Page 167 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 153

Section 10(b)-5 extends the definition of insider to anyone trading with information not
known to the public that could affect the price of the stock. This rule has snared brokers,
hairdressers, and psychologists.
In 2000, the SEC issued Regulation FD (Fair Disclosure) forbidding companies from
selectively disclosing material information. Failure in this regard must be promptly corrected
with public disclosure so no one is at an advantage regarding a purchase, hold, or sale deci-
sion on the company stock. Failure to comply will result in significant penalties. About the
same time, the SEC issued Rule 10b5-1 stating that executives would not be barred from
buying or selling their stock regardless of what information they possessed at time of a trans-
action provided that the transaction was part of a trading plan, formula, or similar established
program before the insider was aware of the material nonpublic information regarding
the company.
This is an important exception to Section 10(b)5, which otherwise bars anyone inside or
outside of the organization from trading in the security if that person possesses information
unknown to the public that could affect the stock price. An example might be a consultant
privy to confidential information.
To avoid claims of insider trading, it would be logical for insiders to put their trading
plan on the company website agreeing only to transactions on a prescribed date (e.g., third
trading day after earnings release for each quarter). These transactions would take place
regardless of what happens.
Company Disclosures The SEC also requires filings from publicly traded companies.
A few of the more significant ones are as follows:
• Form S1 The registration form for initial and secondary public offerings of the
company stock. A prospectus with required information about the company (which
includes officer and director compensation data) is included.
• Form S3 A shorter version of Form S1, used to sell additional shares by a company
that is already public, having successfully registered under Form S1 and not meeting
the secondary offering requirement of Form S1.
• Form S4 Used if company issues shares for an acquisition or a merger.

• Form S8 A very brief registration statement used to register shares for a stock plan.
• Form 8K Anything of significance that would be reported in the next 10K or 10Q
should be reported, including employment agreements, compensation, pension plans,
and other deferred compensation agreements, as well as when directors and officers
leave or new ones are elected, with four business days of a triggering event.
• Form 10K Annual report on financial and related business information, including
background on corporate officers.

• Form 10Q An abbreviated version of the 10K, filed after the completion of each of
the company’s first three fiscal quarters.
The SEC also requires that publicly traded companies notify shareholders of the annual
meeting (or other shareholder meeting) in a document identified as the proxy statement.
This document must also disclose matters to be voted on at the meeting (e.g., election of
directors and some approvals of acquisitions and mergers), a ballot for voting, and significant