Insider Securities Reporting

Top

Newsletter Sign Up

Home >> Public Company Topics

Insider Reporting of Securities Ownership and Trading

Insider Reporting Requirements

The SEC requires that a public company’s directors, officers, and larger shareholders report the extent of their ownership of a company. This information is posted for public access, and can also be used by the SEC or other organizations as evidence for any investigations they may conduct of the company or its shareholders.

Who must report their ownership? Any director or officer of the company must file reports. For the purposes of this filing, an officer is a company’s:

…president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), and vice president of the company in charge of a principal business unit, division, or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the company.

In addition, any beneficial owner of greater than 10 percent of a class of registered equity securities must file reports, though this does not apply to such institutions as banks, brokers, and employee benefit plans where the securities are held for the benefit of third parties. For the purposes of this definition, stock appreciation rights (SARs) that may be settled in either stock or cash are considered an equity security (whereas SARs that can only be settled in cash are not equity securities). A beneficial owner means that the person either directly or indirectly, through any contract or relationship, has or shares a direct or indirect interest in the equity securities. For example, a person would be considered to have a beneficial interest in securities held by immediate family members sharing the same household (such as the person’s spouse). This also applies to a person’s right to acquire equity securities through the exercise of any derivative security. For example, if an investor acquires shares with attached warrants, then the additional shares represented by the warrants must be included in the calculation, even if the exercise price of the warrants is currently well above the market price.

Insider Reporting Forms

There are three ownership forms to be completed by the applicable investors. The first of the forms is the Form 3. This is a statement of a person’s initial ownership in the equity securities of a company, and must be filed within 10 days of the event that results in that person becoming either a director, officer, or 10 percent beneficial owner. However, a reporting person of a company that is registering securities for the first time must file the Form 3 no later than the effective date of the registration statement.

The same individuals are also subject to the filing requirements of the Form 4. The information filed on this Form reveals any changes in a designated person’s beneficial ownership of a company’s securities. The Form must be filed before the end of the second business day following the day on which a transaction resulting in a change in beneficial ownership has been executed. The filing person must file a separate Form for each Company for which there are reportable transactions. Both direct and indirect beneficial ownership changes must be reported. Transactions that are directly beneficially owned should be reported on a different line from those that are indirectly beneficially owned.

If an individual engages in an ongoing series of buying or selling transactions, such as selling off shares on a daily basis over many months, every transaction must be filed on a separate Form 4. Transactions that occur within the same two-day filing period can be reported on the same Form. Luckily, there is an exemption from filing a Form 4, but only for acquisitions of equity securities that do not exceed $10,000. Thus, barring the noted exemption, Form 4 filings can be onerous if someone is engaged in long-term buying or selling.

The Form 4 reporting requirement continues past an individual’s tenure in office with the company. If an officer or director resigns, that person must continue to file Form 4 reports for any changes in his beneficial ownership of the company’s equity securities for six months following the date of resignation.

The Form 5 is an end-of-year cleanup form, meant to capture transactions that should have been reported on Form 4 but were not, or which were subject to an exemption from filing in a Form 4 (such as the just-noted acquisition of equity securities totaling less than $10,000). Thus, its primary purpose is to bring current an individual’s reportable transactions. If needed, the Form is filed within 45 days of the company’s fiscal year end.

For all three forms, the person who is obligated to file each form is liable for doing so – the company is not liable. However, the company is obligated to report in its annual proxy statement if it has knowledge that one of the forms has not been filed in a timely manner.