The Profit Sharing / 401k Council of America
10 South Riverside Plaza, Suite 1610, Chicago, Illinois 60606-3802
312.441.8550 Fax: 312.441.8559 www.psca.org
December 16, 2002
Jonathan G. Katz
United States Securities and Exchange Commission
RE: File No. S7-44-02
Insider Trades During Pension Fund Blackout Periods, Proposed Rule
The Profit Sharing / 401k Council of America (PSCA) is pleased to comment on the Proposed Rule on Insider Trades During Pension Fund Blackout Periods. PSCA is a 1,200 member national association of employer plan sponsors that for over fifty-five years has identified and shared best practices with its members, represented their interests in Washington, and provided analysis and reportage on the latest regulatory changes. PSCA members range in size from a six-employee auto parts manufacturer to firms with hundreds of thousands of employees. Our members believe that profit sharing, 401(k), and related savings and incentive programs strengthen the free-enterprise system, empower and motivate the workforce, improve domestic and international competitiveness, and provide a vital source of retirement income.
The Commission inquired if it should define the term "blackout period" to be shorter than the three consecutive business days specified in the statute. PSCA believes the Commission should follow the statutory language in section 306(a)(4) of the Sarbanes-Oxley Act of 2002 (the Act), which states that a blackout occurs only during a period of time of more than three consecutive business days. The three-day period resulted from extensive discussion among policymakers and representatives of the voluntary employer-provided retirement system. It recognizes that blackout periods lasting less than three consecutive business days, properly conducted, will not significantly impact the rights of participants and beneficiaries. Moreover, the Commission should closely coordinate any definitional issues with the Department of Labor, as is specified in section 306(a)(3) of the Act, which states "The Commission shall, in consultation with the Secretary of Labor, issue rules to clarify the application of this subsection . . ."
The proposed definition of securities acquired in connection with service or employment includes securities held as directors' qualifying shares or other securities that he or she must hold to meet an issuer's minimum ownership requirements for directors or executive officers (section 245.100(a)(3)). These securities could be securities that were acquired years before becoming a director. PSCA believes that treating securities that were purchased prior to becoming a director as acquired in connection with service as a director is inconsistent the Act's intent of treating trading opportunities for all shareholders who hold securities obtained as the result of an employment relationship equally. The Commission's interpretation is particularly troublesome when viewed in conjunction with section 101(b).
Section 101(b) of the proposed rule states that any equity security of the issuer purchased, sold, or transferred during a blackout period will be deemed to be a transaction involving an equity security acquired in connection with service or employment as a director or executive officer as defined in section 245.100(a). This proposal will not allow an executive officer or director who holds any equity securities of the issuer acquired in connection with service or employment as an officer or director to sell any stock, regardless of whether or not the stock was acquired in connection with service or employment as a director or executive officer, during a blackout period without first violating the Act. PSCA believes that this interpretation is inconsistent with both the language and intent of the Act. For example, assume that a company's largest stockholder is elected as a director. The only holding requirement is that a director be an owner; that is, the director must own one share. Under the proposed rules, the director cannot sell any of the stock acquired prior to service as a director without violating the Act. Similarly, an executive officer would violate the Act with any transaction involving the issuer's equity securities even if they were acquired prior to assuming an executive officer position, whether or not they were acquired in connection with employment, as long as one share was acquired in connection with employment as an executive officer. PSCA recommends that the Commission adopt an approach that assigns equity securities subject to the Act the same identification that they have for tax reporting purposes.
The Commission is proposing in section 100(h)(1) that the existing definition of "officer" found in Exchange Act rule 16(a)-1(f) be used to define "executive officer" in the Act even though "executive officer" is also defined in the Exchange Act rules. The preamble to the proposed rule states that the Commission feels that the definition of "officer" "is more appropriate" than the definition of "executive officer" despite the express use of the latter term in the Act. PSCA believes that the Commission should follow the legislative language, particularly when it refers to an entity specifically identified in the Exchange Rules.
The proposed rule provides an exception to the definition of a blackout for regularly scheduled periods in which the participants and beneficiaries may not purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer if the terms of the periods are included in the plan documents and they are disclosed to an employee before he or she formally enrolls, or within 30 days following formal enrollment as a participant; or within 30 days after the adoption of an amendment to the plan. These notice requirements are in addition to, and different from, the requirements under ERISA that insure that participants are properly informed about their retirement plan details, including the "regularly scheduled periods' discussed above. PSCA suggest the Commission take the approach found in section 306(b) of the Act that specifies that a blackout occurs only when an ability under the plan "which is otherwise available under the terms of such plan" is suspended. Under this approach, there is no need to promulgate unnecessary additional requirements for employers who voluntarily provide retirement plans to their workers.
Section 245.101(c)(2) of the proposed rule exempts certain transactions from the scope of the Act, but it mandates that, for purposes of that section, awareness of an impending blackout period will constitute awareness of material, non-public information. This provision could result in restricting a director or executive officer from establishing a 10b5-1 plan or similar arrangement for periods of time that frequently exceed twelve months, merely because the director or executive officer is aware that a blackout is planned in the future. In addition, although the language of the presumption says it is limited to this "section", it is unclear what is being referred to and whether (for that reason or otherwise) the presumption will be deemed to apply more broadly to any trading by directors or executive officers. The presumption that awareness of a future blackout is material is very troubling to PSCA. Materiality is a subjective finding based on the application of the particular facts as well as existing securities laws, regulations, and adjudications. It is not apparent that awareness of any impending blackout period (as defined under the proposed rules) will necessarily constitute awareness of material information. The presumption would not let the relevant director or executive officer take into account in determining whether he or she did have material information, among other things, the size of the affected plan in relation to the issuer's outstanding shares and the probability that the blackout will occur. The language also is vague. Is a director or executive officer "aware" of an "impending blackout period" if one is being discussed but no definite date has been set? Also as written, the presumption would apply even if the information regarding the planned blackout had been made known to plan participants or even to the public.
The Commission inquired if "Where an employee of a target company becomes an executive officer of an acquiring company and, in connection with a merger, consolidation or other acquisition transaction of the two entities, is issued equity securities of the acquiring company to replace equity securities of the target company, should the equity securities received be considered "acquired in connections with service or employment as a director or executive officer" only to the extent that they were otherwise acquired in connections with service or employment as a director or executive officer of the target company? PSCA recommends that the Commission consider the new equity securities to be "acquired in connections with service or employment as a director or executive officer" only to the extent that they were otherwise acquired in connections with service or employment as a director or executive officer of the target company.
The Commission inquired what would be an appropriate measurement date for determining the number of participants or beneficiaries in an individual account plan for purposes of conducting the 50% test. PSCA recommends that this measurement be made as of the end of the most recent plan year.
The Commission inquired if the 15-day notice to directors and executive officers should be calendar or business days. PSCA recommends that they be business days.
Thank you for considering these comments. If you have any questions, or if I can be of any assistance, please contact me at 312-441-8550 or Edward Ferrigno, vice president, government affairs, at 202-626-3634.
David L. Wray