AMERICAN BAR ASSOCIATION
Section of Business Law
750 North Lake Shore Drive
Chicago, IL 60611
December 24, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attn: Jonathan G. Katz, Secretary
Re: Insider Trades During Pension Fund Blackout Periods
(Release No. 34-46778; IC-25795; File No. S7-44-02)
Ladies and Gentlemen:
This letter is submitted on behalf of the Committee on Federal Regulation of Securities of the American Bar Association's Business Law Section (the "Committee")* in response to the Commission's request for comments to Release No. 34-46778 (issued November 6, 2002 and referred to herein as the "Release") regarding the implementation and interpretation of Section 306(a) of the Sarbanes-Oxley Act of 2002 (the "Act").
The comments expressed in this letter represent the views of the Committee only and have not been approved by the American Bar Association's House of Delegates or Board of Governors and therefore do not represent the official position of the Association. In addition, this letter does not represent the official position of the ABA Section of Business Law, nor does it necessarily reflect the views of all members of the Committee.
We would like to express our support for the Commission's reliance on certain concepts well established under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in proposing rules to implement and interpret the trading prohibition contained in section 306(a). As commented upon throughout this letter, the Section 306(a) trading prohibition presents complex interpretive issues, and we believe that harmonizing these issues with Section 16 concepts, to the extent appropriate, will make the interpretation and administration of this new law easier and more effective.
We provide comments below on the following issues raised by the Release:
I. Transactions subject to the Section 306(a) trading prohibition
A. Service or employment presumption
B. Treatment of stock ownership guidelines.
C. Transactions exempt from trading prohibition of Section 306(a)
II. Definition of "blackout period"
A. Duration of plan suspension
B. Individual account plans
C. Exceptions to blackout period definition
D. Application of 50% test under blackout period definition
III. Remedies: determination of profits
IV. Application to foreign private issuers
A. Clarification of treatment of foreign private issuers who file information with the SEC pursuant to Rule 12g3-2(b)
B. Impact of proposed Regulation BTR on foreign private issuers
C. Persons subject to trading prohibition
D. Fifteen percent test for blackout periods affecting plans of foreign private issuers
V. Notice of pension plan blackout periods
A. Notice to officers and directors
B. Notice to Commission
I. TRANSACTIONS SUBJECT TO SECTION 306(a) TRADING PROHIBITION
A. Service or Employment Presumption
Proposed Rule 101(b) extends the trading prohibition of Section 306(a) (the "Trading Prohibition") of the Act to all equity securities held by an executive officer or director (an "Insider"), not just those acquired in connection with service or employment as a director or executive officer of a public issuer of equity securities. This result is not consistent with the express terms of Section 306(a) and its legislative history and is not necessary to prevent evasion of the Trading Prohibition. We believe that an alternative approach that combines (1) specific identification or tracings of shares consistent with the Insider's other reporting obligations and (2) prompt public disclosure of the identification will implement the Trading Prohibition in a manner consistent with Section 306(a).
1. Effect of Proposed Rule 101(b)
Proposed Rule 101(b) establishes an irrebutable presumption that, if an executive officer or director sells any issuer equity securities during a blackout period, the first share sold will be deemed to be a share acquired "in connection with service or employment as a director or executive officer" - unless the executive officer or director has no pecuniary interest in any such shares 1. This is the case without regard to the Insider's other holdings, the reason for the sale or the actual source of the shares sold.
In our collective experience, almost every director or executive officer will have acquired at least one share of an equity security "in connection with service or employment as a director or executive officer," as that phrase is broadly defined in the Release. Moreover, institutional shareholder groups are advocating increased equity-ownership requirements for Insiders that, if adopted, would have the effect of increasing further the number of directors and executive officers acquiring shares in connection with their service or employment as directors and executive officers. As a result, most executive officers and directors will be unable to sell a single share of issuer equity securities during a blackout period without violating the Trading Prohibition.
By way of example, assume that an individual purchased 250 shares of issuer stock on the open market two years before becoming an Insider, obtained physical certificates representing the shares and placed them in a safe deposit box. After becoming an executive officer, the individual acquired 750 shares upon exercise of a stock option, intending to hold such shares in order to obtain favorable income tax treatment. Thereafter, the individual needs to sell 250 shares during a blackout period, to make a down payment on a home. It seems appropriately consistent with Congressional intent to permit the individual to deliver the certificates from the safe deposit box to the individual's broker and complete the sale. To permit investors to monitor Insiders' compliance with the Trading Prohibition, Insiders could be required to note on the Form 4 filed to report the transaction that occurred during a blackout period the date and circumstances of the acquisition of the shares involved in the reported transaction, together with a representation that the shares were acquired other than in connection with service or employment as a director or executive officer.
Brokerage statements typically track share acquisitions by date to facilitate tax reporting, so the individual's account would show two line-items for the separate acquisitions: one line for 250 shares and one for 750 shares. Although the shares held in the account may be fungible, the circumstances surrounding their acquisition can be verified and need not be ignored. There is no reason to presume that an individual would make an unlawful sale when shares are available for lawful sale in the same account. Therefore, the individual should still be free to sell the first 250 shares without liability.
The Release suggests that the result of an irrebutable presumption is not "overly-broad" because, in a given blackout period, equity securities acquired in connection with service or employment could only count against one disposition transaction during "the same blackout period", but the wording of proposed Rule 101(b) leaves open the possibility that the same securities could be counted again in a subsequent blackout, which should not be the case. Further, the Release asserts that liability for violating Section 306(a) is not limited to the recovery of the profit deemed to have been realized by the Insider from the prohibited transaction. An Insider who violates the trading prohibition is instead subject to the possibility of "civil injunctive actions, cease-and-desist proceedings, civil penalties and all other remedies available to the Commission to redress violations of the Exchange Act." The possibility of criminal liability is also discussed.
In light of the foregoing, the irrebuttable presumption of proposed Rule 101(b) effectively extends the Trading Prohibition to all equity securities held by an executive officer or director. While the proposed limit on double counting within a single blackout period suggests that the Commission seeks to steer clear of this result, the limit on double counting will have no practical limiting effect with respect to separate blackout periods (if the same securities can be used as the basis for liability in subsequent blackouts as indicated above) and in light of the threat of civil and criminal action under the Exchange Act.
2. Inconsistency with Section 306(a)
The irrebuttable presumption of proposed Rule 101(b) is inconsistent with Section 306(a) in three principal ways.
First, the irrebuttable presumption is inconsistent with both the unambiguous terms of Section 306(a) and the clearly expressed intent of Congress to permit some sales by Insiders during blackout periods. As described above, proposed Rule 101(b) eliminates the "in connection with" requirement from Section 306(a). This requirement is an important, substantive part of Section 306(a) and its omission fundamentally changes the operation of the section. However, the Release itself recognizes that Section 306(a) permits Insiders to sell a portion of their holdings during blackout periods:
Since the statutory trading prohibition of Section 306(a) of the Act applies only to equity securities acquired in connection with service or employment as a director or executive officer, the statute, by its terms, does not completely preclude a director or executive officer from engaging in an acquisition or disposition of the equity securities of the issuer during a blackout period. (first sentence of Part 4(c) of Release)
Moreover, despite the general lack of legislative history relating to the Act, it is clear that Congress did not intend to impose a blanket restriction on trading by Insiders during blackout periods. Both the House and the Senate specifically considered and voted on versions of Section 306(a) that would have imposed a blanket trading restriction on Insiders during blackouts. See H.R. 3763, 107th Cong. § 5 (2002); S. 2673, 107th Cong. § 306(a) (2002). In the conference between the House and the Senate immediately preceding enactment of the Act, Congress revised the blanket restriction by providing that the trading prohibition should apply only to shares acquired "in connection with service or employment". Rule 101(b), as proposed, would frustrate this unambiguously expressed intent by presuming the sale of the first share during any blackout by almost all directors and executive officers to be unlawful, no matter how that share was acquired.
Second, although we appreciate the simplicity of establishing an irrebuttable presumption that operates in a manner analogous to the short-swing profit recovery provisions of Exchange Act Section 16(b), we believe that an irrebuttable presumption is not appropriate in the context of Section 306. In the case of Section 16, where liability is limited to forfeiture of profits accrued during a time period reasonably related to the purposes of the statute, courts have found strict liability appropriate, because there is no contrary statement in the statute that limits the presumption. Thus, the courts have approved the maximum possible recovery by refusing to trace individual purchases and sales because there is no basis for tracing in the statute. Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943), cert. denied, 320 U.S. 751 (1943). Under Section 306, however, the statute specifically contemplates the possibility of tracing individual shares by including the "in connection with" requirement.
Finally, in contrast to Section 16, the Release asserts the potential for criminal liability for Insider sales during a blackout period. We believe that it is unlikely that Congress intended to establish any irrebuttable presumption of criminal intent in enacting Section 306.
3. Alternative Proposal
We believe that while it should not be the norm that Insiders should sell shares during a blackout period, a mechanism should be in place to permit the sales specifically authorized by the Act without liability. We suggest that:
- The Commission permit executive officers and directors to identify or trace shares sold;
- The Commission require that share identification be consistent with the Insider's other reporting obligations (such as tax reporting and, to the extent applicable, calculation of holding periods under Exchange Act Rule 16b-3(d)(3) or Securities Act Rule 144(d)); and
- The Commission require that executive officers and directors add a notation in the "Explanation of responses" section of the Form 4 reporting the sale transaction that would describe the date and nature of the transaction in which the shares were acquired. Since this representation would be made under penalty of perjury, as already noted on Form 4, this mechanism should offer sufficient assurance of veracity.
Tracing shares is a concept that has long been endorsed under the Internal Revenue Code (the "Code") and Federal securities laws. The Code has a well-developed system for identifying shares sold, including procedures for identifying certificated shares and shares held in the custody of a broker or agent. See Treas. Reg. Sec. 1.1012-1(c). Similarly, both Exchange Act Rule 16b-3(d)(3) and Securities Act Rule 144(d) require tracing to calculate compliance with applicable holding periods. Further, Rule 16b-3 requires tracing with respect to shares purchased or sold following compensation committee or Board of Directors approval.
We believe that there are few opportunities for abuse with a tracing rule so long as Insiders are required to identify shares sold consistently among the various reporting regimes. Only in cases where shares cannot be adequately identified in accordance with the Code, do we believe that a presumptive "first-in, first-out" rule should apply. Such a presumption would be consistent with the reporting regime required by Section 306.
B. Treatment of Stock Ownership Guidelines.
Proposed Rule 100(a)(3) would establish the principle that securities that must be held in order to meet an issuer's minimum ownership requirements for directors or executive officers will, by definition, be treated as acquired in connection with service as a director or executive officer. We believe this concept is not compelled by the language or intent of Section 306 of the Act, would prove extremely difficult to administer in practice and creates an undesirable chilling effect on issuer programs of this nature. An interpretation consistent with the intent of Section 306 would limit the "in connection with" requirement to situations where there is a clear causal link between the acquisition and the individual's employment.
The administrative difficulties of the proposal should also be considered. Although the concept of share ownership guidelines is simple, they can become quite complex in practice. What interests in issuer stock count toward the guidelines and would therefore be considered subject to the rule? Only nonforfeitable shares held directly, or do shares held by family members count? What about restricted stock, shares in 401(k) plans or phantom stock in deferred compensation plans? Frequently these guidelines are relatively informal and are not precisely drafted or kept up-to-date, giving rise to variations in interpretation.
Most important, however, is the unnecessary chilling effect that the overly broad requirements of the proposal would have on stock ownership guidelines. Companies adopt stock ownership guidelines to further the same objectives as the Act in general, and Section 306 in particular. Minimum ownership requirements are intended to foster long-term share holdings, enhance a culture of ownership among managers and deter pursuit of short-term gains. It would be counterproductive, therefore, to discourage adoption of these programs. If this proposal were adopted, whenever a company was considering the adoption or continuation of stock ownership guidelines, it would need to consider the possible impact of Regulation BTR on the program, instead of evaluating the guidelines on their merits. This seems to be a needless burden to impose on a device designed entirely to serve the interests of shareholders. The reference to minimum ownership requirements in proposed Rule 100(a)(3) should be deleted.
C. Transactions Exempt from Trading Prohibition of Section 306(a)
We believe the list of transactions exempt from Section 306(a)(1) should be expanded. The additional transactions described below neither provide the opportunity for improper self-dealing nor present the apparent unfairness the statute was designed to address,2 and should therefore be exempt:
1. Bona Fide Gifts.
Bona fide gifts made by an Insider should be exempt, as they are under Section 16. Gifts are made without the expectation of profits, and thus the policy reason behind Section 306 of the Act - to prevent Insiders from profiting at a time when rank and file employees cannot - is not violated by the making of a gift.
Bona fide gifts made to an Insider also should be exempt, as they are under Section 16. Otherwise, under Proposed Rule 101(b), they could be deemed acquisitions in connection with service or employment as an Insider. It is patently clear that a bona fide gift to the Insider is not an acquisition in connection with service or employment, since transfers in connection with service or employment would be compensation and not a gift. Therefore gifts to an Insider should be exempt.
2. Acquisitions and Dispositions on Death.
We assume that since transfers after death would occur when the individual is no longer an Insider, they are exempt from the Trading Prohibition.
Acquisitions by an Insider as a result of the death of another person would presumably only arise in rare instances, such as when an Insider is related to (and thus a natural beneficiary of) another security holder of the issuer. Such an acquisition is not within the purpose of the statute, since it would not arise as a result of the Insider trying to benefit himself at the expense of the rank and file employees, and would certainly not be volitional. Moreover, acquisitions resulting from the death of another would not be "in connection with service or employment."
3. Other Involuntary Dispositions.
Certain other involuntary dispositions should also be treated as discussed below:
Dispositions required by court order or administrative order such as a divorce proceeding should be exempt under Section 306(a) of the Act. These dispositions are not subject to manipulation.
Dispositions occurring as a result of diversification elections required under the Internal Revenue Code, mandatory distributions required under the Internal Revenue Code and transactions in connection with death, disability, retirement or termination of employment should be exempt. To the extent a diversification, mandatory distribution or transaction in connection with death, disability, retirement or termination of employment is required in a plan, the Insider would not have an advantage over rank and file employees, because rank and file employees' transactions in the plan would not be blocked. Diversification elections and mandatory distributions occur solely in tax-qualified plans that are subject to significant restrictions, including a requirement that they be broad-based. Thus, treating Insiders participating in these plans the same as rank-and-file employees offers no advantage to the Insider. Further, failure to permit an Insider to implement a diversification election or take a statutorily required distribution could potentially cause the plan to lose its tax-qualified status, which would have adverse tax consequences to the rank and file. Implementation of Section 306 should not put benefits of the rank and file at risk.
In addition, to the extent that the Commission does not give broad interpretation to the merger-related exception to the blackout period definition, as discussed in Part II.C below, dispositions of target securities held by target or acquiror Insiders in a merger of target with acquiror should be exempted from the Trading Prohibition.
4. Acquisitions and Dispositions Pursuant to Rule 10b5-1 Plan.
Section 306(a)(3) of the Act authorizes the SEC to grant exemptions for purchases or sales made pursuant to an advance election. We believe that it is appropriate to exempt transactions occurring pursuant to 10b5-1 plans. For ease of administration, we recommend that with respect to any 10b5-1 plan entered into more than six months prior to the commencement of a blackout period the Insider should conclusively be presumed to be unaware of the blackout period, and that in the case of any 10b5-1 plan entered into within six months of the commencement of the blackout period, but prior to the Insider's receipt of notice of the blackout period, the Insider should rebuttably be presumed to be aware of the blackout period. Moreover, we suggest that the language of Proposed Rule 101(c)(2) be modified to clarify that awareness of an "impending" blackout period would require awareness of the actual or expected beginning and ending dates of a specific blackout period (whether or not notice thereof has officially been given), and not merely awareness of the potential for a blackout period (as defined in Rule 100) to occur at an undetermined future date.
5. Other Acquisitions.
Involuntary acquisitions that are exempt from Section 16(b) of the Exchange Act, such as option grants or other equity awards, should be exempt under Section 306(a).
In addition, to the extent that the Commission does not give broad interpretation to the merger-related exception to the blackout period definition, as discussed in Part II.C below, acquisitions of acquirer securities by target or acquirer Insiders in a merger of target and acquirer should be exempted from the Trading Prohibition.
Other routine acquisitions and routine reinvestment of dividends under non-qualified deferred compensation arrangements should not be unlawful. For tax reasons, deferrals of compensation into a non-qualified deferred compensation plan (whether elective or automatic) must be made pursuant to a prior election or plan provision. Where deferrals are invested in (or deemed invested in) issuer equity securities, it is typical for dividends (or dividend equivalents) to be reinvested (or deemed reinvested) in additional shares. The continued normal operation of these plans during a blackout period is not contrary to the purpose of Section 306(a) where the election (or plan provision) was made (or adopted) prior to the issuance of a notice of the impending blackout period. Such prior elections (or previously established plan operations) are similar to operations under Rule 10b5-1 plans. Where the transactions meet the requirements for Rule 10b5-1 plans, they should be exempt as noted elsewhere in this comment. However, even if such transactions do not technically qualify for Rule 10b5-1 treatment, they should be exempt as long as the election (or plan provision) was made (or adopted) prior to the issuance of notice of the impending blackout period.
6. Certain Derivative Securities.
In the case of option exercises and the exercise of stock appreciation rights (SARs) for stock, both the disposition of the derivative security and the acquisition of the underlying security should be exempt. The exercise of an option or SAR for stock neither reduces the Insider's market risk in a declining market (in fact, the Insider has real market risk after exercise), nor enhances an Insider's opportunities in a rising market (generally, the Insider has the same opportunity whether or not the option is exercised). In neither case is the executive advantaged over rank and file employees. This is sufficient justification for exercising the statutory discretion to grant exemptions. (Of course, any dispositions of issuer equity securities to finance an option exercise would not be exempt unless covered by another exemption.)
While we think it unnecessary as a practical matter, if the Commission believes there is a risk that the purpose of Section 306(a) could be thwarted by exempting the disposition of a derivative security in a blackout period that may have been granted in the same blackout period, the exemption for the conversion of derivative securities could be limited to derivative securities either granted in an exempt grant described in Item 5 above or granted at least six months prior to the commencement of the blackout period. We believe the six-month bright line test is preferable to requiring a subjective determination of when the granting body became aware of the impending blackout period. Although it is conceivable that some blackout periods could take as long as six months to plan, there is little likelihood that the exact timing of the blackout period would be fixed more than six months in advance.
If it is determined, notwithstanding the lack of opportunity to gain advantage, that option exercises and SAR exercises for stock during a blackout period should not be exempt, then there should nevertheless be an exception for options and SARs that would otherwise expire in the blackout period. Unlike options and SARs, funds held in individual account plans subject to blackout periods do not have a fixed term. No rank and file employee is at risk that a unique opportunity to acquire issuer securities will expire during a blackout period. Moreover, as noted above, the exercise of an option or an SAR for stock does not reduce an Insider's market risk.
II. DEFINITION OF "BLACKOUT PERIOD"
Section 306(a)(4)(A) of the Act defines the term "blackout period" to mean any period of more than three consecutive business days during which the ability of not fewer than 50% of the participants or beneficiaries under all individual account plans maintained by the issuer to purchase, sell or otherwise acquire or transfer an interest in any equity security of such issuer held in such an individual plan is temporarily suspended by the issuer or by a fiduciary of the plan. The discussion below identifies certain interpretive questions that will arise under proposed Rules 100(b) and 102 and recommends that certain changes be made to these rules before they are finally adopted.
A. Duration of Plan Suspension.
As an initial matter, the Commission requests comment as to whether it would be appropriate for the Commission by regulation to shorten the three consecutive business day period required to constitute a blackout period under Section 306(a). We question the Commission's authority to shorten the blackout period threshold, where criminal liabilities are implicated. We believe that the three-day threshold requirement contained in Section 306(a) should not be changed.
The statutory three-day period represents a reasonable balance between the need to protect plan participants and the need to assure that issuers and their Insiders who may be subject to liability for failing to comply with the statute have adequate certainty as to what constitutes a blackout period under Section 306(a) and notice as to the application of a trading prohibition. Shortening the period of time required to constitute a blackout period to one or two days would increase the number of interpretive questions arising under Section 306(a) and would significantly increase the administrative burden of complying with the Act's notice requirements.
The types of events most commonly giving rise to trading suspensions that affect individual account plans will typically result in blackouts lasting more than three days and will be planned many days in advance, so the statute as drafted adequately covers these events. Suspensions that last for fewer than three days are likely to be suspensions that are not planned, or known of, in advance - that is, unexpected or inadvertent suspensions. (We discuss issues presented by unexpected trading suspensions in further detail below, in "Exceptions to the Blackout Period Definition-Recommendation of Additional Exceptions-Unexpected Trading Suspensions").
Shortening the threshold will require further guidance on such issues as: How long must a trading suspension last on a single business day for it to contribute to the threshold? Will suspensions of a few hours be counted? Does the time of day during which the suspension occurs matter?
The Commission should not consider shortening the three-day threshold established by Congress unless and until it has substantial evidence that a shorter period is necessary to prevent evasion of the purposes of the Act.
B. Individual Account Plans.
The Section 306(a) trading prohibition is triggered if and only if there is a trading suspension meeting the statutory requirements that applies to the requisite number of participants and beneficiaries of individual account plans maintained by the issuer. We believe that issuers will have a difficult time determining when and whether certain administrative actions taken with respect to their employee benefit plans will trigger the Section 306(a) trading prohibition. Therefore, we believe that an important function of the final Section 306(a) rules and the release issuing these rules should be to clarify which plans and which plan events do and do not implicate this new insider trading prohibition.
Section 306(a)(5) and Proposed Rule 100(j) define an "individual account plan" for purposes of the Section 306(a) trading prohibition. As defined, an individual account plan must be a "pension plan" under the ERISA rules, meaning a plan that includes the required income deferral feature.3 As summarized in the Release, this definition encompasses a variety of pension plans, including 401(k) plans, profit sharing and savings plans, stock bonus plans and money purchase pension plans, as well as certain non-qualified deferred compensation plans. The final Section 306(a) rules should make clear that the only plans triggering a trading prohibition are pension plans as defined in ERISA, whether or not the plans involved are actually subject to the provisions of ERISA.
In addition, it would be helpful for the release containing the final Section 306(a) rules to specifically list certain types of employee benefit plans that are not included in the "individual account plan" definition. The release issuing the final Section 306(a) rules should explicitly state that other types of employee benefit plans, such as stock option plans, employee stock purchase plans (including one that complies with Section 423 of the Internal Revenue Code), restricted stock unit plans, performance share plans and certain deferred compensation plans will not constitute "individual account plans" if they are not a "pension plan" as defined in ERISA, so that a restriction on participants' rights to purchase, transfer into or out of a fund measured by issuer equity securities or convert from a derivative security to shares of the issuer would not result in a "blackout period" under Section 306(a).
Finally, trading suspensions applicable to individual account plans in which no issuer securities are actually held by participants or beneficiaries should not trigger a Section 306(a) pension plan blackout period or implicate the insider trading prohibition. Proposed Rule 100(b)(1) should specifically make this clear. The Section 306(a)(4) definition of blackout period refers to the suspension of the ability to purchase, sell, or otherwise acquire or transfer an interest in any equity of such issuer held in a plan. No blackout period can occur with respect to any equity securities of an issuer not held in a plan. A plan that either prohibits the acquisition of issuer equity securities or does not permit participants to manage the issuer equity investments should not be taken into account in determining whether a blackout affects 50% of the participants.
C. Exceptions to the Blackout Period Definition.
Section 306(a) and the proposed rules address two specific exceptions to the definition of blackout period. In addition to discussing issues raised by these two exceptions, we also suggest that the Commission should adopt three additional specific exceptions.
1. Current Statutory Exceptions.
Regularly Scheduled Blackouts. The statute and the proposed rules except from the definition of blackout period a regularly scheduled period in which the participants and beneficiaries may not purchase, sell or otherwise acquire or transfer an interest in any equity security of an issuer, if such period is incorporated into the individual account plan and timely disclosed to employees before they become participants in the plan or as a subsequent amendment to the plan.
As an initial matter, we interpret the term "regularly scheduled blackout period" to mean any plan trading suspension that occurs on a regular basis, regardless of its duration. For example, many plans provide that participants may make investment changes only on a periodic basis, for example, monthly or quarterly.
The Commission has requested comment as to whether it is necessary or appropriate to clarify and propose in Rule 102(a) that a regularly scheduled blackout period will be considered "incorporated" into an individual account plan if it is included in any of the documents or instruments, such as the summary plan description, under which the account plan operates. In practice, many communications with participants are considered part of the plan, even if they are not included in the plan document or the summary plan description.
For example, it is common for plan documents to delegate to the named fiduciary of the plan the power to establish arrangements to allow employees to make direct investment elections concerning their plan accounts. These policies are not required to be disclosed in the summary plan description and are frequently provided to the employee in general announcements or in enrollment materials. In some cases, notices of regularly scheduled blackouts are provided electronically to participants. These notices and communications become part of the documents and instruments under which the individual account plan is administered and should be deemed to be "incorporated" into the plan.
The Commission should retain the language in proposed Rule 102(a)(1) and should not restrict the form in which notice of regularly scheduled blackout periods may be given. In addition, the Commission should add a de minimis threshold with respect to this notice requirement such that the exception for a regularly scheduled blackout period would not be lost in the event some small number of plan participants (less than 2% of total plan participants) failed to receive timely notice of the blackout period and further provided the issuer or plan fiduciary provided notice promptly after discovering that such persons had not received notice.
To avoid an unnecessarily harsh result on certain issuers with respect existing plans, the Commission should also consider providing a transition period in which to comply with the timely notice requirement of Section 306(a) and proposed Rule 102(a)(2). Current Department of Labor regulations require issuers to deliver a summary plan description to a participant in a plan within 90 days after the employee becomes a participant. It is likely that there are many issuers who, in the past, provided notice of regularly scheduled blackout periods more than 30 days after a participant formally enrolled in a plan. Under the proposed rules, it appears that an employer who previously provided notice of a regularly scheduled blackout period in a summary plan description (or otherwise) within the time period specified by the Department of Labor could be forever barred from using the exception for regularly scheduled blackouts. To avoid this result, the final rules should make clear that issuers have an opportunity to cure any past failures to give notice by providing notice of the regularly scheduled blackout periods to all participants within a reasonable period after the effective date of Section 306(a).
Similarly, issuers that fail to give timely notice under proposed Rule 102(a)(2) should be able to obtain periodic cures as long as the notice is given within a specified period before the beginning of a regularly scheduled blackout period.
Merger-Related Blackouts. Section 306(a)(4)(B)(ii) provides that a suspension otherwise covered by the statutory blackout definition that is imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, in an individual account plan by reason of a corporate merger, acquisition, divestiture, or similar transaction involving the plan or plan sponsor will not be considered a blackout period under Section 306(a). Proposed Rule 102(b) provides that a suspension otherwise covered by proposed Rule 100(b) will not be considered a blackout period if the principal purpose of the suspension is to permit persons affiliated with the acquired or divested entity to become participants or beneficiaries, or to cease to be participants or beneficiaries, in an individual account plan following a corporate merger, acquisition, divestiture or similar transaction involving the plan or plan sponsor.
The Commission should interpret the exception provided by Section 306(a)(4)(B)(ii) as broadly as possible. Rule 102(b) should make clear that trading suspensions occurring as a result of or in connection with a corporate or plan merger are deemed to be made solely in connection with participants and beneficiaries becoming or ceasing to be such. In addition, the rule should not refer to persons "affiliated" with the acquired or divested entity, as the term "affiliate" has connotations from other contexts that are inappropriate here. Finally, the exception should not be restricted to those suspensions taking place "following" a merger or other transaction, but rather should be those taking place "in connection with" such transactions. To this end, target Insiders holding target equity securities will be involved in transactions involving those securities during what would likely be under this more restrictive approach a pension plan blackout period - the Insiders will be disposing of target securities in connection with the closing of the merger.4
Permanent Trading Suspensions. Under Section 306(a)(4)(A), a blackout period occurs only if there is a temporary suspension of trading. Permanent restrictions on trading in issuer equity securities held in individual account plans should not implicate Section 306(a).
In light of the questions that have been raised by issuers to date, it would be very helpful if the release adopting Regulation BTR noted that the following common situations do not involve the type of blackout covered by the Regulation:
- The inability of a participant in an individual account to direct the sale of issuer equity securities in the employer matching contribution account in a plan that prohibits participants from exercising any investment control over issuer securities contributed to the plan through employer matching contributions (and that either does or does not permit participants to acquire issuer securities through employee contributions).
- The inability of participants in an individual account plan to direct the acquisition of issuer equity securities in a plan that permits participants to dispose of issuer securities contributed (through employer matching contributions) to their accounts but prohibits them from directing the investment of their accounts to acquire any additional issuer securities.
- The inability of participants to control the investment of their account in target or acquirer securities where an issuer acquires a target company that maintains a 401(k) plan that permits participants to invest their own contributions into stock issued by the target company. After the closing of the acquisition the issuer/acquirer amends the plan of its new subsidiary to provide that participants may no longer invest their contributions in either target or acquirer securities.
- The inability of participants in an individual account plan to control investment of their account in issuer equity securities in a plan that permits investments in issuer securities after the issuer amends the plan to provide for the sale of the issuer securities held by the plan and to further provide that no issuer securities may be held by the plan in the future.
- The inability of participants in an individual account plan to control investment of their account in issuer equity securities where the plan limits the amount that a participant may invest in issuer stock. For example, a plan may provide that no more than 25% of a participant's account may be invested in issuer stock.
- The inability of participants to control investment of their account in issuer equity securities in an employee stock ownership plan, which does not allow employees any investment control in the assets held in their respective accounts.5
These examples all reflect permanent trading restrictions applicable to individual account plans, which are therefore not included in the definition of blackout period.
2. Recommendation of Additional Exceptions.
In addition to the statutory exceptions, we recommend that the Commission should create additional exceptions from the definition of a Section 306(a) blackout period for trading suspensions that occur under the following circumstances:
- General Trading Suspensions - Trading suspensions that are not specific to individual account plans (although they may incidentally apply to issuer securities held in such plans), such as insider-trading policy-related suspensions and contractual lock-ups; and
- Unexpected Trading Suspensions - Trading suspensions that are unplanned and outside the control of the issuer or plan fiduciaries, such as those resulting from unexpected computer failures, natural disasters and the like.
We discuss these two situations in turn.
General Trading Suspensions. Trading suspensions that apply to issuer securities generally and that are not specific to individual account plans should not trigger the Section 306(a) trading prohibition, even if they incidentally apply to issuer securities held in such plans. Examples of such general suspensions include blackout periods under issuer insider trading policies and contractual trading restrictions (for example, underwriter "lock-up" arrangements that commonly apply to all or most issuer employees holding company equity securities for six months following an issuer's initial public offering).
There is a statutory basis for concluding that these trading suspensions are outside the scope of Section 306(a). Section 306(a)(4)(A) requires that plan trading be "suspended by the issuer or a fiduciary of the plan." General trading suspensions that incidentally apply to individual account plans should not be deemed to be imposed by the issuer or a plan fiduciary. Although there is inevitable issuer involvement in these trading suspensions, the insider trading policy blackout period should properly be viewed as if it were a trading suspension imposed by federal law rather than by the issuer,6 and contractual lock-ups should be seen as imposed by the third party who requires the lock-up.
Section 306(a) was intended to address the specific situation that occurred in Enron, where employees were precluded from trading issuer stock held in their retirement plan accounts while Enron executives freely sold their (non-plan) company stock in the market.7 Applying the Section 306(a) trading prohibition to an insider trading policy suspension or a contractual lockup would go beyond the intended reach of the statute. When these types of suspensions are imposed, executive officers and directors are the first issuer securityholders whose transactions are suspended. Treating these trading suspensions as blackout periods under Section 306(a) would be largely redundant as regards the Insiders' ability to trade in issuer securities. The categories of additional transactions in which Insiders would be permitted to engage if these suspensions are not considered pension plan blackout periods subject to Section 306(a)8 do not present concerns from the perspective of the issuer's other employees or the public.
Further, if general trading suspensions of the type described above were considered pension plan blackout periods, the Section 306(a) notice requirements would be problematic for companies and could require that sensitive corporate events be reported on Form 8-K in advance of the time that the issuer would otherwise be required to report the corporate event itself.
The Commission should consider providing an exclusion from the definition of blackout period similar to the exclusion found in Section 306(b)(7)(B)(i) for suspensions that occur by reason of the application of the securities laws.
Unexpected Trading Suspensions. As described above, in order for there to be a blackout period under Section 306(a), trading must be temporarily suspended by the issuer or a fiduciary of the plan. Unexpected suspensions in trading caused by circumstances beyond the control of the issuer or the plan fiduciaries - such as power or equipment failures, and natural and manmade disasters - should not trigger a blackout period because in these circumstances neither the issuer nor a plan fiduciary suspends trading. Rather, trading is "automatically" suspended.
Most of these inadvertent trading suspensions will be corrected within a relatively short period of time and the three-day threshold requirement discussed above will likely result in few such suspensions constituting Section 306(a) blackout periods. Nonetheless, unexpected suspensions that last more than three days should not be deemed to be blackout periods under Section 306(a). If the Commission determines that unexpected suspensions lasting more than three days should be subject to Section 306(a), it will need to provide guidance so as to avoid the problems issuers will face in complying with the Section 306(a) notice requirements in these circumstances. For example, if an issuer experiences a suspension of trading in individual account plans as a result of an unexpected computer failure, and it believes that the shutdown will be fixed within a day, but in fact the shutdown continues for five days, the issuer would not be aware that it is experiencing a blackout period until the second or perhaps even the third day of the shutdown. Under these circumstances, the issuer should be given a reasonable period of time following that time to provide a Section 306(a) notice and to file the Form 8-K (for example, until the end of the fourth day of the shutdown). The Section 306(a) trading prohibition should not apply until such Section 306(a) notice is required to be provided.
D. Application of 50% Test under Blackout Period Definition
We believe that it is appropriate to use the controlled group concepts in Internal Revenue Code Sections 414(b), (c), (m) and (o) (the "414 Rules") to aggregate plans maintained by an issuer and its affiliates in determining whether blackout periods under an issuer's plans affect 50% or more of the participants. Without any aggregation rules, issuers might be tempted to structure entities and separate plans to avoid the effect of Section 306. We believe the aggregation rules applicable to tax-qualified plans are the appropriate rules to use because most plans subject to blackout periods will be tax-qualified plans. Issuers will have participant data collected and sorted for those plans based on the 414 Rules. To apply different aggregation rules would require separate determinations of which entities are in a given controlled group, and a re-sorting of data to determine whether there is a statutory blackout period. We see no benefit to having separate rules for blackout periods. Similarly, we see no reason to carve out exceptions for portions of the 414 Rules, even though some portions - such as the rules regarding service organizations under Section 414(m) - may not seem directly relevant to the purposes of the Act.
Under proposed Rule 100(b)(1), a temporary suspension would only be a "blackout period" if it applies with respect to "not fewer than 50% of the participants or beneficiaries" under all individual account plans. The following items should be clarified, either in the release covering the final rule or in a footnote:
(1) In determining the number of participants and beneficiaries in a plan, the issuer may use data as of any convenient date within the twelve-month period preceding the blackout period. In most cases, this will permit issuers to refer to the most recent Form 5500, the annual return/report required to be filed with the IRS for tax-qualified plans, in order to determine the number of participants and beneficiaries in those plans. To require a different date or different means of counting would be unduly burdensome for the marginally more precise number such a requirement might generate. If there has been an acquisition, disposition or merger since the number was derived, issuers should be required to make a reasonable estimate of the effect on the number of participants and beneficiaries.
(2) No adjustment to the number of participants or beneficiaries needs to be made if an individual is a participant or beneficiary in more than one plan. To have a different rule, for example a rule prohibiting "double counting" an individual who is a participant in more than one plan, would require ordering rules for allocating each individual to only one plan, and possibly different rules for calculating the total number of participants or beneficiaries in the relevant plans versus the number subject to the blackout. Moreover, issuers would be required to go behind numbers collected and reported for other reasons (e.g., Form 5500) which is undesirably complex, especially where there may be numerous employees transferred among affiliates who have account balances in several different plans.
III. REMEDIES: DETERMINATION OF PROFITS
We urge the Commission to adopt a specific formula for the determination of "realized profits" under Section 306(a). As the Commission indicated in the Release, there are a number of possible approaches to determining the measure of profits, with no guidance provided by the statute. Leaving this determination to the courts would result in needless uncertainty and a potential for different approaches to be taken by different courts.
We believe that the appropriate measure of profits for purposes of Section 306(a) should be the difference between the price paid or received by the Insider during the blackout period and the price the Insider would have paid or received if the transaction had taken place on the first trading day after the end of the blackout period. If, however, option exercises are not exempted from the Trading Prohibition, the amount of recoverable profit should be limited to the difference between the market price of the underlying security on the date of exercise and the market price on the first trading day after the end of the blackout period, in a manner similar to Rule 16b-6(d). This measure seems the most consistent with the purpose of Section 306(a) as expressed in the legislative history of the Act - to prevent officers and directors from profiting by selling their company stock at a time when employees were prevented from selling the company stock held in their retirement plans. The measure of "profits" under Section 306(a) should thus be designed to put Insiders in the same place they would have been had they waited to trade until the end of the blackout period.
The other alternatives identified in the Release are problematic in that they seek to match a sale during the blackout period with an earlier purchase price of company stock (or a purchase during a blackout with an analogous sale). While finding a matching purchase and sale is familiar from the Section 16(b) context, there is nothing in either the language or legislative history of Section 306(a) that supports using such a measure. Indeed, the measure of profits we recommend closely parallels the measure of damages in Rule 10b-5 cases, the level of which (a single trade based on inside information) is akin to the level addressed by Section 306(a).
IV. APPLICATION TO FOREIGN PRIVATE ISSUERS
A. Clarification of Treatment of Foreign Private Issuers who file Information with the SEC pursuant to Rule 12g3-2(b)
Proposed Regulation BTR should clarify that foreign private issuers who are exempt from registration under the Exchange Act because they file information with the SEC pursuant to Rule 12g3-2(b) are not subject to the provisions of Section 306(a) because they do not meet the definition of "issuer" in Section 2(a)(7) of the Act. This clarification could be included in a footnote to the explanation preceding the text of the Regulation BTR relating to the discussion of foreign private issuers in II.B.1.(a).9
B. Impact of Proposed Regulation BTR on Foreign Private Issuers
The staff has requested comments on the impact that Section 306(a) and proposed Regulation BTR have on the willingness of foreign private issuers to raise capital in the public U.S. capital markets, to list on U.S. markets and to register their securities under the Securities Act or the Exchange Act, as well as whether the application of proposed Regulation BTR would unduly discourage foreign private issuers from implementing equity-based compensation plans for the benefit of their U.S. based employees. Finally the staff requested comments on whether proposed Regulation BTR should apply more broadly to foreign private issuers.
Until a period of time has passed after the implementation of Regulation BTR, it will not be possible to determine its impact on foreign private issuers. However, we do not believe that Regulation BTR alone would discourage such issuers from raising capital in the public U.S. capital markets, to list on U.S. markets or to register under the Securities Act or the Exchange Act. However, we do believe that Regulation BTR, as proposed, would make foreign issuers rethink whether they want to offer their equity securities to their U.S. employees in broad-based individual account plans. Because option plans and stock purchase plans are not individual account plans, the use of these plans should not be affected.
We do not believe that Section 306(a) applies to foreign private issuers that do not meet the definition of "issuer" under the Act. For a foreign private issuer that is an "issuer" as defined under the Act, Section 306(a) should only apply if its executive officers and directors can be reasonably expected to become aware of a trading blackout imposed on US employees and the consequent restrictions under U.S. law. Unlike many other provisions of the Act, Section 306(a) imposes liability for individual conduct that is unlikely to raise concerns of any kind under the laws of an issuer's home country. The inclusion of these individuals in a prohibition that may well go beyond the jurisdictional powers of the U.S. would be futile and has the potential to weaken the overall integrity of our regulatory system. Section 306(a) can be readily distinguished from the requirements of the Act that seek to ensure adequate standards of corporate governance and financial accountability for all issuers seeking to raise capital in the U.S. or trade on a U.S. exchange. Section 306(a) was designed primarily to ensure fairness to employees, rather than to protect investors as such. Fairness demands that its sanctions only apply to executive officers and directors whose connection with the U.S. is sufficiently close that they are likely to learn of a blackout period and appreciate its U.S. legal significance.
Section 306(a) and proposed Regulation BTR focus on the inability of pension plan participants in U.S. plans to trade in equity securities of their employer due to a temporary blackout period when executive officers and directors could do so outside the plan during such period. With few exceptions, the plans offering equity securities of foreign private issuers are offered through plans of such issuers' U.S. subsidiaries. In most cases, these plans are administered by the U.S. subsidiary and its third party service providers with little, if any, oversight by, or input from, the home office. Since foreign private issuers are exempted from the Exchange Act's Section 16 insider trading rules, the concept of disgorgement of profits, as required by Section 16(b) is foreign to such issuers' executive officers and directors.
In response to the staff's request for comments, we do not think that proposed Regulation BTR should apply more broadly to foreign private issuers than as currently proposed, and, in fact, believe that it should not apply to such issuers. In this regard, we note that proposed Regulation BTR would not apply if the blackout period affected only plan participants or beneficiaries located outside the U.S. "This approach is consistent with the purposes of the statute. We believe that, in enacting Section 306(a), Congress was seeking principally to protect pension plan participants located in the U.S., and generally leaving to foreign authorities issues related to the interests of plan participants located outside the U.S. It also conforms to our policy of focusing the protections of the federal securities laws on U.S.-based investors."10
Accordingly, we suggest that foreign private issuers should only be subject to Section 306(a) if (i) a majority (or perhaps some lesser percentage) of their senior management are located in the U.S., (ii) more than 50% of the assets of the issuer are located in the U.S., or (iii) the business of the issuer is administered principally in the U.S., provided, in each case, a majority of the voting securities of the issuer are held by U.S. residents. These are familiar tests from Rule 3b-4 under the Exchange Act, which defines "foreign private issuer," and would limit the application of Section 306(a) to those issuers with a fair chance of knowing that a blackout period was about to take place. In other words, a foreign private issuer that met any one of the multiple tests under Rule 3b-4 would be subject to Section 306(a). We submit that this is an appropriate standard for imposing liability on conduct that may be completely innocent from the perspective of management located in another jurisdiction with its own set of restrictions on insider trading. The theoretical alternative, taken to its logical conclusion, is a global patchwork of trading restrictions that impose impossible complexity on otherwise lawful conduct.
Our proposal stops well short of the complete exclusion for foreign private issuers that applies in the Section 16 context. It would subject foreign private issuers whose management has a close connection to the US to the restrictions of Section 306(a), but exclude companies whose business and management are largely remote from U.S. operations.
C. Persons Subject to Trading Prohibition
Because foreign private issuers are not subject to Section 16 of the Exchange Act, proposed Regulation BTR provides definitions of "director" and "executive officer" which are more limited than the definitions applicable to domestic issuers. We agree that these more limited definitions are appropriate.
D. Fifteen Percent Test for Blackout Periods Affecting Plans of Foreign Private Issuers
To the extent that the final Regulation BTR applies to foreign private issuers, it should only apply if the special percentage test for blackout periods affecting plans of foreign private issuers is revised. The test as currently drafted in the proposed BTR will not provide the relief intended for foreign private issuers.
In many countries, the concept of individual account plans -- or pension plans with individual accounts for each participant with benefits based on amounts contributed to individual accounts -- has no meaning. Such plans are common in the U.S. and in a few other countries, such as Canada, but cannot be applied to the type of pension plans, which by law can be provided to employees in most foreign countries.11 In many other countries, employers do not, or because of local laws, cannot, sponsor individual account plans. Because the proposed 15% test compares the number of participants and beneficiaries in individual account plans located in the U.S. subject to the temporary suspension in trading in equity securities of the employer/foreign private issuer to the overall number of participants or beneficiaries under all individual account plans maintained by the issuer worldwide, the 15% test will likely be met whenever the concurrent 50% test is met. For example, where the only individual account plans maintained by the foreign private issuer worldwide are those covering employees located in the U.S., whenever the 50% test is met, the 15% test would also be met. This would be true even though the employees in the U.S. only comprise less than 5% of the foreign private issuer's worldwide employees.
We suggest that the 15% test compare participants and beneficiaries affected by the blackout who are located in the U.S. to the total worldwide number of employees of the foreign private issuer. By comparing the number of participants and beneficiaries affected to the worldwide workforce of such issuers, Section 306(a) and proposed Regulation BTR would apply to foreign private issuers only where the number of participants and beneficiaries in the U.S. were a significant portion of such issuer's employees.12
We also suggest that the 15% threshold be increased where the amount of capital raised in the US by the foreign private issuer is less than 15% of the total capitalization of such issuer. In such case, we suggest the threshold be set at 25%.
V. NOTICE OF PENSION PLAN BLACKOUT PERIODS
A. Notice to Officers and Directors
We believe that any of the advance notice periods (10 days, 15 days or 30 days) proposed in the Release is acceptable. We also believe that there should not be an outside maximum period for providing such notice. A blackout period for Section 306(a) may frequently be caused by a blackout period for which 30 days notice is required to be given under Section 306(b). It is common for these blackout periods to be planned well in advance, and notice is frequently given several times in different forms more than 30 days ahead of the beginning of the blackout period. Although we expect that many issuers may well send reminders to executives of the effective and upcoming blackout, we do not believe that such a notice should be required.
B. Notice to Commission
The Commission has proposed that notice to the Commission be provided by means of Form 8-K. We strongly object to this proposed requirement.
The Commission has stated that it believes that the principal purpose of this requirement is to ensure that an issuer's security holders have notice of the blackout period so that they can monitor compliance with the statutory trading prohibition. We doubt that that was the intent of Congress when it enacted that provision. When Congress intended that public disclosure be made, it included specific provisions to that effect (as under Section 403 of the Act). In other provisions of the Act, when Congress intended that Form 8-K be filed, it included specific provisions to that effect (as in Section 406(b) of the Act). The absence of any public disclosure requirements in Section 306(a) indicates that Congress did not believe it was important to file Form 8-K or give public notice in order to give notice to the Commission. Section 306 only requires notice to the Commission; it does not require the giving of notice to shareholders. Requiring a notice to be filed on Form 8-K will give a false signal that there is some importance attached to the notice. We do not believe this result was intended by Congress.
Under the standard set forth in the proposed disclosure item under Form 8-K, an issuer may be obliged to file a Form 8-K well in advance of the date it would be required to give notice of a blackout period to employees. For example, whenever an issuer decides to replace the record-keeper for a plan, (a circumstance which will invariably result in a blackout period) the personnel at the issuer who oversee the plan will have "actual knowledge" of an impending blackout period, even if that blackout period will not commence for several months, and even if the precise timing of the transfer of record-keeping responsibility and related blackout period is as yet unknown. Prior to the time when notice would be given to participants (or, in the case of an unforeseen blackout, the commencement of the blackout period), there may not be a distinct and formal event which would trigger the proposed Form 8-K disclosure obligation.
We note that when the Commission proposed earlier this year13 to require issuers to disclose any known event that would have the effect of materially limiting, restricting or prohibiting participants in a plan from acquiring, disposing or converting their holdings, other than a periodic or other limitation, restriction or prohibition based on presumed or actual knowledge of or access to material non-public information, the Commission stated that this proposed disclosure would not be necessary when a company imposes temporary trading "blackouts" on its senior officers and directors because they possess material non-public information, such as during the period surrounding the announcement of an earnings release or during negotiation of a merger agreement. We believe that the approach of the Commission to exclude giving notice of those events was correct. That approach should be the approach taken by the Commission under Regulation BTR. Therefore, Regulation BTR should specify that issuers will satisfy the notice requirement by providing the required information in a letter addressed to the Commission that would be treated as "correspondence" and would not be publicly filed.
If, despite the absence of any language in the Act mandating that issuers make public disclosure of blackout periods, the Commission determines that a public filing of some sort is necessary, we believe that the approach suggested in the proposing release for foreign private issuers would more than suffice for domestic issuers. An issuer could be required to file as an exhibit to its next periodic report a copy of the notice it was required to give to its employees in connection with any blackout period that commenced during the period covered by the report. In contrast to employees, whose investment choices are constrained by the imposition of a blackout period, we see little need for securityholders to have advance notice of a blackout period. Because a lawsuit to recover profits arising from a violation of Section 306(a) of the Act may be brought for up to two years following the violation, the filing of the notice of a blackout period as an exhibit to an issuer's next periodic report will provide timely information to those securityholders who desire to monitor compliance with the Act.
We appreciate the opportunity to comment on the Proposals, and would be pleased to discuss any questions the Commission may have with respect to this letter. Any questions about this letter may be directed to Stanley Keller (617) 239-0217 or Anne G. Plimpton (617) 248-7514.
Chair, Committee on Federal
Regulation of Securities
Anne G. Plimpton, Chair
Pamela C. Baker
Alan L. Dye
Sharon J. Hendricks
George R. Ince, Jr.
William H. Schmidt
David A. Schuette
Max J. Schwartz
Susan P. Serota
Scott P. Spector
cc: The Honorable Chairman Harvey L. Pitt
Commissioner Paul S. Atkins
Commissioner Roel C. Campos
Commissioner Cynthia A. Glassman
Commissioner Harvey J. Goldschmid
Alan L. Beller, Director, Division of Corporation Finance
Martin P. Dunn, Deputy Director, Division of Corporation Finance
|*|| References in this letter to "we" and "our" mean the Committee.
|1|| We assume that "such an equity security" in proposed Rule 101(b) refers to "equity security acquired in connection with his or her service" in proposed Rule 101(a) (rather than "equity security of the issuer" in proposed Rule 101(a), as some have argued; perhaps this could benefit from clarification).
|2|| The preamble to the Proposed Rules states the purpose for the statutory prohibition on insider trading during a blackout period: "Section 306(a) is designed to address the apparent unfairness of an issuer's directors and executive officers being able to sell their equity securities when the issuer's employees cannot. The statute's trading prohibition should mitigate the risk that corporate executives are putting their personal interests ahead of their responsibilities to their companies, their employees and their companies' security holders."
|3|| See Section 3(2)(A) of ERISA.
|4|| We refer to the types of transactions discussed in the Commission's letter to Skadden, Arps, Slate, Meagher & Flom, dated January 12, 1999, which transactions may also involve acquiror Insiders disposing of target securities, as well as acquiror Insiders (including former target Insiders) acquiring acquiror stock as a result of the transaction.
|5|| The only exception to this practice is that under applicable tax laws ESOPs must allow participants who have attained age 55 and completed 10 years of service to elect to diversify their accounts (including to dispose of issuer securities). It may, however, be appropriate for Section 306(a) to apply to a blackout period applicable to such a diversification right.
|6|| Treating Rule 10b-5 type restrictions under insider trading policies as imposed by applicable securities laws, would encourage issuers to be more conservative in adopting corporate policies responsive to Rule 10b-5 concerns.
|7|| See Note 2 above.
|8|| In the case of Insider trading blackout periods, Insiders would be permitted to exercise stock options or similar rights if Section 306(a) does not apply and would not be permitted to do so if it does. In the case of contractual lock-ups, which typically govern only sales and other dispositions of issuer securities, Insiders would be permitted to engage in purchases and other acquisitions of issuer securities (including option exercises and similar transactions) if Section 306(a) does not apply and would not be permitted to do so if it does.
|9|| Similar clarification was included in SEC Release No. 33-8124 and 34-46427, fn 42 (issued August 29, 2002).
|10|| Release No. 34-46778 at 4.
|11|| One type of plan, which might meet this definition, is a provident fund offered in some Asian countries.
|12|| We note that plans of foreign private issuers covering participants and beneficiaries located in the U.S. have the protections afforded by the Employee Retirement Income Security Act of 1974, including the new notice provisions of Section 306(b) of the Act.
|13|| See Release No. 33-8090 (issued April 12, 2002).