I had this on file, but no web site.
An Insider:
According to the Securities Exchange Act of 1934, an insider is defined as an officer or
director of a public company, or an individual or entity owning 10% or more of any class of a
company's shares. The definition in all its legal speak is given in Section 16 of the 1934 Act,
There are further words sparred on how more specifically to define an "officer" and
"beneficial owner" in Rule 16a-1 of the Code of Federal Regulations. Though both are
lovely pieces of prose, be content with the knowledge that the definition of an insider is
intended to cover the people who have the most knowledge of the inner workings and future
prospects of a publicly traded company.
Once pegged as an insider, the SEC becomes very interested in how the person may be
benefiting from the unfair advantage they presumable have when trading their own company’s
shares. Insiders must make an initial statement of holdings via the SEC’s Form 3 within 10
days after gaining their insider status.
Subsequent changes in ownership must be reported to the SEC on a Form 4 by the 10th day
of the month following an insider’s trade. Any trade by an insider in the month of January, for
instance, must be reported to the SEC by February 10. To guard against any funny business
just before becoming an insider, trades made up to six months prior to achieving the status
must also be reported on a Form 4 soon after filing the Form 3. Filing requirements linger on
for another six months after insiders lose their status as well. This stops abuses such as a
director giving up his seat on a company’s board just in time to buy as much stock as
possible before an imminent merger.
The SEC’s nosiness doesn’t stop there. Insiders must also file a Form 5 within 45 days after
their company’s fiscal year end. A Form 5 not only has to be filed by anybody considered an
insider at fiscal-year end, but also by anyone who was considered an insider for any part of
the previous year. This is another way the SEC makes sure people don’t just pop
back-and-forth between being an insider or not just to skirt filing requirements.
Form 4:
Of these three Forms, the Form 4 is the most important source of useful insider data. While
Forms 3 and 5 record a snapshot of an insider’s holdings of their company’s shares, the
Form 4 is the dynamic information that gives the best window into the feelings insiders have
about their firm’s shares. Individuals would do best to spend whatever time and resources
they have prospecting through the more useful Form 4 data, and skip over the other two.
A Form 4 lists the name of the insider, their relationship to the company, how many shares
were traded, and at what price. It also gives the date of the trade, total holdings of the insider
after the transaction, and if the trade was open market, related to the exercise of stock
options, or for some other special reason.
Besides being quite detailed, a Form 4 is also timely. With the deadline for filing being the
10th of the month following the transaction, an insider’s trade should take 41 days tops to
reach the SEC—and that’s only if the insider trades during a 31-day month. Form 4s can, of
course, be filed immediately, and some are. However, there is always a predictable bulge in
the number of filings around the 10th of the month as insiders rush to meet the deadline.
Insiders don’t wait until the last minute to be sneaky. The deadline surge is more the result of
procrastination. The fact is that filling out a Form 4 is just annoying paperwork for insiders,
most of whom are busy executives. Typically, the Form is passed to an overloaded secretary
or company lawyer to complete, and it is not likely their first priority either.
This may explain why some (perhaps 5%) of the From 4s filed the SEC are filled out
incorrectly. These mistakes seem to be made as much by highly paid legal counsel as
overworked secretaries, and explain why even the most expensive insider database isn’t
perfect. Another subset of filings also reaches the SEC late. In any given week, Form 4s with
trade dates that are months or even a year old betray the tardiness of insiders or their
charges. Again, this is more likely the result of a mistake than intended deceit. Late filers
generally don’t get more than a slap on the wrist from the SEC if no harm seems to be done.
But worse can, and does, happen to late filers.
Fortunately, the vast majority of insiders are both diligent and accurate when filing their Form
4, and they supply the market with high-quality investment information every time they trade
their own company’s shares.
Form 144:
Form 144 data is considered by many to be the second most useful stream of insider
information the SEC has to offer. This Form is filed by people holding unregistered securities
as the final part of a process that exempts the shares from being registered with the SEC
before being sold in the open market. Form 144s are therefore a harbinger of the insider
selling activity that will be filed with the SEC in the near future.
According to the Securities Exchange Act of 1933, securities must be registered with the
SEC before being issued to the public. But the SEC isn’t so anal in its mandate to protect
individual investors not to realize that the gruesome burden of disclosure doesn’t make sense
all the time. There are numerous exemptions from registration that give companies the ability
to issue small amounts of shares directly to somebody as part of a stock bonus, pension, or
profit-sharing plan, or a private placement, among other reasons. Under Rule 144 of the
Code of Federal Regulations, the people who receive these restricted securities also don’t
need to register them when they finally sell the shares in the open market. Rule 144 does hold
up a few hoops for sellers of unregistered shares to jump through before they can unload, but
the requirements generally make sure that the amount of shares is reasonably small, and that
the seller isn’t an underwriter.
Criteria met, a person may file a Form 144 with the SEC giving notice of their intent to sell a
specified number of unregistered shares within the next three months. The Form 144 does
not commit the filer to sell the shares indicated on the Form within three months, but if they
aren’t, the Form 144 must be amended.
Typically, the shares indicated on a Form 144 have probably already been sold by the time
you see the document. If the seller is an insider, they may actually file the Form 144 and
Form 4 sale at the same time. This makes sense. After all, why would the holder go through
the paperwork of a Form 144 unless they were ready to pull the trigger? In any case, Form
144s still indicate that somebody has, or is expected to, sell shares. That’s useful information
to at least keep in the back of you mind when researching a new investment idea, or
following a stock you own.
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More Info:
InsiderTrader's value-added summaries list all the companies with open-market Form 4
and Form 144 trades over a given week or month, along with the following data: transaction
value of trades; number of shares traded; number of insiders who traded along with their
relation to the company; the transaction dates; and the average transaction price.
The summaries are designed to yield important information quickly. Aggregating the data
over a week or month gives investors a better "birds-eye view" of insider activity than seeing
the Form 4s one by one. The inclusion of only open-market trades is designed to limit the
"noise" caused by option-related Form 4 activity, which is generally less significant.
Investors prospecting for investment opportunities should view the summaries sorted by
transaction value (a good proxy for significance), while investors checking up on stocks they
own should use our new ticker-search function.
Transaction Codes:
B - Form 4 buy.
S - Form 4 sale.
144 - Form 144.
For explanations of what an insider, a Form 4, and a Form 144 are, please see Definitions.
Insider Relation Codes:
(Codes: E, M, OD, OS, OX, OT, and TT began to be applied January 1998.)
A - Affiliated person.
B - Beneficial owner of 10% or more of a company's shares.
C - Chairman.
CP - Controller.
D - Director.
E - Chief executive officer.
F - Chief financial officer and/or treasurer.
G - General Partner.
H - An Officer, Director, and Beneficial owner of 10% or more of a company's
shares.
IA - Investment Advisor.
L - Limited partner.
N - None. This code is only found on Form 144 filings, and relates to the fact that
not all owners of unregistered shares are insiders.
M - Member of a policy-making committee.
O - Officer.
OD - Officer and Director.
OS - Officer of a subsidiary.
OT - Officer and Treasurer.
OX - Officer of a division.
P - President and/or chief executive officer.
S - Shareholder of 10% or more of a class of stock.
T - Trustee.
TT - Treasurer.
U - Unknown. Usually the result of a form that was not filled in properly.
V - Vice President.
Hope this helps,
Fred |
