legally transact securities involves pre-arranged trading plans. For example, SEC Rule 10b5-1 permits
executives at public companies to transact securities so long as it is arranged in good faith beforehand to take
place on certain predetermined future dates and involves pre-set amounts. So long as these criteria are
followed, they are granted safe harbor. Safe harbor, in this context, refers to exemption from insider trading
charges for compliant pre-arranged equity trades.
Schedule 13D
In 1968, the Williams Act amended the Securities Exchange Act of 1934 so that investors could have advance
warning of possible corporate takeovers. If someone (individual/corporation) becomes the beneficial owner
of more than 5% of a company’s stock, that entity must file a Schedule 13D with the SEC within 10 days of
purchase. A beneficial owner is anyone with “voting and investment power over their shares.” There are a few
exceptions that apply, such as qualified institutional investors—large investors who are deemed to have
sophisticated knowledge of securities such that they do not need the same level of protection as general
investors. Insurance companies, state employee benefits plans, and investment companies are examples of
qualified institutional investors who are allowed to report their holdings at the end of the calendar year.
Insider Transactions
Corporate insiders are those officers, directors, and beneficial owners who own more than 10% of a class of
securities, registered under Section 12 of the Securities Exchange Act of 1934. Corporate insiders must file a
statement of ownership with the SEC to be in compliance, and as of August 27, 2002, the SEC implemented
new rules that shortened the time period to report insider transactions. It is important for a company to have
internal controls and a system to ensure their corporate insiders are reporting their trades in a timely fashion.
Companies that do not implement and enforce compliance procedures can become liable for the actions of
their employees who fail to follow the law.
Reporting Requirements
Publicly owned companies that meet certain size requirements are called reporting companies, and per
Section 13(a) of the Securities Exchange Act of 1934, they must file periodic disclosures. The purpose of these
disclosures is to help investors make educated decisions regarding how to invest their money. These reports
include information about a company’s line of business, corporate officers and directors, and financial
statements.
•
Form 10-K. Form 10-K, also known as the annual report, contains audited financial statements. Audited
financial statements have been reviewed by one or more CPAs who are not affiliated with the company
and who provide an objective opinion about whether or not the financial statements, such as the balance
sheet, income statement, statement of changes to retained earnings, and cash flow statement, conform
with accounting standards known as the Generally Accepted Accounting Principles (GAAP). When the
Securities Exchange Act of 1934 was first passed, most companies’ annual reports contained only the bare
minimum amount of information. However, over time, companies came to view their annual reports as a
way to not only comply with SEC requirements, but also to attract new investors and impress securities
analysts, or financial professionals who study various industries to make recommendations on whether a
security should be bought, held, or sold. Today, many annual reports contain not only the required facts,
Chapter 14 Securities Regulation
153