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U.S. Securities and Exchange Commission

Securities Exchange Act of 1934 — Section 16

February 10, 1999

Response of the Office of Chief Counsel
Division of Corporation Finance


American Bar Association
Incoming letter dated January 20, 1999

You have asked the Division's views about the application of Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934 ("Exchange Act"). Our views are as follows:

1. Transactions With Subsidiaries. A transaction in issuer securities by an officer or director of the issuer will be considered a transaction with the issuer for purposes of Rule 16b-3(a) if the transaction is with:

  • a majority-owned subsidiary of the issuer, as defined in Exchange Act Rule 12b-2;1 or
  • an employee benefit plan sponsored by a majority-owned subsidiary.

However, the approval requirements of Rules 16b-3(d)(1), 16b-3(d)(2) and 16b-3(e) may be satisfied with respect to these transactions only if the approval is obtained from:

  • the issuer's board;
  • a committee of two or more Non-Employee Directors of the issuer; or
  • the shareholders of the issuer.

2. Excess Benefit Plans. Your letter describes certain supplemental non-qualified benefit plans ("supplemental plans"), operated in conjunction with related Qualified Plans, which permit employer contributions with respect to certain dollar amounts that are not income for federal income tax purposes. You ask whether these plans may be viewed as Excess Benefit Plans, as defined by Rule 16b-3(b)(2), in which transactions are exempted by Rule 16b-3(c). The following interpretations supersede American Express Company (Feb. 26, 1997).

  1. The annual compensation limit in Section 401(a)(17) of the Internal Revenue Code will be considered a "benefit or contribution limitation set forth in the Internal Revenue Code" within the meaning of Rule 16b-3(b)(2).
  2. A supplemental plan allowing employer contributions (other than matching contributions) that otherwise would have been contributed to the related Qualified Plan with respect to salary that is not compensation for purposes of Internal Revenue Code Section 415, because it has been deferred into a non-qualified plan, also will be considered to implement a "benefit or contribution limitation set forth in the Internal Revenue Code" within the meaning of Rule 16b-3(b)(2).
  3. However, the following plans, even if operated in conjunction with a Qualified Plan, are not Excess Benefit Plans. This is because the amount of issuer securities acquired will be determined based on the amount of salary the officer or director chooses to defer, rather than an objective measure derived from the Internal Revenue Code.
    • Any non-qualified plan that permits participants to defer a portion of their compensation into the plan (a "non-qualified deferred contribution plan"); and
    • Any supplemental plan that provides an employer matching contribution based on the employee's deferral of salary into a non-qualifed plan.

For purposes of applying the Rule 16b-3(c) exemption, a plan may not be bifurcated on a transaction-by-transaction basis. Accordingly, the Rule 16b-3(c) exemption will not be available to exempt any transaction made under these plans. However, acquisitions and dispositions of issuer equity securities under these plans may be eligible for exemption under Rules 16b-3(d) and 16b-3(e), respectively.

3. Aggregate Reporting. Acquisitions of phantom stock (including dividend reinvestments) that are exempted by Rule 16b-3(d) may be reported on an aggregate basis on Form 5, so long as they are periodic transactions under a non-qualified deferred compensation plan or a supplemental plan that is not an Excess Benefit Plan. This position supersedes the interpretive advice provided in American Express Company (Feb. 26, 1997). This position also supersedes the interpretive advice provided in American Bar Association (Dec. 10, 1996) Q. 4(d)(2), but only with respect to phantom stock units acquired on a periodic basis under these types of plans.

4. Transactions in Which an Officer or Director Has an Indirect Pecuniary Interest. Rule 16b-3 is available to exempt an officer's or director's indirect interest in transactions between the issuer and:

  • a partnership or corporation in which beneficial ownership of the securities is reportable by the officer or director pursuant to Rule 16a-1(a)(2);
  • a member of the officer's or director's immediate family where Rule 16a-1(a)(2)(ii)(A) requires the officer or director to report a pecuniary interest; and
  • a trust where Rule 16a-8(b) requires the officer or director to report holdings and transactions.

In order to satisfy the specificity requirements of Note 3 to Rule 16b-3 for purposes of applying the approval conditions of Rules 16b-3(d) and 16b-3(e) to these transactions, the approving entity must know and the document evidencing the approval must specify:

  • the existence and extent of the officer's or director's indirect interest in the transaction; and
  • that the approval is granted for purposes of making the transaction exempt under Rule 16b-3.

Because these positions are based on the representations made to the Division in your letter, it should be noted that any different facts or conditions may require different conclusions.


Anne M. Krauskopf
Special Counsel


Incoming Letter:

The Incoming Letter is in Acrobat format.


Modified: 04/26/2007