Questions Posed for Today's Webcast

Alan Dye on the Latest Section 16 Developments

Q&A and Practice Tips from the Expert

Thursday, January 25, 2007

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Dividend Accruals on Restricted Stock Units

  1. Our Section 16 officers have restricted stock units which, upon vesting, entitle the insider to common stock, with no opportunity to receive cash instead.  Each grant of RSUs was reported on Form 4, in Table I, as an acquisition of common stock.  Dividends accrue on the RSUs as additional RSUs based on the market price of the company’s common stock on the dividend payment date.  Shares resulting from dividend accruals vest and become deliverable to the insider on the vesting dates of the related RSUs.  Insiders may elect to defer receipt of their common stock upon vesting, in which case dividends continue to accrue on the deferred shares.
     
    1. When do we report the dividend accruals:  the dividend payment date, the vesting date, or the date of delivery of deferred shares?
       
    2. If the dividend accruals should have been reported on the dividend payment dates, should we report the acquisitions on insiders’ upcoming Forms 5, and do the delinquencies have to be disclosed in the proxy statement under Item 405?

Trust of Which Insider is Co-Trustee

  1. One of our directors is one of two co-trustees of a trust that holds company stock and therefore has shared voting and investment power over the stock.  Neither the director nor any member of his family is a beneficiary of the trust.
     
    1. a. Must the director report the trust’s holdings of and transactions in company stock?

    2. b. Would the director’s reporting obligation extend to shares acquired through dividend reinvestment?

Obtaining a Certificate That No Form 5 is Due

  1. Our corporate secretary, who works closely with our board, would rather have me file a Form 5 for each director instead of bothering them with the certifications that no Form 5 is needed.  Do you consider that an advisable approach?

Filing Form ID

  1. When filing a Form ID, is it still necessary to fax in a signed, notarized copy of the form?

EDGAR Filing Deadline

  1. The 10:00 pm deadline for filing Section 16 reports electronically used to be a pilot program.  Was action ever taken to make it permanent, or is it just going to stay in place indefinitely?

Filing Date Adjustment

  1. We missed a Form 4 filing deadline by minutes, as we scrambled to finish inputting the data in our software program.  Is there any way to avoid treating the missed deadline as a late filing, so that we don’t have to disclose the delinquency in the proxy statement?

Reporting Amendments of Outstanding Options

  1. In reviewing our past option grants, we uncovered several instances where a grant was misdated.  To avoid Section 409A excise taxes upon vesting, we amended the options to increase the exercise price.   Does the amendment of the option require a new or amended Form 4?
  1. When our compensation committee approved option grants last year, one of our insiders was listed in the wrong pay grade, resulting in his getting an option that was smaller than it should have been.  We considered this to be an administrative error and  fixed the problem without further action by the committee, although we informed the committee of the correction.  Does this correction need to be reported?
  1. If, during a stock option back-dating review, we find that grants to Section 16 officers have a different measurement date and market value than was originally reported, are we required to file amended Forms 4.  If so, would we need to amend only the Form 4 on which the grant was reported?
  1. The compensation committee of our board of directors is planning to accelerate the vesting of all outstanding underwater options so that the options become exercisable immediately.  Will the amendment require that we file Forms 4 for all affected insiders? 

Amending An Erroneous Form 4

  1. In February of 2006, we filed a Form 4 to report several stock sales by an insider.  Unfortunately, we omitted from the Form 4 one sale of 1,000 shares.  As a result of that omission, three subsequent Forms 4 filed by the insider also were incorrect, in that they overstated the insider’s ownership of common stock in Column 5 by 1,000 shares.  We know that we need to amend the February Form 4.  Do we also need to amend each of the three subsequent Forms 4 to reduce the holdings reported in Column 5 by 1,000 shares?

Six-Month Holding Period Under Rule 16b-3(d)(3)

  1. In the December 2006 issue of Section 16 Updates, you say that Rule 16b-3(d)(3) exempts an insider’s acquisition of an option if (i) the option is held for at least six months or (ii) if the option is exercised, the underlying stock is not sold within six months of the option grant date.  Does that mean the exemption would not be available for a reload option that is immediately exercisable at the time of grant, if the insider exercises the option and sells the underlying stock within six months?

Average Price Reporting

  1. When reporting multiple sales at slightly different prices, can we round some of the price points to avoid having hundreds of lines, or show a weighted average price, with a footnote disclosing the range of prices?  I am concerned that I will lose several work days each quarter to inputting Form 4 data.

Tax Withholding During Blackout Periods

  1. Do you see any reason to prohibit executives from electing, during a quarterly blackout period, tax withholding of shares upon exercise of an option or vesting of restricted stock?

Gifts During Blackout Periods

  1. Do you recommend that an issuer apply its insider trading policy blackout periods to gifts as well as open market transactions?  Could an insider have potential liability, for example, for making a gift to a charity that is timed to result in the greatest tax benefit to the insider?

Variable Prepaid Forward Contracts

  1. Has the SEC staff addressed the application of Section 16 to variable prepaid forward contracts since offering its preliminary views in 1998?

Completing Column 9 of Table II

  1. When reporting a transaction involving one of an insider’s many employee stock options, what number should be reported in Column 9 of Table II as the “number of derivative securities beneficially owned following the reported transaction”?

Former Insider’s Resumption of Insider Status

  1. One of our vice-presidents was considered a Section 16 officer until 2002, when we re-evaluated our list of Section 16 officers and concluded that he should no longer be considered subject to Section 16.  Since then, the vice-president’s policy-making function has been expanded, and we plan to designate him as a Section 16 insider at the next board meeting.  The vice-president never filed an exit report indicating that he was no longer subject to Section 16.  Do we need to file a new Form 3, or can we just resume filing Forms 4?

Identifying Named Executive Officer After Year-End

  1. As we draft our executive compensation disclosures, we see that one of our vice-presidents, who in the past has not been considered a Section 16 officer, is likely to be one of our highest paid executives for 2006.  If we conclude that the vice-president should be deemed an executive officer for 2006 and therefore should be included in the compensation tables, when will his Form 3 be due?  We usually have the board adopt a resolution each year designating our Section 16 officers.

Indemnification and Non-Employee Director Status

  1. We have several shareholder lawsuits pending against the company and its directors based on a restatement of our financial statements last year.  As required by our certificate of incorporation and bylaws, we are paying the legal expenses of all of the directors.  Does our payment of these expenses affect the status of our compensation committee members as “non-employee directors” under Rule 16b-3?

Discretionary Transactions

  1. A Section 16 officer recently transferred part of her 401(k) plan balance into the company stock fund.  Only two months earlier, the same officer sold company stock in an open market transaction.  Does the prior sale of stock affect the availability of Rule 16b-3 to exempt the purchase in the 401(k) plan?

Filing Section 16(a) Reports with Nasdaq

  1. Can you confirm that it still is not necessary to file copies of Section 16(a) reports with Nasdaq?

Post-Termination Transactions

  1. I read that post-insider transactions do not have to be reported unless the insider engaged in an opposite-way transaction in the prior six months while still an insider.  One of our officers was terminated last year and thereafter exercised an employee stock option during his 90 day grace period.  The option was granted in a Rule 16b-3 exempt transaction.  The former officer had no unreported transactions and no opposite-way transactions within the preceding six months while he was an officer.  Do we need to report the post-termination transaction on a Form 5?

Directors by Deputization

  1. Can a director by deputization rely on Rule 16b-3 to exempt an acquisition of securities from the issuer?

Early Item 405 Disclosure

  1. Several of our insiders filed late Forms 4 during 2005, and we disclosed those reporting delinquencies in the proxy statement we filed for the 2006 meeting of shareholders.  One of our insiders also filed a late Form 4 in February 2006, and we disclosed that delinquency in the 2006 proxy statement, even though we may not have had to.  Do we need to disclose that delinquency again in our 2007 proxy statement?  We have no other Item 405 disclosures this year and therefore would rather not include the disclosure if we don’t have to.

Reimbursement of Section 16(b) Liability

  1. One of our insiders sold stock within six months of a non-exempt purchase, and we failed to identify the short-swing problem when we pre-cleared the sale.  Now a plaintiff’s attorney has submitted a letter demanding that we recover the profit.  Would it be permissible for the company to pay the claim, or to reimburse the insider the amount of the liability?

Matching Transactions in Directly and Indirectly Owned Shares

  1. How should recoverable profits be calculated where an insider purchases stock in its own name and then sells stock through a corporation of which it is a 70% equity owner?  Say, for example, the insider purchases 100 shares of stock for $10 a share and then, within six months, the corporation sells 100 shares for $12 a share and another 100 shares for $14 a share?

Corporate Secretary as Section 16 Insider

  1. Should the corporate secretary (who may also be a senior vice president or vice president) of a public company be a reporting person under Section 16, and  does making that person a reporting person under Section 16 automatically make him/her an executive officer too?