Are There 'Exemptions' For Insider Reporting?

Insider reporting is quite a cumbersome process and one that requires immense attention to detail and accurate filing. Under Section 16 Form 4 requirements, many transactions completed by insiders must be done within two business days, leaving little wiggle room for insiders to miss an important filing.

However, there are certain exemptions to insider trading laws and reporting requirements. These exemptions for insider reporting exist and are designed to protect insiders from having to report minor transactions or trades. Certain classes of small transactions are exempt from insider trading requirements, such as those involving the purchase of less than $10,000 worth of a company's stock or options. Below are some more types of exemptions to consider, and how these exemptions can affect the reporting process for insiders.

Transactions Not Made By an Insider

By far, one of the biggest exemptions from insider trading laws is the fact that they only apply to transactions made by an insider. Any transaction made by somebody who is not an insider of the company and does not have insider information, such as an employee, family member (living in another household), or friend of another insider, is not considered an insider trade and thus does not need to be reported through the SEC's Section 16, Forms 3, 4, or 5. Certain examples of insiders include:

  • Company officers
  • Company directors
  • Stockholders with 10% or more share value
  • Those who possess inside information due to their position and relationship with a company or with an officer, director, or stockholder of the company

In addition, Rule 10b-5, which is a part of the 1934 Securities Exchange Act, also applies to insiders and any other person who is part of a securities fraud scheme. This includes employees who might obtain material non-public information or anyone who has received a tip from an insider concerning the company that is material and non-public, and who trades the company's stock or securities.

If you are not an insider and are simply trading the company's securities, you do not need to worry about filing any insider reports.

Acquisitions Under Tax-Conditioned Plans

Being an insider often means that you have a financial interest in the company, which could involve participating in certain tax-conditioned plans such as 401(k)s or ESPPs. Acquisitions under these plans are not subject to insider reporting rules, as long as they are made through the plan and do not violate its provisions.

For instance, let's say you're a director of a company and you participate in the company's ESPP plan. Your purchases under the plan do not need to be reported, as long as they follow the plan's provisions. Similarly, if you are a stockholder with 10% or more ownership and participate in a 401(k) plan, any transactions made under the plan are also exempt from any insider filing requirements.

Restricted Stock Vesting

Restricted stock vestings are also exempt from insider reporting rules, as long as they are issued in accordance with Rule 144 of the Securities Act. Restricted stocks are often given to employees or other insiders as compensation, and are subject to certain restrictions that limit their sale. As long as the restricted stocks are issued following Rule 144, they do not need to be reported, and the insider is free to sell them at any time without filing an SEC Form.

Expiration of Stock Options

If you leave a company, any unexercised stock options you may have held are no longer subject to insider trading rules or filing requirements. This means that once the stock options have expired, you no longer need to file an insider report for them. While most insiders might not wait until their stocks are about to expire before reporting them, this is an important exemption to keep in mind for those who have left the company and still have unexercised stock options.

Transactions After Termination of Insider Status

Similarly, any transactions made after a person's insider status has expired (usually 90 days after termination) do not need to be reported. This could include securities purchased or sold by the individual once they have left the company, and any other transaction that was made after their status as an insider had ended. However, determining when exactly an individual's insider status has ended can be tricky, and it's recommended that those in this situation contact the SEC for guidance. You can also hire a securities attorney to ensure that your transactions are not subject to insider trading rules after you terminate your position as an insider.

The Bottom Line

There are certain cases in which insider reporting is not required. These include acquisitions under tax-conditioned plans, restricted stocks issued in accordance with Rule 144, and transactions made after the termination of one's insider status just to name a few.

The best way to make sure you are in compliance with insider trading rules is to seek the advice of a securities lawyer, SEC filing services, or contact the SEC directly for more information on exemptions and what is required of insiders.

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