Compass Bancshares, Inc.
VIA E-MAIL to firstname.lastname@example.org
December 12, 2002
Securities and Exchange Commission
Re: Proposed Rule to Implement Sarbanes-Oxley Act Section 306(a) Insider Trades during Pension Fund Blackout Periods
Dear Mr. Katz:
Compass Bancshares, Inc. ("Compass") appreciates the opportunity to comment on the Proposed Rule issued by the Securities and Exchange Commission under Section 306(a) of the Sarbanes-Oxley Act (the "Act").
Compass is a financial services company that was organized in 1970 and operates approximately 344 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.7 billion in assets and is among the top forty (40) bank holding companies in the United States in terms of assets.
Section 306(a) of the Act is designed to prohibit an issuer's directors and executive officers from directly or indirectly purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during a pension fund blackout period that prevents plan participants or beneficiaries from engaging in equity securities transactions if the equity security was acquired in connection with the director or executive officer's service or employment as a director or executive officer.
Section 306(a) was primarily designed to address several highly publicized corporate scandals in which company executives sold company shares while other rank-and-file employees were precluded from selling shares they owned through a company retirement plan due to a blackout period. To clarify the scope and application of Section 306(a), the Commission proposes to adopt new Regulation Blackout Trading Restriction ("BTR") which would then be implemented through Proposed Rules 100, 101, 102, 103 and 104 of the Securities Exchange Act of 1934 (the "Exchange Act").
Compass strongly supports the goals of Section 306(a) and the Commission's efforts to address the unfairness of an issuer's directors and executive officers from selling equity securities when other employee's of the issuer cannot. To this end, we support the Commission's attempt to ensure that rank-and-file employees, who typically own an issuer's securities as part of an issuer-sponsored retirement plan, and company executives are on a level playing field concerning their ability to sell an issuer's equity securities during a pension fund blackout period. However, while we support the objectives of the Proposed Rules, in our view, the Proposed Rules can be clarified and simplified in a few areas. We have not addressed each request for comment in the Proposed Rules, but rather only those issues with which we have concerns or for which we have suggestions for improvement.
I. The Definition of Derivative Security Should be Modified
Under Proposed Rule 100(d), for purposes of Section 306(a) and proposed Regulation BTR the term "derivative security" would have the same meaning as set forth in Exchange Act Rule 16a-1(c). We would suggest that this definition be modified slightly as set forth on Annex A attached hereto. This modification (along with a subsequent proposal contained in III below) would make it clear that a secured party holding equity securities owned by an executive officer or director as collateral for a bona fide loan or other credit obligation may sell those equity securities upon an event of default under its security agreement with the individual. The modification would also add to the definition of "derivative security" certain types of principal protected notes whose "principal value" is fixed - but whose investment return is tied to the movement in the price of the equity security.
II. The Irrebuttable Presumption Contained in Proposed Rule 101(b) Should be Modified to reflect a Rebuttable Presumption
Proposed Rule 101 clarifies the operation of the general statutory prohibition on trading by directors and executive officers and sets forth exceptions to the prohibition. Directors or executive officers are prohibited from directly or indirectly, purchasing, selling or otherwise transferring an equity security of the company during a blackout period. In theory the prohibition applies only to equity securities acquired in connection with service as a director or executive officer; however, Proposed Rule 101(b) establishes an irrebuttable presumption that equity securities sold by a director or executive officer during a blackout period were acquired in connection with service or employment as a director or executive officer to the extent that an individual owns such securities without regard to the actual source of the securities sold.
We strongly believe that the presumption should be rebuttable by the director or executive officer. We can understand the Commission's desire to create a rule that will eliminate the need to analyze whether securities sold by an executive officer or director during a blackout were acquired in connection with the individual's service as an executive officer or director. However, a director or executive officer may be able to clearly indicate that the securities sold were not acquired in connection with service as an executive officer or director. The potential penalties under Section 306(a) are quite high - loss of profit, civil injunctive actions, cease and desist proceeds as well as possible criminal liability. It is unlikely a director or executive officer will be willing to risk these penalties unless she is confident she will not be found to have violated the Act. As proposed, Rule 101 is unnecessarily broad in scope and would result in prohibiting many legitimate transactions that were not intended by Congress to be suppressed.
III. The List of Exempt Transactions Should be Broadened and made into a Safe Harbor
Proposed Rule 101(c) exempts certain transactions from the trading prohibition, including acquisitions under dividend or interest reinvestment plans, 10b5-1(c) plans, certain tax-qualified employee benefit plans, stock splits, stock dividends, and prorata rights distributions. All of these plans allow for transactions in a company's equity securities automatically, i.e. they require advance elections and do not require nor invite discretion on the part of the participants. We would suggest that Rule 101(c) be modified to instead provide for a broader, more general exemption for types of transaction with certain common elements. Specifically we would propose a safe-harbor be created on the basis of Rule 10b5-1(c) but would modify Rule 10b5-1(c)(B)(3)1 to provide for situations in which the same administrator may be the administrator for several employer-sponsored plans, only one of which may be affected by the blackout).
We would also suggest the use of additional examples that would aid in concluding whether a transaction is prohibited. For example, we would include in the list of exempt transactions: (i) a sale of an equity security during a blackout by a secured lender holding the equity securities as collateral pursuant to a bona fide loan or other credit agreement2; (ii) gifts to a charitable institution (as defined in the Internal Revenue Code); (iii) the sale or other transfer of an equity security that is compelled by an order from a court of competent jurisdiction. This would encompass those transfers pursuant to a Qualified Domestic Relations Order and all collection of judgements made against an executive officer or director; and (iv) stock option exercises where the options are exercised and held (without the sale of any options or shares to pay for the exercise). In our opinion option exercises where a director or executive officer simply pays the exercise price (rather than selling some shares in order to pay the exercise price for remaining shares) does not change the individual's holdings, but only converts an indirect ownership to a direct ownership. The price paid for the options was previously fixed; therefore there is no threat of the director or executive officer profiting from the use of insider information at the expense of rank-and-file employees. Additionally, the Commission should permit the exercise of any options that will expire during the blackout period.
The items enumerated in Rule 101(c) would then be listed as examples of transactions that would fall within the safe harbor, but they would not be an exhaustive, limited list of exempt transactions. Moreover, by using a limited list of certain transactions rather than a broad, general rule that then sets out examples of permissible transaction types, the Commission may unintentionally create potential loopholes that could be used by unscrupulous persons to evade the trading prohibition in Rule 101(b). For example, many dividend or interest reinvestment plans will contain a provision that allows participants to make voluntarily contributions to the company's plan, through the transfer agent to purchase equity securities at a discount or without commission. Technically these are "acquisitions of equity securities made under dividend or interest reinvestment plans" but are clearly not the type of discretionary purchases the Commission intended to exempt. In our opinion, a broad general rule, followed by an example of a dividend reinvestment plan would catch this type of unforeseen consequence.
Finally, we note that the Commission has specified that the affirmative defense in 10b5-1(c) would not be available if the individual was "aware" of the impending blackout. We fail to see the purpose of a 15-day advance notice period to directors and executive officers if they are unable to enter into transactions during the notice period. The Commission may wish to address this inconsistency.
IV. The Required Notice to the Commission should be Harmonized with the Notice to be Provided to Directors
Proposed Rule 104(b)(1) of Regulation BTR requires an issuer to provide notice of a blackout period to its directors and executive officers at least fifteen calendar days prior to the commencement of the blackout period. An issuer is also required under Rule 104(b)(3) to provide notice to the Commission on Form 8-K upon the earlier of receipt of notice of the blackout period from the plan administrator or actual knowledge by the person designated to oversee the issuer's pension plans. An issuer is also required by the Employee Retirement Income Security Act ("ERISA") to provide notice of the blackout to all of the participants of the affected pension plan.
While the content of the notice required to be provided to pension plan participants, the Commission and directors and executive officers is essentially the same, the time when notice is required to be provided is very different and places significantly increased reporting and compliance burdens on issuers. For instance ERISA would require notice to be provided to plan participants not less than 30 days prior to the commencement of the blackout. Proposed Rule 104 would require directors and executive officers to be provided with at least 15 days notice while notice to the Commission is dependent upon the more subjective factor of when the issuer had actual knowledge of the blackout.
This could result in the issuer having to make three separate disclosures at three disparate times and represents a significant burden for the issuer to manage. The blackout period may evolve over discussions and may be required to be modified due to business concerns of the issuer or of plan recordkeepers. The person responsible for ensuring the proper notices are sent may not herself be informed of the impending blackout until well after a decision has been made concerning the commencement time of the blackout. This is especially true in smaller companies without a general counsel or compliance officer or strong Human Resource or Employee Benefit departments.
There should be a single triggering event that would harmonize the three required disclosure times. We would suggest that the notice provisions of ERISA control the time within which the issuer is required to provide notice of the blackout.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the Proposed Rules. We would be happy to meet with representatives of the Commission to discuss our comments.