Alert September 24, 2014

SEC Charges Officers, Directors, Stockholders and Companies for Failure to Timely File Reports Under Sections 13 and 16 of the Exchange Act


The director of the SEC’s Division of Enforcement, Andrew Ceresney, said that using quantitative analytics the SEC has identified various individuals and companies with especially high rates of filing deficiencies and emphasized that the SEC will vigorously police these types of filing violations.

In a press release dated September 10, 2014 , the SEC announced charges against 28 officers, directors or stockholders of public companies for violating federal securities laws by failing to timely report their transactions under Sections 13(g), 13(d) and/or 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In the same release, the SEC also reported charging six public companies for failing to report their insiders’ filing delinquencies. Although the charges stemmed from the failure of the targeted parties to make timely filings, the SEC in some cases also examined more closely the substance of the reporting positions taken by the parties. This action by the SEC casts new light on Section 13 and 16 compliance by officers, directors and significant stockholders.

Quantitative Analytics

The SEC stated in its press release that it utilized “quantitative data sources” and “ranking algorithms” to identify officers, directors and significant stockholders who did not timely file their reports. Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated “[W]e are bringing these actions together to send a clear message about the importance of these filing provisions. Officers, directors, major shareholders, and issuers should take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions.”

Materiality and Effect on the Markets

As the SEC noted in its press release, reports filed under Sections 13 and 16 provide the markets with insight into the holdings and trading activities of company insiders. The SEC also noted that such disclosures could be indicative of the company’s future prospects. These statements reflect the SEC’s view that, in general, disclosures under Sections 13 and 16 have a substantial likelihood of being viewed by a reasonable investor as significantly altering the total mix of information in the markets in view of the position of the reporting person. For example, the frequency of transactions, number of shares sold and proceeds from sales, including in relation to the insider’s aggregate holdings, are facts that the SEC believes are material to investors.

Violations and Penalties

Section 8A of the Securities Act of 1933 (the “Securities Act”) and Section 21C of the Exchange Act give the SEC the authority to institute a cease-and-desist order against a person who has violated one or more provisions of the Securities Act or Exchange Act, as applicable.

In the SEC’s view, the delinquent filings of the insiders identified in the enforcement actions generally resulted in violations of Sections 13(g), 13(d) and 16(a) of the Exchange Act, and, except as noted below, the insiders and companies agreed to various civil monetary penalties. However, there are a number of other provisions of the federal securities laws that can be implicated and that the SEC has pursued and we expect will continue to pursue. For example, the SEC can charge an officer or director of a public company who fails to timely file Section 13 and 16 reports with violations of Sections 17(a)(1) of the Securities Act (employing a device, scheme or artifice to defraud), 17(a)(2) of the Securities Act (obtaining money or property by means of an untrue statement of material fact or omission to state a material fact necessary in order to make the statements made not misleading) and 17(a)(3) of the Securities Act (engaging in any transaction, practice or course of business which operates or would operate as a fraud or deceit in the offer or sale of securities). A public company can be found to have violated Section 14(a) of the Exchange Act and Rules 12b-20, 13a-1 and 14a-9 of the Exchange Act, for failure of the company’s Form 10-K or proxy statement to disclose delinquent Section 16 filings by insiders during the most recently completed fiscal year and, to the extent not previously disclosed, in prior fiscal years. These provisions of the Exchange Act relate to false and misleading statements or omissions made in Exchange Act filings and incomplete filings. The board of directors of the company may also be charged with similar violations for having caused the company to have made such filings.

In the SEC’s enforcement actions described in the press release, the penalties levied against 13 individuals who were officers or directors ranged from $25,000 to $100,000. Penalties levied against five individuals who were stockholders ranged from $64,125 to $100,000, and against 10 investment firms ranged from $60,000 to $120,000. Finally, six public companies agreed to pay fines ranging from $75,000 to $150,000. It is worthwhile to note the SEC’s position that penalties levied against officers, directors and stockholders are not subject to indemnification or insurance.

Of the 34 individuals and entities that were subject to the SEC’s enforcement actions described in the SEC’s press release, all but one entered into a settlement with the SEC and agreed to pay the monetary penalties described above. One individual refused to settle and is the subject of an ongoing SEC lawsuit.

Rule 506 “Bad Actor” Considerations

A significant consideration for public companies whose insiders fail to timely make required Section 13 and/or Section 16 filings and who become the subject of an SEC cease-and-desist order is the effect on the company’s ability to rely on Rule 506 of Regulation D of the Securities Act. Under Rule 506(d), disqualification occurs if the issuer or any director or executive officer of the issuer is the subject of any SEC order entered within five years before the proposed offering that orders the issuer or such director or executive officer to cease and desist from violating any scienter-based1 anti-fraud provision of the federal securities laws, including Section 17(a)(1) of the Securities Act. Although it does not appear that any of the orders that are the subject of the SEC’s enforcement actions described above included a finding of scienter in connection with the conduct of the individuals and entities, absent a settlement the SEC could pursue a finding of scienter in litigation.


Insiders often view filing obligations under Sections 13 and 16 as more mechanical in nature and focus more closely on the implications of those reports only when there is actual liability concern, most notably in the Section 16 context if there have been or might be opposite way matching transactions on either side of the transaction being reported. To our knowledge, prior to the SEC enforcement actions described above, the SEC has rarely taken action on delinquent or catch-up filings, nor has it concentrated on the substance of the reporting position in the absence of litigation brought by the Section 16 plaintiffs’ bar. It remains to be seen whether the SEC’s enforcement actions are the precursor to broader efforts to analyze Section 13 and Section 16 reporting, including a deeper dive into common types of reporting positions with respect to which the SEC may or may not agree. In any event, in light of the SEC’s focus on delinquent filings, we have the following recommendations:

  • Public companies should review their insider trading policies to ensure that the need for any related Section 13 and 16 filings are appropriately identified in connection with securities transactions proposed or permitted by insiders. Typically, a company’s insider trading policy will require pre-clearance of all proposed transactions by insiders. However, it would be prudent to ensure that insiders are being reminded periodically of, and preferably receive some general training with regard to, their reporting obligations in connection with securities transactions and the need to work closely with the company’s legal or other compliance officer(s) to be certain that filing obligations are timely met.
  • In connection with the preparation of a public company’s annual proxy statement, the company should ensure that it has policies and procedures in place to identify any delinquent Section 16 filings made by insiders, including a review of all insider transactions during the last fiscal year of which the company has knowledge, as well as written representations from officers and directors as to their compliance with Section 16 reporting during the last fiscal year.
  • Public companies should not limit the discussion of Sections 13 and 16 compliance to the management teams, and the board of directors should not assume, without inquiry, that the company is making the required filings on a timely basis. Instead, boards of directors should be reminded periodically of the general reporting requirements and deadlines and be advised of the internal compliance procedures adopted and maintained by the company to ensure filings are made on a timely basis by insiders who execute transactions in the company’s securities.
  • Private investment funds, institutional money managers and other firms who manage one or more portfolios that include significant positions in public company securities should pay careful attention to their compliance policies and procedures. In addition, historical reporting positions should be reassessed periodically to ensure that they remain consistent with developments in the law as well as with new or evolving structures within the firm.
  • Private investment funds, institutional money managers and other firms also should think big picture in terms of the consistency between their various disclosures, including those under Sections 13 and 16 and in the beneficial ownership table of registration statements for securities offerings. For example, in initial public offerings in which the firm will have Section 13 beneficial ownership in excess of 5% of the publicly traded class, the Section 13 filing is often not due until February 14 of the year immediately following the year in which the IPO closes. Careful thought should be given to the interplay between disclosure in the IPO prospectus and any Section 16 filings required in connection with the pricing and closing of the IPO, on the one hand, and the Section 13 filing due the following February 14, on the other.

Please call your Goodwin Procter contact if you have any questions.


1 The United States Supreme Court has defined “scienter” as “a mental state embracing intent to deceive, manipulate, or defraud.”