Section 16

Glossary Entry

Section 16 refers to provisions of the Securities Exchange Act of 1934 that impose reporting and trading-related obligations on certain corporate insiders of U.S. public companies. The principal reporting obligation is in Section 16(a), which requires specified insiders to disclose their equity ownership and changes in ownership to the SEC using standardized forms. A related provision, Section 16(b), provides for disgorgement of short-swing profits realized on certain transactions within a six-month period. (SEC)

Who Is Covered:

Under Section 16(a), persons generally subject to reporting obligations include:

  • Officers of an issuer with a class of equity securities registered under Section 12 of the Exchange Act;
  • Directors of such issuers;
  • Beneficial owners of more than 10 % of any class of registered equity securities. (Default)

This set of insiders must file periodic disclosures with the SEC via EDGAR — typically on Form 3 (initial), Form 4 (changes), and Form 5 (annual summary for deferred/exempt transactions) — to report ownership and transactions involving the issuer’s securities. (Default)

Core Reporting Requirements:

  • A newly covered insider must file an initial ownership report (Form 3) when first subject to Section 16(a), generally within 10 calendar days of becoming an officer, director, or beneficial owner of more than 10 %. (Default)
  • Most subsequent changes in beneficial ownership must be reported on Form 4 within two business days after the transaction date. (Default)
  • Certain transactions that are deferred or exempt from immediate reporting may be included in an annual Form 5, typically due within 45 days after the fiscal year end. (Default)

Short-Swing Profit Rule (Section 16(b)):

Section 16(b) is a strict liability provision that allows the issuer — or a shareholder on behalf of the issuer — to recover profits from certain purchases and sales of the issuer’s securities made by insiders within any six-month period. It applies regardless of intent or whether inside information was used. The provision defines short-swing profits as gains derived from a purchase and a sale (or sale and purchase) of securities within a rolling six-month period, and requires those profits to be disgorged to the issuer. (SEC)

Purpose:

Section 16’s reporting and short-swing profit rules are designed to increase transparency and reduce asymmetry between corporate insiders and public investors by ensuring that insider holdings and trading activity — and any potential profits realized from rapid trades — are publicly visible and legally accountable. (SEC)

Regulatory Context:

Section 16(a) is part of the Exchange Act’s broader disclosure framework and works in conjunction with other insider reporting forms:

  • Form 3: initial statement of beneficial ownership;
  • Form 4: changes in beneficial ownership;
  • Form 5: annual summary for deferred/exempt transactions. (Default)

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