The NASPP Blog

When an individual becomes a Section 16 insider, she or he must report all beneficially owned company stock. For reporting purposes (as opposed to those used in the calculation of 10% ownership) securities beneficially owned by the insider are those which she or he has the opportunity, directly or indirectly, to profit from a transaction in the shares (a “pecuniary interest”). Because part of your year-end process should be to confirm the current beneficial ownership for each of your Section 16 insiders, I wanted to do a brief review of beneficial ownership.

There is, of course, direct beneficial ownership. This includes all shares or derivative securities that are held in the insider’s name. There are cases where direct beneficial ownership could be a little less straight-forward. These holdings may include shares that are held in a joint account (or held as community property). Shares held in the individual’s 401(k) or other retirement account are also considered directly owned. When filing the Form 3, all shares directly owned by the insider should be aggregated onto one line.

Indirect beneficial ownership is a bit more complex to determine. These are shares or derivative securities in which the insider has a pecuniary interest, but are not held in the insider’s name. The most common indirect beneficial ownership comes through securities held by family members. Securities that are held by immediate family members who share the insider’s household are included in indirect beneficial ownership. Insiders must be careful with this definition because it is an inclusive rather than an exclusive definition. In other words, if the person in question is either an immediate family member or shares the household (but not both), the securities owned by that person can’t be categorically discounted. Family trusts are another common source of securities indirectly owned by your insiders.

Your company should not only have a questionnaire for your insiders to complete, but should also take time to sit down with each insider to review any potential beneficial ownership securities. This should be done at the initial Form 3 filing as well as annually to confirm that any changes in beneficial ownership are correctly reported. You can find an example questionnaire in our NASPP Document library, or on the Section 16.net site here.