SEC Rules To Accelerate Section 16 Reporting To Be Effective August 29, 2002

On August 6, 2002, the Securities and Exchange Commission announced that it will adopt new rules relating to Section 16 as directed by the Sarbanes-Oxley Act no later than August 29, 2002. The Sarbanes-Oxley Act of 2002 (the "Act"), signed into law on July 30, 2002, includes new accelerated filing deadlines under Section 16 of the Securities Exchange Act of 1934. Section 16 applies to transactions in a company’s equity securities by its directors, certain officers and 10% or greater beneficial shareholders. These provisions of the Act become effective August 29, 2002 and apply to transactions on or after that date.

To assist clients in responding quickly to the changes, we have outlined below the new accelerated filing requirements under the Act as well as the proposed changes to the related rules that the SEC intends to implement. We recommend all companies notify company insiders as soon as possible of the need to comply with the new requirements.

For any changes in an insider’s beneficial ownership of the company’s equity securities on or after August 29, 2002, a Form 4 report must now be filed no later than the second business day following the day on which the transaction occurred. Previously, Form 4 reports were not due until 10 days after month end.

• All transactions in a company’s equity securities must now be reported within 2 business days on Form 4. This includes most transactions that used to be eligible for delayed reporting on Form 5 under the rules. In addition to market transactions, issuances by the Company, stock grants, option exercises and cancellations, regrants of stock options, gifts, and discretionary purchases and sales of the company’s stock under employee benefit plans will now be subject to immediate reporting.
• The SEC has stated that it is considering adopting one or more exceptions from the 2-day filing rule for narrowly defined transactions that may prove difficult to report on a timely basis, but we expect these exceptions will be limited. Information on the SEC actions should be available in the next few weeks.

By July 30, 2003, all insiders who must file reports under Section 16 will be required to file such reports with the SEC electronically via EDGAR, and companies which maintain websites must post these reports on their websites no later than the end of the business day following the filing date. The SEC is encouraging all insiders to file their Forms 4 electronically. Currently, this requires separate EDGAR filer identification numbers for each insider.

Pending finalization of the SEC rules and complete review of insider trading policies and procedures, we recommend that companies immediately undertake the following steps:

1. Immediately notify all Section 16 reporting persons (i.e. directors and covered officers) of these accelerated reporting obligations.
2. Require Section 16 reporting persons (including their family members) to pre-clear any and all proposed transactions, including gifts, in the company’s equity securities with the CFO or general counsel. Keep in mind that administratively, this preclearance will need to be sufficiently in advance of the proposed transaction to provide enough time for the company to assist in the preparation of the Form 4.
3. Obtain a power of attorney from each Section 16 reporting person granting the CFO or general counsel authority to sign any required report on the insider’s behalf.
4. For companies that commence a six to eight-week "black-out" period during the third month of each quarter, consider closing the window on August 29 th (rather than September 1 st ) for this quarter. This will afford reasonable time to study the new rules and establish appropriate procedures in order to avoid delinquent reporting and filing errors.
5. Obtain EDGAR filer access codes for each of the company’s Section 16 reporting persons to facilitate the filing of the reports via EDGAR as soon as possible. Alert appropriate personnel to begin exploring website capability for postings of Section 16 reports.
6. Consider requiring all Section 16 reporting persons to sign a certification acknowledging their understanding of, and intent to comply with, the procedures adopted in order to comply with the new deadlines.
7. Consider updating and/or adopting new written insider trading policies and procedures to address the new regulatory environment, including procedures for mandatory pre-clearance of all transactions by Section 16 reporting persons and procedures for company approval of insiders’ 10b5-1 trading plans.

In announcing that the new Section 16 rules will be forthcoming in the next few weeks, the SEC also clarified that it will not move forward with its previously proposed rules which would have required companies to file reports on Form 8-K regarding insider transactions in company securities. The SEC is, however, continuing to consider other expanded Form 8-K disclosures proposed in its earlier releases, including immediate disclosure of related party transactions and insider adoption of 10b5-1 trading plans (these plans can serve to preclude insider trading violations for preplanned purchases or sales of company securities).