In order to avoid the slippery legal slope of insider trading allegations, company insiders making a trade on the stock market must file certain forms with the SEC. These SEC rules help maintain transparency in the market and foster consumer confidence in the idea of buying and selling stocks.
9 SEC Forms for Insider Trading Reports
- DEF 14A
- Form 13D
- Form 13G
- Registration Statements
- Form 10-K
- Form 10-Q
- Form 8-K
- Proxy Statement
- Forms 3, 4 and 5
The Securities and Exchange Commission was created in the wake of the Stock Market Crash of 1929 and the resulting Great Depression it created. The mission of the SEC is to maintain investor confidence in the stock market, protect investors, and maintain fairness and order in the market. Part of how the SEC does this is by disseminating material financial information.
In times past, corporate insiders would use their vantage point to place profitable trades at the expense of other investors or those to whom they had a fiduciary duty. This manipulative behavior has indeed continued to occur from time to time, but the SEC monitors the market and actively prosecutes those who violate rules around insider trading.
A corporate insider, as defined by the SEC, is someone who owns 10 percent or more of the voting shares a of a company’s stock. They can be an owner, executive, manager, or even a relative of the aforementioned persons. An insider can also be an institutional investor, like a hedge fund, mutual fund, bank, or other business.
If an insider places a trade on the stock market based on nonpublic material information, they can be accused of insider trading and face steep fines, jail time in white collar prison, and even the revocation of their ability to be involved in the securities market. Company insiders are still allowed to buy and sell stocks, they just have to fill out the requisite paperwork.
What are SEC Forms?
SEC forms can be filed electronically on the SEC website. This is typically how they are filed today, with nearly 3,000 forms submitted every day. These forms are retrievable to the general investing public through the EDGAR system (Electronic Data Gathering, Analysis, and Retrieval). These forms are triggered by corporate events and individual decisions to buy or sell stocks.
A quarterly report, initial statement, and registration statement are just a few of the different types of SEC forms that each and every public company is required to file. SEC filing is a requirement for insiders at a company that is a stock issuer, so that these security holders don’t run afoul of federal securities laws.
There is also a disclosure requirement for beneficial owners, known as a beneficial ownership report. This requirement was created as part of The Exchange Act in 1934 to protect retail investors and foster confidence in the market. It is a large reason why retail investors and institutional investors continue to invest in everything from mutual funds to individual equity securities.
Let’s take a look at each and every document and disclosure that the SEC is looking at when a registrant files with the SEC in accordance with the Securities Act.
9 SEC Forms for Insider Trading Reports
Form DEF 14A is often referred to as a definitive proxy statement or just proxy statement.
If you want to know who is in charge of the company and how much they are making, this is where you’d look. The proxy statement lists their salaries, along with any other perks or bonuses they are entitled to as executives or management. It is a legal requirement that these key executives be listed.
A proxy statement needs to be filed before shareholder meetings or soliciting a shareholder vote on major corporate actions or electing directors for the board. If you own stocks in an individual company, you may have seen these proxy reports sent to your home. If anything, it’s a friendly reminder that you have the ability to vote on company policies as an owner of company stock, even if you only own a handful of shares.
Form 13D or Schedule 13D (also known as The Beneficial Ownership Report) must be filled out anytime someone acquires five percent of a company’s stock in terms of voting share stock. It must be filed within 10 days of the acquisition and includes the following information: origin of funds used to make the trade, type and class of security traded, explanation of why the trade is being placed, indications of any criminal record on the part of the filer (or lack thereof), description of relationship to the company, and personal information, such as a mailing address.
If you own significant shares of stock ownership in a company, it’s a good idea to create a legal way to obscure your private residence address from the public.
Form 13G is an alternate, truncated version of Schedule 13D, but the filer must meet certain exemption requirements in order to file this form instead.
If the filer acquired the securities in question with no intention of influencing the issuing company, and if they do not own more than 20 percent of the company stock, the investor can file Form 13G.
Alternatively, if they acquired beneficial ownership in the company prior to December 22, 1970, they can also be exempt. The deadline for filing a Form 13G depends on how many securities are being traded, but it can range up to 45 days from the date of the transaction.
This form must be filled out when a company insider or affiliate sells company stock and the sale exceeds 5,000 shares or $50,000 as an aggregate sale value within a three-month period.
The filing party must have a genuine intention to sell the securities within a reasonable amount of time after filing the form. It’s important to note that companies with publicly traded securities must have blackout periods after an initial public offering (IPO), during which insiders cannot sell the company’s stock. This helps the stock price maintain some stability for other investors.
This period can last anywhere from 120-365 days, depending on the agreement made by the company with its underwriters. Once the period has expired, an insider selling the amount of stock listed above must file Form 144.
Many companies will also have blackout dates after major corporate events, during which company insiders cannot buy or sell stocks. This is also to maintain stock price stability and consumer confidence.
Registration statements provide consumers with a look at the company offering stocks and its numbers. This ensures that those who are able to read the forms can understand its overall state of financial health.
When a company is ready to offer securities (for example, ready to offer stocks on the market), they will need to file Form S-1 with the SEC. Part one of Form S-1 contains a prospectus, and the second part is just a compilation of any supplemental material the company wants to include.
The prospectus details the management, operations, financials, risks, and performance of the company. Any income statements attached to the prospectus must be audited by a separate and independent CPA.
Companies must submit Form 10-K within 60-90 days of the close of their fiscal year, providing a comprehensive analysis of the company and its performance in the past year.
A business summary describes operations in all segments of the business, products, services, research and development, and the state of human capital (employees and management). It also discusses anything averse the company might face, such as competition or regulatory issues.
The management discussion and analysis allows the company to explain its operations from the previous year and the financial results they generated. Financial statements might include the company income statement, balance sheet, and cash flow statement.
Form 10-K seems very comparable to an annual report, but it is not the same thing. Generally speaking, the 10-K is more detailed but harder to read for the average consumer, while the annual report has more graphics, charts, and sometimes photos.
Form 10-Q is similar to Form 10-K, but it is filed more frequently. Companies must file a Form 10-Q within 40 days of the end of the business quarter.
This means Form 10-Q provides a seasonal snapshot of the company on a rolling basis. There are only three required per year, since the end of the fiscal year will soon see the company filing a Form 10-K.
Form 10-Q is not required to be as thorough as its annual counterpart, and it does not require the auditing of an independent CPA.
If a major corporate development occurs in between Form 10-Q filings, or between a Form 10-Q and Form 10-K filing, the company will need to file Form 8-K.
Major corporate events triggering the necessity of this SEC form include bankruptcy and changing of the guard in the executive sphere (the departure or appointment of executives). Other relevant events include receiverships (court-appointed abilities to collect outstanding debts), material impairments or weaknesses (when internal controls like company rules have failed at something), and the complete dissolution or acquiring of assets (any stock can count as an asset in this regard, as can inventory).
Forms 3, 4 and 5
These forms are for corporate insiders to fill out when they buy and sell company stock. Again, an insider is defined as a director, manager, or officer who owns company stock, or owner who owns 10 percent of the company voting stock or more.
Keep in mind that if you own 10 percent or more of a company stock, you are considered an owner.
Form 3 is for corporate insiders to disclose their ownership amounts and must be filed within 10 days of joining a company.
Form 4 is for indicating changes in ownership, such as buying and selling company stock, and must be filed with the SEC within two days of the trade.
Form 5 is an annual summary of Form 4 or multiples thereof. These forms help SEC staff track any suspicious, unethical behavior or manipulative market practices by insiders.
SEC Forms Can Provide Valuable Insight About a Company
You might wonder what gives a registered investment adviser an edge over retail investors, so much so that they can charge for their services. Truth be told, it’s more than just watching the market and the news like the rest of us. Registered investment companies and their advisors are keeping abreast of SEC forms and seeing what insiders are doing with their stocks and bonds.
This information compliments the investment company advisers in their assessment of the market. They may also pore over a financial statement from the company in question and examine other paperwork.
All this hard work is not beyond your reach, either, as long as you know where to look. SEC forms time consuming to analyze, but by subscribing to an insider monitor, like InsiderTrades.com, you can follow what the beneficial owners of any given company are doing in the stock market and piggyback off their financial decisions.