Securities transactions by officers, directors and 10%+ shareholders

Section 16 of the 1934 Act requires a public company’s officers, directors and holders of more than 10% of any class of equity security to report their transactions in such company’s securities and to disgorge certain “short-swing profits.”

Section 16(a) of the 1934 Act requires a company’s officers, directors and any beneficial owners of more than ten percent of a class of the company’s equity securities to file the following reports:

  • Form 3. The initial filing is on Form 3. It must be filed within ten days of becoming an officer, director, or 10%+ beneficial owner.
  • Form 4. Changes in ownership are reported on Form 4 and must be reported to the SEC within two business days.
  • Form 5. Form 5 is filed to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. It is due within 45 days after the end of the company’s fiscal year.

Section 16(b) of the 1934 Act provides that, if a officer, director or greater-than-10-percent shareholder of an issuer engages in a purchase and sale of equity securities of such issuer within a period of less than six months, then any profit realized by the insider as a result of the two transactions (i.e., as a result of the “short-swing trade”) must be disgorged to the issuer upon demand by the issuer or by any security holder of the issuer.  The amount of the profit is calculated by multiplying the difference between the sale and purchase prices by the number of shares sold.  The recovery of short-swing profits is not something that the SEC seeks on behalf of shareholders, but rather class action law firms monitor trading by groups and 10% shareholders through the Forms 4 and 5 filings, they then file lawsuits to recover on behalf of the issuer, and take a substantial portion of the recovery in legal fees.  The SEC is aware of these cases and will often review such cases to determine whether there has been any misuse of material, non-public information, in which case the SEC would be the entity to bring the action against a corporate insider.

Warrants and other “derivative securities” are generally considered equity securities of the issuer and their purchase and sale is subject to Section 16.