Trading of all stock is regulated by the Securities and Exchange Commission (SEC). Officers and directors of companies, owners of restricted stock, and owners of more than 10% of a company's stock are legally required to let the SEC, and thereby the public, know when they sell, or intend to sell their stock. Today's Brief outlines the forms that are used for this purpose.

"Insider" is a general term for officers and directors of a company. However, most "insider" rules also apply to shareholders who have more than 10% of the company's stock.

Restricted stock, in general, is stock that has been purchased in any way other than a public offering. There may or may not be actual restrictions imposed by the company or underwriters on how the owner can dispose of the stock (often there are). However, for SEC purposes, restricted stock means stock sold directly by the company to an investor in a privately arranged sale. Exercise of stock options generally does not fall into this category.

Form 144 filings report the proposed sale of any restricted stock. While this includes company insiders, it also includes anyone who owns restricted stock, as defined above, regardless of how many shares.

It is important to note that many "insider" trading reporting agencies list filings of Form 144 by directors and officers, but do not include Form 144 filings by unaffiliated shareholders.

It is also important to note that the filing of a Form 144 does not obligate the filer to sell any or all of the shares listed. The filer has 90 days in which to make the transaction, or portion of it. If the 90 days passes without a transaction, a new Form 144 may be filed.

Form 3 filings state the ownership totals for a new officer, director, or 10% owner.

Form 4 filings state the changes to an insider's holdings when they occur. The Form 4 includes purchases and sales as well as exercise of options, disposition by gift, or other transactions.

Form 5 filings are an annual summation of the Form 4 changes to give an annual summation of the ownership by officers, directors, and 10% owners.

For clarity, the Form 13D is a required filing by any entity that becomes a 5% holder. This filing must be made at the time (within 10 days) the holder crosses the 5% threshold. Form 13G is the same form, but used when the person or entity is making the purchase for "investment" only.) Additional purchases by this holder do not have to be reported on Forms 3, 4, or 5, until the holder crosses the 10% threshold.

Insiders who purchase or sell stock on the open market, just as any other investor, have to file these transactions on a Form 4 filing, but do not have list sales with a Form 144.

Filing of the SEC forms listed above is mandatory and required by law. However, and unfortunately, they are not required to be electronically filed as part of the SEC's EDGAR database. The EDGAR database, which is freely accessible on the Internet at www.sec.gov, contains all of the electronic filings made by a company. However, since electronic submission of Forms 3, 4, 5, and 144 is optional, many companies make only a paper filing of these forms.

This has created a market for companies that manually monitor and collect the SEC insider filings and resell the information. The two major vendors of Form 144, 3, 4, and 5 information are the Vickers Stock Research Corp., and CDA Investment Technologies.

Unfortunately, even if you could access all insider filings electronically as an Internet investor, the time requirements on these forms does not always prove helpful. Form 144s must be filed in advance of the actual sale, but it may be done as early as the morning of the sale. Even if you are aware of the sale the moment it is filed on paper SEC offices, if the insider sale occurs shortly thereafter, it would be hard to derive a market advantage from this information.

Form 4 information is filed after the fact. Many companies report Form 4 transactions monthly, for transactions in the previous month. If the Form 4 information represents stock that is not restricted, and therefore, not subject to Rule 144, there is no advance information at all. Simultaneous exercise and sale of options often falls in this category.

By the time you find out about most Form 144 or Form 4 filings, any effect it may have upon the stock has already happened. The only thing you can actually do is form an overall opinion about what it might mean for the insider's opinion of the stock.

For example, with Amazon.com there is a long list of Form 144 filings with no immediate corresponding sales. The first conclusion might be that holders feel the stock still has a ways to go up.

But since actual sales will be recorded on Form 4, which could be a month from now, you don't really know. It could be that they have all sold already, and the information just hasn't made it through the SEC, then through the data distributors, to the channels to which you have access.

In addition, the Form 144s include unaffiliated owners of restricted stock. For example Michael Dell, of Dell Computer, who apparently owns pre-IPO Amazon.com stock, filed a Form 144 to sell 2,200 shares on June 18, 1998, when Amazon was trading at $75 per share. Whether he has sold or not by now is known only to Michael and the transfer agent.

Although people tend to draw conclusions from insider sales it may be wise to ignore them.

Peter Lynch, the great mutual fund manager, frequently stated that he only paid attention to purchases, not sales. To paraphrase his thoughts, he felt that sales could occur for any number of valid reasons, including personal needs or a desire to diversify or for tax purposes.

But a purchase can only mean the insider believes strongly in the company. Purchases show up only on Form 4's and 5's.

Robert V. Green