When a Form 4 Is Not Required: Section 16’s Reporting Exceptions

16(a) Reporting Obligation vs. 16(b) Short-Swing Liability

Section 16(a) governs reporting on Forms 3, 4, and 5. Section 16(b) governs the disgorgement of profits from purchases and sales matched within any six-month period.

Rule 16a-10 connects section 16(a) and 16(b) in a single direction. A transaction exempt from Section 16(a) reporting is, except as otherwise expressly provided, also exempt from Section 16(b) liability. However, the relationship does not run in reverse. A transaction can be exempt from short-swing liability and still require a Form 4 within two business days.

Filing relief is located in the SEC rules’ 16a- series. Liability relief is located in the 16b- series.

Common Transactions That Do Not Trigger A Form 4

1. The “Changing Pockets” exception: Rule 16a-13. No Form 4 filing is triggered when a reporting person changes the form in which securities are held, without changing his or her pecuniary interest in them. The person is not treated as having acquired or disposed of anything, so there is nothing to report on a Form 4 or a Form 5, and by operation of Rule 16a-10 the transaction is equally exempt from short-swing liability.

The most common application is a transfer between accounts. For example, an insider moves shares from an individual brokerage account into a revocable trust of which the insider is both trustee and sole beneficiary. Legal title changes but the reporting person’s pecuniary interest does not. The same reasoning covers a transfer from one broker to another, and a move from direct to indirect holding where the insider retains the entire economic interest.

The availability of this exemption turns on pecuniary interest rather than on the character of the recipient. Where a trust has beneficiaries other than the insider, the insider’s pecuniary interest is generally reduced, and Rule 16a-13 would not reach the transfer. Such a transfer is typically reportable as a gift. Where the exemption does apply, the new ownership form and the nature of the indirect holding would be first reported on the next Form 4 filing triggered by a non-exempt reason (e.g., the reporting persons’ next open market sale or purchase).

2. The Stock Split or Pro Rata Distribution exception: Rule 16a-9. No Form 4 filing is triggered when a stock split or a stock dividend applying equally to all securities of the class changes the number of shares outstanding without changing any holder’s proportionate position.

Stock splits and pro rata distributions have no effect on the proportional beneficial ownership of the reporting person, which is the rationale supporting the exception. In the case of such corporate actions, both the split (including reverse and forward splits) and the stock dividend, including a stock dividend paid in the equity securities of a different issuer, are exempt from both reporting and short-swing liability, because Rule 16a-9 exempts them from Section 16 in its entirety, and the restated holdings figure appears on the next required Form 4. Rule 16a-9 separately exempts the acquisition of shareholder or pre-emptive rights granted pro rata to all holders of the class, on the same both-purposes basis.

3. The DRIP exception: Rule 16a-11. Acquisitions that occur under a broad-based dividend reinvestment plan that is available to all holders of the securities on the same terms are exempt from reporting and short swing liability. This is most common for issuers who have a Dividend Reinvestment Plan (DRIP) that its officers and directors are eligible to participate in, provided that the rest of the issuers’ shareholders are similarly able to participate in the DRIP. The exemption reaches the reinvested dividends only. Optional cash purchases made through the same plan, which many plans offer under a combined “Dividend Reinvestment and Direct Stock Purchase Plan,” are ordinary acquisitions and are reportable.

4. The Domestic Relations Order exception: Rule 16a-12. Acquisitions or dispositions pursuant to a domestic relations order, as defined in the IRC or Title I of ERISA, and the rules thereunder are exempt from both reporting on Form 4 and short-swing liability. A transfer made in connection with a divorce that is not effected pursuant to a qualifying order falls outside the rule.

Transactions Deferred to Form 5

A second exception to the general rule that transactions are reportable within two business days on Form 4 are transactions that are reportable on Form 5 within 45 days of the issuer’s fiscal year end. These transactions are not exempt from reporting. Only the deadline moves, and the deferral by itself confers no relief from short-swing liability. Note, however, despite the eligibility to report on Form 5, many issuers and reporting persons find it simpler from an administrative hygiene perspective to report such transaction voluntarily on a Form 4. Note that despite the exceptions enumerated below, in current practice, Form 5 serves mainly as a year-end reconciliation of the insider’s ownership record. Its most common contents are transactions that belonged on a Form 4 and were missed, holdings restatements that describe indirect ownership through trusts and partnerships, and the annual sweep of exempt acquisitions accumulated through dividend reinvestment and employee benefit plans.

1. Small acquisitions of $10,000 or less. Rule 16a-6. An acquisition of $10,000 or less in market value, other than from the issuer or from a plan the issuer sponsors, may be deferred to Form 5. Two conditions apply: the acquisition, added to other acquisitions of the same class over the prior six months, must stay under $10,000, and the reporting person must not make a non-exempt disposition in the six months that follow. If either condition fails, the acquisition must be reported on Form 4 within two business days. That risk is generally why it is administratively easier to report a small acquisition on Form 4 in the ordinary course.

2. Acquisitions by Inheritance. Rule 16a-3(f). Acquisitions by will or the laws of descent and distribution may be reported on Form 5. Note, however, that rule changes in 2023 now require gifts to be reported on Form 4. Both gifts and inheritance transactions remain exempt from short-swing liability under Rule 16b-5.

Transactions Exempt from Short-Swing Liability that Still Require Reporting on Form 4

Each of the following exempts a transaction from short-swing profit liability but leaves the requirement to report the transaction on Form 4 within 2 business days intact.

1. Transactions between issuer and its officers or directors. Rule 16b-3. This is the exemption most equity compensation programs are built around and covers the grants and awards through which issuers deliver restricted stock units (RSUs), performance stock units (PSUs), and stock options to their directors and officers. An acquisition from the issuer is exempt from short-swing liability if any one of three conditions is satisfied: advance approval by the board or by a committee composed solely of two or more non-employee directors (e.g., the compensation committee), approval by shareholders either in advance or by ratification no later than the next annual meeting, or a six-month holding period for the security acquired. Dispositions back to the issuer, including forfeitures and shares withheld to cover tax obligations, are exempt under a separate provision of the same rule, which requires board, committee, or shareholder approval and offers no holding-period alternative. A further provision of the same rule exempts transactions under tax-conditioned plans, including 401(k) plans and Section 423 employee stock purchase plans, without the approval conditions that apply to grants and dispositions.

2. Exercises or Conversions of Derivatives. Rule 16b-6. The exercise or conversion of a derivative security (e.g., a stock option) at a fixed price is exempt from short-swing liability, on the reasoning that the economic position was established when the derivative was acquired. The exercise remains reportable on Form 4 as a transaction in the derivative security together with the acquisition of the underlying shares. Note, however, that an acquisition of underlying securities from the exercise of an out-of-the-money option, warrant, or right is not exempt unless the exercise was necessary to comport with the sequential exercise provisions of the IRC.

Consequences

Careful analysis should be undertaken before relying on an exception from filing on Form 4/5. If a filing is skipped on the belief that an exception exempted it where none is applicable, the filing is deemed untimely and when discovered, must be promptly reported on the correct Form 4/5 as well as disclosed in the issuer’s proxy statement pursuant to Item 405 of Regulation S-K. If a reporting person reports a transaction that is not required to be reported, there are no direct consequences other than considerations related to the privacy of the reporting person, the fact that the holdings figure reported carries forward into subsequent filings until corrected by an amendment, and the incremental disclosure accuracy liability created by filing an SEC Form with the Commission.

How Section 16 Agent Helps

Deciding whether a transaction is reportable is one problem. Preparing the form correctly is another. Section 16 Agent takes a plain-English description of the transaction and returns a Form 4 with the right transaction code, the share and price arithmetic worked through, and footnotes drafted to match what actually happened.