which the transactions occurred. All other transactions were either reportable on Form 5 up to 45 days following the fiscal year in which the transaction occurred, or were not reportable at all based on exemptions from the reporting requirements under Section 16(a). As a result of Sarbanes-Oxley and the new SEC rules, all transactions formerly reportable on Form 4, as well as all transactions between a company and its directors and executive officers formerly reportable on Form 5, will be subject to accelerated reporting. The accelerated reporting requirements, as well as other aspects of the new rules, are addressed in more detail below.

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