Forms 3, 4, and 5, and the Short-Swing Trap

Section 16 of the Exchange Act applies to three groups of people at a public company: officers, directors, and anyone who beneficially owns more than ten percent of a registered class of equity securities. If you are in one of those groups, you have personal filing obligations, separate from anything the company files.

Three forms.

Form 3 is the initial statement of beneficial ownership. It is due within ten days of becoming an officer, director, or ten percent holder — or, where the company is registering securities, by the effective date.

Form 4 reports a change in beneficial ownership. Due within two business days of the transaction. Two business days. This is the form that gets missed, and it gets missed because people think of it as a company obligation. It is not. It is yours, personally, and your name is on the late filing.

Form 5 is the annual catch-up for exempt transactions and anything that should have been reported earlier. Due forty-five days after fiscal year end.

Now the part with teeth. Section 16(b), short-swing profits.

If an insider buys and sells, or sells and buys, equity securities of the company within any six-month window, any profit from matching those trades is recoverable by the company. Automatically. There is no intent requirement. It does not matter that you had no material nonpublic information. It does not matter that you were not trying to do anything wrong. It does not matter that the two trades were unrelated in your mind. The statute matches the highest sale against the lowest purchase in the window, and the profit goes back to the issuer.

And the company does not have to be the one to enforce it. A shareholder can bring the action on the company's behalf, and there is a well-established plaintiffs' bar that watches Form 4 filings for exactly this pattern.

Two practical consequences.

First, insiders need a pre-clearance process. Before any transaction, someone checks the prior six months. That takes ten minutes and prevents a category of problem that cannot be fixed after the fact.

Second, late Form 4s get disclosed. Delinquent Section 16 filings must be identified in the company's proxy statement. It is a small item that signals a larger one to anyone reading carefully — including the staff.

Section 16 compliance is not complicated. It just requires that someone is actually watching the calendar.

This is Inside Securities Law. I'm Frederick M. Lehrer. General information, not legal advice.