Title 18 Section 1001 and SEC Form 4s

Every officer or director of a public company must report transactions they make in company equity securities on SEC Form 4s.

For example if a CEO purchases 10,000 common shares of his company in the market, he is required to report that transaction on a SEC Form 4 on Table I by entering Code "P" in column 3 and code "A" in column 4.

If a CEO sells 10,000 common shares of his company in the market, he is required to report that transaction on Table I by entering Code "S" in column 3 and code "D" in column 4.

If the CEO delivers shares to the company to pay for the exercise price of ESOs as a result of the CEO exercising ESOs and the grant of the ESOs has been approved with the required specification under SEC Rule 16 b-3, and Note (3), he should enter Code "F' in Column 3 and Code "D" in column 4 of the SEC Form 4.

The same applies to delivering shares for a true tax liability as a result of the vesting of Restricted Stock or RSUs. Code "F" should be entered in Column 3 of Table I if the grant of the Restricted stock or the RSUs was approved with sufficient specificity to achieve an exemption from 16 (b)  and Code "D" should be entered into Column 4.  

If the CEO delivers shares to the company for an exercise price payment upon the exercise of ESOs and the delivery is a disposition that has been approved  pursuant to SEC Rule 16 b-3(e), then the CEO should enter a Code "D".


If the CEO delivers shares to the company for an  tax liability payment upon the vesting of Restricted stock and the delivery is a disposition that has been approved pursuant to SEC Rule 16 b-3(e), then the CEO should enter a Code "D".

If the issuer has discretion to accept or not accept the delivery of shares for a exercise price payment or a tax liability, the delivery is not approved sufficiently to get an SEC Rule 16 b-3(e) approval and the CEo should enter a code "F" in column 3 of Table II.

Below is the view of the SEC staff on the effect of the issuer having discretion

Q and A to and from Staff of the SEC 

Question: Would approval of a grant that by its terms provides for automatic reloads satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants?

Answer: Yes. Approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis.

The same result applies under Rule 16b-3(e) where the automatic feature is a tax- or exercise-withholding right. [May 23, 2007]

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If the Code "D"is entered into Column 3, on Table I where the specificity of approval requirements under Rule 16 b-3(e) were not satisfied, the consequences are that the CEO could be charged with a violation of Title 18 section 1001, in addition to a possible violation of section 16 (b) of the Securities Exchange Act of 1934 if there is a matching non exempt purchase. 



John Olagues

Edited Sat, Jun 17, 2017 9:00 AM

Replies to this Topic

I'm not sure Transaction Code "D" should be used to represent the surrendering, tendering, or otherwise withholding of option shares or RSUs to satisfy the payment of the exercise price or tax liability. In my SEC Reporting experience, for these transactions, Transaction Code "F" has been used if the grant was made in accordance with the requirements in Rule 16b-3.

The Form 4 instructions clearly state use Transaction Code "F" to represent the following: "Payment of exercise price or tax liability by delivering or withholding securities incident to the receipt, exercise or vesting of a security issued in accordance with Rule 16b-3."

Transaction Code "D" in my SEC Reporting experience has generally been used when there is a merger transaction and shares are being cancelled/disposed back to the issuer and converted to a right to receive cash.

Maybe I'm missing something...

Bill

Edited Fri, Jun 2, 2017 7:39 AM

Bill:

I agree that when there is a disposition to the issuer for tax payments from vesting, the insider generally enters a "F" in column 3 of Table 1. But they also enter a "D" in column 4 on Table I.

Below is a link to a insider by the name of James Dimon who entered "F" in column 3 and "D" in column 4.

http://www.secform4.com/filings/19617/0001225208-16-024263.htm


 Below is part of the SEC Form 4 Transaction Code

D - Disposition to the issuer of issuer equity securities pursuant to Rule 16b-3(e)
F - Payment of exercise price or tax liability by delivering or withholding securities incident to the receipt , exercise or vesting of a security issued in accordance with Rule 16b-3.

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SEC Rule 16 b-3 applies to both dispositions to the issuer and purchases from the issuer.

SEC Rule 16 (b)-3(e) applies to just dispositions to the issuer from the officer, director to the issuer.

Edited Fri, Jun 2, 2017 8:02 AM

Thanks John,

I see the Dimon Form 4 example you provided. Column 4 of Form 4 Table I is not a Transaction Code. That's just whether the shares were Acquired (A) or Disposed (D) by the Section 16 filer. The "D" in Column 4 is not the same as Transaction Code "D" used in Column 3. The way JP Morgan Chase has disclosed the withholding of shares for Dimon's RSU vesting is consistent with my understanding.

I think I just misread your statement. Column 4 of Table I has to be an A or D... it can't be anything else.

We're good now. 

Edited Fri, Jun 2, 2017 8:30 AM

I appreciate your reply and your interest in the topic.

 

Check out the link below which is a list of all the Transactions Codes from the SEC.

http://www.secform4.com/site/transaction-codes.htm

 

Cheers:

 

John

Bill; You are correct.

 

The "D" in column 4 apparently does not mean the same as the "D" in Column 3 of Table 1.

The Code list that I linked apparently applies just to column 3. I revised the article to correct the error.

 

John

Edited Fri, Jun 2, 2017 6:25 PM

Sigh-

You had me concerned John that I missed a Form 4 update. Thanks for the link that has all the Form 4 Transaction Codes... I usually get the Transaction Codes directly from the SEC website via the Forms List https://www.sec.gov/forms or my trusty Romeo & Dye Section 16 Handbook.

Still good we could collaborate...Smile

Edited Sat, Jun 3, 2017 6:48 AM

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