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Section 403 of the Sarbanes-Oxley Act

On August 29th, 2002 insider-trading data received what is arguably its most important upgrade in usefulness since it was mandated back in 1934. After 68 years, the deadline for filing Form 4s at the SEC was shortened to just two business days!

This was a huge boon to those of us who practice the art/science of analyzing Form 4 data for investment intelligence. The data was already useful when the delay could be as long as 40 days. It is only more so now without the old time lag. Also, on July 30, 2003, insider data was made available electronically by the SEC via its EDGAR system on the same day it is filed.

To familiarize investors with the Sarbanes-Oxley Act (the Act), we have reproduced Section 403 below, which is the part of Sarbanes-Oxley that affected Form 4 regs, and follow it with further discussion. It's really not that awful to read, and we have highlighted the important sections in red to make it even more painless.


H.R.3763
Sarbanes-Oxley Act of 2002 (Enrolled as Agreed to or Passed by Both House and Senate)



SEC. 403. DISCLOSURES OF TRANSACTIONS INVOLVING MANAGEMENT AND PRINCIPAL STOCKHOLDERS.

(a) AMENDMENT- Section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) is amended by striking the heading of such section and subsection (a) and inserting the following:

`SEC. 16. DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS.

`(a) DISCLOSURES REQUIRED-

`(1) DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS REQUIRED TO FILE- Every person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security (other than an exempted security) which is registered pursuant to section 12, or who is a director or an officer of the issuer of such security, shall file the statements required by this subsection with the Commission (and, if such security is registered on a national securities exchange, also with the exchange).

`(2) TIME OF FILING- The statements required by this subsection shall be filed--

`(A) at the time of the registration of such security on a national securities exchange or by the effective date of a registration statement filed pursuant to section 12(g);

`(B) within 10 days after he or she becomes such beneficial owner, director, or officer;

`(C) if there has been a change in such ownership, or if such person shall have purchased or sold a security-based swap agreement (as defined in section 206(b) of the Gramm-Leach-Bliley Act (15 U.S.C. 78c note)) involving such equity security, before the end of the second business day following the day on which the subject transaction has been executed, or at such other time as the Commission shall establish, by rule, in any case in which the Commission determines that such 2-day period is not feasible.

`(3) CONTENTS OF STATEMENTS- A statement filed--

`(A) under subparagraph (A) or (B) of paragraph (2) shall contain a statement of the amount of all equity securities of such issuer of which the filing person is the beneficial owner; and

`(B) under subparagraph (C) of such paragraph shall indicate ownership by the filing person at the date of filing, any such changes in such ownership, and such purchases and sales of the security-based swap agreements as have occurred since the most recent such filing under such subparagraph.

`(4) ELECTRONIC FILING AND AVAILABILITY- Beginning not later than 1 year after the date of enactment of the Sarbanes-Oxley Act of 2002--

`(A) a statement filed under subparagraph (C) of paragraph (2) shall be filed electronically;

`(B) the Commission shall provide each such statement on a publicly accessible Internet site not later than the end of the business day following that filing; and

`(C) the issuer (if the issuer maintains a corporate website) shall provide that statement on that corporate website, not later than the end of the business day following that filing.'.

(b) EFFECTIVE DATE- The amendment made by this section shall be effective 30 days after the date of the enactment of this Act.




Amen To Amendments
The first highlight points out the method Congress used to change the filing deadline: it amended the original Section 16 of the Securities Exchange Act of 1934 (the 1934 Act).

Since Section 16 of the 1934 Act had the old filing deadline entrenched in it, it would seem obvious that this was the proper method to make the deadline more timely. Well, it was obvious, but it certainly wasn't a definite.

At the time, Congress was negotiating the wording of so many bills relating to corporate governance issues, that any one bill could not be guaranteed to make it into the final law that passed both houses.

Knowing this, the SEC took it upon itself to make a back-up plan. On June 17, 2002 it reserved insider transactions as one of the additional disclosures that would require a company to file an 8-K. An 8-K is where important intra-quarter disclosures are made by firms. Mergers, changes in earnings guidance, and other important events have to be disclosed promptly by a firm on an 8-K, and the SEC was prepared to lump most insider transactions greater than $100,000 in the definition of a reportable event.

That was quite a bold proposal. Form 4s, as mandated by Section 16 of the 1934 Act, are the responsibility of the individual insiders themselves to file. The SEC was prepared to make it the company's responsibility!

It was an admirable proposal, but not an ideal one. Subscribers may recall from an editorial in the April 1, 2002 issue of InsiderInsights that Harvey Pitt was even on record advocating a "legislative solution" to the filing deadline. He understood that with the deadline language imbedded in Section 16, it would take an act of Congress to change it.

Fortunately, a legislative solution did pass both houses. And with the inclusion of Section 403 in Sarbanes-Oxley, the SEC rescinded its intention to mandate some insider transactions on 8-Ks. It correctly saw that that proposal was redundant.

But the fact that Pitt & Co. formulated a back up plan with the tools at their disposal is consistent with the SEC's strong backing of making Form 4 data more timely. In fact, back on March 1, 2002 Mr. Pitt's office penned an extraordinary letter to Senator Jean Carnahan of Missouri welcoming the opportunity to provide technical assistance on her bill that was working towards that end. Mrs. Carnahan's "Fully Informed Investor Act of 2002" was the main bill advocating more timely Form 4 disclosure, and her language is what primarily made up Section 403 of Sarbanes-Oxley.

Hooray For Two Days
The meat of the change Section 403 makes to Section 16 of the 1934 Act is in that innocuous second highlight we've made. This highlight points out that the filings to report changes in insider ownership must be made "…before the end of the second business day following the day on which the subject transaction has been executed…"

It's as simple as that. The filing deadline in the original Section 16 was worded as follows: "…within ten days after the close of each calendar month…"

I was never able to determine the precise rationale behind this odd original deadline. But , as I speculated in my book Profit from Legal Insider Trading, the best I can determine is that the deadline related to the postal efficiency of the depression era. It seems that legislators in 1934 imagined executives filling out the annoying paperwork of the Form 4 at the end of each calendar month. And the 10 days related to the time it took for executives in outlying areas to get it to the SEC after popping it in the mail on the first of each month-with a couple days cushion built in, no doubt.

That deadline probably made Form 4s a very timely piece of information in the decades before computers. But in today's atmosphere of 24-hour business news, the deadline had long ago become and anachronism.

Every week we saw stocks that had gotten away before insiders told us of their trades. It's not that the executives were taking advantage of the deadline to be sneaky. It's just human nature to procrastinate doing annoying paper work. So, around every 10th-of-the-month, there was a predictable bulge of filings to analyze as insiders rushed to make the deadline. That bulge of delayed filings is gone now, though, and good riddance.

Technology Is Our Friend
As an added bonus, Section 403 mandated that Form 4s be filed electronically by July 30, 2003. Furthermore, the Act stated that the SEC is responsible for making sure Form 4s are posted on a publicly available website within a day of receiving it.

Once again, we appear to have Senator Carnahan to thank for the wording on electronic filing in Section 403. One of our sources working with this process indicated that Mrs. Carnahan worked that language in at the last minute.

Making It So
Mandated to move within 30 days of Sarbanes-Oxley being passed, the SEC promulgated rules on August 6, 2002 consistent with the Act, and submitted them for public comment. But the proposed rules were as close to a done deal as it gets, and the final rules can be viewed at: http://www.sec.gov/rules/final/34-46421.htm.

InsiderInsights.com applaudes these important regulatory changes, and will continue to work with our community to add features that add value to the data.


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