Section 16 is a section of the Securities Exchange Act of 1934. It describes the regulatory filing responsibilities of directors, officers, and principal stockholders. Section 16 imposes filing standards for “insiders.” Insiders include any officers, directors, or stockholders possessing over 10% of the company’s stock. It applies to SEC reporting companies. Section 16 requires insiders to disgorge any short-swing profits made from trading activities.
Penalties for Noncompliance
The maximum prison sentence for an insider trading violation is 20 years. The maximum criminal fine for individuals is $5 million. Section 16 does not apply to private companies.
Determining Officer Status
Decisions on Section 16 officer status are made by a company’s Board of Directors. They consult management and counsel. Over-inclusive Section 16 officer designations can cause challenges in reporting and unnecessarily scrutinize some employees. Companies with fewer than five executive officers prompt SEC requests to confirm full executive compensation disclosure.
Form 4 is required to be filed by a company or the individual at the company when there is a change in the holdings of company insiders. The SEC Staff has stated that it will not advise registrants regarding the determination of executive officers and will neither object to nor concur in those determinations.
Compliance and Filing Requirements
The role of Section 16 is to ensure that transactions and holdings of company insiders are transparent. Insiders are expected to file forms 3, 4, and 5, where form 3 is for initial filings, form 4 is for transaction reports, and form 5 is for deferred reporting. Section 16 does not directly prohibit insider trading but rather requires disgorging of illicit profits. Violations of Section 16 regulations can result in severe penalties, including fines and prison sentences. Section 16 thus serves to maintain transparency between insiders and public shareholders.