How Companies Report Insider Transactions
Trading of stock is controlled by the Securities and Exchange Commission (SEC), an agency of the United States federal government.
Company insiders - directors, officers or 10% owners are legally bound to inform the SEC about all sales, purchases and holdings of their company's stock by filing Forms 3, 4 and 5. This information from SEC filings is then made public.
Reporting of insider trading transactions is governed by Section 12 of the Securities Exchange Act of 1934. On August 27, 2002, the SEC adopted rules and amendments to Section 16 of the Exchange Act, implementing the provisions of the Sarbanes-Oxley Act of 2002 that accelerated the deadline for filing most insider ownership reports and created new public disclosure requirements.
The initial filing is on Form 3. When a person becomes an insider (for example, when they are hired as an officer or director), he or she must file a Form 3 to disclose the totals of their ownership of the company's shares. Form 3 must be filed within ten days after the person becomes an officer, director, or beneficial owner.
Form 3 must be filed within 10 days after the person becomes an insider.
Changes in ownership are reported on Form 4 and according to the provisions of Section 16 of the Securities Exchange Act they must be reported to the SEC before the end of the second business day following a change in ownership. Form 4 reports sales and purchases including the price per share as well as the exercise of grants, options, gifts and other transactions. Each transaction has a special code to indicate the nature of the transaction.
A Form 5 must be generally filed no later than 45 after the end of the company's fiscal year. Insiders are only required to file Form 5 to report any transactions that were not reported during the year due to an exception, deferred reporting or a failure to report on Form 4. Transactions that have been previously reported do not have to be included in Form 5. When reporting transactions on Form 5, insiders use the same transaction codes as on Form 4.
Since June 30, 2003 electronic filing of the SEC forms is obligatory and required by law. Prior to that date electronic filing was optional. According to SEA Section 12(a), failure to register stock before trading it on a public exchange may lead to an embargo on the stock, meaning that the stock will cease to be traded.