Section 16 Reporting Obligations of Directors, Executive Officers and 10% Beneficial Shareholders

Who Is an Insider?

Directors and Officers. Section 16(a) of the 1934 Act requires directors and specified officers of a public company to report their beneficial ownership of and transactions in the company’s securities to the SEC and the public. An officer for this reporting purpose generally includes the company’s “executive officers,” as that term is used in the rules governing proxy statements and other SEC disclosure documents, and covers:

• President and principal executive officer;
• Principal financial officer;
• Principal accounting officer or, if none, the controller;
• Any vice president in charge of a principal business unit, division or function (such as sales, administration or finance); and
• Any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the company, including officers of the company’s parent or subsidiaries.
   

More Than 10% Beneficial Shareholders. In addition to directors and officers, persons, including entities, who beneficially own more than 10% of a class of a company’s registered securities are subject to Section 16(a) reporting obligations. In determining who is a more than 10% holder, Section 16(a) uses the concept of beneficial ownership rather than legal or record ownership. For this purpose, a person’s voting or investment power over a security is a key factor in determining beneficial ownership. For example, a person with sole or shared voting or investment power over securities will usually beneficially own the securities for Section 16(a) 10% beneficial ownership purposes. This is the same test used for determining 5% beneficial ownership for purposes of Schedules 13D and 13G.

What Is the Scope of Section 16?

Equity Securities. Section 16 applies only to equity securities of the company, including the right to acquire equity securities. It does not apply to non-equity securities, such as pure debt securities.

What Do Section 16(a) Insiders Report?

Beneficially Owned Shares. Section 16(a) insiders (including 10% beneficial shareholders) must report holdings and transactions in securities they beneficially own under a beneficial ownership test that is different from that for determining 10% beneficial holder status. For this purpose, beneficial ownership is based on the insider’s direct or indirect pecuniary interest in the securities—that is, the insider’s ability to profit from purchases or sales of securities.

Shares Held by Household Members. An insider is considered to have indirect beneficial ownership of securities held by members of the insider’s immediate family sharing the same household. These immediate family household members include grandparents, grandchildren, siblings and in-laws, as well as the insider’s spouse, children and parents.

Trust Shares. An insider is considered a beneficial owner of shares in a trust for Section 16 purposes if the insider has or shares investment control over the trust securities and the insider is a:

• Trustee, and either the trustee/insider or a member of the trustee/insider’s immediate family (whether or not they share the same household) has a pecuniary interest in the trust securities;
• Beneficiary; or
• Settlor, and the settlor/insider has the power to revoke the trust.

Partnership or Corporation Shares. An insider who has control or a controlling influence over a partnership or corporation will generally have beneficial ownership of the securities held by that partnership or corporation.

Derivative Securities. Section 16(a) applies not only to a company’s common stock but also to derivative securities. Derivative securities include restricted stock units (RSUs), stock options,  stock  appreciation  rights,  warrants,  convertible securities or similar rights with an exercise or conversion privilege at a price related to an equity security. Derivative securities also include third-party contracts: puts, calls, options or other rights to acquire the company’s securities that an insider enters into with a person other than the company.

How Does an Insider Report Beneficial Ownership?

Initial Report—Form 3. Upon becoming an insider, an insider initially files a Form 3 with the SEC listing all the insider’s holdings of the company’s securities, including derivative securities. The insider must file a Form 3 within ten calendar days after becoming an officer, director or more than 10% shareholder of a public company. The insider must file a Form 3 even if the insider does not beneficially own any securities of the company at the time of the filing. Insiders of a newly public company file a Form 3 on the date the company becomes a reporting company under the 1934 Act.

Current Report—Form 4. Generally, any change in an insider’s beneficial ownership of the company’s securities is reported on a Form 4. Insiders usually must file a Form 4 within two business days after a change in beneficial ownership. This two-day reporting period begins when a transaction is executed, not when it settles.

Practical Tip: When to File Form 4?

If an executive vice president places an order with a broker to purchase or sell company securities on a Monday morning in Los Angeles, she must file the Form 4 with the SEC no later than 10:00 p.m. Eastern time (7:00 p.m. Pacific time) on Wednesday. The Form 4 must indicate the officer’s total direct and indirect ownership in the company’s securities after the reported transaction. In accordance with company compliance procedures discussed later in this chapter, the officer should notify the company compliance officer before placing the order to enable the company to begin preparing a Form 4 on the officer’s behalf.

In addition to transactions with a broker, the Form 4 two-day filing deadline also applies to any transaction between an insider and the company, including transactions that are exempt from short-swing profit recovery under Rule 16b-3 under the 1934 Act. This includes the grant of equity awards, the exercise or conversion of stock options or other derivative securities and the withholding of shares for tax purposes (such as upon vesting of RSUs).

Two transactions are exempt from the two-day filing deadline:

• Inheritances; and
• Small acquisitions other than from the company that do not exceed in the aggregate $10,000 in market value within a six-month period, provided the insider makes no nonexempt dispositions during the six months thereafter.

The insider must report these transactions at the end of the company’s fiscal year on a Form 5 annual report if they were not voluntarily reported earlier on a Form 4.

Effective February 27, 2023, insiders must report gifts of securities on a Form 4 within two business days, rather than being permitted to report them on a Form 5.

Practical Tip: Awards at Hire or Initial Board Election

Officers often receive equity awards at the time of hire as do directors at the time of election to the Board. The Form 3 filed upon becoming an insider should report only securities beneficially owned immediately prior to becoming an insider. Report the awards granted as a result of becoming an insider on Form 4. In this situation, the Form 4 would be due before the Form 3, but the better practice is to file the Form 3 and the Form 4 at the same time (within two business days after the grant), even though the Form 3 would not technically be due until ten calendar days after the triggering event.

Insiders are not required to report on Form 4 or 5 transactions that effect only a mere change in the form of the insider’s beneficial ownership of securities without changing the insider’s pecuniary interest in the securities. For example, a distribution to the insider of securities previously beneficially owned by the insider through an employee benefit plan merely changes the form of the insider’s beneficial ownership (from indirect to direct) and is exempt from Forms 4 and 5 reporting requirements. Likewise, a pro rata distribution of securities from a general partnership to its general partners is a mere change in the form of ownership and exempt from Forms 4 and 5 reporting requirements. This exemption does not apply to the following events, which must be reported on a Form 4:

• The conversion or exercise of a derivative security; or
• A transfer of securities to a person whose holdings are attributed to the insider, such as a gift to a minor child or a transfer to a family trust.

Acquisitions of company securities in ongoing, tax-conditioned employee benefit plans (e.g., broad-based employee stock purchase plans or 401(k) plans) generally are also exempt from Section 16(a) reporting obligations. By contrast, dispositions of securities acquired under employee benefit plans must be reported on Form 4. Transfers into and out of company stock funds in employee benefit plans generally must be reported on Form 4, but in specific circumstances the insider may be provided additional time to report.

Even if a Form 4 or 5 reporting obligation is not triggered by a mere change in the form of an insider’s beneficial ownership or by an insider’s acquisition of securities under a tax-conditioned employee benefit plan, the insider must reflect the resulting changed ownership in the total direct and indirect beneficial ownership column on the next Form 4 or 5 the insider files.

Annual Report—Form 5. Insiders must file any required Form 5 within 45 calendar days after the end of the company’s fiscal year. Any person who was an insider at any time during the fiscal year must file a Form 5 unless the insider had no reportable transactions during the year or had already filed one or more Form 4s during the year covering all transactions required to be reported on a Form 4 or 5. A Form 5 must include all reportable transactions that were exempt from Form 4 reporting requirements and not reported earlier and all holdings or transactions that should have been reported on Form 3 or 4 during the fiscal year but were not.

Consequences of Late Filing: Fines, Embarrassment and Publicity

Civil Penalties. Failure to timely file a Form 3, 4 or 5 can result in substantial penalties to the insider. The SEC can seek fines in judicial enforcement actions of up to $11,823 for each violation by an individual and up to $118,225 for each violation by a corporation or other entity. If the violation includes fraud, deceit or deliberate disregard of a regulatory requirement, the fine can be as much as $236,451 for an individual and $1,182,251 for a corporation. (These amounts are subject to adjustment for inflation.) The SEC can also issue cease-and-desist orders in administrative proceedings against future violations. Failure to file reports also prevents the two-year statute of limitations from running on suits against insiders to recover any profits due to the company under the short-swing profit rules in Section 16(b).

Proxy Statement Disclosure. A public company must disclose by name in its proxy statement any insiders who reported transactions late or failed to file required reports during the fiscal year under the heading “Delinquent Section 16(a) Reports.” This disclosure is not required if there are no delinquencies to report for the fiscal year (though companies should be sure to confirm annually whether the disclosure is required in the proxy statement).

SEC Enforcement. Aided by sophisticated computer algorithms and quantitative data sources, the SEC has made it clear that it has the tools and the intention to vigorously investigate and enforce Section 16 reporting violations. Following a major enforcement initiative in 2014 specifically targeting Section 16 reporting violations, the SEC has undertaken additional recent sweeps in 2023 and 2024 and recovered significant monetary penalties from both individual insiders and companies. While the SEC typically focuses enforcement attention on cases in which an insider also committed other more serious violations of the federal securities laws or had multiple late filings or reporting delinquencies, the SEC is committed to enforcing Section 16 reporting requirements and could initiate another sweep at any time. A company’s agreement to make filings on behalf of insiders is not a valid defense against individual director and officer liability since insiders bear the ultimate responsibility for Section 16 filings. The recent sweeps also demonstrate that a company can be subject to enforcement action if it agrees to make filings for its insiders but is found to have acted negligently in making the filings or in failing to disclose filing delinquencies in its proxy statement.

Mandatory Electronic Filing and Website Posting of Beneficial Ownership Reports

Electronic Filing. Insiders must file Section 16 reports electronically with the SEC. The reports are due by 10:00 p.m. Eastern time on the filing deadline. Although insiders can file reports directly through the SEC’s online filing system (located at www.onlineforms.edgarfiling.sec.gov), it is far more common for companies or third-party service providers to submit Section 16 reports on behalf of insiders, although the insiders remain legally responsible for their individual electronic filing obligations.

Electronic Signatures. Insiders can sign Section 16 reports electronically by using platforms such as DocuSign and Adobe Sign. Before utilizing the electronic signature process, the filer must manually sign an attestation agreeing that the filer’s electronic signature will constitute the legal equivalent of a manual signature. The attestation must be furnished to the SEC on request and retained by the company for at least seven years from the date it was last used in connection with an electronically signed filing.

Practical Tip: Apply for EDGAR Codes Early

To file electronically, insiders must apply for EDGAR access codes. It can take up to five days to receive the codes, so do not delay in submitting an application until the last minute. Since only one set of codes is permitted for an insider, companies obtaining codes on an insider’s behalf should verify that the insider does not already have assigned codes (e.g., if an insider is or was also a director or officer of another reporting company). Please visit the SEC’s website for information about generating access codes. After September 12, 2025, all Section 16 filings must be submitted via EDGAR Next, a platform adopted by the SEC to improve the security of the EDGAR filing system and the filing authorization process. Enrollment in EDGAR Next opened for insiders on March 24, 2025.

Website Posting. Section 16 rules mandate that companies post on their corporate websites all Forms 3, 4 and 5 filed by their insiders and 10% beneficial owners by the end of the business day after the date of filing. Companies must keep the reports posted for at least 12 months. Although companies may post the reports directly, most post by linking to third-party service providers or to the EDGAR database. The link must be directly to the forms or a list of the forms, and the link caption must clearly indicate access to insider Section 16 reports.

Practical Tip: Link to www.sec.gov

To easily and efficiently satisfy the website posting requirements, link to the EDGAR database on the SEC’s website. The advantage is that the EDGAR link will not require an update each time you file a new Section 16 report and will capture reports of 10% beneficial owners that your company might not otherwise notice.

Practical Tip: Implement Section 16(a) Compliance Procedures

As a best practice for compliance with Section 16(a) reporting obligations, we suggest that your company implement the following procedures:

• Preclearance. Require all insiders to preclear their transactions (and those of any family members sharing their household) with the company’s CFO, general counsel or other designated compliance officer at least two business days before they initiate any transaction in the company’s equity securities.
• Broker Interface Procedures. Establish coordinated procedures with knowledgeable brokers and encourage your insiders to use those brokers to facilitate trading in company securities.
• Powers of Attorney. Have each director and officer execute a power of attorney authorizing at least two of the company’s officers to sign Forms 4 and 5 on behalf of the director or officer. This written authorization is filed with the SEC, typically as an exhibit to the first report authorizing the power of attorney. 

Section 16(b)—Short-Swing Profit Liability

Section 16(b) of the 1934 Act imposes strict liability on insiders for profits realized on short-swing trades, that is, for any profits an insider receives from the purchase and sale (or sale and purchase) of registered securities of the company within a period of less than six months in nonexempt transactions, such as open market purchases and sales of securities. In other words, the insider must not have any “matchable” (opposite-way) transactions in the six months prior to the planned nonexempt transaction and in the six months following the transaction to avoid a short-swing trade. If the insider makes a short-swing trade, the insider is liable for profits realized in either cash or noncash form (such as securities). Under Section 16(b), the company or a shareholder acting on behalf of the company may bring an action against the insider for disgorgement of the realized profits. Section 16(b) applies to all Section 16(a) insiders (i.e., directors, executive officers and more than 10% beneficial shareholders).

The test for Section 16(b) liability is purely objective: an insider who purchases and sells (or sells and purchases) registered securities in nonexempt transactions within a period of less than six months is liable for the profits received as a result of the transactions. It does not matter whether the insider was aware of confidential information or whether the insider acted in good faith.

Transactions Exempt from Section 16(b) Liability

Transactions Between the Company and Its Officers or Directors. Transactions between the company and its officers or directors may be exempt from Section 16(b) short-swing liability. For example, a grant of RSUs or stock options to a director or officer will not be treated as a purchase under Rule 16b-3, and, therefore, matchable with any nonexempt sales, if the company’s Board, a committee of nonemployee directors or the shareholders approve the grant or if the director or officer holds the RSUs or stock options or shares acquired upon settlement of the RSUs or exercise of the stock options for at least six months from the grant date. The vesting of the RSUs or the exercise by the director or officer of the stock options will also be exempt. Similarly, a sale or disposition of securities by the director or officer back to the company generally will not be treated as a sale for purposes of Section 16(b) if the Board or a committee of nonemployee directors pre-approves the sale or disposition.

RSUs, Stock Options and Other Derivative Securities: Purchase Occurs at Time of Grant. Shares subject to RSUs, stock options and other types of derivative securities are deemed to be purchased for Section 16(b) purposes upon the grant of the derivative security rather than upon exercise or conversion. This is because a derivative security is treated as the functional equivalent of the underlying security into which it can be exercised or converted. For example, the grant of an option to purchase common stock is treated as the functional equivalent of the insider’s purchase of the common stock. Similar to the grant of a derivative security by the company, the exercise, conversion or vesting of a derivative security is generally exempt from Section 16(b) liability.

Although exempt from Section 16(b) liability, insiders generally must report separately the grant and the exercise or conversion of an option or other derivative security on Form 4 within two business days after each transaction (though it is permissible to report RSUs that can be settled solely in shares only at grant and not also upon settlement in shares following vesting).

Calculating Profit Realized in a Short-Swing Transaction

The short-swing profit calculation for a single purchase and single sale of securities within a six-month period is straightforward: the aggregate purchase price of the securities is subtracted from the aggregate sale price.

For multiple sales and purchases within a six-month period, the profit realized is calculated under the lowest-in, highest-out method. The following example illustrates the application of the rule:

Assume that Director Bertrand Brass purchases 100 shares of his company’s common stock in January for $40 a share, purchases an additional 100 shares in February for $45 a share, sells 100 shares in March for $60 a share, purchases 100 shares in April for $50 a share, sells 100 shares in May for $55 a share and sells 100 shares in June for $80 a share. Under the lowest-in, highest-out approach, the January purchase ($40 per share) would be matched with the June sale ($80 per share), the February purchase ($45 per share) would be matched with the March sale ($60 per share) and the April purchase ($50 per share) would be matched with the May sale ($55 per share). Mr. Brass would be liable for $6,000 in realized profits.
 

Schedules 13D and 13G Reporting Requirements for 5% Shareholders

Entirely apart from any Section 16(a) reporting obligations they may have, shareholders who beneficially own more than 5% of a public company’s voting stock must report their stock ownership to the SEC on Schedule 13D or 13G filed on EDGAR. Shareholders who through shared control or other similar relationship have agreed to act together with respect to a public company’s stock become a group, and if together they beneficially own in excess of 5% of a public company’s stock, they must report the group’s ownership on Schedule 13D or 13G. In October 2023, the SEC adopted amendments to Regulation 13D-G that impact the deadlines for initial Schedules 13D and 13G filings and amendments to those schedules and provided guidance on when a group may be considered to exist.

Initial Schedule 13G Report

Within 45 days following the end of the calendar quarter in which a company completes its IPO, every person (including directors and officers) that beneficially owned more than 5% of the company’s stock at the time of the IPO and as of the last day of the calendar quarter must report that ownership to the SEC on a short-form Schedule 13G. The term person includes entities. These initial 5% shareholders are referred to as exempt investors because their shares were acquired prior to the company’s IPO.

Schedule 13D or 13G Filings Once the Company Is Public

After a company is public, any exempt investor who acquires more than 2% of the company’s stock in a 12-month period, or any other shareholder who acquires more than 5% of the company’s stock (following its IPO), may be required to file a Schedule 13D, which generally has shorter filing deadlines and is more lengthy than Schedule 13G. Shareholders who qualify as passive investors can initially file Schedule 13G within five business days after acquiring more than 5% of the company’s stock and those qualifying as qualified institutional investors can initially file Schedule 13G within 45 days following the end of the calendar quarter in which they acquire 5% of the company’s stock, thereby avoiding the more burdensome Schedule 13D. A passive investor is a shareholder who does not otherwise qualify as a qualified institutional investor and beneficially owns less than 20% of the company’s stock, provided the investor did not acquire the securities for the purpose, or with the effect, of changing or influencing control of the company. A person in a control position—such as a director or executive officer—does not qualify as a passive investor. For purposes of Regulation 13D-G, a qualified institutional investor is a shareholder that is a certain type of qualified institutional investor such as a registered broker-dealer, bank, registered investment advisor or company, or insurance company that may report on Schedule 13G if it has acquired the securities in the ordinary course of business and without the purpose or the effect of changing or influencing control of the company.

In general, an investor filing Schedule 13G must file an amended Schedule 13G within 45 calendar days after the end of the calendar quarter to report any material change in the information previously reported, which includes any change of 1% or more in its beneficial ownership of the company’s outstanding shares (not including changes in percentage ownership due to fluctuations in the number of shares outstanding). Whenever a passive investor acquires more than 10% of the company’s stock, the investor must amend the Schedule 13G within two business days after the date of the acquisition. From then on, the passive investor must file an amended Schedule 13G within two business days after the date on which its beneficial ownership increases or decreases by more than 5%, until the passive investor has reported beneficial ownership below 10% again. Whenever a qualified institutional investor acquires more than 10% of the company’s stock, the investor must amend the Schedule 13G within five business days following the end of the first calendar month of reaching that beneficial ownership level. From then on, the qualified institutional investor must file an amended Schedule 13G within five business days after the end of the first calendar month in which its beneficial ownership increases or decreases by more than 5%, until the qualified institutional investor has reported beneficial ownership below 10% again. A nonpassive investor must amend its more detailed Schedule 13D within two business days to report any material change in the information previously reported (including any change of 1% or more in its beneficial ownership).

A passive investor loses Schedule 13G eligibility—and must file a Schedule 13D—if the investor acquires 20% or more of a class of securities or no longer holds the shares with no purpose or effect of changing or influencing control of the company. In either case, the investor must file a Schedule 13D within five business days of the acquisition or change in passive investor status. In addition, the investor may not vote its shares or acquire more shares during the period that begins at the time of the acquisition of 20% or more of the company’s shares or loss of passive investor status and ends ten days after the investor files Schedule 13D.

Individuals and entities who fail to file timely and accurate Schedules 13D and 13G can be subject to significant monetary penalties and cease-and-desist orders. The SEC’s enforcement initiative targeting Section 16 beneficial ownership reporting violations (discussed above in the section on Section 16 reporting) has also been directed against Schedule 13D and 13G filers.

Practical Tip: Apply for EDGAR Codes Early

New Schedules 13D and 13G filers who don’t already have EDGAR access codes must obtain their EDGAR access codes before the applicable due date. It can take up to five days to receive the codes, so do not delay in submitting an application until the last minute. Please visit the SEC’s website to generate access codes.

Rule 144 Restrictions on Trading Restricted Stock and Stock Held by Directors, Executive Officers and Other Affiliates

The 1933 Act requires that any sale of a security must be registered with the SEC, unless the security or transaction qualifies for an exemption. Rule 144 under the 1933 Act provides the most frequently used exemption for the public resale of restricted and control securities.

Although brokerage firms generally play the primary role in assisting their clients with Rule 144 compliance, as a best practice companies should educate insiders who are subject to Rule 144 regarding the applicable resale limitations and assist with Rule 144 compliance. (See “Practical Tip: Provide Your Directors and Officers with a Trading Compliance Checklist” later in this chapter for our suggestions regarding compliance with Rule 144.)

Securities Subject to Rule 144

Rule 144 covers two types of securities: restricted securities and control securities.

• Restricted securities result from a purchase directly from the issuer or an affiliate of the issuer in a private offering exempt from registration. Restricted securities typically bear a restrictive notation or legend that states that the securities are not registered and can only be offered or sold in an offering registered with the SEC or under an exemption from registration.
• Control securities are securities owned by any person who directly or indirectly may exercise control over the issuer, either alone or as a member of a control group. Control securities may be acquired in any manner, including on the open market, from the company through a public offering or upon the exercise of a stock option or vesting of RSUs. The SEC uses the term affiliate to describe such a control person.

Who Are Affiliates?

Under Rule 144, a company’s affiliates generally include its directors, executive officers and significant shareholders that can influence the company either individually or in concert with others, as well as:

• The spouse or any relative of the affiliate who lives in the same household as the affiliate;
• Certain trusts or estates for which the affiliate (or a member of the affiliate’s family sharing the same household) serves as a trustee, executor or 10% beneficiary;
• Certain corporations, partnerships or other entities in which the affiliate or the affiliate’s family owns a 10% interest; and
• Affiliates of companies acquired in transactions regulated by Rule 145 under the 1934 Act—even if they do not become affiliates of the acquiring company.

Determining which persons may be affiliates for purposes of Rule 144 requires a fact-specific inquiry.

Rule 144 Requirements

General requirements:

• Current Public Information. Requires that adequate public information be available concerning the issuer of the securities. To satisfy this requirement, a company that has been a reporting company for at least 90 days before the date of sale must have filed all SEC-required reports during the 12 months immediately preceding the proposed sale (or such shorter period in which it was required to file), other than current reports on Form 8-K. In addition, the company must have filed electronically and posted on its website all interactive data files it was required to submit and post during the 12 months immediately preceding the sale (or such shorter period in which it was required to file and post the files). (We discuss interactive data files in Chapter 4.)
• Holding Period for Restricted Securities. A person who acquires restricted securities of a reporting company must hold the restricted securities for at least six months. In some situations the holder may measure this holding period starting from the date the previous holder acquired the securities (e.g., if the restricted securities are acquired as a gift). The holding period does not begin until the seller has fully paid the purchase price for the securities. For example, if the stock was purchased with a promissory note, the purchase price would not be considered fully paid unless the note is full recourse and secured by collateral, other than the stock, having at least equal value to the shares (and the note must also be paid in full before the stock may be sold). Control securities that are not restricted securities have no holding period.

Four additional requirements of Rule 144 apply only to affiliates:

• Volume Limitations. During any three-month period affiliates may only sell up to a number of shares equal to the greater of 1% of the outstanding securities of the class or the average weekly reported trading volume for the previous four calendar weeks. (For most insiders, this limitation does not limit sales.) An alternate volume limitation exists for debt securities, which limits the sale of debt securities to 10% of the outstanding tranche (or class).
• Manner of Sale. Affiliates must sell shares only in unsolicited broker transactions, transactions directly with a market maker or in riskless principal transactions. A riskless principal transaction occurs where, after having received an order to buy (or sell), a broker or dealer buys (or sells) the security as principal in the market to satisfy the order to buy (or sell). The seller may not solicit or arrange for the solicitation of orders to buy the stock or make any payment in connection with the sale of the stock to any person other than ordinary commissions payable to the broker who executes the order to sell the stock. In a broker transaction, the broker must do no more than execute the order to sell the stock and receive no more than the usual and customary broker commission. The broker must neither solicit nor arrange for the solicitation of customers’ orders to buy the stock. (Most national brokerage firms have a Rule 144 sales unit that ensures compliance with this manner-of-sale requirement.) The manner-of-sale restriction does not apply to debt securities.
• Notice of Sale. If an affiliate intends to sell more than 5,000 shares or expects to receive aggregate sale proceeds of over $50,000 in any three-month period, the affiliate must file a Form 144, “Notice of Proposed Sale of Securities,” with the SEC concurrently with either the placing with a broker of an order to execute a sale or the execution directly with a market maker of a sale. The person filing the notice must have a bona fide intention to sell the securities referred to in the notice within a reasonable time after filing the notice. The purpose of the filing is to serve as a nonbinding notice to the public that a significant number of additional shares are likely to enter the market. The Form 144 filing covers sales of the securities referred to in the notice during the three-month period that begins on the filing date. If the seller wishes to sell additional securities, or to sell securities after the end of that three-month period, the seller must file a new Form 144.
• Mandatory Electronic Filing and Powers of Attorney. An affiliate must file the Form 144 electronically via the SEC’s EDGAR system. The Form 144 is due by 10:00 p.m. Eastern time on the filing deadline. Sellers can elect to sign Forms 144 electronically by using platforms such as DocuSign and Adobe Sign. Before utilizing the electronic signature process, a filer must manually sign an attestation agreeing that the filer’s electronic signature will constitute the legal equivalent of a manual signature. The attestation must be furnished to the SEC on request and be retained by the company for at least seven years from the date it was last used in connection with an electronically signed filing. Although sellers can file Forms 144 directly through the SEC’s online filing system (located at www.onlineforms.edgarfiling.sec.gov), it is far more common for brokers to submit Forms 144 on behalf of sellers, although sellers remain legally responsible for their individual electronic filing obligations. Where a Form 144 is filed on behalf of the seller by an attorney-in-fact, it should be accompanied by a signed copy of the power of attorney authorizing the filing. After the power of attorney is attached to the Form 144 and filed, it does not have to be refiled as an attachment to subsequently filed Forms 144 while it remains in effect.

It is important to note, however, that although affiliate status generally ceases upon termination of a director’s or officer’s employment or service relationship with a company, brokers generally require that a former affiliate continue to sell under Rule 144 until 90 days after the date affiliate status terminates.

Rule 144 and Shell Companies

Generally, sellers may not rely on Rule 144 for the resale of securities initially issued by current or certain former shell companies, other than a business combination–related shell company.

Rule 144 Compliance Chart for Reporting Companies

Insider Trading and Rule 10b-5

The antifraud provisions contained in Rule 10b-5 under the 1934 Act prohibit directors, officers, employees and others who are aware of material nonpublic information from trading while aware of that information. Disclosing material nonpublic information to others who then trade while aware of that information is also a violation of Rule 10b-5, and both the person who discloses the information and the person who trades while aware of the information are liable. These illegal activities are commonly referred to as insider trading. In the context of insider trading, the term insider covers all employees and certain others who are aware of the material nonpublic information, such as consultants, in addition to Section 16 insiders.

Penalties

Insider Liability: For Trading. Potential penalties for insider trading violations include imprisonment for up to 20 years, civil fines of up to three times the profit gained or the loss avoided by the insider trading and criminal fines of up to $5 million.

Issuer Liability: For Inaction. The company, as well as directors and officers, may be subject to controlling-person liability under federal securities laws. Controlling-person liability may apply if the company or the director or officer knew, or recklessly disregarded, that a person directly or indirectly under the company’s or the responsible person’s control was likely to engage in insider trading and the company or person failed to take appropriate steps to prevent the trading. The penalty for inaction is a civil fine of up to the greater of $2,636,135 in 2025 (subject to annual adjustment for inflation) or three times the profit gained or the loss avoided as a result of the insider trading and criminal fines of up to $25 million.

Company Insider Trading Policy

The best way to protect a company and its insiders from potential liability under the insider trading laws is to adopt and enforce a clear policy that defines insider trading and prohibits trading while aware of material nonpublic information. The insider trading policy should apply to all directors, officers, employees and consultants of the company.

Establish Blackout Periods. The insider trading policy should establish trading blackout periods. A trading blackout period is a time period during which the company prohibits Section 16 insiders and other employees and consultants who have access to material nonpublic information about the company from buying and selling the company’s securities. Blackout periods generally begin two to four weeks before the end of the quarter and end after the first or second full business day following the company’s earnings release for that quarter. If a material event occurs (or material information is known) outside a blackout period, the company generally will impose an event-specific blackout period for applicable insiders while the event (or information) remains material and nonpublic.

Require Preclearance. Section 16 insiders and certain other employees and consultants with access to material nonpublic information should be required to notify and seek approval from a company compliance officer for any transactions in company stock by them or their family members at least two business days before the contemplated transaction.

Properly Disclose. Companies must disclose in their Form 10-K and proxy statements whether they have insider trading policies or explain why they have not adopted such policies. Companies must file all of their insider trading policies as exhibits to the Form 10-K unless they are contained in the company’s code of ethics that is filed with the SEC.

Rule 10b5-1 Trading Plans

Rule 10b5-1 provides an affirmative defense for insiders who sell securities pursuant to a previously established Rule 10b5-1 trading plan, even if the insider is aware of material nonpublic information at the time of the actual trade. (We discuss Rule 10b5-1 trading plans in detail later in this chapter.) A company’s insider trading policy will generally permit an insider to adopt a Rule 10b5-1 trading plan during a period of time outside a blackout period and when the insider is not aware of material nonpublic information, but only if the trading plan is precleared by a compliance officer. The insider trading policy should exclude trades under appropriately established Rule 10b5-1 trading plans from the preclearance policy and blackout periods.

Insider Trading During Plan Blackout Periods Prohibited

Under the SEC’s Regulation Blackout Trading Restriction (Regulation BTR), executive officers and directors may not, during any blackout period for an individual account plan (such as a 401(k) plan or profit sharing plan), directly or indirectly (including through a family member) acquire, sell or transfer any company equity securities that the director or executive officer acquired in connection with employment or service as a director or executive officer.

A Regulation BTR blackout period is any period of more than three consecutive business days during which at least 50% of the participants in all of the company’s “individual account plans” cannot trade in securities held in their individual accounts. A Regulation BTR blackout period does not include:

• Any regularly scheduled trading suspension that the company incorporates into the plan’s governing documents and timely discloses to employees before they become participants; or
• Certain temporary trading suspensions imposed by the plan in connection with individuals’ becoming (or ceasing to become) participants in the plan by reason of a corporate merger, acquisition or similar transaction.

A variety of transactions over which directors and executive officers have no control fall outside Regulation BTR. For example, transactions under Rule 10b5-1 trading plans, changes that result from a stock split or dividend and compensatory grants and awards under plans that clearly set out the amount, price and timing of awards or include a formula for determining these items are all exempt.

To satisfy Regulation BTR and notify the directors, executive officers and the public, companies must, within specific time frames:

• Provide their directors and executive officers with a Regulation BTR notice of plan blackout periods; and
• File the Regulation BTR notice on Form 8-K.

Practical Tip: Provide Your Directors and Officers with a Trading Compliance Checklist

In addition to implementing an insider trading policy and Section 16(a) and Rule 144 compliance procedures, providing your insiders with a Trading Compliance Checklist similar to the following will serve as a basic reminder of trading prohibitions and SEC filing requirements:

Comply with the Company’s Insider Trading Policy

Any time you engage in a transaction involving company securities, you must comply with the company’s insider trading policy and applicable insider trading laws. The company’s insider trading policy requires that transactions by insiders be precleared with the company’s compliance officer and that insiders trade only during periods that are not blackout periods. Before effecting any transaction in company securities, you should ask:

• Is the company in a blackout period?
• Am I aware of any material nonpublic information?
• Have I precleared the transaction with the company’s compliance officer?

Short-Swing Profit-Matching Liability Under Section 16(b) and Reporting Under Section 16(a)

Any nonexempt purchase within six months before or after a nonexempt sale and any nonexempt sale within six months before or after a nonexempt purchase result in a violation of Section 16(b). The profit will be determined by matching the highest-priced sale with the lowest-priced purchase within six months of the sale. Even if you do not realize this profit in an economic sense, the company or any shareholder acting on behalf of the company may recover this profit from you. It makes no difference how long you held the shares, that you were not aware of inside information, that you had no harmful intent or that one of the two matchable transactions occurred after you were no longer an insider. Before effecting any transaction in company securities, you should ask:

For Sales:

• Have I, my immediate family members or any trust, partnership or corporation that I am affiliated with made any purchases within the past six months?
• Do I anticipate that I, my immediate family members or any trust, partnership or corporation that I am affiliated with will make any purchases within the next six months?

For Purchases:

• Have I, my immediate family members or any trust, partnership or corporation that I am affiliated with made any sales within the past six months?
• Do I anticipate that I, my immediate family members or any trust, partnership or corporation that I am affiliated with will make any sales (including sales occurring through a broker-assisted cashless option exercise) within the next six months?

Before Any Transaction in Company Securities:

• Have I notified the company’s compliance officer prior to engaging in the transaction for purposes of facilitating Section 16 filings?

Compliance with Rule 144

To comply with Rule 144, certain limitations on sales of company securities must be met, and generally, insiders must file Forms 144 with the SEC. Before effecting any transaction in company securities, you should ask:

• Has a Form 144 been prepared?
• Have I reminded my broker to sell under Rule 144?

Get with the Program: Rule 10b5-1 Trading Plans

One cost of inside knowledge for a public company director or executive officer is illiquidity. The insider cannot sell shares during a trading blackout period or when the insider is aware of material nonpublic information. For many insiders, this may leave little or no time in which to trade. The SEC, by adopting Rule 10b5-1, opened a path that can bring transparency and order to insider selling, and in so doing eases this liquidity squeeze and helps ensure compliance with the antifraud provisions of Rule 10b-5.

Rule 10b5-1 begins by clearly stating that anyone trading in a company’s securities while aware of material nonpublic information is engaging in unlawful insider trading. The rule then provides a limited safe harbor (technically, an affirmative defense) that, when closely followed, creates a shield from liability. Rule 10b5-1 allows insiders to adopt, at a time when the insider is not aware of material nonpublic information, a written trading plan that will permit future sales, even when those future sales may occur at times that the insider is aware of material nonpublic information. Rule 10b5-1 trading plans are relatively easy to understand, establish and administer, and court cases have demonstrated the usefulness of properly structured trading plans in defending against charges of insider trading.

Benefits to the Company and Its Insiders on Adopting Rule 10b5-1 Trading Plans

In addition to helping establish protection from liability, written Rule 10b5-1 trading plans can:

• Enable insiders to make orderly dispositions of stock for diversification, estate planning or other personal needs and to facilitate stock option exercise and sale programs;
• Reduce the number of times a company faces a decision about whether material nonpublic information exists that requires the company to prohibit trading in its stock by insiders;
• Help market perceptions by bringing transparency and advance disclosure to insiders’ sales of company stock; and
• Protect an insider from the risk of “conduit theory” liability for gifts to charitable organizations or others when the insider knows the donee is likely to sell the gifted securities in the near future.

The Three “Legs” of a Rule 10b5-1 Trading Plan

A successful Rule 10b5-1 trading plan stands on three legs. First, the trading plan must be established when the insider is not aware of material nonpublic information. SEC guidance clarifies that the affirmative defense of a trading plan is not available if an insider establishes the plan while aware of material nonpublic information, even if the plan is structured so that transactions will not begin until after that material information is made public.

Second, the trading plan must be in writing and must:

• Specify the amount (either number of shares or dollar value), price (market price on a particular date, a limit price or a specified dollar price) and dates of the trades (this may be the day on which a market order is to be executed or on which “best execution” begins or on which a limit order is in force); or
• Include a formula, algorithm or computer program for determining the amount, price and dates of the trades to be made; or
• Delegate to another person sole discretion to determine the amount, price and dates of the trades to be made, provided that the person is not aware of material nonpublic information.

Third, each trade should comply with the trading plan. The insider must not alter or deviate from the trading plan (by changing the amount, price or timing of the trade) or enter into or alter a corresponding or hedging transaction or position with respect to the securities. SEC guidance clarifies that the cancellation of one or more plan transactions represents an alteration of or deviation from the trading plan that may affect the availability of the affirmative defense.

In addition to these three legs, the insider must enter into the trading plan in good faith and not as part of a scheme to evade the prohibitions of Rule 10b5-1, and, as described below, a certification is required from directors and Section 16 officers.

Also, as described below, there is a mandatory waiting period between the adoption of a Rule 10b5-1 trading plan and the first transaction made under that trading plan, a limitation on overlapping trading plans and limitations on single-trade plans.

Drafting a Rule 10b5-1 Trading Plan

The legal or compliance department of the insider’s broker usually will take the lead in drafting the insider’s Rule 10b5-1 trading plan. The insider and the company must then closely review and tailor the draft trading plan to ensure that it fits their requirements. The trading plan should first establish the amount, price and dates of the trades, or a method to determine the amount, price and dates. Next, a Rule 10b5-1 trading plan will state explicitly in writing the following:

• Adoption in Good Faith and No Inside Information. Rule 10b5-1 trading plans for directors and Section 16 officers must include a specific representation certifying that at the time of the adoption of a new or modified plan, the director or Section 16 officer is not aware of any material nonpublic information with respect to the company or its securities and is adopting the Rule 10b5-1 trading plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1.
• Mandatory Waiting Periods. The first transaction under the trading plan can take place only after a mandatory waiting period. Rule 10b5-1 trading plans for directors and Section 16 officers must not permit a transaction until the later of:
  • 90 days after plan adoption; and
  • Two business days after the Form 10-Q or 10-K is filed for the reporting period in which the trading plan was adopted (but no more than 120 days).
    
    The waiting period for persons other than directors and Section 16 officers is 30 days after plan adoption.
• No Multiple Overlapping Trading Plans. The insider does not have any other Rule 10b5-1 trading plan in place for the same period. There is an exception for “sell to cover” transactions, where shares acquired through equity awards are sold for tax withholding obligations with respect to those equity awards, as well as an exception for certain coordinated multiple broker situations.
• No More than One Single-Trade Plan in a 12-Month Period. If the trading plan is designed for a purchase or sale in a single transaction, no other trading plan entered into during the prior 12 months can have been designed for a purchase or sale in a single transaction. There is an exception for “sell to cover” transactions, where shares acquired through equity awards are sold for tax withholding obligations with respect to those equity awards.
• No Hedge. The insider has not entered into or altered a corresponding or hedging transaction with respect to the stock to be traded under the trading plan and agrees not to enter into any of those transactions while the plan is in effect.
• Rule 144. The insider and the broker will take any steps necessary to comply with Rule 144.
• Filings. The insider will be responsible for making all filings, if applicable, under Sections 13(d) and 16 of the 1934 Act, and the broker will supply the insider with all the information necessary for those filings on a timely basis.
• Independent Broker. The insider acknowledges that the insider does not have any authority, influence or control over any actions by the broker and will not attempt to exercise any authority, influence or control, and the broker will not seek advice from the insider with regard to the manner in which the broker acts under the trading plan.
• Purpose. The trading plan will generally set forth a specified purpose, for example, to permit the orderly disposition of a portion of the insider’s holdings or to facilitate the exercise of options and sale of the underlying stock.
• Intent. The trading plan is intended, and will be interpreted, to comply with Rule 10b5-1 and related SEC interpretations.

Review by the Company

A company’s insider trading policy should require insiders to submit Rule 10b5-1 trading plans to the company’s compliance officer for preclearance before adoption. The purpose of preclearance is not for company “approval” of the terms of the trading plan, but to permit the compliance officer to determine that the plan is being adopted outside a trading blackout period and otherwise complies with the company’s insider trading policy. To assist with this review, companies should consider adopting written Rule 10b5-1 guidelines that all insiders must follow in adopting a Rule 10b5-1 trading plan.

Public Disclosure; Filing the Right Forms

Insiders must now indicate in the checkbox at the top of Form 4 and Form 5 whether the transactions reported were made pursuant to a Rule 10b5-1 trading arrangement. Even before this requirement, many insiders stated in a footnote to Form 4 whether a transaction was made pursuant to a Rule 10b5-1 trading arrangement to minimize speculation that the transaction reflected the insider’s current perspective of the status of the company.

Companies must disclose in their Forms 10-Q and 10-K the adoption or termination (including a modification) of Rule 10b5-1 trading plans by their directors and Section 16 officers during the last quarter, as well as the material terms of any such plan (other than price), including the name and title of the director or Section 16 officer, date of adoption or termination, duration of the plan, and the aggregate number of securities subject to the plan. Disclosure of other trading arrangements not designed to constitute Rule 10b5-1 trading plans is also required.

Companies should implement procedures to ensure that insiders timely report Rule 10b5-1 trading plan transactions on Forms 4, 5 and 144 and, as required, on Schedule 13D or 13G. When reporting transactions on Form 144 (initially filed when the first trade under the trading plan is executed or a sell order is placed), the insider must sign the form and indicate in the space provided above the signature line (in the “Remarks” section of the form) the date on which the insider adopted the trading plan, which actions serve as the insider’s representation that the insider was not aware of material nonpublic information as of the date the plan was adopted (rather than the date the Form 144 was signed). Sales under a trading plan that will occur over a period of more than three months will require multiple filings of Form 144.

Practical Tip: Six Simple Steps 

Insiders should be cautioned that a Rule 10b5-1 trading plan, even one that meets all the requirements of Rule 10b5-1, only provides an affirmative defense in an enforcement action or lawsuit alleging unlawful insider trading. It does not prohibit someone from bringing the enforcement action or lawsuit. It is possible to strengthen this affirmative defense by following the six steps suggested below.

• Ask the broker that will be executing the insider’s trades for a copy of the broker’s current form of a Rule 10b5-1 trading plan. This will be the starting place for drafting a trading plan. The company’s counsel or a compliance officer should then review the draft for compliance with the company’s insider trading policy and Rule 10b5-1 guidelines and to ensure that the plan protects the company’s interests.
• An insider can terminate a trading plan, but termination must be done with caution. Termination may call into question whether the trading plan was entered into in good faith and not as part of an effort to evade insider trading rules. If an insider terminates a trading plan, she must satisfy a new waiting period before entering into a new plan.
• An insider may modify a trading plan, provided that the insider is not aware of material nonpublic information at the time of the modification. But any modification is, in effect, the adoption of a new trading plan and a new waiting period applies. Frequent modifications, like terminations, can call into question the good faith of the insider.
• An insider may make trades outside the trading plan provided the insider is not aware of material nonpublic information. Trades outside the trading plan are not protected by Rule 10b5-1’s affirmative defense and must not hedge trades made under the plan. Some Rule 10b5-1 trading plans prohibit trades outside the plan with a different broker to avoid the risk of exceeding the Rule 144 volume limitations.
• Carefully review the insider’s contractual lock-up agreements. Underwriters, for example, may have prohibited or restricted any trades for a set period after an offering, even under Rule 10b5-1 trading plans.
• A trading plan should provide for automatic suspension or termination upon specified events. These may include the insider’s death or bankruptcy, imposition of an underwriter’s lock-up agreement or the announcement of a tender offer for the company’s stock or a merger.