Section 16 of the Securities Exchange Act requires insiders or stock owners with over 10% of a company’s outstanding stock to file with the SEC. Beneficial owners with voting rights are included. Insiders must report all material changes in their holdings and profits gained from buying or selling company stock. Exemptions apply to certain transactions, including those ratified by shareholders or approved by a board of directors with non-employee members.
In 1934, the United States Congress passed the Securities Exchange Act, which, in addition to establishing the Securities Exchange Commission (SEC), also establishes regulations for the secondary trading of bonds, stocks and debentures by directors, officers and major shareholders of companies. Section 16 establishes filing requirements with the SEC for insiders or stock owners who own more than 10 percent of a company’s outstanding stock. Under Section 16, significant owners and affiliated insiders must file Form 3 electronically with the SEC within 10 days of the stock purchase or affiliation date. Insiders must report all material changes in their holdings on Form 4. Company officers who engage in internal dealings that are not reported on Form 4 must disclose such transactions on Form 5 annually.
Section 16 applies to all beneficial owners of a particular stock or share. The term beneficial owner can refer to any person or group who has the ability to influence decisions relating to such action or title. This includes people with voting rights, even if they have no title to the title or title. The President of the United States or the director of an executive branch agency can exempt companies from their reporting obligations under the Securities Exchange Act of 1934 when such reports involve matters of national security.
To prevent the unfair use of inside information to make a profit, Part b of Section 16 requires all insiders to report all profits gained from buying or selling company stock before the 10th day of the month following the transaction. The Sarbanes-Oxley Act of 2002 reduced the reporting period to two days. Also, profits from short-term transactions, involving a quick buy and sell or sale and repurchase made within six months of each other, belong to the company, not the merchant. The SEC tracks this information, but doesn’t directly enforce the rule. A company’s shareholders must find out the facts and sue the insider who engaged in the improper short-swing if he fails to return profits to the company.
If a registered investment firm enters into the transactions and the commission has exempted both the component transactions of buying and selling the security in question, 16b does not apply. Furthermore, transfers representing genuine gifts or inheritances are also exempt from 16b. Exemptions may also apply to employee benefit plans, mergers, consolidations and voting trusts. Finally, transactions which are ratified by a company’s shareholders or approved by a board of directors which includes at least two non-employee members cannot be subject to part b of section 16.
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