The SEC Form 4 is a form used by officers, executives, and other officials of companies to report to the U.S. Securities and Exchange Commission (SEC) their personal transactions in the company’s securities. Form 4 must be filed within two business days of the transaction. Insider transactions provide insight into the company’s opportunities and financial condition. Form 4 makes this information available to everyone.
Definition and Examples of SEC Form 4
Officials within the company can acquire shares in several ways. They can purchase shares with their own money in a brokerage account or stock purchase plan, or a retirement plan like a 401(k). Alternatively, officials may receive shares or options to purchase shares as part of their compensation.
Form 4 is used to inform the public that an insider transaction has occurred, as well as to provide details about the timing, size of the transaction, and stock price. It also reveals whether the shares are owned directly by the insider or indirectly through a document or another entity, and the total number of shares owned after the transaction. Form 4 uses a series of codes to describe the nature of the transaction, such as stock grant or option exercise.
Here are some examples:
- Transaction Code A: Grant or award from the company
- Transaction Code P: Purchase
- Transaction Code S: Sale
- Transaction Code D: Sale or transfer back to the company
- Transaction Code M: Exercise of options or other derivatives
While many of these transactions are routine, sometimes they can have a significant impact, attracting market attention, especially when share prices are declining.
Note: Investors scrutinizing Form 4 filings pay particular attention to Transaction Code P. The P indicates a direct purchase by the officer using their own funds.
For example, on March 13, 2020, following a market-wide selloff due to uncertainties related to the emerging global pandemic, the CEO of Wells Fargo, Charles Scharf, purchased 173,000 shares of the bank’s stock with his own money – a $5 million purchase. At that time, the stock price was down 42% from the previous year.
How Does SEC Form 4 Work?
Form 4 is not limited to transactions by executive officers and directors. It must also report purchases and sales made by family members of the officers, trusted individuals, and other entities that the officer may control. Investors owning 10% or more of the company’s shares must also report their transactions on Form 4.
Form 4 is used by shareholders and other groups monitoring stock performance to identify short-term transactions. Short-term transactions are the officer’s sale and repurchase or purchase and sale of the company’s shares within six months. Short-term transactions are prohibited under the Securities Exchange Act of 1934; any profits from a short-term transaction must be returned to the company. Shareholders can sue the officer to recover the proceeds from short-term transactions if the company takes no action.
As mentioned, officials must submit Form 4 to the U.S. Securities and Exchange Commission within two business days from the date of the transaction. They are filed electronically via EDGAR, the SEC’s database for publicly traded companies and individuals. Form 4 is available online, free to the public, along with most other disclosures in EDGAR, such as Form 10-K and Form 8-K. The EDGAR search page provides a guide to researching public securities companies, including how to access Form 4 reports.
Note: Form 4 submissions can help evaluate how management views its company. If there is a consistent trend of officials buying shares with their own funds, it may be a positive sign for the company’s prospects.
But
In some cases, understanding insider stock sales and option exercises may not be clear. Executives sell for many reasons, and research indicates that in some instances, it may be a positive sign rather than a negative one.
What does this mean for investors?
Although insider transactions can provide hints about a company’s stock, they are not necessarily a standalone reason for investors to buy or sell. Some types of purchases, such as small buys by mid-level managers, may be more meaningful than others. Another cautionary signal: while there are exchange-traded funds (ETFs) for almost any type of investment strategy, there is currently no trading fund in the market that invests solely based on insider buying.
Using EDGAR
If you are looking for individual stocks, Form 4 is a useful tool, alongside fundamental and technical analyses. You can search EDGAR by the company’s name or ticker symbol, as well as by the names of individual executives, directors, and investors.
Unless you are a skilled researcher or know exactly what you are looking for, using EDGAR to review all Form 4 filings for a single company can be time-consuming and unproductive. You may want to take advantage of a stock screening tool or an insider trading tracking service instead.
Stock Screening Tools
Stock screening tools are search engines for stocks. Stock screening tools can scan thousands of stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq stock market using hundreds of criteria, including insider buying and selling trends.
Most brokerage firms offer online stock screening tools for their clients. There are also online services that track insider trading and provide daily reports to subscribers.
Takeaway
Companies use SEC Form 4 filings to disclose transactions in the company’s stock by executives and individuals or entities associated with them. Insider transactions may provide guidance for investors on the company’s opportunities and financial condition. Form 4s make this information readily available and at no cost to all types of investors through the U.S. Securities and Exchange Commission (EDGAR) database.
Source: https://www.thebalancemoney.com/what-is-sec-form-4-5223580
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