What is a Form 4?

A Form 4 is a document that discloses insider trades that result in a change in ownership, and any associated transaction information.  These forms must be filed with the SEC within two business days of the transaction.

Who has to file Form 4s?  How do you define an “insider”?

'Insiders' are required to file Form 4s in a timely manner following transactions in their company's stock.  An insider is defined by the SEC as a reporting companies’ directors, officers, and > 10% shareholders by Section 16 of the Exchange Act. 

What are the differences between a Form 3, 4, and 5?

A Form 3 is the initial report of beneficial ownership of securities.  This is the form an insider will file when they join a public company or the company they work for goes public.  These forms report the insider’s initial holdings – including common stock directly and indirectly held, restricted stock units, stock options, and other derivative securities.

Form 5s are the annual report of beneficial ownership.  If an insider’s transactions throughout the prior year do not meet the threshold for a Form 4 filing, they must file a Form 5 with their current holdings and other transactions that have occurred in the prior year.  The deadline for Form 5s is February 15.

Are insiders required to file derivatives securities holdings and transactions?

Yes, Forms 3, 4, and 5s all have a “Table II” in which insiders are supposed to list “derivative securities acquired, disposed of, or beneficially owned.”  However, the Washington Service has discovered that the reporting of derivative securities is inconsistent.  As a result, we’ve created a proprietary process to extract Table II trades and tracking derivative security holdings over time. 

How does The Washington Service capture data from insider filings?

WS’s proprietary form reading process combines human and computer intelligence. Our automated software allows us to quickly and accurately identify standardized fields. To assist the software, at least two different data integrity specialists key and review every form to ensure the cleanest, highest-quality data. The data integrity specialists are able to extract trade information from the footnotes and correct a range of filing errors, providing information that other automated services are unable to. WS also runs a variety of daily quality assurance and database maintenance checks.

(P) Purchase – Purchases that take place on the open market, in privately negotiated transactions, or through offerings.

(S) Sale – Sales that take place on the open market, in privately negotiated transactions, or through offerings.

What is the SEC’s Short-Swing Rule?

As stated in Section 16b of the Securities and Exchange Act of 1934, the Short-Swing Rule requires that corporate insiders who engage in any short-swing transactions  involving a security (purchasing and subsequently selling at a higher price within six months), or security-based swap agreement, surrender any profits gained from the transactions to the issuer.

To whom does the Rule apply?

The Rule applies to Directors, Officers, and Beneficial Owners of more than 10 percent of any class of equity security of the company whose stock is involved in the transaction.

Why was the Short-Swing Rule created?

The Rule was implemented to prevent the unfair use of non-public information by directors, officers, and other “insiders” to produce personal returns on equity transactions. In 2005, the SEC amended Section 16b to include several exceptions to the Rule.

How is the Rule Enforced?

Enforcement of the Rule relies on Sections 16a and 16b of the Securities and Exchange Act of 1934. Section 16a requires that designated insiders disclose any purchases or sales of stock to the SEC. Section 16b allows the issuer of the security transacted to file a lawsuit against the insider in order to appropriate the gains from the transaction.

Note: The insider does not have to be in possession of non-public information to be held in violation of the Rule. Violation is dependent on the nature of the transaction, regardless of whether or not the insider holds information pertinent to stock movement.

What are SEC forms Schedule 13D and Schedule 13G?

Schedule 13D (13D) and Schedule 13G (13G) are similar forms that are both used to disclose a party’s ownership of more than 5% of a class of equity security in a company. Both forms are used as an indicator when there is a large, rapid aggregation of securities that might represent a material shift in corporate control.

13D is considered a “long-form” beneficial ownership statement, and contains more details about the intentions of the securities holder. 13G is considered "short-form", and contains less information than a 13D.

What are the filing requirements for a 13D?

Any person who, either directly or indirectly, becomes the beneficial owner^* of more than 5% of a company’s outstanding securities is required to file a 13D within ten days after the triggering acquisition. This does not include acquisitions made by means of a registration statement, any acquisition that does not exceed 2% of the entire class of securities in a 12-month period, or securities acquired by their own issuer.

^*In this context, a beneficial owner is defined as the party who has "the ability to control or influence the voting or disposition of the securities."

What information is disclosed on a 13D?

• A cover page disclosing the identity and information of the beneficial owner, including: name, country of citizenship, business address, and class and title of securities held.
• The filer must disclose the source and amount of funds used, and the method of acquisition.
• The filer must state the purpose of the acquisition and describe any plans or proposals that would result in a material change. These include proposed corporate transactions, changes in board composition, changes in the company bylaws, material changes in the issuer’s business, or any other similar action.
• The aggregate number of securities owned, and the percentage of the class of securities held.
• Any transactions that were effected during the last 60 days, or since the most recent SC 13D filing.
• Exhibits containing copies of all written agreements related to the acquisition and holdings.

What are the filing requirements for a 13G?

Beneficial owners that meet the SEC's exemption requirements may file a 13G in lieu of a 13D. Those exemptions include qualified institutional investors, passive investors, and exempt investors, who are each subject to specific filing requirements.

• Qualified institutional investors, which include registered broker-dealers, investment companies, banks, investment advisors, or other similar groups, may file a 13G instead of a 13D when they acquire securities in the ordinary course of business without the purpose of changing or influencing the control of the issuer. They must file a 13G either within 45 days after the calendar year in which the investor holds more than 5% as of the year end, or within 10 days after the end of the first month in which beneficial ownership exceeds 10% as of the end of the month.
• Passive investors may file a 13G within 10 days of the triggering event if the investor has not acquired the securities with any purpose or effect of changing control of the issuer, if they do not own more than 20% of the security, and are not a qualified institutional investor.
• A party will qualify as an Exempt investor if they hold more than 5% of a class of securities at the end of the calendar year, but have not made a triggering acquisition (ex: an investor who holds a significant portion of a company’s securities would become subject to filing requirements after the company’s initial public offering, even though that investor did not purchase any additional shares). Exempt investors must file a 13G within 45 days after the end of the calendar year in which the event triggering the reporting obligation occurred.

What information is disclosed on a 13G?

• A cover page which discloses general information about the filer (name, citizenship, place of organization, classification of reporting person).
• Specification as to which rule they are using to claim the ability to file a 13G rather than a 13D.
• The aggregate number and percentage of the class of securities of the issuer owned.
• Whether or not the beneficial owner has ceased to own over 5% of a class of securities.
• Whether they, or a parent company, have filed a 13D.
• Certification that they have not acquired and held the shares for the purpose of influencing control of the issuer.

Can these filings be amended?

Yes, when a material change occurs in the facts set forth in one of these filings, including any material change in the percentage of the class beneficially owned, the party who filed the disclosure must promptly file an updating amendment with the SEC outlining such a change.

A 13G filer is required to file an annual amendment within 45 days after the end of the calendar year to report any changes from the previously disclosed filing. If there have been no changes (or if the changes are limited to a change in the percentage owned by the filing party resulting solely from a change in the aggregate number of securities outstanding), then no amendment is required.

When would a beneficial owner need to switch to filing the other type of form?

Any beneficial owner who intends to switch from filing a 13D to a 13G must meet the requirements and qualifications for filing a 13G. When a security holder was previously only eligible to file a 13D and reports its holdings fell below 5%, then the holder may qualify to file a 13G if it’s beneficial ownership increases above the threshold.

A beneficial owner who has previously filed a 13G must instead file a 13D if they intend to influence control of the issuer or engage in any transaction to that end.

Does a holder of more than 5% of derivative securities of an issuer need to file a 13D/G?

Yes, derivative securities which grant a right to acquire an equity security also may trigger a 13D/G reporting event.

Are non-U.S. beneficial owners required to make these filings?

Yes, all beneficial owners are subject to the disclosure requirements. Additionally, foreign institutions are allowed to file as qualified institutional investors.