Section 16 Definition and SEC Filing Requirements

What Is Section 16?

Section 16 is a rule within the Securities Exchange Act of 1934 (SEA) that articulates the regulatory filing responsibilities that directors, officers, and principal stockholders are legally required to adhere to. The Securities and Exchange Act of 1934 is a law that governs the secondary trading of securities in the U.S. This wide-ranging legislation was established in 1934 as part of an effort to guarantee more transparency and less fraud in financial dealings. The Securities and Exchange Act of 1934 can be contrasted to the Securities Act of 1933, which governs the original issues of securities.

According to Section 16, 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, is required to file the statements required by Section 16.

Understanding Section 16

Section 16 imposes filing standards for "insiders." Insiders are any 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 class of equity.

Section 16 also applies to investors in public companies who own fixed-income securities (i.e. bonds) that trade on national stock exchanges. Anyone who can be classified as an insider must file specific forms with the SEC that disclose their equity interests. These documents also describe how their investment positions have changed over time, in light of previous transactions.

Provisions of Section 16 deem a person to be a beneficial owner, even if that individual does not directly have any equity interest in a given company. For example, if a person is part of a shared household where an immediate family member beneficially owns an interest in a covered company, that individual is equally subject to Section 16 filing 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 Filing Requirements

Section 16 requires insiders to file Forms 3, 4, and 5. These forms can be filed electronically. The SEC requires Form 3, which is an initial statement of beneficial ownership, if there is an initial public offering (IPO) 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 a given year to also file Form 5 if the transactions were not already reported on Form 4.