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What are Schedules 13D & 13G?


The following
is excerpted from the book
"Profit from Legal Insider Trading"


The Schedule 13D
This SEC document is filed by holders of 5% or more of any class of a company's shares outstanding. When a person or entity first reaches the 5% ownership level, a 13D must be filed within 10 days. Importantly, the intention of the investment must also be stated on the form. Subsequent trades must be promptly stated on an amended 13D.

The 13D was first mandated in 1968, when Congress passed changes to the 1934 Act designed to require disclosure by parties affecting the change of ownership of companies by acquiring shares.

Schedule 13Ds used to be some of the most monitored SEC documents around. In the midst of the mergermania of the 1980s, a 13D was often the first indication that a company was being taken over. Raiding firms would discreetly acquire 4.9% of their targets' shares, before pouncing across the 5% ownership barrier that required a 13D to be filed. Cover blown, the large investor declared its intention to take over the company whether management went along or not. A fight for the remaining shares often ensued, and professional arbitrageurs bet heavily on the outcome.

Although the importance of 13Ds has waned somewhat in recent years, they remain a decent source of information on the trading activities of many larger investors

The Schedule 13G
Not all the smart money around wants to take over the firms they take ownership in. The great influx of money into mutual funds, for instance, has turned mutual fund managers into major players in many stocks. The bylaws of their funds certainly don't allow them to make a grab for power.

The SEC exempts such passive, large investors from the burdensome reporting requirements of the Schedule 13D, but makes them fill out a Schedule 13G instead.

Schedule 13Gs were mandated in 1977, and must be filed 45 days after the end of each calendar year by passive investors owning 5% or more of a company's outstanding shares. One 13G must be filed for each company in which 5% or more is owned.

This less-frequent filing is certainly a relief from paperwork for passive investors, but it also mitigates the usefulness of the data to investors given that it is dated, and only represents holdings rather than transactions. Nevertheless, Schedule 13Gs certainly offer some useful information.

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