Who counts as an insider and has to file Form 4?

Who are the three groups?

Section 16(a) of the Securities Exchange Act applies to every person who is directly or indirectly the beneficial owner of more than 10 percent of any class of equity security registered under Section 12, and to every director or officer of the issuer. The SEC's investor bulletin calls these three groups "insiders" for short: officers, directors, and those who hold more than 10 percent of any class of a company's securities.

So the label is narrower than in everyday speech. A mid-level manager with stock options is not an insider in this sense, and neither is a shareholder who owns half of one percent. The word describes a legal reporting status.

Who is an officer?

The rule that defines the term, Rule 16a-1(f), is based on function, not on title. An officer is the issuer's president, principal financial officer, principal accounting officer (or the controller if there is no such officer), any vice-president in charge of a principal business unit, division or function such as sales, administration or finance, any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer. Officers of a parent or subsidiary count if they perform such functions for the issuer.

Two consequences follow. A person with a grand title who performs no policy-making function may not be an officer under the rule, and a person with a modest title who does perform one may be. Companies decide who their Section 16 officers are, and the Form 4 itself shows the title the filer gave.

How is more than 10 percent counted?

The rule uses two definitions of beneficial owner. To decide whether someone owns more than 10 percent of a class, it uses the meaning from Section 13(d) of the Act and the rules under it, the same concept behind the Schedule 13D and 13G filings. To decide what holdings and trades the person must report once covered, it uses a different test: a person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the equity securities. That is why a Form 4 can include shares held through a family trust or another entity, marked as indirect ownership.

What do insiders file, and when?

The SEC bulletin sets out the three forms. A person who becomes an insider files a Form 3 within 10 days. After that, a Form 4 is due within two business days after a transaction. A Form 5 is a year-end catch-up for items not reported earlier. All are public on EDGAR. The next article, Forms 3, 4 and 5 explained, has the details and a table.

Who is not covered?

Under the definition, the following are outside Section 16 for a given company unless they also fall into one of the three groups:

• employees who are not officers;
• shareholders below the 10 percent line;
• members of Congress, whose stock trades are reported on a different document, the periodic transaction report (see how to read a Congress periodic transaction report).

The Form 4 instructions also contemplate a reporting person who is none of officer, director or ten percent holder: such a person checks "other" and describes the reason for reporting status. So the three groups are the core of the rule, not a complete list of every possible filer.

What does the test look like in practice?

Some illustrations of how the definitions apply. A chief financial officer is the principal financial officer, so an officer. A vice-president in charge of sales is a vice-president in charge of a principal business unit, division or function, so an officer under the rule. A member of the board is a director. An investor holding 12 percent of a class of registered stock is above the 10 percent line. An engineer with stock options who has no policy-making function is not an officer under the rule's definition and holds no more than a fraction of one percent, so is outside Section 16 for that company. The rule decides by function and by percentage, not by how senior a person feels.

What does the relationship box tell you?

When a name appears on a Form 4, the relationship box says which of the groups the person belongs to: director, officer with the title written in, 10 percent owner or other. The form says to check all that apply, so one person can be in more than one group, for example a director who also owns more than 10 percent. A person in none of the groups would not be filing under Section 16 for that company at all, apart from the "other" case that the form's instructions describe.

What this does not tell you

A filing by an insider says that the person is subject to the reporting rule and that a transaction or holding was reported. It does not say that the person has special knowledge. The SEC bulletin notes that insiders may sell for liquidity and diversification, among other reasons. It also does not say the list of insiders is stable: people join and leave the groups, and a person who stops being a director or officer stops filing.

On OQRO, the insider trades page shows the Form 4 filings for covered companies, and each links to the filing on sec.gov, where the relationship box (director, officer, 10 percent owner or other) is printed at the top.