Once designated as an " insider" at a publicly-traded company, the Securities Exchange Commission ( SEC) becomes very interested in how you may be benefiting from the unfair advantage you have when trading your own company's shares.
Insiders must report trades of their companies' shares to the SEC via a template document called a Form 4 by the second business day following the trade. Since passage of the Sarbanes-Oxley Act in July 2002, the Form 4 is an electronic document that is filed on the SEC's EDGAR system.
A Form 4 lists the name of the insider, their relationship to the company, how many shares were traded, and at what price. It also gives the dates of an insider's trades, total holdings of the insider after the transactions, and if the trades were open market, related to the exercise of stock options, or some other special reason. Besides being quite detailed, a Form 4 is also timely.
Investors should keep in mind, however, that filling out a Form 4 is just annoying paperwork for insiders, most of whom are busy executives. It is typical that the burden is passed to an overloaded assistant or company lawyer to complete, and the forms are not likely their first priority either. This may explain why a small percentage Form 4s filed with the SEC are not filled out correctly, and require some interpretation.Indicating a share purchase when it should have been a sale, typing in the wrong transaction price or total holdings figures -- virtually every field on this electronic form can fall prey to human largesse. Mistakes seem to be made as much by highly paid legal counsel as overworked assistants. Another subset of filings also reaches the SEC late. In any given week, Form 4s with trade dates that are months or even a year old betray the tardiness of insiders or their charges. But again, this is annoying paperwork, and tardiness is more likely the result of a mistake than intended deceit. Let's face it, any insider trade that is really illegal is not going to be reported at all to the SEC. Fortunately, the vast majority of insiders are both diligent and accurate when filing their Form 4s, and they supply the market with high-quality investment information every time they trade their own companies' shares in the open market.