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Top 10 Tips for Searching SEC Filings

10/03/2016 2:47 PM | Apra Carolinas (Administrator)

Written by: Elizabeth Roma, The Helen Brown Group & President-Elect of APRA-Carolinas

I remember the feeling of dread that would run through me in my early days as a researcher when a search for my prospect’s name in SEC filings returned a page full of hits. I felt overwhelmed by the unfamiliar forms and their language and anxious that I would miss (or misinterpret) important information on the individual I was researching. Eventually, thanks to the help of many skilled researchers who generously shared their knowledge with me and the comfort that experience brings, I learned to keep calm and slog on through the filings, and now I love it when my prospects show up in SEC filings.

Here are my top 10 tips for using SEC documents in your research. I hope you will find them helpful!

1.       Know the reporting requirements. Before you get started, it is important to know what information you can and cannot find. Here are the basics:

·         Public companies in the US are required to report the compensation paid in the last three years to the company’s chief executive officer, chief financial officer, and the three highest paid executive officers, other than the CEO and CFO, who were serving as executive officers at the end of the last completed fiscal year.

·         They are also required to report compensation paid in the last year to members of the company’s board of directors.

·         Company insiders (officers, directors, or holders of more than 10% of any class of stock) are required to report purchases, sales, and holdings of their company’s securities.

2.       Know the forms. You can save yourself a lot of time if you know which forms to search for the information you need. The forms you will probably use most frequently are:

·         Form DEF 14A More commonly known as the proxy statement, this form is filed by a company prior to an annual meeting in order to update shareholders on items that will be brought to a vote. It contains bios of directors and executive officers, as well as information about compensation of directors and officers and information about insider securities holdings.

·         Forms 3, 4, & 5 are filed by individuals and used to report insider holdings. Form 3 is the initial filing, which an individual must file within 10 days of becoming an officer, director, or holder of more than 10% of any class of stock. Changes in ownership are reported on a Form 4, and a Form 5 is used for deferred reporting.

·         Form 10-K is a comprehensive financial report that must be filed annually by publicly traded companies. It contains detailed information about the company’s finances, including disclosures of risks the company faces, which can provide important context for prospect researchers.

·         Form S-1 is known as a prospectus and is filed by companies preparing for an initial public offering. The prospectus contains background information on the company’s operations, management, and ownership, as well as information about the underwriters of the IPO and the planned offering price. If significant changes occur after the prospectus is filed but before the IPO, they will be reported on a Form 424.

·         Form 8-K is used to report “material events” that could have a significant impact on the company’s business. Examples of these events include mergers, executive changes, and patent rulings.

3.       Start with the basics. The specifics of your prospect’s situation and the scope of your research will determine the level of detail you need to provide, but in many cases you can probably find what you need to know about compensation and stock holdings by checking the proxy statement and the most recent Form 4 filed by your prospect. If there are extenuating or unusual circumstances or you are doing a deep dive into financials in order to help craft an ask that is planned for the near future, you might need to delve deeper.

4.       Use multiple sources to check each other and yourself. Most screening tools offer information about stock holdings and/or compensation, and there are also free tools that allow you to look up insider holdings by an individual’s name. (J3SG.com is a favorite of mine.) These tools are a great first step, but they are not perfect, so always make sure to go directly to the filings to verify that the information other sources report is current and accurate.

5.       Read the footnotes. That’s where the good stuff is! Footnotes contain a treasure trove of information about executive perks like security details and use of company cars and airplanes, and they can also contain clues about family members and charitable giving. Pay particular attention to footnotes that explain the nature of indirect ownership of stock holdings. Often they will be held in trust for an individual’s spouse or children, who might be named in the filings, or by a family foundation.

6.       See if someone else has already done the hard work. Let’s face it: sometimes the legal terms used in SEC filings can be pretty obtuse. If the language is particularly challenging or the situation seems especially complex, it’s worth a quick news search to see if a financial reporter has already deciphered the filings for you. You might get lucky and find an article that explains the exact situation that has you stumped.

7.       Use a cheat sheet. Not sure which form will have the information you need or what in the world carry trade is? Look it up in a reference resource. I like Investopedia, and the SEC has many helpful explanations on its site.

8.       Look for patterns. Does your prospect sell the same amount of shares every month or every quarter? This might be evidence of a stock trading plan set up to help diversify your prospect’s holdings or ensure a steady cash flow when compensation is largely made up of stock. Either way, it’s worth checking the filings to see if you can find an explanation. Looking at the list of recent transactions by your prospect in Yahoo! Finance or a similar tool is a great way to quickly spot patterns. You can work backwards from there by using the transaction dates to find the corresponding filings.

9.       Search for salary comps. SEC filings can help even if you are researching an individual who works at a private company. If you can find a few publicly traded companies in the same industry that are roughly the same size and (ideally) in the same region, you can use the reported compensation figures for executives at those companies to help you estimate what your prospect might be making at a private company. This is not an exact science, to be sure, but at least you can make an educated guess.

10.   Phone a friend. If you are fortunate enough to work in a shop with other researchers, ask for a second opinion when you aren’t sure where to find information or whether you are interpreting it correctly. If you are flying solo, reach out to other members of your local APRA chapter when you get stuck. If you find yourself consistently feeling unsure when you are asked to review SEC filings, ask your boss for some extra training in this area. At one university where I worked, we invited a professor from the business school to spend a couple of hours going over SEC filings with our entire research staff. We all learned a lot, and it didn’t cost a penny.

Although financial documents can be intimidating, they are a wonderful source of information for prospect researchers. I hope that these tips will help you get started. And I would love to hear your favorite tips for researching public company insiders!

  Apra Carolinas. All rights reserved.

For any questions or corrections, please reach out to ApraCarolinas@gmail.com
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