This "case study" is the latest in a series of articles aimed at helping public companies understand how other organizations are using technology to comply with new regulations and standards. These are not advertisements or marketing vehicles for the companies mentioned; Compliance Week's editorial staff speaks with the public company that has deployed the technology, and the article is written without the input—and in many cases the knowledge—of the vendor.

DETAILS

THE FIRM

Company

Skadden Arps

HQ

New York, NY

Employees

1,830 attorneys

Industry

Law firm

'03 Rev.

$1.3 billion

'03 Net

NA

THE CHALLENGE

Skadden Arps, one of the largest law firms in the country, needed a new software system to help its corporate clients comply with the new two-day filing deadline for disclosure of insider transactions.

SOLUTION CHOSEN

Web-based, self-filing, Section 16 solution from printing giant Bowne & Co. called BowneFile16.

A New Regime

As a law firm, Skadden Arps itself is not obligated to comply with the strictures of The Sarbanes-Oxley Act or financial reporting rules from the SEC. But its clients are.

For years, "Skadden" has helped its corporate clients comply with a number of filing procedures mandated by the Securities and Exchange Commission, including so-called "Section 16" filings. Officers and directors at public companies—as well as individuals who own more than 10 percent of a public company—must disclose the amount of their ownership, and must keep this information current.

But many executives and directors lack the time or knowledge to make such filings themselves, so—in conjunction with a client’s broker or in-house counsel—Skadden attorneys sometimes file the reports for them.

Under “the old regime,” as Skadden corporate-client specialist David Brumble describes life before Sarbanes Oxley, the firm handled Section 16 filings via paper. An insider had more than 30 days to disclose a trade, so Skadden lawyers had plenty of time to create a form—usually SEC Form 4—in a word processing application, enter the data, secure necessary approvals from the client’s in-house legal or compliance team, have the insider sign the form, and submit it to the SEC. Even if the necessary approvals and signatures were delayed by a week or more, the firm still had ample time to file the report.

But that leisurely system changed in May 2003, when the SEC finalized a rule that accelerated the speed with which those insiders must report trades, and mandated that the trades be filed electronically with the Commission.

“Since we had handled the filings prior to the changeover, we were also now responsible for handling filings subsequently,” Brumble says. “That meant submitting them on a timely basis.”

Evaluating Options

Skadden knew it had to use technology to automate its Section 16 filing process; however, Brumble says, cost and usability requirements quickly pushed the firm to consider an outside software vendor as its only choice. The firm does have its own EDGAR department that could handle such filings, but those lawyers primarily work on registration statements and other large filings; devoting their time to relatively small items like a Form 4 “would be a very costly process,” Brumble says.

Brumble’s team also inspected the SEC’s own Web site for directly submitting Section 16 filings. But the firm discovered numerous shortcomings for large-scale use. For example, the SEC's application "times out" after a few minutes (for security purposes), making it impossible to circulate a form to brokers or lawyers before final submission. In addition, forms cannot be saved and re-used for similar trades at a later date.

“The SEC application … is not meant for generating multiple reports or retention of information,” Brumble says. “If you have the prepackaged, approved, signed form in front of you ready to go at 10 a.m. so that you could submit it at 10:15, then the SEC site is ideal for you. The real world doesn’t work like that.”

Confronted with those facts, Brumble says, “There really is no choice; you file through a vendor.”

Skadden compiled a short-list of four possible vendors. Two were financial printing houses, eager to seize new business stemming from Section 16. One of those was Bowne, a billion-dollar financial printer that had launched its own application under the oversight of David Copenhafer, a 15-year SEC veteran who helped launched the Commission's EDGAR system. Another Section 16 application was from Romeo & Dye, which was created by former SEC officials Peter Romeo and Alan Dye. The pair are involved in a number of related publishing businesses tied to executive compensation and the management of stock plans.

Above all Brumble wanted storage, so that Skadden lawyers and support staff could access forms electronically and re-use them. He also wanted multiple users to be able to access the system at once. That was critical, as over a dozen Skadden partners and associates handle Section 16 filings for the firm’s clients. Brumble also wanted the application to be Web-based, so filers could access forms and data from home or at a client’s office if necessary.

Little Hassle

$899 million Bowne met all those requirements. The company's system, BowneFile16, also generated forms on the screen that visually resembled what lawyers were accustomed to seeing. What’s more, the service is hosted on Bowne servers, which meant little hassle for Skadden when it comes to implementation and maintenance.

Bowne did have to pass numerous IT security tests, and to work with Skadden’s IT department to ensure that users could toggle between BowneFile16 and the firm’s database. Still, Brumble said, Bowne passed those tests within a day and the system went live in May 2003.

Skadden would not disclose the amount of money it spent for use of Bowne's application; however, Bowne lists pricing for BowneFile16 as $300 to $2,000 per quarter depending on the number of users a corporate customer has. The fee allows for unlimited filings.

Brumble estimates that Skadden makes about 100 Section 16 filings every quarter, the majority of them using Form 4.

Lessons Learned: Very Complex

According to Brumble, clients were oblivious to the change that occurred when Skadden moved from paper to BowneFile16; the only education they needed, he says, was prodding them to provide insider-trade information to Skadden within the two-day deadline. Today, many corporations require insiders to alert compliance or legal departments about trades before they happen.

However, the SEC's filing requirements are not simple. Internally, Skadden provides a slide presentation and tutorial for those who want to use BowneFile16—but. Still, Brumble says, many staffers keep their distance. “It’s not that we restrict access, but Section 16 is very complex and a lot of people are more comfortable leaving it to others who know what they’re doing,” he says. “There are so many nuances to the system—fields, footnotes, the codes—that it’s not as simple as sticking information on paper in a word processor and submitting it.”

Brumble readily attests that he “loves” BowneFile16. However, he warns that Section 16 novices should be prepared for a daunting process because the SEC itself builds so many limitations into its filing procedures. For example, a filer might have 200,000 shares to sell every month. But brokers typically divide that trade into several smaller amounts at varying prices, each listed as a separate line on the form. That 200,000-share trade can ultimately total 30 or 40 transactions, but Form 4 only has room to list 30.

“There have been a lot of hair-pulling moments, but they’ve not been with Bowne … Folks have to understand the limitations in the application are stipulated by the SEC,” Brumble advises. “These are things that we only learned along the way.”

Topics