Publish Date

May 26, 2022

Buyer, Seller and Vester Beware: Top Pitfalls for SEC Forms 3, 4 and 5 Filings

Industry Insights / Human Capital Today

Federal securities laws require individuals designated as “insiders” to submit beneficial ownership reports to the Securities and Exchange Commission (SEC) when there has been a change to the insider’s beneficial ownership. An insider is generally defined as a publicly-traded company’s officers, directors, or someone in control of at least 10 percent of the voting rights for the outstanding voting equity. The reports submitted to the SEC to disclose an insider’s ownership are Form 3, Form 4 and Form 5.

SEC Form 3, SEC Form 4 and SEC Form 5 have their own requirements regarding timing and the information that is disclosed on the form. While knowing these requirements are essential, there are several pitfalls that companies should watch out for to ensure accurate filings with the SEC.

1. Tracking Ownership

Tracking ownership can be a complicated process depending on the number of equity-based programs a company has and the number of different holdings of each insider. The company may need to track multiple compensation programs that have an equity component that they do not have visibility into and, therefore, will need to rely on reporting from different functions (or outside providers.)  Additionally, an insider may have family members that own shares that must also be reported and/or holdings with numerous brokers, which can add to the complexity of tracking and the potential for changes to ownership of which the company may not be aware.

2. Ownership in 401(k) Plans

Companies with company stock in their 401(k) plan will need to track changes to the 401(k) balance for its insider filings. Sometimes these holdings are tracked in units that don’t equate to a single share, and therefore must be converted for reporting purposes. The company will also need to know what types of changes to an insider’s 401(k) holdings trigger a SEC Form 4 filing event.

3. Nonqualified Deferred Compensation Programs

In addition to 401(k) plans, some companies may sponsor a nonqualified deferred compensation program that allows insiders to defer their equity awards and/or convert cash into deferred equity.  However, the equity administrator may not be aware of activity within the deferred compensation program that triggers a SEC Form 4 reporting event and may not have a line of sight into a nonqualified deferred compensation program once equity is contributed into the program.

4. Employee Stock Purchase Plans

An Employee Stock Purchase Plan (ESPP) adds further to the complexity of tracking ownership.  Companies must be actively tracking an insider’s activity in an ESPP to ensure that any triggering event is timely reported and to ensure accurate SEC Form 4 reporting of the insider’s holdings within the ESPP.

5. Dividend Reinvestment

It is important that companies understand whether activity corresponding to a company’s dividend reinvestment plan triggers a filing for an insider. It is also important for an equity administrator to know which company equity programs participate in the dividend reinvestment plan to ensure accurate reporting when there is a reinvestment event.

6. 10b5-1 Trading Plans

If a company allows its insiders to enter  10b5-1 trading plans, it is imperative that the equity administrator has access to the 10b5-1 plans to ensure the activity under the 10b5-1 plan is timely reported and to understand how an insider’s holdings will change with each activity under said plan.  Additionally, companies must keep abreast of changing legal and regulatory requirements, as there are current initiatives to change the reporting requirements related to trading under a 10b5-1 plan that may add additional filing frequency for insider trades.

A&M Expertise

Failure to properly plan for these top pitfalls can result in late or inaccurate SEC Form 3, SEC Form 4, and SEC Form 5 filings. It is important to understand how the above events affect a company and its insiders.

Alvarez and Marsal’s Compensation & Benefits team is equipped to help companies understand its equity programs and how they tie in with SEC reporting requirements and can assist with beneficial ownership tracking and effectuating the requisite disclosure filings. For questions relating to SEC insider reporting requirements for SEC Form 3, SEC Form 4, or SEC Form 5, including the correction process of any filings, please contact A&M for assistance.