Insider reporting of securities ownership and trading

Insider securities reporting is the mandated reporting of share ownership activity by corporate insiders. It is intended to inform the public of ownership changes, which may impact their investment decisions. The Securities and Exchange Commission (SEC) requires that the directors, officers, and larger shareholders of a publicly held company file reports with the SEC concerning their holdings in the business. The SEC makes this information available to the public, and the submissions can also form the basis for investigations regarding ownership issues.

The SEC defines an officer who must engage in this report filing as the:

…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.

A beneficial owner must also file reports. This is considered to be anyone who has a direct or indirect interest in the equity securities of the business, and who owns more than 10% of a class of the company's registered equity securities. This definition does not apply to brokers, banks, or employee benefit plans. Examples of beneficial owners are immediate family members if they share the same household. To arrive at the 10% figure, you must include any outstanding stock appreciation rights, options, and warrants. Options and warrants are to be included even if their exercise prices are currently above the market price (and so are unlikely to be exercised).

Insider Reporting Forms

The SEC requires insiders to report using three forms. The forms are:

  • Form 3. Reveals the initial ownership of the company's equity securities. If the securities have just be registered, then this form must be filed by the effective date of the registration statement. If the filer has just been classified as being required to file, then he or she has 10 days within which to file the report.
  • Form 4. Reveals changes in a person's ownership of the issuer. Once the change in ownership has occurred, the form must be filed by the end of the second business day thereafter. Direct and indirect ownership changes are reported on separate lines of the form. If the person acquires securities amounting to no more than $10,000, it is not necessary to file this form. Many of these forms may be filed if a person is engaged in an ongoing program of stock purchases or sales. The filing requirement continues for six months after a person has stopped being an officer or director of the issuer.
  • Form 5. Is intended to be a summarization form to be filed at year-end, on which are noted all additional transactions for which a person was exempt from filing on a Form 4. The form should be filed within 45 days of the fiscal year-end of the business.

The Form 4 is the most frequently filed of the three forms, since there may be a large number of individual transactions requiring documentation over the course of a year.

The issuing entity is not responsible for filing these forms, but must indicate in its annual proxy statement if it has knowledge of missing or untimely filings.

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Public Company Accounting & Finance