With so many SEC reporting requirements to consider, it’s important that organizations understand all their insider disclosure obligations. One of the most important factors to consider is how transactions are being reported. This includes any change in the beneficial ownership of a company’s securities and any trades made by insiders, such as directors or officers. Organizations must also be aware of other internal rules regarding employee trading, which can vary depending on the company’s size, structure, and business operations.

In addition to reporting transactions, organizations should also be aware of any potential conflicts of interest between officers or directors and their own trading activities. For example, a director may be considering investing in another company that competes with the organization they oversee. If it seems like there's no end to factors of insider reporting obligations, don't worry. This article covers the basics of different insider reporting obligations, what to report, who needs to report it, and how you can continue to submit your reports in a timely manner to avoid huge penalties.

Defining Insider Reporting

First and foremost, it's crucial to define what insider reporting is. Insider reporting is the process of disclosing material information related to securities transactions by individuals with access to nonpublic financial information about the company. This includes upper-level executives, like CEOs and CFOs, as well as board members, officers, directors, and even employees who may have knowledge of sensitive or confidential matters.

Reporting allows investors to know ahead of time about any changes in the organization’s ownership, such as when an insider buys or sells a significant amount of company stock. This helps protect investors from potential conflicts of interest, market manipulation, and other unethical practices.

Factors to Consider in Insider Reporting Requirements

Organizations should be aware of different reporting obligations that apply to their insiders. The SEC requires executives to report any changes in their beneficial ownership of company stock within two business days. Other requirements include reporting the purchase or sale of any securities, such as stocks, bonds, options, and derivatives (although these fall under different requirements). Below are some key factors in insider reporting to consider.

Types of Security

Both equity and debt instruments, including stocks, bonds, options, and derivatives, must be reported. The different types of security can be broken down into three categories:

• Equity: Includes stocks (common and preferred stock), stock options, warrants, and convertible securities
• Debt: Includes bonds and other debt-based instruments.
• Hybrid securities: Includes instruments that combine both equity and debt elements such as equity warrants, convertible bonds, and preference shares.

Insider reporting obligations require that insiders report any changes in their ownership of the above-mentioned securities within two business days, as well as any transactions involving those securities. However, certain types of security, such as investments into an employee stock ownership plan, may be exempt from reporting.

Frequency of Reporting

Insiders must report any changes in their beneficial ownership within two business days. Reporting is done through Form 4, which is a SEC form that contains information about the transaction. This includes the date it occurred, the type of security involved in the transaction, and the amount of the security.

Reporting must also be done on an ongoing basis, as insiders are required to update their Form 4 filings at least once every quarter. It’s important to note that if an insider fails to report a transaction, they may face significant fines and other penalties.

In addition to reporting on Form 4, other deadlines include:

• Form 3: This is a form that must be submitted when an insider first acquires either direct or indirect beneficial ownership of a security. Form 3 should be submitted within 10 days of becoming an insider.
• Form 5: This form must be filed no less than 45 days after the end of a given fiscal year. Form 5 is used to report any transactions that occurred during the current fiscal year, but were not reported on Form 4. For instance, if an insider acquired a security but didn't report it to the SEC within two business days, they would need to file Form 5.
• Schedule 13D/G: This form should be filed by an insider who acquires more than 5% of the voting securities of a public company. It must be filed with the SEC within 10 days of acquiring the securities.

Position of the Insider

Designated insiders such as executives, directors, or even shareholders with a 10% or more stake in the company are all considered to be "insiders" and must report any transactions or changes in their beneficial ownership.

To be considered an insider, the individual must meet certain criteria such as having access to nonpublic information about the company, being a director or officer of the organization, or being a shareholder with a 10% or greater stake in the company.

In addition to insiders, there are also "beneficial owners." These are individuals or entities that have a relationship with the company but don’t meet the criteria of an insider. In many cases, beneficial owners will need to report their transactions as well through Schedule 13D/G.

Transaction Type

Transactions don't just include purchases and sales of securities; they can also include gifts, loans, pledges, hedging transactions, derivatives transactions, and other types. All of these must be reported and potentially have different reporting requirements and deadlines.

For instance, an inheritance that leads to changes in ownership and or any new beneficial ownership be reported on Form 3 within 10 days of the change. However, "bonafide gifts" don't need to be reported on Form 4, and can instead be reported on Form 5. Holdings of derivative securities, including puts, calls, options, warrants, convertible securities, or other rights or obligations to buy or sell securities, must also be reported on Form 4.

It can be confusing to know which types of transactions need to be reported and when, so it's important to understand the reporting requirements for each type of security. Fortunately, there are agencies that can help organizations understand their obligations and insider trading regulations, providing assistance in keeping up with the various deadlines.

Thresholds

Someone owning 5% of a company’s stock or other securities, either through direct or indirect ownership, is considered a “beneficial owner” and must report their ownership through Schedule 13D/G. In addition, an insider who acquires more than 10% of a company's voting securities is also required to report their ownership. Different thresholds of ownership will trigger different reporting requirements and deadlines.

Regulatory Authority

In addition to reporting requirements for the SEC, companies might also need to report to the Commodities Futures Trading Commission (CFTC) or the Financial Industry Regulatory Authority (FINRA). Different agencies have different requirements and regulations, so it's important to understand which agency you need to report to and when. The CFTC is the agency responsible for regulating commodities and derivatives trading, while FINRA regulates brokers and broker-dealers.

Insider reporting regulations can be complicated, but understanding the different factors to consider is essential in ensuring compliance with insider reporting obligations. Companies should familiarize themselves with the rules and regulations of each applicable agency as well as review their own policies on insider trading.

Jurisdiction

It's important to know that both the SEC and the Department of Justice (DOJ) have jurisdiction over insider trading laws. Depending on the type of transaction and the jurisdiction in which it took place, different regulations may apply. For instance, insider trading by foreign nationals, including recent cases from Chinese nationals, are typically handled by the DOJ. If your company is dealing with foreign nationals, it's important to understand the laws and regulations in that jurisdiction.

Getting Help With Insider Reporting

By understanding your insider reporting obligations, companies can better protect themselves from potential legal issues. Organizations can also enlist the help of outside professionals, such as compliance lawyers and consultants, to ensure that their reporting is in accordance with the applicable laws and regulations. Doing so will help companies avoid fines and other penalties for non-compliance.