Section 16 refers to the 16th section of the Securities and Exchange Act. It requires that certain company insiders—executives, board members, certain key employees, investors owning more than 10%—file paperwork documenting their holdings and trades with the SEC.
The goal is to prevent these insiders from profiting off of material non-public information. For instance, if an executive sold all of their shares right before the company was hit with a massive lawsuit, causing the share price to tank, the SEC would have a record of these trades and might investigate.
How do I know if Section 16 applies to me?
You should learn this information as part of your onboarding process at your company. If there’s any confusion, you can ask HR or your company’s general counsel.
You may want to revisit these questions if you are promoted, particularly to an executive or C-suite level position. Ask if any changes to your role or compensation package make you subject to Section 16.
If Section 16 does apply to me, what do I need to do?
Typically, you need to file a Form 3, Form 4, or Form 5 any time you trade shares of your employer’s stock. (Form 4 is the most common.) Usually, these forms must be filed within 48 hours of a trade. These form filings then become part of the public record.
Ultimately, the responsibility of filing this paperwork falls on the individual. That said, many companies use an admin group when issuing restricted stock units (RSUs) or equity stock options (ESOs). If that’s the case, then you likely execute trades by alerting the admin group about what you plan to do, and they file the relevant forms with the SEC as part of execution.
However, make sure you confirm this, as the legal responsibility is yours. Similarly, if a financial advisor is executing the trade on your behalf, check to confirm they are aware of your Section 16 status and filing the required paperwork. Not every advisor is familiar with the rules and regulations that govern high-ranking or key employees at publicly-traded companies.
Keep in mind: Following the rules of Section 16 and filing the required paperwork does not exempt you from allegations of insider trading. If you are concerned about that, consider a proactive defense, like a 10b5-1 plan.
