U.S. securities laws prohibit insider trading, and so the SEC keeps track of how much stock of their companies certain insiders own. After the SEC knows about the insider and receives an initial statement of the insider's holdings, the insider must report changes in the beneficial ownership of such securities on Form 4. As the SEC states, the primary purpose for the form is to provide information about transactions involving directors, officers, and beneficial owners of stock amounting to 10% or more of outstanding shares in companies that are registered with the regulatory body.
Filing Form 4
Insiders have two business days following the transaction in question to report it using Form 4. Most insiders have to file Form 4 electronically using the Electronic Data Gathering Analysis and Retrieval System, also known as EDGAR. Those who've received a hardship exception from electronic filing requirements can file Form 4 on paper.
What information to put on Form 4
Most of the information on Form 4 is self-explanatory. The form includes spaces for the reporting person's name and address, the company name and ticker, the date of the transaction, and the relationship of the reporting person to the company.
The most important part of Form 4 involves specific transaction information. The reporting person must include the specific type of security traded, the date of the transaction, a code reflecting the exact type of transaction, and the number of shares or units bought or sold and their price. The reporting person must also say how many shares or units remain in possession of the reporting person after the transaction.
Reporting persons must file Form 4 even if they hold shares indirectly through a trust or retirement account. In that case, they must report the ownership form as indirect and then provide details on the exact nature of the entity that owns the shares and what role the reporting person plays in it. Often, reporting persons will do multiple transactions involving various roles at the same time. To fulfill reporting requirements, entries on Form 4 must be made on separate lines for each different type of ownership and each class of security.
That information is generally easy to obtain and understand for shares of stock, but a separate section of Form 4 deals with the more complex matter of derivative securities. For derivatives, additional information is required, including the conversion or exercise date and the type and amount of underlying securities in the company that are covered under the derivative.
In general, Form 4 tells you what insiders are doing with their holdings, and you can use that information to inform your own decisions about whether to invest. For more information on the specifics of Form 4, you can see the instructions of the SEC website here (link opens PDF).
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