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  • SEC Warns That Inadvertence is No Defense to Filing Violations

    On September 10, 2014, the Securities and Exchange Commission (the “SEC”) announced that it charged six public companies and twenty-eight directors, officers, and significant shareholders with violating the prompt reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). The announcement reflects the SEC’s increasingly aggressive stance on minor securities violations.

    “The reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Those who fail to do so run the risk of facing an SEC enforcement action.”

    The SEC alleges that the twenty-eight insiders and shareholders violated sections 16(a), 13(d) and/or 13(g) of the Exchange Act and the regulations promulgated thereunder. Section 16(a) requires officers, directors, and ten-percent beneficial owners—insiders— to file a Form 3 reporting their holdings within ten days of becoming an insider. Corporate insiders must make additional filings within two days of any ownership changes. Section 13(d) requires beneficial owners to report stock acquisitions that increase their total holdings to more than five percent of the company’s stock. Certain acquisitions are exempt from section 13(d) reporting obligations. However, beneficial owners who pass the five-percent threshold by entering into exempt transactions must nonetheless report on Schedule 13G.

    The SEC claimed that the six public companies it charged negligently aided the untimely filers. In addition, the SEC claimed that the companies violated section 13(a) of the Exchange Act, which requires issuers to report known instances of absent or late filing.

    The SEC’s decision to pursue these charges demonstrates that directors and officers cannot avoid the consequences of late or non-existent reporting by blaming the stock’s issuer, and vice versa. Several parties to the September enforcement actions alleged that they informed the stock’s issuer about their transactions and, in good faith, relied on the issuer to timely file the necessary reports with the SEC on their behalf. However, the SEC explained that intent is not an element of reporting offenses, and that these insiders and shareholders had a legal responsibility to ensure that the filings were timely and accurate.

    “Officers, directors, major shareholders, and issuers should all take note,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “[I]nadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions.”

    Almost all parties settled with the SEC without admitting or denying the allegations. The financial penalties ranged from $25,000 to $150,000.

    These charges are the latest development in the SEC’s initiative to enforce of the non-fraud provisions of the federal securities laws. Last year, SEC Chair Mary Jo White explained that the SEC would pursue minor securities violations with greater force than it had before because ignoring minor violations could lead to more serious offenses.

    “When a window is broken and someone fixes it—it is a sign that disorder will not be tolerated,” White said. “But, when a broken window is not fixed, it is a signal that no one cares, and so breaking more windows costs nothing.”

    To avoid penalties, officers, directors and significant shareholders should familiarize themselves with the prompt reporting requirements and deadlines. Issuers should strengthen their internal compliance procedures to better track insider transactions.

    If you have questions or concerns about this topic and would like further information, please email Jim Ryan at jryan@cullenanddykman.com or call him at (516) 357-3750. *A special thanks to Alissa Piccione for her help with this article.