Association for Investment Management and Research
The U.S. Advocacy Committee
9 January 2003
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459
Re: Insider Trades During Pension Fund Blackout Periods-File No. S7-44-02
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on the SEC's proposed rule addressing insider trades during fund blackout periods. The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.
USAC strongly supports Section 306(a) of the Sarbanes-Oxley Act that prohibits certain corporate insiders from seeking to benefit from transactions in equity securities of the company during pension plan blackout periods if the securities were acquired in connection with that person's service or employment with the company. We believe that the proposal's tone and clarifications of this section generally set the appropriate parameters for restricting a company's directors and executive officers from using inside information to take advantage of investment opportunities in the company's pension plan that are not concurrently available to the company's employees.
AIMR's Standards of Professional Practice, to which all members, CFA charterholders and CFA candidates must adhere, recognize that fiduciary duties require placing the interests of clients before one's own. Clarifications of Standard IV (B.1)-Fiduciary Duties provide that when a manager is responsible for the portfolios of pension plans or trusts, the client is not the person who hires the manager, but rather the beneficiaries of the plan or trust. Thus, the duty of loyalty is owed to the beneficiaries.
Similarly, we believe that directors clearly have a responsibility to act in the best interests of their clients. In the case of internal pension plans consisting of company stock, the "clients" are the employees who are the beneficiaries in those plans. It therefore follows that allowing a situation to exist whereby directors and executives officers can profit when employees cannot, flies in the face of basic notions of fairness, corporate integrity, and fiduciary duties. Thus, we agree with the proposed Regulation BTR, largely as originally drafted.
Blackout periods in company pension plans can address long-term ownership interests by restricting employees, including corporate officers, from participating in the company's pension plan until the lapse of a certain amount of time from the start of employment, as a means of encouraging long-term employment and ownership interest in the company. As drafted, however, we understand that the proposed regulation is designed not to address these types of blackout periods, but instead focuses on black out periods resulting from administrative purposes (e.g., changes in plan trustees, in investment alternatives, in the frequency of portfolio valuations).
Thus, we do not foresee any direct detrimental effect on company pension plans as a result of the proposed regulation. Instead, we believe that requiring directors and executive officers to observe the same limitations during blackout periods is an important step in restoring confidence in the corporate pension plan system.
We provide additional comments on several specific aspects of the proposal, below.
Foreign Private Issuers
We believe that Regulation BTR should apply to foreign private issuers, as drafted. In the interests of creating a "level playing field" and absent a compelling reason why foreign issuers should be treated differently, we support the extension of the trading prohibition to foreign private issuers when 50% or more of the participants or beneficiaries of the plans are located in the U.S. (and territories and possessions) and the employees affected by the blackout period represent a significant portion of the issuer's plan participants.
Securities Acquired in Connection with Service or Employment
We agree with the approach taken in proposed Exchange Act Rule 100(a)(1) to broadly define the range of equity security acquisitions that will be covered under the trading prohibitions of Regulation BTR. This definition focuses on equity securities acquired in connection with a director's or executive officer's employment or service in those positions. While we endorse this approach, we question the treatment to be afforded equity securities that were not acquired in connection with service or employment, but nevertheless, were traded during the blackout periods. We assume that in such cases, where the director or executive officer purchased or sold equity securities while in possession of material information that was acquired while in the role of director or officer position, existing insider trading laws would apply. If not, we urge the Commission to consider measures to close this potential loophole that would allow an individual to "bring" equity securities with him or her prior to employment or service with the issuer, and sell them at a profit (based on information acquired as a director or officer) during an employee blackout period.
We agree with the proposed timing of the blackout period. We believe that a period of more than three consecutive business days during which plan participants or beneficiaries are precluded from trading in equity securities of the issuer is an appropriate trigger.
As indicated above, we support the proposed provisions of Regulation BTR as an appropriate response to corporate management who tries to benefit through issuer stock transactions during blackout periods while employees are precluded from trading. If we can provide additional information, please do not hesitate to contact Deborah Lamb at 770.971.7010,
firstname.lastname@example.org or Linda Rittenhouse at 434.951.5333, email@example.com.
/s/ Deborah A. Lamb
Deborah A. Lamb
Chair, U.S. Advocacy Committee
|| /s/ Linda L. Rittenhouse|
Linda L. Rittenhouse
Staff, AIMR Advocacy
Cc: Members of the U.S. Advocacy Committee
Rebecca T. McEnally, CFA, PhD.,
Vice President-AIMR Professional Standards and Advocacy
|1 || With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional association of 61,000 financial analysts, portfolio managers, and other investment professionals in 114 countries of which 48,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 117 affiliated societies and chapters in 37 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.