What Is Section 16?
Section 16 is a Securities Exchange Act of 1934 rule articulating the regulatory filing responsibilities that directors, officers, and principal stockholders must adhere to. According to this mandate, anyone who is directly or indirectly a beneficial owner of more than 10% of a company, or any director or officer of the issuer of such a security, must file statements required by this section.
The Basics of Section 16
Section 16 of the Exchange Act of 1934 imposes filing standards for "insiders," the name given to officers, directors or stockholders, who possess stock that directly or indirectly results in beneficial ownership of more than 10% of the company’s common stock or other equity class.
Section 16 likewise applies to investors in public companies whose fixed income securities (bonds), trade on national stock exchanges. Insiders must file specific forms with the SEC that disclose their equity interests and they must describe how their investment positions have changed over time, in light of previous transactions.
Section 16 deems a person to be a beneficial owner, even if that individual does not directly own equity interest in the company. Case in point: those who share households with immediate family members who beneficially own an interest in a covered company are equally subject to Section 16 requirements.
Financial interest in a company can also exist indirectly if multiple persons act as a group that collectively acquires, possesses and sells a covered company's securities. In addition, Section 16 deems those who own equity derivatives that, upon their exercise, provide equity interest, as beneficial owners.
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 if a person becomes a director, officer, or a holder of at least 10% of a company’s equities.
New directors, new officers, and new significant shareholders must file Form 3 within 10 days of acquiring such investment assets. If there is a material change in the holdings of a company's insiders, they must file Form 4 with the SEC. Furthermore, Section 16 requires insiders who conduct equity transactions during the year, to file Form 5 if the transactions were not already reported on Form 4.