What is {term}? Section 16

Section 16 is a section of the Securities Exchange Act of 1934 that describes the various regulatory filing responsibilities of directors, officers and principal stockholders. According to Section 16, every person who is directly or indirectly a beneficial owner of over 10 percent of a company, or who is a director or an officer of the issuer of such a security, shall file the statements required by this subsection with the Securities and Exchange Commission.


Section 16 of the Exchange Act of 1934 requires the reporting of beneficial ownership by the officers, directors or stockholders who possess stock directly or indirectly resulting in beneficial ownership over 10 percent of the company’s common stock or other class of equity. Parties that fall under Section 16 are typically referred to as insiders. This rule applies to public companies and private companies whose non-equity securities, such as bonds, are traded on national stock exchanges. Insiders of a private or public company covered by Section 16 must file specific forms with the SEC that disclose their equity interests and how they change over time because of past transactions.

Beneficial Ownership

Section 16 considers a person a beneficial owner even if the individual does not directly own any equity interest in the company. It also considers immediate family members sharing the same household with another member who beneficially owns an interest in a covered company beneficial owners. Financial interest in a company can also exist indirectly if multiple persons act as a group to acquire, possess and sell a covered company's equity securities. In addition, if a person owns equity derivatives that, upon their exercise, provide equity interest, Section 16 also considers that individual a beneficial owner. Officers and directors fall under Section 16 requirements regardless of how small or large their beneficial ownership.

Filing Requirements

Section 16 requires insiders of a covered company to   file Forms 3, 4 and 5 electronically. The SEC requires Form 3, which is an initial statement of beneficial ownership, if there is an initial public offering of equity or debt securities or a person becomes a director, officer or 10 percent holder in a company. New directors and officers, and new significant shareholders, must file Form 3 within 10 days. If there is a material change in the holdings of a company's insiders, they must file Form 4 with the SEC. In addition, under Section 16, an insider who has conducted an equity transaction during the year must file Form 5 if it was not previously reported on Form 4.