What Are the Item 405 Disclosure Requirements?
Learn how Item 405 of Regulation S-K provides investor transparency by requiring companies to disclose delinquent ownership filings by their insiders.
Item 405 of Regulation S-K is a disclosure requirement mandated by the U.S. Securities and Exchange Commission (SEC). It compels public companies to report information regarding the timeliness of ownership report filings made by their corporate insiders. The primary objective of this rule is to foster transparency for investors, allowing them to monitor whether these insiders are complying with their filing deadlines.
Identifying Reporting Persons and Required Filings
Under Section 16 of the Securities Exchange Act of 1934, “reporting persons” or “insiders” fall into three distinct categories. The first group includes directors of the company, and the second encompasses officers, which typically includes the president, principal financial officer, principal accounting officer, and any vice president in charge of a principal business unit. The third category consists of any person who is the beneficial owner of more than 10% of any class of the company’s equity securities.
These individuals are obligated to file specific forms with the SEC to report their ownership and any changes to it. The first is Form 3, an initial statement of beneficial ownership, which must be filed within 10 days of becoming a reporting person. Any subsequent transactions, such as purchases or sales of company stock, must be reported on a Form 4, generally due within two business days of the transaction.
Finally, there is Form 5, an annual statement of changes in beneficial ownership. This form is used to report any transactions that should have been reported earlier on a Form 4 but were not, or certain transactions eligible for deferred reporting. Form 5 must be filed within 45 days after the end of the company’s fiscal year.
Information Required for Item 405 Disclosure
When a company identifies a delinquency in filings by one of its insiders, Item 405 mandates the disclosure of specific information. The company must clearly identify each delinquent filer by name in its public filings.
Beyond just naming the person, the disclosure must provide quantitative details about the delinquency. This includes stating the total number of late reports filed by that individual during the fiscal year. The company must also specify the number of transactions that were not reported on a timely basis, as a single late report could contain multiple late-reported transactions.
The rules also require the disclosure of any known failure to file a required form. This could include a complete failure to file a Form 3 upon becoming an insider or a failure to file a Form 5 when one was required. If a company’s review reveals no late filings, it is encouraged to omit the disclosure and the corresponding heading to reduce unnecessary disclosures.
The Company’s Review and Disclosure Process
The company is responsible for reviewing Forms 3, 4, and 5 filed by its insiders during the most recent fiscal year. The company’s review is not expected to be an exhaustive investigation beyond the filed forms.
The regulation allows a company to rely on written representations from its insiders. A company can depend on a written statement from a reporting person confirming that no Form 5 was required for the year. The company must keep these representations on file for two years and make them available to the SEC upon request.
Once the review is complete, any required disclosure must be presented under the specific heading “Delinquent Section 16(a) Reports.” This information is typically included in the company’s annual proxy statement sent to shareholders before its annual meeting or incorporated by reference into the company’s Annual Report on Form 10-K.