SEC Reporting on Form 4 by Executives Raises questions of Intentional Misstatements

Below illustrates two Codes that may be inserted into Column 3 on Table 1 of SEC Form 4 by insiders to satisfy reporting requirement for transaction done by insiders


Rule 16b-3 Transaction Codes

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

 

When insiders deliver shares to the issuer, whether discretionary or mandatory, to pay tax liabilities when RSUs or Restricted Stock vest, they almost always enter code "F". 

When insiders deliver shares to the issuer, whether discretionary or mandatory, to pay the exercise price of ESOs, or SARs or warrants, they again enter "F".

Why do they choose to enter "F" instead of "D"?

Code "D" indicates that the disposition was approved by the Board of Directors or the Compensation Committee in a manner that satisfies the approval requirements of SEC Rule 16 b-3(e).

Code "F" does not claim that the delivery or withholding of shares to the issuer satisfy the approval requirements under SEC Rule 16 b-3(e). But Code "F" merely says shares were delivered or withheld incident to the receipt, exercise or vesting of a security issued in accordance with Rule 16 b-3. In other words, the "F" means that the deliverance of the shares to the issuer are for taxes or the exercise payments resulting from a security (such as a ESOs or RSU) issued in accordance with Rule 16b-3,

 

But these insiders claim subsequently that the delivery or withholding of issuer securities to the issuer are dispositions that are pursuant to Rule 16 b-3(e) and that as a result, these dispositions are exempt from section 16 (b) of the 1934 Securities Exchange Act.

 

So if the dispositions of the shares to the issuer for tax payments or  exercise price payments are pursuant to Rule 16 b-3(e), why don't the insiders report the transactions using code "D" ?

The answer is that if they report code "D", and the transactions do not satisfy the specificity requirements to achieve an approval pursuant to Rule 16 b-3(e), the following statement applies.

"Intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a)."

The SEC Staff stated in a Q and A of May 2007 that when the issuer has discretion of requiring shares or cash for exercise prices or tax liabilities from ESOs, RSUs and the like, there is no specificity that will get approval under Rule 16 (b)(e).

But what are the implications of reporting Code "F"?

Was it a misstatement  to use Code "F" and not use "D", and then subsequently claim what "D" says?

Or is the use of "F" really a statement saying that they are not sure whether the disposition is pursuant to "D", so they will use "F" ?

John Olagues

Edited Sun, Jul 9, 2017 12:18 PM

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