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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 240 and 249
[Release Nos. 34-37260; 35-26524; IC-21997; File No. S7-21-94]
RIN 3235-AF66
Ownership Reports and Trading by Officers, Directors and
Principal Security Holders
AGENCY: Securities and Exchange Commission
ACTION: Final rules
SUMMARY: The Securities and Exchange Commission ("Commission")
is adopting amendments to its rules and forms regarding the
filing of ownership reports by officers, directors, and principal
security holders, and the exemption of certain transactions by
those persons from the short-swing profit recovery provisions of
Section 16 of the Securities Exchange Act of 1934 ("Exchange
Act") and related provisions of the Investment Company Act of
1940 ("Investment Company Act") and the Public Utility Holding
Company Act of 1935. The revised rules are intended to
streamline the Section 16 regulatory scheme, particularly with
respect to transactions between an issuer and its officers and
directors; simplify the reporting system; broaden exemptions from
short-swing profit recovery where consistent with the statutory
purposes; and codify several staff interpretive positions.
DATES: Effective date: August 15, 1996. The phase-in period
for Rule 16b-3 is extended until November 1, 1996 pursuant to
Release No. 34-37261. For a discussion of transition provisions,
see Section VII.
==========================================START OF PAGE 2======
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special
Counsel, Office of Chief Counsel, or Elizabeth M. Murphy, Special
Counsel, Office of Disclosure Policy, at (202) 942-2900, Division
of Corporation Finance, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments
to Rules 16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3,
and 16b-6 -[1]- promulgated under Section 16 -[2]- of
the Exchange Act. -[3]- The Commission also is amending
Rule 16b-2 -[4]- and redesignating it as Rule 16a-11,
-[5]- and adopting new Rules 16a-12 and 16a-13. -[6]-
Finally, the Commission is adopting revisions to Item 405 of
Regulation S-K -[7]- and Regulation S-B, -[8]- as well
as to Forms 3, 4, and 5. -[9]-
---------FOOTNOTES----------
-[1]- 17 CFR 240.16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-
8, 16a-9, 16b-3, and 16b-6. Throughout this
release, the term "current Rule or Form" refers to
the regulation as in effect before today's
amendments, while "new Rule or Form" refers to the
regulations as amended or adopted in this release.
-[2]- 15 U.S.C. 78p.
-[3]- 15 U.S.C. 78a et seq.
-[4]- 17 CFR 240.16b-2.
-[5]- 17 CFR 240.16a-11.
-[6]- 17 CFR 240.16a-12 and 16a-13.
-[7]- 17 CFR 229.405.
-[8]- 17 CFR 228.405.
-[9]- 17 CFR 249.103, 104 and 105.
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TABLE OF CONTENTS
I. EXECUTIVE SUMMARY AND BACKGROUND
II. TRANSACTIONS BETWEEN AN ISSUER AND ITS DIRECTORS OR OFFICERS
A. General Approach
B. Tax-Conditioned Plans
C. Discretionary Transactions
D. Grants, Awards and Other Acquisitions from the Issuer
1. General; Participant-Directed Acquisitions
2. Alternative Conditions
3. Scope of Approval Required
4. Non-Employee Director Definition
E. Dispositions to the Issuer
III. DERIVATIVE SECURITIES
A. Compensatory Cash-Only Instruments
B. Over-Allotment Options
C. Surrender and Withholding Rights in Connection with
Exercise or Tax Withholding
D. Value Derived from Market Price of an Equity Security
IV. REVISIONS TO REPORTING SYSTEM
A. Overall Approach
B. Transactions No Longer Reported at All
C. Transactions to be Reported on Form 5
D. Transactions to be Reported on Form 4
E. Joint and Group Reporting
F. Trust Transactions
G. Compliance with the Reporting Requirements
H. Equity Swaps
I. Changes in Forms and Reporting Codes
V. ADDITIONAL EXEMPTIONS AND REVISIONS
A. Dividend or Interest Reinvestment Plans
B. New Exemption for Domestic Relations Orders
C. Exemption for Stock Dividend Transactions
VI. 1995 SOLICITATION OF COMMENT REGARDING THE ON-GOING MERIT OF
THE SHORT-SWING PROFIT RECOVERY PROVISIONS OF SECTION 16
VII. TRANSITION TO NEW RULES
A. General Application
B. New Rule 16b-3
VIII. COST-BENEFIT ANALYSIS
IX. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
X. STATUTORY BASIS AND TEXT OF THE AMENDMENTS
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I. EXECUTIVE SUMMARY AND BACKGROUND
In February 1991, in response to developments in the trading
of derivative securities, the growth of complex and diverse
employee benefit plans, and substantial filing delinquencies, the
Commission adopted comprehensive changes to the beneficial
ownership and short-swing profit recovery rules and forms
applicable to insiders -[10]- pursuant to Section 16.
-[11]- While many aspects of the new Section 16 rules were
---------FOOTNOTES----------
-[10]- The term "insider," as used in this release,
refers to officers and directors of issuers with a
class of equity securities registered pursuant to
Section 12 of the Exchange Act, and holders of
more than ten percent of a class of equity
securities so registered. When referring to an
issuer with securities registered under Section
12, this release includes securities of closed-end
investment companies subject to Section 30(f) of
the Investment Company Act [15 U.S.C. 80a-29(f)
(1988)] and public utility holding companies
subject to Section 17 of the Public Utility
Holding Company Act of 1935 [15 U.S.C. 79q
(1988)]. The insiders of a closed-end investment
company also include the adviser and any
affiliated person of the adviser. Section 2(a)(3)
of the Investment Company Act [15 U.S.C. 80a-
2(a)(3) (1988)].
-[11]- Release No. 34-28869 (February 8, 1991) [56 FR
7242] ("Adopting Release"). The rules generally
became effective on May 1, 1991, except for the
phase-in period for compliance with the
substantive conditions of new Rule 16b-3. The
phase-in period previously was extended until
September 1, 1996 or such different date as may be
set in further rulemaking (Release 34-36063
(August 7, 1995) [60 FR 40994] ("1995 Phase-in
Release")). It is being further extended to
November 1, 1996 to accommodate the transition to
the new rules. Issuers may use new Rule 16b-3 for
transactions on or after the August 15, 1996
effective date, but are not required to use the
new rule until the end of the phase-in period.
(continued...)
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favorably received, unanticipated practical difficulties arose in
implementing the new rules, particularly with respect to thrift
and similar employee benefit plans. In particular, issuers and
insiders stated that the application of current Rule 16b-3 to
these plans is cumbersome, presents significant record-keeping
problems and discourages insiders from participation in plan
funds holding employer securities.
In order to address these concerns, in 1994 the Commission
proposed further rule changes designed to streamline the Section
16 regulatory scheme adopted in 1991. The proposals were
designed to facilitate the operation of employee benefit plans;
broaden exemptions from Section 16(b) -[12]- short-swing
profit recovery where consistent with statutory purposes; and
codify several staff interpretive positions. -[13]-
Comment also was solicited on various suggested modifications to
the Section 16(a) -[14]- reporting requirements.
---------FOOTNOTES----------
-[11]-(...continued)
See Section VII, below.
Following the Adopting Release, the Commission issued two
other releases relating to the revised rules; one set forth
the Commission's views regarding shareholder approval for
amendments to employee benefit plans under Rule 16b-3, as
well as certain technical amendments (Release No. 34-29131
(April 26, 1991) [56 FR 19925]), while the other adopted a
technical amendment to Form 4 (Release No. 34-28869B (April
10, 1991) [56 FR 14467]).
-[12]- 15 U.S.C. 78p(b).
-[13]- Release No. 34-34514 (August 10, 1994) [59 FR
42449] ("1994 Release").
-[14]- 15 U.S.C. 78p(a).
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A follow-up release -[15]- solicited further comment
on the treatment of compensatory cash-only instruments based on
the value of the issuer's equity securities. Such instruments
currently are not subject to Section 16 if they meet specified
conditions. The Commission requested comment as to whether the
current exclusion is appropriate in light of the fact that
equity-based securities provide identical opportunities for
profit predicated on the underlying stock price movement, whether
settled exclusively in cash or stock, and whether, from the
perspective of shareholders and analysts, cash-only instruments
have the same Section 16(a) informational value as instruments
that may be settled in stock.
Finally, additional rule proposals were published in 1995
-[16]- to provide a broader exemption from short-swing
profit recovery for transactions between an issuer and its
directors or officers, whether or not in the context of employee
benefit plans; broaden the exemption for transactions in dividend
and interest reinvestment plans; and revise the Section 16(a)
reporting scheme.
The 1995 proposals presented a simplified, flexible approach
based on the premise that transactions between an issuer and its
officers and directors are intended to provide a benefit or other
---------FOOTNOTES----------
-[15]- Release No. 34-34681 (September 16, 1994) [59 FR
48579] ("Cash-only Release").
-[16]- Release No. 34-36356 (October 11, 1995) [60 FR
53832], as corrected in Release No. 34-36356A
(October 29, 1995) [60 FR 54823], (together, the
"1995 Release").
==========================================START OF PAGE 7======
form of compensation to reward service or to incentivize
performance. Generally, these transactions do not appear to
present the same opportunities for insider profit on the basis of
non-public information as do market transactions by officers and
directors. Typically, where the issuer, rather than the trading
markets, is on the other side of an officer or director's
transaction in the issuer's equity securities, any profit
obtained is not at the expense of uninformed shareholders and
other market participants of the type contemplated by the
statute. -[17]- Based on its experience with the Section
16 rules, the Commission is persuaded that transactions between
the issuer and its officers and directors that are pursuant to
plans meeting the administrative requirements and
nondiscrimination standards of the Internal Revenue Code
-[18]- and the Employee Retirement Income Security Act of
1974 ("ERISA"), -[19]- or that satisfy other objective
gate-keeping conditions, are not vehicles for the speculative
---------FOOTNOTES----------
-[17]- An insider's breach of fiduciary duty to profit
from self-dealing transactions with the company is
a concern of state corporate law. Generally,
states have created potent deterrents to insider
self-dealing and other breaches of fiduciary duty.
See 3 Fletcher Cyc. Corp. 837.60 (Perm. ed.
1994); D. Block, S. Radin and N. Barton, The
Business Judgment Rule: Fiduciary Duties of
Corporate Directors 124-37 (4th ed. 1993). There
are also potential liability considerations under
Rule 10b-5 [17 CFR 240.10b-5].
-[18]- 26 U.S.C. et seq. (1986) ("Internal Revenue
Code").
-[19]- 29 U.S.C. 1001 et seq. (1986).
==========================================START OF PAGE 8======
abuse that Section 16(b) was designed to prevent. Accordingly,
these transactions are exempted by new Rule 16b-3 as adopted.
-[20]-
As a corollary to this approach, it was proposed that cash-
only instruments would be subject to Section 16 to the same
extent as other instruments that embody the opportunity for
profit based on price movement in the issuer's stock. These
instruments would be eligible for exemption from Section 16(b),
but reportable under Section 16(a), to the same extent as other
issuer equity securities in transactions between an issuer and
its officers and directors. The Commission has determined to
adopt this proposal as an integral part of its revised approach
to transactions between an issuer and its officers and directors.
As a further corollary to the 1995 proposal, the Commission
indicated that it contemplated simplifying the reporting system.
Certain routine transactions were proposed to be exempted from
reporting, while other transactions exempt pursuant to Rule 16b-3
would be reported on Form 4 within ten days after the end of the
month in which the transaction occurred. The Commission has
determined to revise the reporting system so that most
transactions exempt pursuant to new Rule 16b-3 will be reported
on an annual basis on Form 5, and to eliminate the class of
transactions currently reportable on the earlier of the next
required Form 4 or Form 5 by requiring that option exercises be
reported on Form 4 and small acquisitions on Form 5. A number of
---------FOOTNOTES----------
-[20]- See Section II, below.
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exempt transactions of a routine nature, such as acquisitions
pursuant to tax-conditioned plans and dividend and interest
reinvestment plans, will not be required to be reported at
all. -[21]-
Eighty-nine letters of comment were received in response to
the 1994 Release and the Cash-only Release, and 38 letters were
received in response to the 1995 Release. -[22]- In
general, the commenters expressed strong support for the tenor of
the proposals, with most preferring the 1995 version of Rule 16b-
3 to the 1994 version. These commenters thought that the
revisions would alleviate many of the practical issues and
uncertainties that have arisen since adoption of the
comprehensive Section 16 amendments in 1991. Many commenters
suggested modifications to the proposals, some of which are
addressed in this Release, as discussed throughout.
The rules adopted today essentially implement the 1995
proposals, as well as the elements of the 1994 proposals not
addressed in 1995. -[23]- Changes from the proposals are
---------FOOTNOTES----------
-[21]- See Section IV, below.
-[22]- These comment letters, together with two Summaries
of Comments prepared by Commission staff, are
available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington D.C. 20549. Persons
seeking these materials should make reference to
File No. S7-21-94.
-[23]- Pursuant to Release 33-7300 issued today, the
Commission also is rescinding Rules 16b-1(c) and
16b-4 and amending Rule 16a-3(i) to permit typed
signatures, consistent with the recommendations of
the Task Force on Disclosure Simplification.
==========================================START OF PAGE 10======
discussed in the release below. Highlights of changes from the
current rules are as follows:
A. Transactions Between an Issuer and its Directors or
Officers
* Generally, transactions between an issuer (including an
employee benefit plan sponsored by an issuer) and its
directors or officers will be exempt from Section 16(b) if
they satisfy the applicable conditions of new Rule 16b-3, as
set forth below:
* Routine transactions pursuant to specified tax-conditioned
plans (such as thrift plans, stock purchase plans and excess
benefit plans) will be exempt from Section 16(b) without
further condition.
* Fund-switching transactions or volitional cash withdrawals
from an issuer equity securities fund will be exempt if the
election to engage in the transaction is at least six months
after the last election to engage in such a transaction that
was opposite-way (i.e., a previous acquisition if the
transaction to be exempted is a disposition, and vice
versa).
* Other acquisitions by an officer or director from the
issuer, including grants, awards and participant-directed
transactions, will be exempt upon satisfaction of any one of
three alternative conditions:
==========================================START OF PAGE 11======
- approval of the transaction by the board of directors
of the issuer or a committee of two or more Non-
Employee Directors;
- approval or ratification of the transaction by the
holders of the majority of the issuer's securities; or
- satisfaction of a six-month holding period following
the date of acquisition.
* Other dispositions by an officer or director to the issuer
will be exempt if approved by the board of directors of the
issuer, a committee of two or more "Non-Employee Directors,"
as defined, or the holders of the majority of the issuer's
securities.
B. Derivative Securities
* The current Section 16 exclusion from the definition of
"derivative securities" for instruments based on the value
of the issuer's equity securities but settled exclusively in
cash -[24]- is rescinded. However, these instruments
are eligible for exemption pursuant to new Rule 16b-3.
* Options granted to an underwriter in a registered public
offering to satisfy over-allotments are expressly excluded
from the definition of "derivative security." -[25]-
---------FOOTNOTES----------
-[24]- Current Rule 16a-1(c)(3).
-[25]- New Rule 16a-1(c)(7), which will codify the
interpretive positions set forth in Video
Technology (Overseas) Limited/Davis Polk &
Wardwell (June 17, 1992) and Davis Polk & Wardwell
(July 16, 1992).
==========================================START OF PAGE 12======
* Rights to withhold or surrender a security in satisfaction
of the exercise price of a derivative security, or in
satisfaction of the tax-withholding consequences applicable
to the receipt, exercise or vesting of an issuer equity
security (including a derivative security) are excluded from
the definition of "derivative security." -[26]-
C. Reporting
* A number of transactions exempt from Section 16(b) that
currently must be reported on Form 5 no longer will be
required to be reported at all, among them:
- Exempt transactions pursuant to tax-conditioned plans
(other than fund-switching transactions and volitional
cash withdrawals from an issuer equity securities
fund);
- Transactions pursuant to dividend or interest
reinvestment plans -[27]- and domestic relations
orders; -[28]-
- Transactions that change only the form of beneficial
ownership; -[29]-
---------FOOTNOTES----------
-[26]- New Rule 16a-1(c)(3) (proposed as Rule 16a-
1(c)(8)).
-[27]- New Rule 16a-11 (current Rule 16b-2).
-[28]- New Rule 16a-12.
-[29]- New Rule 16a-13.
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- Certain transactions by a person who has ceased to be
an insider; -[30]- and
- Expirations or cancellations of certain derivative
securities. -[31]-
* Exercises and conversions of derivative securities,
including employee stock options, whether or not exempt from
Section 16(b), will be reported on Form 4.
* All other exempt transactions and small acquisitions
-[32]- will be reported annually on Form 5, with
earlier reporting on Form 4 permitted.
* Reporting will be permitted on a joint basis when more than
one person subject to Section 16 is deemed to be a
beneficial owner of the same issuer equity securities.
-[33]-
* A trust will be subject to Section 16 only if the trust is
the beneficial owner of more than ten percent of a class of
issuer equity securities registered pursuant to Section 12
of the Act. -[34]-
---------FOOTNOTES----------
-[30]- New Rule 16a-2(b).
-[31]- New Rule 16a-4(d).
-[32]- These transactions, which do not exceed $10,000 in
the aggregate, are eligible for deferred reporting
pursuant to current and new Rule 16a-6.
-[33]- New Rule 16a-3(j).
-[34]- Current Rule 16a-8(a)(1)(ii), which makes a trust
subject to Section 16 if the trustee otherwise is
subject to Section 16 and exercises or shares
investment control of issuer securities held by
(continued...)
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* Item 405 of Regulations S-K and S-B -[35]- is revised
to clarify the nature of the issuer's obligation to review
insiders' filings in order to determine whether there are
any delinquent reports that require disclosure. Item 405
disclosure will be required to be placed under a separate
caption.
* Insiders' obligation to report equity swap transactions is
reiterated and clarified, and a new reporting code is added
for equity swaps.
D. Other Issues
* The exemption for the reinvestment of dividends and interest
pursuant to dividend and interest reinvestment plans
-[36]- is revised to eliminate the requirement that
the plan be made available on the same terms to all holders
of the class of securities.
* A new exemption is provided for transactions pursuant to
domestic relations orders. -[37]-
---------FOOTNOTES----------
-[34]-(...continued)
the trust and the trustee or a member of the
trustee's immediate family has a pecuniary
interest in such issuer securities, is rescinded.
Other obligations applicable to trusts, trustees,
beneficiaries and settlors pursuant to current
Rule 16a-8 are not affected by this change.
-[35]- 17 CFR 229.405 and 228.405.
-[36]- New Rule 16a-11 (current Rule 16b-2).
-[37]- New Rule 16a-12.
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* The exemption for stock splits, stock dividends and pro rata
rights -[38]- is expanded to exempt stock dividends
paid in the securities of a different issuer, such as
spinoff distributions.
* A transaction that occurs after a person ceases to be an
officer or director will be subject to Section 16 only if it
is not otherwise exempt from Section 16(b) and is executed
within six months of an opposite-way transaction subject to
Section 16(b) that occurred while the person was an officer
or director. -[39]-
II. TRANSACTIONS BETWEEN AN ISSUER AND ITS DIRECTORS OR OFFICERS
A. General Approach
The amendments to Rule 16b-3 adopted today implement the
approach set forth in the 1995 proposal to align better the
regulatory requirements under the rule with the statutory goals
underlying Section 16. -[40]- Moreover, since benefit
plans and compensation payments and programs vary widely in
design and purpose, the Commission is convinced that a "one size
fits all" regulatory scheme is impractical. The proliferation of
unique plan features over the last decade has led to legal
uncertainty regarding the application of Rule 16b-3 to these
innovations. Rather than react to present plan developments, the
---------FOOTNOTES----------
-[38]- Current and new Rule 16a-9.
-[39]- New Rule 16a-2(b).
-[40]- See Section I, above.
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Commission intends to provide greater regulatory flexibility to
accommodate future developments.
New Rule 16b-3 exempts from short-swing profit recovery any
acquisitions and dispositions of issuer equity securities
(including those that occur upon the exercise or conversion of a
derivative security, whether in- or out-of-the-
money) -[41]- between an officer or director and the
issuer, subject to simplified conditions. -[42]- A
transaction with an employee benefit plan sponsored by the issuer
will be treated the same as a transaction with the
issuer. -[43]- However, unlike the current rule, a
---------FOOTNOTES----------
-[41]- As indicated in Note (1) to new Rule 16b-3, the
exercise or conversion of a derivative security
that does not satisfy the conditions of this rule
will continue to be eligible for exemption from
Section 16(b) pursuant to Rule 16b-6(b) [17 CFR
240.16b-6(b)]. Similarly, a note is added to new
Rule 16b-6(b) as a reminder that exercises or
conversions also may be exempted by new Rule
16b-3.
-[42]- Like current Rule 16b-3, new Rule 16b-3 does not
provide an exemption for persons who are subject
to Section 16 solely because they beneficially own
greater than ten percent of a class of an issuer's
equity securities. Officers and directors owe
certain fiduciary duties to a corporation. See n.
17, above. Such duties, which act as an
independent constraint on self-dealing, may not
extend to ten percent holders. The lack of other
constraints argues against making new Rule 16b-3
available to ten percent holders. However, new
Rule 16b-3 is available to such a person who is
also subject to Section 16 by virtue of being an
officer or director with respect to transactions
with the issuer.
-[43]- New Rule 16b-3(a). Although some transactions
between officers or directors and issuer-sponsored
(continued...)
==========================================START OF PAGE 17======
transaction need not be pursuant to an employee benefit plan or
any compensatory program to be exempt, nor need it specifically
have a compensatory element.
A transaction will be exempt if it satisfies the appropriate
conditions set forth among four alternative categories: Tax-
Conditioned and Related Plans; Discretionary Transactions;
Grants, Awards and Other Acquisitions from the Issuer; and
Dispositions to the Issuer. -[44]- New Rule 16b-3
eliminates many of the conditions of current Rule 16b-3, such as
general written plan conditions, -[45]- the prohibition
against transfer of derivative securities, shareholder approval
---------FOOTNOTES----------
-[43]-(...continued)
employee benefit plans technically are not
transactions with the issuer, such transactions
should be within the scope of an exemption
premised on the nature of insiders' transactions
with issuers. Employee benefit plans are the most
common vehicle by which issuers provide for
securities-based compensation of employees,
including officers and directors, that otherwise
would be satisfied through direct compensation
from the issuer.
-[44]- In addition to the conditions for exemption, as
discussed below, Note (2) has been added to new
Rule 16b-3 to reference the reporting rules
applicable to transactions exempted by the new
rule. See Section IV, below.
-[45]- Because a plan no longer will be required to set
forth in writing either the price at which
securities may be offered and the amount of
securities to be awarded, or the method by which
such price and amount are to be determined, the
manner in which shares are counted no longer will
present interpretive issues. As noted at n. 69 to
the 1994 Release, interpretive letters regarding
this subject for purposes of the requirements of
current Rule 16b-3(a)(1) no longer are required to
be followed.
==========================================START OF PAGE 18======
as a general condition for plan exemption, the six-month holding
period as a general condition for the exemption of grant and
award transactions, the disinterested administration or formula
plan requirements regarding grant transactions, and the window
period requirement for fund-switching transactions and stock
appreciation right exercises.
B. Tax-Conditioned Plans
The exemption for transactions pursuant to tax-conditioned
plans -[46]- is adopted substantially as proposed in 1995.
This exemption is premised on the view that an adequate safeguard
against speculative abuse is provided when a plan satisfies
certain conditions imposed by the Internal Revenue Code and
ERISA. -[47]- Accordingly, any acquisition or disposition
of issuer equity securities, except as discussed below, will be
exempt without further condition if made pursuant to a plan that
satisfies the definition of a "Qualified Plan," -[48]- an
"Excess Benefit
---------FOOTNOTES----------
-[46]- New Rule 16b-3(c).
-[47]- The rule does not require the plan to be tax-
qualified, but instead either to satisfy specified
conditions applicable to tax-qualified plans, or,
in certain circumstances, to be operated in
connection with a plan that satisfies those
conditions.
-[48]- New Rule 16b-3(b)(4). The definition of
"Qualified Plan" is adopted as proposed, i.e., an
employee benefit plan that satisfies the coverage
and participation requirements of Sections 410 and
401(a)(26) of the Internal Revenue Code of 1986,
or any successor provisions thereof.
==========================================START OF PAGE 19======
Plan," -[49]- or a "Stock Purchase Plan." -[50]-
Thus, for example, routine acquisitions pursuant to thrift and
stock purchase plans generally will be exempt under this
provision. The tax code coverage and participation requirements
provide readily accessible, objective standards for designing an
exempt plan.
While most transactions pursuant to tax-conditioned plans
may rely on this exemption, fund-switching and cash withdrawal
transactions arising solely from an insider's volitional
---------FOOTNOTES----------
-[49]- New Rule 16b-3(b)(2). The definition of "Excess
Benefit Plan" has been revised to eliminate
references to specific I.R.C. Sections so as to
ensure that plans qualifying for an exemption
under Section 201(2) of ERISA would be covered by
the exemption. The revised definition requires
that such a plan be operated in conjunction with a
Qualified Plan, and provide only the benefits and
contributions that would be provided under the
Qualified Plan but for any benefit or contribution
limitations set forth in the Internal Revenue
Code. As was proposed, the amended rule does not
require transactions pursuant to an Excess Benefit
Plan to be in tandem with transactions in the
related Qualified Plan to be eligible for
exemption.
-[50]- New Rule 16b-3(b)(5). The definition of "Stock
Purchase Plan" has been revised to indicate that
satisfaction of the coverage and participation
standards of Section 410 of the Internal Revenue
Code is an alternative to satisfaction of Internal
Revenue Code Sections 423(b)(3) and 423(b)(5),
rather than an additional requirement. The
purpose of including this alternative standard is
to make the exemption available to stock purchase
plans that do not satisfy the standards of
Internal Revenue Code Section 423, but
nevertheless are operated in a broad-based manner.
==========================================START OF PAGE 20======
investment decision, defined as "Discretionary Transactions,"
instead must satisfy a timing requirement. -[51]-
As proposed, the exemption for tax-conditioned plans would
have exempted without further condition any acquisition pursuant
to a plan or transaction that satisfied the conditions applicable
to performance-based compensation imposed by Section 162(m) of
the Internal Revenue Code and the regulations
thereunder. -[52]- Commenters expressed divergent views on
whether this basis for exemption would be useful. The Commission
is not adopting the Section 162(m) provision, since it appears
unnecessary in view of the expanded availability of the exemption
for grants, awards and other acquisitions. -[53]-
C. Discretionary Transactions
Many contributory employee benefit plans permit a
participant to choose one of several funds in which to invest
(e.g., an issuer stock fund, a bond fund, or a money market
fund). Plan participants typically are given the opportunity to
engage in "fund-switching" transactions, permitting the transfer
of assets from one fund to another, at periodic intervals. Plan
participants also commonly have the right to withdraw their
---------FOOTNOTES----------
-[51]- See Section II.C, below.
-[52]- Internal Revenue Code Section 162(m) and
Regulation 1.162-27(e), which set forth the
conditions pursuant to which an issuer may deduct
compensation in excess of $1 million paid to its
chief executive officer and four other most highly
compensated officers for whom disclosure is
required to be reported in Exchange Act filings.
-[53]- See Section II.D, below.
==========================================START OF PAGE 21======
investments in cash from a fund containing equity securities of
the issuer. Fund-switching transactions involving an issuer
equity securities fund and cash distributions from these funds
-[54]- may present opportunities for abuse because the
investment decision is similar to that involved in a market
transaction. Moreover, the plan may buy and sell issuer equity
securities in the market in order to effect these transactions,
so that the real party on the other side of the transaction is
not the issuer but instead a market participant.
In order to foreclose opportunities for abuse, the 1995
proposal contemplated that such transactions in a tax-conditioned
plan would be exempt only if effected pursuant to an election
made at least six months following the date of the most recent
prior such election. As adopted, this provision has been made
applicable to these transactions pursuant to any plan, whether or
not tax-conditioned, -[55]- given that it is the nature of
the transaction, without regard to the type of plan, that
presents an opportunity for abuse. Accordingly, these
transactions are defined separately as "Discretionary
Transactions," -[56]- and the exemption is placed in a
---------FOOTNOTES----------
-[54]- No exemption has been provided in new Rule 16b-3
for a withdrawal in kind of issuer equity
securities because such a transaction would be a
change in form of beneficial ownership from
indirect to direct, which will be exempt from
Section 16 pursuant to new Rule 16a-13. See
Section IV.B, below.
-[55]- New Rule 16b-3(f).
-[56]- New Rule 16b-3(b)(1).
==========================================START OF PAGE 22======
separate paragraph rather than included with the exemption for
tax-conditioned plans.
As favored by many commenters, the six month condition will
apply only to "opposite way" transactions; i.e., elections that
effect acquisitions and dispositions must be six months apart,
but prior "same-way" elections within the preceding six months do
not render the exemption unavailable. -[57]- The six month
condition will apply if a prior election by the officer or
director effecting an "opposite way" Discretionary Transaction
was made pursuant to any plan of the issuer in which the officer
or director participates. Some commenters favored an exemption
premised on transactions taking place during a window period.
The Commission, however, prefers a more simple approach that is
more consistent with the statutory purpose.
The definition of "Discretionary Transaction" excludes a
number of transactions that are primarily for retirement
planning. -[58]- Transactions resulting from an election
to receive, or to defer the receipt of, securities and/or cash in
connection with death, disability, retirement or termination of
---------FOOTNOTES----------
-[57]- Because it is anticipated that the actual date on
which such a plan transaction occurs may be
outside the control of an insider participant, the
rule is premised on a six-month interval between
the date of subsequent "opposite way" elections.
The rule does not require that such an election be
made six months in advance of the related
transaction.
-[58]- The items enumerated are the same as those in the
rule as proposed, although they were not set forth
in a separate definition.
==========================================START OF PAGE 23======
employment, -[59]- as well as transactions that effect a
diversification or distribution which the Internal Revenue Code
requires an employee benefit plan to make available to a
participant, -[60]- need not comply with the six-month
condition. -[61]- Thus, these transactions are eligible
for exemption pursuant to other applicable provisions of the
amended rule (most likely the exemption for tax-conditioned
plans). Although such transactions have an element of volition,
the insider's opportunity to speculate in the context of a death,
disability, retirement or termination of employment would seem
well circumscribed, as is also the case with regard to the
specified diversification and distribution elections.
---------FOOTNOTES----------
-[59]- Such transactions are exempted by current Rule
16b-3(d)(1)(ii).
-[60]- Such transactions include diversification
elections and distributions provided for by
Internal Revenue Code Section 401(a)(28), and
distributions required by Internal Revenue Code
Section 401(a)(9).
-[61]- A loan funded by the disposition of issuer equity
securities will be considered a cash distribution
involving a volitional disposition of an issuer
equity security unless the insider continues to
bear the risk of loss with respect to such issuer
equity securities during the term of the loan.
Involuntary distributions of cash for the purpose
of satisfying the limitations on employee elective
contributions and employer matching contributions
imposed by the Internal Revenue Code will be
exempt without condition because such transactions
do not occur at the insider's volition.
==========================================START OF PAGE 24======
D. Grants, Awards and Other Acquisitions from the Issuer
1. General; Participant-Directed Acquisitions
Plans that authorize "grant and award" transactions provide
issuer equity securities to participants on a basis that does not
require either the contribution of assets or the exercise of
investment discretion by the participants. For example, awards
of bonus stock pursuant to a salary-based formula and grants of
options or restricted stock are grant and award transactions. In
contrast, a "participant-directed transaction" requires the
participant to exercise investment discretion as to either the
timing of the transaction or the assets into which the investment
is made. For example, the exercise of an option and a
participant's election pursuant to a thrift plan to invest either
the employee or the employer contribution in issuer equity
securities are participant-directed transactions.
Both the current and the new rules provide a specific
exemption for the grant or award of issuer equity securities.
The new rule makes the exemption more readily available, since
only one of three alternative conditions need be satisfied.
-[62]- Commenters responded favorably to this proposal.
They expressed concern, however, that some participant-directed
transactions (such as deferrals of bonuses into phantom stock and
other deferred compensation programs) that are exempt under the
---------FOOTNOTES----------
-[62]- New Rule 16b-3(d).
==========================================START OF PAGE 25======
current rule -[63]- would lack an exemption under the new
rule.
The 1995 proposal was intended to permit such transactions,
which ordinarily do not present opportunities for abuse, an
opportunity for exemption. Accordingly, as adopted, the proposed
grant and award exemption has been retitled "Grants, Awards and
Other Acquisitions from the Issuer" to make it clear that
participant-directed acquisitions that are not pursuant to tax-
conditioned plans may rely on this exemption. -[64]-
However, if a participant-directed transaction is a
"Discretionary Transaction," as defined in the new rule, it must
instead satisfy the conditions designed specifically for
Discretionary Transactions in order to be exempt. -[65]-
2. Alternative Conditions
The new rule provides three alternative bases for exempting
the acquisition of issuer equity securities (including derivative
securities). The first two conditions exempt an acquisition that
is either: (i) approved in advance by the board of directors or
a committee of the board composed solely of two or more "Non-
Employee Directors;" -[66]- or (ii) approved in advance, or
---------FOOTNOTES----------
-[63]- Many such transactions are now exempt pursuant to
the six month advance election provided by current
Rule 16b-3(d)(1)(i).
-[64]- Participant-directed dispositions are eligible for
the "Dispositions to the Issuer" exemption,
discussed in Section II.E, below.
-[65]- See Section II.C, above.
-[66]- New Rule 16b-3(d)(1).
==========================================START OF PAGE 26======
subsequently ratified not later than the date of the next annual
meeting of shareholders, by shareholders. -[67]- If a
transaction has satisfied more than one of the alternative
approval conditions specified in the new rule (for example, if
board approval is followed by shareholder approval) the issuer
may rely on any condition that provides the basis for the
exemption.
Alternatively, an acquisition that does not satisfy any of
the approval conditions will be exempt if the securities acquired
are held by the insider for six months following the date of
acquisition, or in the case of a derivative security, at least
six months elapse between the date of acquisition of the
derivative security and the date of disposition of the underlying
security. -[68]- The six-month holding period for dividend
---------FOOTNOTES----------
-[67]- New Rule 16b-3(d)(2). Like current Rule 16b-3(b),
this standard would require the affirmative vote
of the holders of the majority of the issuer's
securities present or represented and entitled to
vote at a meeting duly held in accordance with the
applicable laws of the state or other jurisdiction
in which the issuer is incorporated, or the
written consent of the majority of the issuer's
securities entitled to vote, solicited in
compliance with Section 14 of the Securities
Exchange Act [15 U.S.C. 78n].
-[68]- New Rule 16b-3(d)(3). The 1995 Release solicited
comment as to whether a grant or award that
satisfies any of the three alternative conditions
should be exempt only if the officer or director
to whom the grant is made had not disposed of
issuer equity securities on a non-exempt basis
during the previous six months at a price higher
than that at which the grant is made. New Rule
16b-3(d), as adopted, does not require
satisfaction of this condition with respect to any
acquisition.
==========================================START OF PAGE 27======
equivalent rights ("DERs") and shares purchased pursuant to the
automatic reinvestment of dividends will be deemed to commence on
the date of acquisition of the shares on which the DERs or
dividends are paid. -[69]-
Commenters who addressed this segment of the 1995 proposal
favorably noted both its simplicity and flexibility. The
Commission is persuaded that satisfaction of any of the three
conditions is a sufficient basis to exempt an acquisition of
issuer equity securities from the issuer.
---------FOOTNOTES----------
-[69]- This position is consistent with the amendment to
current Rule 16b-3(c)(1) proposed in 1994, which
would have reversed current interpretation
providing that the six-month holding period is
deemed to commence on the date the dividend or DER
is granted or allocated to the participant. See
Hewitt Associates (Apr. 30, 1991) Q. 2(b); and
Davis Polk & Wardwell (Aug. 23, 1991). Under new
Rule 16b-3, DERs and shares purchased pursuant to
the receipt of dividends will need to satisfy a
six-month holding period only if the securities on
which the dividends or DERs are paid rely on a
six-month holding period as the basis for
exemption. Moreover, pro rata dividends paid in
stock with respect to all securities of a class
will continue to be exempt pursuant to Rule 16a-9.
==========================================START OF PAGE 28======
3. Scope of Approval Required
When the rule requires "Non-Employee Director," -[70]-
full board or shareholder approval, the Commission intends that
the approval relate to specific transactions rather than the plan
in its entirety. However, approval of a plan pursuant to which
the specific terms and conditions of each acquisition are fixed
in advance, such as a formula plan, -[71]- will satisfy
this condition, and the exemption also will be available for a
plan with an appendix providing for specific grants to specific
individuals. Note (3) has been added to the new rule, making the
specific nature of the approval required clear.
The note also provides that where the terms of a subsequent
transaction are provided for at the time a transaction is
initially approved, the subsequent transaction will not require
further specific approval. If the terms of an award as approved
provide for a subsequent participant-directed election, that
election will be exempt without further condition if effected
pursuant to those terms. For example, if an award of restricted
stock as approved permits an insider awardee to defer receipt
pursuant to a related deferred compensation plan, the insider's
election to defer will be exempt without further condition. In
---------FOOTNOTES----------
-[70]- This term is defined in new Rule 16b-3(b)(3). See
Section II.D.4, below.
-[71]- A plan that constitutes a "formula plan" under
staff interpretations of current Rule 16b-
3(c)(2)(ii) will be considered a formula plan for
this purpose.
==========================================START OF PAGE 29======
the same manner, the acquisition of underlying issuer equity
securities that occurs upon the exercise or conversion of a
derivative security will be exempt, provided that the exercise is
pursuant to terms provided in the derivative security originally
approved in its acquisition. -[72]- Similarly, if an award
as originally approved specifically provided for the automatic
grant of reload options, each resultant grant of reload options
pursuant to those terms will not require subsequent approval.
4. Non-Employee Director Definition
With respect to committee approval as a basis for exemption,
"Non-Employee Director" as proposed in 1995 was defined as a
director who is not currently an officer of, or otherwise
employed by or a consultant to, the issuer, its parent or its
subsidiary. The 1995 Release further elaborated that, for this
purpose, "consultant" would include attorneys, accountants or
others who indirectly receive compensation from the issuer
through firms that provide services to the issuer.
---------FOOTNOTES----------
-[72]- The disposition of the derivative security that
occurs upon exercise similarly will be exempt
pursuant to new Rule 16b-3(e). See Section II.E,
below.
A derivative security that did not satisfy the Non-Employee
Director committee, board of directors or shareholder
approval conditions (such as a derivative security issued in
reliance on the six-month holding period of new Rule
16b-3(d)(3) or a derivative security acquired other than
directly from the issuer) could be exercised or converted
and the underlying issuer equity securities acquired on an
exempt basis pursuant to Rule 16b-6(b), if the conditions of
that rule are met (fixed exercise price and exercise not
out-of-the-money unless necessary to comport with the
sequential exercise provisions of Internal Revenue Code
Section 422A).
==========================================START OF PAGE 30======
However, commenters criticized the "Non-Employee Director"
definition to the extent that it would prohibit any consulting
arrangement with the issuer. These commenters cited definitional
uncertainty, the special expertise provided by retired senior
executives and other consultants, and the absence of problems
stemming from such persons' service as disinterested directors
under the current rules -[73]- as reasons for not imposing
an absolute ban on consulting arrangements.
The Commission is persuaded that the reasoning supporting
these comments justifies permitting directors with limited
consulting relationships with the issuer to serve as Non-Employee
Directors. Under the rule as adopted, -[74]- a "Non-
Employee Director" will be a director who is not currently an
officer or otherwise employed by the issuer, or a parent or
subsidiary of the issuer; does not receive compensation directly
or indirectly from the issuer, its parent or subsidiary for
services rendered as a consultant or in any capacity other than
as a director, except for an amount for which disclosure would
not be required pursuant to Item 404(a) of Regulation S-K;
-[75]- does not possess an interest in any other
---------FOOTNOTES----------
-[73]- Current Rule 16b-3(c)(2)(i).
-[74]- New Rule 16b-3(b)(3)(i).
-[75]- 17 CFR 229.404(a). This item generally requires
disclosure of related party transactions where the
amount involved exceeds $60,000. For purposes of
the definition of "Non-Employee Director," each
test that refers to S-K Item 404 will be measured
by reference to the Regulation S-K disclosure
(continued...)
==========================================START OF PAGE 31======
transaction for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K; and is not engaged in a business
relationship for which disclosure would be required pursuant to
Item 404(b) of Regulation S-K. -[76]- With respect to a
closed-end investment company, a "Non-Employee Director"
-[77]- will be a director who is not an "interested person"
of the issuer, as that term is defined in Section 2(a)(19) of the
Investment Company Act. -[78]-
Although the new rule would not prohibit Non-Employee
Directors or the full board from awarding themselves grants of
issuer equity securities, such grants would be subject to state
laws governing corporate self-dealing. -[79]- The
Commission believes that traditional state law fiduciary duties
facilitate compliance with the underlying purposes of Section 16
by creating effective prophylactics against possible insider
trading abuses.
E. Dispositions to the Issuer
---------FOOTNOTES----------
-[75]-(...continued)
Item, whether the disclosure requirements
applicable to the issuer are governed by
Regulation S-K or S-B.
-[76]- 17 CFR 229.404(b). This item generally requires
disclosure of business relationships with the
registrant where the amount involved exceeds
greater than five percent of the consolidated
gross revenue of either the registrant or the
other entity.
-[77]- New Rule 16b-3(b)(3)(ii).
-[78]- 15 U.S.C. 80a-2(a)(19).
-[79]- See n. 17, above.
==========================================START OF PAGE 32======
Both as proposed in 1995 and as adopted, the new rule
exempts any transaction involving a disposition of issuer equity
securities to the issuer, provided that such disposition is
approved in advance by the board of directors, a committee of
Non-Employee Directors, or the shareholders. -[80]-
However, if a disposition is a Discretionary Transaction, as
defined in the new rule, it must instead satisfy the conditions
specifically applicable to Discretionary Transactions to be
exempt. -[81]-
The 1994 Release proposed amendments to current Rule 16b-
3(f) to exempt exercise withholding rights and the surrender or
withholding of issuer equity securities in satisfaction of a tax-
withholding obligation. These proposed amendments are not
adopted because the same transactions will be exempted pursuant
to the broad scope of the new rule. -[82]- For example,
the new rule will exempt dispositions of issuer equity securities
to the issuer pursuant to: (1) the right to have securities
withheld, or to deliver securities already owned, either in
payment of the exercise price of an option or to satisfy the tax
---------FOOTNOTES----------
-[80]- New Rule 16b-3(e).
-[81]- See Section II.C, above.
-[82]- Like most other exempt transactions, these
transactions will be reportable on Form 5. See
Section IV.C, below. However, where the surrender
or withholding transaction is in connection with
the exercise or conversion of a derivative
security, it should be reported on the same Form 4
as the exercise or conversion. See Section IV.D,
below.
==========================================START OF PAGE 33======
withholding consequences of an option exercise or the vesting of
restricted securities, (2) the expiration, cancellation, or
surrender to the issuer of a stock option or stock appreciation
right in connection with the grant of a replacement option or
right, or (3) the election to receive, and the receipt of, cash
in complete or partial settlement of a stock appreciation right.
Additionally, the new rule will give the issuer the flexibility
to redeem its equity securities from insiders in connection with
non-exempt replacement grants, and in discrete compensatory
situations such as individual buy-backs in connection with estate
planning.
The exemption, which was favorably received by commenters,
is adopted substantially as proposed. -[83]- A note has
been added to the new rule to clarify that if the terms of a
subsequent transaction are provided for in the transaction as
initially approved, the subsequent transaction does not require
further specific approval. -[84]- For example, the
exemption will apply to the disposition to the issuer of a
derivative security upon its exercise or conversion, if such
---------FOOTNOTES----------
-[83]- The 1995 Release solicited comment as to whether a
disposition that satisfies either condition should
be exempt only if the officer or director making
the disposition had not acquired issuer equity
securities on a non-exempt basis during the
previous six months at a price lower than that at
which the disposition was made. New Rule 16b-
3(e), as adopted, does not require satisfaction of
this condition with respect to any disposition.
-[84]- Note (3) to new Rule 16b-3. See Section II.D.3,
above.
==========================================START OF PAGE 34======
exercise is pursuant to the terms provided in the derivative
security as initially approved in its acquisition.
In the context of a merger, the new rule will exempt the
disposition of issuer equity securities (including derivative
securities) solely to the issuer, provided the conditions of the
rule are satisfied. -[85]- Dispositions of such securities
to parties other than the issuer, such as an acquiror, are not
covered by the rule and consequently would not be eligible for
exemption under the rule. The specific terms of the
disposition, including price, will require prior approval of
either the full board, the committee of Non-Employee Directors or
shareholders. If shareholder approval is solicited and is to be
the condition relied upon for exemption, the proxy card and proxy
statement both should provide that a vote to approve the merger
also shall constitute a vote to approve insiders' exempt
dispositions of issuer equity securities to the issuer.
-[86]-
---------FOOTNOTES----------
-[85]- If such securities were acquired in reliance on
new Rule 16b-3(d)(3), the six-month holding period
will need to be satisfied prior to such
disposition in order for the acquisition to be
exempt.
-[86]- Any such proxy statement should describe the
security holdings of each officer and director as
to which approval of an exempt disposition is
solicited. See Item 5 of Schedule 14A [17 CFR
240.14a-101], which requires, in a solicitation
made on behalf of the registrant, a brief
description by security holdings of any direct or
indirect substantial interest in any matter to be
acted upon of each person who has been a director
or executive officer of the registrant at any time
(continued...)
==========================================START OF PAGE 35======
III. DERIVATIVE SECURITIES
A. Compensatory Cash-Only Instruments
The proposal to apply Section 16 and the rules thereunder to
compensatory instruments that can be redeemed or exercised solely
for cash ("cash-only instruments") elicited divergent views.
Cash-only instruments provide performance-based cash compensation
to employees, using stock price as a measure of company
performance. Although such instruments do not provide employees
with an equity interest in the employer that may be traded in
securities markets, they do provide the equivalent opportunity to
profit based on an increase in market price.
Currently, a cash-only instrument whose value is derived
from the market value of an issuer equity security -[87]-
is excluded from the definition of derivative security if it:
(i) is awarded pursuant to an employee benefit plan that
satisfies specified provisions of Rule 16b-3, -[88]- or
---------FOOTNOTES----------
-[86]-(...continued)
since the beginning of the last fiscal year,
unless such interest gives rise to a benefit that
is shared on a pro rata basis by all other holders
of the same class. See also Item 3 of Schedule
14C [17 CFR 240.14c-101].
-[87]- An instrument whose value is not derived from the
value of an issuer equity security is not
currently and, under the rules as adopted, will
not be subject to Section 16.
-[88]- Current Rule 16a-1(c)(3)(i), which references the
provisions of Rules 16b-3(a)(1) (written plan
requirements), 16b-3(a)(2) (transferability
restriction) and 16b-3(c)(2) (disinterested
administration or formula plan).
==========================================START OF PAGE 36======
(ii) may be redeemed or exercised only upon a fixed date or dates
at least six months after award, or upon death, retirement,
disability or termination of employment. -[89]- The 1994
Release included a proposed modification of the derivative
security definition that would have excluded all cash-only
instruments issued in the context of an employer-employee
compensation arrangement, including compensation arrangements
between a company and its non-employee directors. As discussed
above, -[90]- the subsequent Cash-Only Release solicited
comment as to whether the existing exclusion for cash-only
instruments is overly broad in light of the purposes of Section
16.
Most commenters responding to the Cash-Only Release favored
an unconditional exemption for cash-only instruments, stressing
that such instruments are not transferable and hence do not give
rise to market transactions. However, the 1995 Release indicated
that, as a corollary to broadening the Rule 16b-3 exemption, the
Commission contemplated rescinding the exclusion for cash-only
instruments. Such instruments thus would be on a par with stock
options and other instruments settled in stock, and would be both
reportable and eligible for exemption under Rule 16b-3 to the
same extent. This approach is consistent with the purpose of the
1995 proposals to eliminate bias toward compensation paid in cash
by exempting from the short-swing profit recovery provisions of
---------FOOTNOTES----------
-[89]- Current Rule 16b-3(c)(3)(ii).
-[90]- See Section I, above.
==========================================START OF PAGE 37======
Section 16(b) virtually all compensatory transactions between an
issuer and its officers and directors. Commenters addressing
this aspect of the 1995 proposals divided in their views; some
indicated that the exclusion should be eliminated because the
insider retains the same opportunity to profit as presented by an
equity-settled instrument, while most favored retention of the
exclusion because transactions in these instruments do not affect
securities markets.
As an integral aspect of the 1995 approach, the Commission
has determined to rescind Rule 16a-1(c)(3) as contemplated. The
Commission believes that because the opportunity for profit based
on price movement in the underlying stock embodied in a cash-only
instrument is the same as for an instrument settled in stock,
cash-only instruments should be subject to Section 16 to the same
extent as other issuer equity securities. However, the
Commission also recognizes that cash-only instruments generally
are not traded in market transactions by insiders. Accordingly,
transactions in these instruments are made eligible for exemption
on the same basis as other transactions in issuer equity
securities between an issuer and its officers and directors.
This change renders uniform the application of a simplified
set of rules applying to all compensatory instruments that
provide an opportunity to profit based on issuer equity
performance. It is anticipated that, by eliminating the more
burdensome aspects of Rule 16b-3 and bringing cash-only
instruments within its scope, the rules adopted today will reduce
==========================================START OF PAGE 38======
the regulatory complexity and uncertainty that has discouraged
the use of equity as compensation. Accordingly, although
transactions in cash-only instruments will be reportable
following effectiveness of the amended rules, -[91]- such
instruments will be eligible, and should usually qualify, for
exemption from Section 16(b) pursuant to new Rule 16b-3.
-[92]- Commenters' concerns regarding the lack of an
exemption for participant-directed transactions in cash-only
instruments, such as the deferral of salary or fees into phantom
stock, have been addressed by expanding the proposed exemption
for grants and awards to cover participant-directed acquisitions
of issuer equity securities. -[93]-
B. Over-Allotment Options
Over-allotment options (sometimes referred to as "Green Shoe
options") facilitate public offerings and do not lend themselves
to the speculative abuse Section 16 was designed to prevent.
Accordingly, in 1994 the Commission proposed codification of
staff interpretive relief -[94]- that would specifically
---------FOOTNOTES----------
-[91]- See the discussion of reporting at Section VII.A,
below, concerning the transition to the new rules.
-[92]- Most of these instruments are acquired from the
issuer and meet the other conditions of the new
Rule. Of course, the acquisition of a cash-only
instrument from a party other than the issuer
would not be within the scope of the Rule.
-[93]- See Section II.D.1, above.
-[94]- See Video Technology (Overseas) Limited/Davis Polk
& Wardwell (June 17, 1992), and Davis Polk &
(continued...)
==========================================START OF PAGE 39======
exclude from the definition of "derivative security" options
granted to an underwriter in a registered public offering for the
purpose of satisfying over-allotments.
In response, some commenters suggested that the exclusion
should not be limited to over-allotment options granted in
registered public offerings, as proposed. Other commenters
differed in their responses to the request for comment as to
whether the exclusion should be limited specifically to those
over-allotment options that comply with the National Association
of Securities Dealers ("NASD") regulation stating that it is
"unfair and unreasonable" for an over-allotment option in
connection with a firm commitment undertaking to exceed 15
percent of the amount of securities offered, exclusive of the
over-allotment option. -[95]- However, given that the
primary need for the exclusion relates to over-allotment options
granted in registered public offerings, which as a practical
matter generally are subject to the NASD regulation, the rule is
---------FOOTNOTES----------
-[94]-(...continued)
Wardwell (July 16, 1992). Absent this relief, an
over-allotment option written by an insider could
be characterized as the establishment of a put
equivalent position and deemed sale of the
underlying stock. Subsequent expiration of the
unexercised option arguably could constitute a
purchase of the underlying security, matchable
with the over-allotment option grant or other
sales by the insider within a six-month period.
-[95]- Paragraph (c)(6)(B)(ix) of Article III, Section 44
of the NASD Rules of Fair Practice (the Corporate
Financing Rule).
==========================================START OF PAGE 40======
adopted in the form proposed, -[96]- without a specific
requirement for compliance with the NASD regulation.
C. Surrender and Withholding Rights in Connection with
Exercise or Tax Withholding
As discussed above, -[97]- the exercise of a right to
surrender or withhold securities in connection with the exercise
of a derivative security or satisfaction of a tax obligation will
be an exempt disposition of issuer equity securities to the
issuer. Whether such a right, when granted, constitutes a
derivative security is a separate issue.
Currently, the right to withhold securities in satisfaction
of a tax obligation is treated as a derivative security separate
from the equity or derivative security to which it relates.
-[98]- However, this right, as well as the right to have
securities withheld in satisfaction of an exercise price,
properly may be viewed as an integral feature of the related
security. -[99]- Accordingly, the 1994 Release proposed a
---------FOOTNOTES----------
-[96]- New Rule 16a-1(c)(7).
-[97]- See Section II.E, above.
-[98]- As an alternative to separate reporting, a tax
withholding right currently may be noted as a
feature of the equity or derivative security to
which it relates. See The Clorox Company (Mar.
27, 1992). An insider's failure to report such
right does not give rise to a disclosure
obligation under Item 405 of Regulation S-B or
Regulation S-K. See Skadden, Arps, Slate, Meagher
& Flom (June 8, 1992).
-[99]- Cf. Xerox Corporation (Jul. 7, 1992) (the staff
reached this conclusion with respect to a
mandatory tax withholding feature).
==========================================START OF PAGE 41======
new rule that would exclude from the definition of "derivative
security" these withholding rights, as well as rights to
surrender previously owned securities in satisfaction of either
an exercise price or a tax obligation incurred upon the exercise
of derivative securities or the vesting of restricted shares.
Commenters suggested that the proposed rule's reference to
"restricted shares" circumscribed too narrowly the class of
securities, other than derivative securities, to which
withholding and surrender rights apply. Commenters indicated
that the receipt of a security also could be a taxable event. In
response to these comments, the rule as adopted -[100]-
has been broadened to exempt also withholding and surrender
rights that apply to "equity securities" rather than only
"restricted shares," and that arise with respect to the receipt
as well as the exercise or vesting of a derivative or equity
security. With respect to a tax-withholding right, the exclusion
from the definition of "derivative security" is not limited to
the insider's marginal tax rate with respect to the underlying
transaction. However, the amount withheld must be applied to the
tax obligation generated by the underlying transaction.
D. Value Derived from Market Price of an Equity Security
In the 1994 Release the Commission proposed an amendment to
the definition of "derivative security" -[101]- to codify
---------FOOTNOTES----------
-[100]- New Rule 16a-1(c)(3) (proposed as Rule 16a-
1(c)(8)).
-[101]- Proposed Rule 16a-1(c)(9).
==========================================START OF PAGE 42======
the staff interpretive position that an instrument is not within
the scope of Section 16 if it includes a material non-market
price based condition (such as return on equity) to exercise or
settlement. -[102]- Although the Commission endorses
the application of this analysis to date, the Commission also
recognizes the advantage in retaining the interpretive role of
the staff to modify or develop further this analysis as may be
appropriate with respect to new instruments that may be developed
in the future. Accordingly, the proposed amendment is not
adopted, and questions regarding this analysis should continue to
be addressed to the staff. For purposes of this interpretive
analysis, a condition will be considered "material" only if it
possesses substance independent of the passage of time or
continued employment.
Most importantly, the Commission believes that under the new
rule much of the incentive to characterize these instruments one
way or the other will evaporate. In almost all cases, they will
be exempt from Section 16(b) because they will be able to satisfy
easily one of the simplified approval conditions. Consequently,
---------FOOTNOTES----------
-[102]- This is an interpretation of current Rule 16a-
1(c), which requires a derivative security to have
"an exercise or conversion privilege at a price
related to an equity security, or . . . a value
derived from the value of an equity security." See
General Mills, Inc. (Jan. 31, 1992); and Certilman
Balin Adler & Hyman (Apr. 20, 1992). See also
Boston Edison Company (Mar. 19, 1992); Merrill
Lynch & Co. (Aug. 28, 1992) Q. 4. (Registrant
discretion to adjust the applicable performance
measure, as to either duration or level of
performance, excludes a performance unit from
being a derivative security.)
==========================================START OF PAGE 43======
the only effect of a particular characterization is on the need
for and timing of any reporting under Section 16(a). The
Commission does not believe that relief generally will be needed
for this purpose.
IV. REVISIONS TO REPORTING SYSTEM
A. Overall Approach
In the 1994 Release, the Commission stated that it was
reconsidering its approach to the reporting of transactions
pursuant to the Section 16 regulatory scheme. The release,
without endorsing a specific proposal, solicited comment on five
alternative proposals seeking to simplify reporting through the
following three different basic approaches: (1) deleting or
substantially reducing the reporting of exempt transactions; (2)
reducing the flexibility currently provided insiders with respect
to use of Form 4 or 5 to report a number of exempt transactions;
and (3) requiring issuer annual reporting of insider holdings and
information as to transactions during the fiscal year.
These varied approaches highlighted several questions as to
what extent, if at all, investors need information with respect
to exempt transactions and whether investors need a
reconciliation of insiders' equity holdings from year to year.
The 1994 Release also requested comment on whether exercises and
conversions of derivative securities exempt from Section 16(b),
as well as small acquisitions, should continue to be reported on
an insider's next required Form 4 or 5, whichever is earlier.
==========================================START OF PAGE 44======
As a corollary to the amendments to Rule 16b-3 proposed in
1995, the 1995 Release requested comment on an additional
reporting approach. Pursuant to the scheme contemplated by the
1995 Release, several types of transactions, such as routine
acquisitions in broad-based employer plans, would not need to be
reported at all. The remaining transactions, including grants
and awards exempt under Rule 16b-3, generally would be reported
on a Form 4 no later than ten days following the end of the month
in which the transaction occurred. Exempt option exercises
either would have remained reportable on an insider's next
required Form 4 or 5, or would have been reported on Form 4.
The approach selected by the Commission is based on the 1995
approach, but includes elements from the 1994 Release. As
outlined in Sections IV.B through D below, the revisions simplify
the reporting framework by providing that several types of
transactions exempt from Section 16(b) no longer will be required
to be reported at all. Transactions exempt from short-swing
profit recovery that still must be reported will be reported on
Form 5, and non-exempt transactions will be reported on Form 4,
except that exercises and conversions of derivative securities
(whether or not exempt) will be reported on Form 4, and small
acquisitions will be reported on Form 5. There no longer will be
a category of transactions reported on a "next required Form 4 or
Form 5, whichever is earlier" basis, which commenters have
criticized as being confusing and possibly leading to inadvertent
late filings. The Commission believes that this new approach
==========================================START OF PAGE 45======
simplifies insiders' reporting obligations without adversely
affecting the timing and amount of information that is
significant to investors.
The 1994 Release solicited comment on whether the Commission
should eliminate the "total holdings" column in Forms 4 and 5 or
simplify the data provided by insiders to reconcile their total
holdings. Alternatively, commenters were asked to consider
whether a new column should be added to Forms 4 and 5 requiring
insiders to reconcile their current holdings with those reported
in a previous filing, particularly if exempt transactions no
longer were to be reported.
Although several commenters supported elimination of the
total holdings columns, they are being retained. Form 4
disclosure of total holdings assists users of Section 16
information in evaluating the significance of a transaction to a
particular insider, and Form 5 total holdings provide a useful
reconciliation of changes in holdings resulting from exempt and
other types of transactions permitted to be reported on a
deferred basis.
The Commission also has decided not to impose any new
reconciliation requirements on insiders. Instead, as currently,
the requirement to report total holdings on Forms 4 and 5 will
remain limited to the class of securities to which a transaction
is reported, and changes in holdings associated with transactions
eligible for deferred reporting on Form 5 will not have to be
reflected in the month-end total holdings reported on Form 4,
==========================================START OF PAGE 46======
unless the transaction voluntarily has been reported earlier on
Form 4. -[103]-
Also in keeping with current practice, insiders will reflect
changes in holdings resulting from transactions that are exempt
from Section 16 reporting in the holdings column of the next
otherwise required Form 4 or 5 filed to report a transaction
involving the same class of securities. Insiders may choose, but
are not required, to include footnote disclosure indicating the
date and nature of transactions not required to be reported. To
the extent that information about a transaction not required to
be reported under the revised rules is not readily available, the
insider should provide a "best estimate" of the change in
holdings resulting from the transaction. -[104]- The
purpose of the best estimate is not indirectly to require
insiders to report transactions exempt from Section 16(a), but
rather, to provide users of Section 16 information with holdings
information that is as accurate as reasonably possible.
-[105]-
---------FOOTNOTES----------
-[103]- Instruction 4(a)(i) to Form 4.
-[104]- There may not be sufficient information available
concerning certain types of transactions that are
not required to be reported under the revised
rules, e.g., periodic purchases in tax-conditioned
employee benefit plans, to establish a best
estimate regarding changes in holdings. In those
cases, the holdings column will not be updated
until the information becomes available.
-[105]- When accurate information concerning holdings that
were estimated by an insider becomes available, it
should be reflected on the next otherwise required
(continued...)
==========================================START OF PAGE 47======
In a separate effort to facilitate the filing of Section
16(a) reports and encourage the speedy dissemination of
information considered valuable by many members of the investment
community, the Commission has expanded the capacity of the EDGAR
system to accommodate the electronic filing of those reports.
-[106]- Insiders have been able to electronically file
their Section 16 reports on a voluntary basis since December 18,
1995. -[107]-
B. Transactions No Longer Reported at All
* "Spinoff" or other dividend transactions in which
equity securities of a different issuer are
distributed to insiders of an issuer
-[108]-
---------FOOTNOTES----------
-[105]-(...continued)
Form 4 or 5 that references the same class of
securities. Modifications in holdings information
to reflect variances in actual holdings from
estimated holdings will not trigger the disclosure
requirements of Item 405 of Regulations S-K and S-
B.
-[106]- See Release Nos. 33-7231 (October 5, 1995) [FR]
and 33-7241 (November 13, 1995) [60 FR 57682]. At
the same time, the EDGAR system was expanded to
accommodate the electronic filing of reports
pursuant to Rule 144 [17 CFR 230.144] under the
Securities Act [15 U.S.C. 77a et seq.].
-[107]- Instruction 3 to Form 3 and Instruction 2 to Forms
4 and 5 have been amended to add a reference to
electronic filing.
-[108]- New Rule 16a-9(a). The current exemption for
stock splits and dividends has been expanded to
include specifically a stock dividend in which
equity securities of a different issuer are
distributed. See Section V.C, below.
==========================================START OF PAGE 48======
* Acquisitions pursuant to a dividend or interest
reinvestment plan -[109]-
* Transactions in a tax-conditioned plan,
-[110]- except for discretionary intra-plan
transfers and cash distributions -[111]-
* Post-termination transactions by a former officer
or director that are exempt from Section 16(b) or
that do not occur within six months of an opposite
non-exempt transaction -[112]-
* Acquisitions or dispositions of securities
pursuant to a domestic relations order meeting
---------FOOTNOTES----------
-[109]- New Rule 16a-11. See Section V.A, below.
-[110]- New Rules 16a-3(f)(1)(i)(B) and 16b-3(c). Current
Instruction 4(a)(ii) to Form 5 sets forth
information regarding the reporting of
transactions and holdings in ongoing securities
acquisition plans. Among other things, it states
that transactions and holdings may be reported as
of the most recent date for which information is
available, and that acquisitions may be reported
on an aggregate basis. The 1994 Release proposed
amendments to Instructions 4(a)(ii) and (iv) to
Form 5 and the Note to Instruction 4(a)(ii) to
Form 4 to codify interpretations regarding
aggregated reporting. Because these acquisitions
no longer are required to be reported under the
revised rules, the proposed amendments are not
adopted. Further, current Instruction 4(a)(ii) to
Form 5 is rescinded since the transactions
addressed will not be reported under the revised
rules.
-[111]- Defined as "Discretionary Transactions" pursuant
to new Rule 16b-3(b)(1). See Section II.C, above.
These transactions will continue to be reported on
Form 5, as discussed in Section IV.C below.
-[112]- New Rule 16a-2(b).
==========================================START OF PAGE 49======
certain conditions of the Internal Revenue Code
-[113]-
* Transactions reflecting a mere change in form of
beneficial ownership -[114]-
* Exempt cancellations or expirations of a long
derivative security where no value is received
-[115]-
The above are transactions that must be reported under
current rules, but will not be reported under the revised rules.
-[116]- In addition to providing a means for enforcing
Section 16(b) short-swing profit liability, Section 16(a)
reporting serves the separate purpose of informing the market of
transactions that reflect insiders' views of their companies'
prospects. Because the transactions listed above generally do
not provide investors meaningful information consistent with this
---------FOOTNOTES----------
-[113]- New Rule 16a-12. See Section V.B below for
further discussion of this new rule, which expands
the existing exemption relating to Qualified
Domestic Relations Orders.
-[114]- New Rule 16a-13.
-[115]- New Rule 16a-4(d).
-[116]- Under the current and revised requirements, stock
splits, stock dividends with respect to the same
issuer and the acquisition of certain pro rata
rights do not have to be reported pursuant to Rule
16a-9. Further, transactions by odd-lot dealers
in odd-lots are exempt from current and revised
reporting requirements pursuant to Rule 16a-5.
Cash-only instruments also are not now reported
since they are excluded from the definition of
"derivative securities" under current Rule 16a-
1(c)(3) if they meet certain conditions, but they
will be reported under the new rules.
==========================================START OF PAGE 50======
purpose, the Commission deems it appropriate to relieve insiders
from unnecessary burdens by exempting these transactions from
reporting. There was nearly unanimous support among the
commenters for these revisions, which are adopted substantially
as proposed.
The revised rules provide a specific exemption from Section
16 for changes in the form of beneficial ownership (but not in
the extent of an insider's pecuniary interest in the subject
securities). -[117]- Although commenters generally
supported the proposal to add a new transaction code to Form 5 to
facilitate the reporting of these transactions, several
commenters suggested eliminating any reporting requirement
regarding changes in the form of beneficial stock ownership.
Since these transactions do not reflect any change in an
insider's pecuniary interest in an issuer's equity securities,
reporting seems to serve little purpose, and the Commission has
determined that they should be exempt from reporting.
-[118]-
---------FOOTNOTES----------
-[117]- New Rule 16a-13. For example, distributions of
equity securities from an employee benefit plan to
an insider participant would be a mere change in
the form of beneficial ownership from indirect to
direct where the securities previously had been
attributed to the insider.
-[118]- Accordingly, the proposed transaction code is not
adopted. The new rule makes it clear that
exercises and conversions of derivative securities
and the deposit or withdrawal of shares into or
from a voting trust are not to be regarded as mere
changes in the form of beneficial ownership, and
will continue to be reported. If a deposit or
(continued...)
==========================================START OF PAGE 51======
C. Transactions to be Reported on Form 5
* Transactions exempt from Section 16(b), except
for: (1) transactions listed in Section IV.B
above that are not required to be reported at all
pursuant to the changes being adopted; and (2)
exempt exercises and conversions of derivative
securities -[119]-
* Small acquisitions -[120]-
A substantial number of commenters supported an alternative
reporting approach described in the 1994 Release involving
elimination of the requirement to report transactions exempt from
Section 16(b) liability, and many also supported the elimination
of Form 5. In contrast, however, a number of commenters thought
that the requirement to report exempt transactions should be
retained, and indicated that Form 5 is a useful document.
As discussed above, the Commission is eliminating the
reporting of several classes of exempt transactions, including
non-volitional transactions in tax-conditioned plans. The
Commission expects that elimination of reporting of these routine
plan transactions will greatly alleviate insiders' burden of
reporting exempt transactions without resulting in any
---------FOOTNOTES----------
-[118]-(...continued)
withdrawal of shares into or from a voting trust
satisfies the conditions of Rule 16b-8 [17 CFR
240.16b-8], the transaction is exempt from Section
16(b).
-[119]- New Rule 16a-3(f)(1)(i).
-[120]- New Rule 16a-6.
==========================================START OF PAGE 52======
significant loss of information that users of Section 16
information find valuable.
The Commission believes, however, that the reporting of
other types of exempt transactions, such as option grants and
other acquisitions and dispositions of securities in plans that
are not tax-conditioned, may provide the marketplace with useful
information. These transactions typically are less automatic and
may reflect insiders' views of their companies' prospects. The
Commission also believes that continued annual reporting of these
transactions on Form 5 is appropriate.
In view of the change discussed above concerning the
treatment of cash-only instruments that derive value from the
market value of equity securities of the issuer, -[121]-
transactions involving such instruments will be reported on Form
4 or 5, depending on whether they are exempt. It is anticipated
that most of these will be exempt pursuant to new Rule 16b-3 and
thus reportable on Form 5.
Pursuant to the reporting scheme contemplated by the 1995
Release, exempt grants, awards and dispositions of securities in
plans that are not tax-conditioned, as well as intra-plan
transfers and cash distributions in tax-conditioned plans, would
have been reported on Form 4 no later than ten days after the
close of the month in which the transaction occurred. The
Commission has determined to require reporting of these
transactions on Form 5 rather than Form 4, in view of the remarks
---------FOOTNOTES----------
-[121]- See Section III.A, above.
==========================================START OF PAGE 53======
of many commenters who felt that the accelerated reporting of
exempt transactions on Form 4 would prove unworkable as the
result of the necessary plan information not being available in
sufficient time to meet Form 4 filing deadlines. Further, while
some commenters expressed a preference for reporting transactions
on Form 4 rather than waiting until year-end to file a Form 5 and
possibly overlooking a transaction, others expressed a need for
flexibility and indicated that annual reporting is preferable.
Those who prefer voluntarily to report exempt transactions on
Form 4, of course, may continue to do so, as is currently
permitted.
The 1995 Release also proposed elimination of the
requirement that gifts be reported. Since some commenters find
gift activity to be a useful indication of an insider's view of
the company's prospects (for example, where a large charitable
gift effects a significant disposition) the requirement to report
gifts on Form 5 is retained.
Small acquisitions, which currently are reported on a next
required Form 4 or Form 5 basis, will be reported on Form 5.
-[122]- The 1994 Release solicited comment as to whether
---------FOOTNOTES----------
-[122]- New Rule 16a-6, like the current rule, provides
only a deferral, not an exemption, from reporting.
All small acquisitions, unless otherwise exempt,
must be reported on Form 5. As is currently the
case, if an acquisition no longer qualifies for
the reporting deferral in paragraph (a) of Rule
16a-6, all such acquisitions that have not yet
been reported will continue to be reported on Form
4 within ten days after the close of the calendar
month in which the conditions of that paragraph no
(continued...)
==========================================START OF PAGE 54======
reporting could be made more convenient for insiders, consistent
with the informational needs of the investing public, by
permitting small acquisitions to be reported solely on Form 5,
and the majority of commenters favored this approach.
-[123]-
Additionally, as proposed in the 1994 Release, the small
acquisitions reporting rule is revised to exclude from the
$10,000 threshold acquisitions occurring within the prior six
months of the current acquisition that were exempted by rule from
Section 16(b), or previously reported on Form 4 or 5. The
revised rule also clarifies, as proposed, that the current
acquisition cannot be disregarded in calculating the $10,000
threshold. All the commenters remarking on these clarifications
supported them.
D. Transactions to be Reported on Form 4
* Transactions not exempt from Section 16(b), except
for small acquisitions -[124]-
* Exercises or conversions of a derivative security,
whether or not exempt from Section 16(b)
-[125]-
---------FOOTNOTES----------
-[122]-(...continued)
longer are met. See Rule 16a-6(b) [17 CFR
240.16a-6(b)].
-[123]- As discussed below, exempt exercises and
conversions of derivative securities will be
reported on Form 4 under the revised rules.
-[124]- New Rule 16a-3(g)(1).
-[125]- Id.
==========================================START OF PAGE 55======
Transactions not exempt from short-swing profit recovery
that currently are reported on Form 4 generally will continue to
be reported on Form 4, including non-exempt exercises and
conversions of derivative securities. In addition, as a change
from the current system, exercises and conversions of derivative
securities exempt from short-swing profit recovery under either
new Rule 16b-3 or Rule 16b-6(b) always will be reported on Form
4, -[126]- since the Commission is eliminating the current
method of reporting these transactions on a next Form 4 or Form 5
basis. Reporting of these transactions has been shifted to Form
4 rather than Form 5 due to concerns expressed by commenters that
the timing of option exercises represents an important indication
of insiders' views of their companies' prospects.
E. Joint and Group Reporting
Currently, when more than one person subject to Section 16
is deemed to be a beneficial owner of the same equity securities,
all such persons must report as beneficial owners and file
separate reports. To reduce this duplicative reporting, the
Commission is adopting rules that permit such persons to file
their reports either separately or jointly, as proposed in the
1994 Release. -[127]-
---------FOOTNOTES----------
-[126]- If a derivative security is exercised or converted
before its exempt grant otherwise must be
reported, the grant should be reported at the same
time as the exercise or conversion.
-[127]- New Rules 16a-3(j) and 16a-1(a)(3) reflect this
change. Forms 3, 4 and 5 and the Instructions
thereto also are modified to permit joint and
(continued...)
==========================================START OF PAGE 56======
Under the new reporting scheme, where persons in a group
have reporting obligations, the filing of collective reports on
behalf of all group members is permitted. -[128]- Such
joint and group filings, and any amendments, may be submitted by
any designated constituent beneficial owner. Required
information must be given for each beneficial owner, and such
filings must be signed by, or on behalf of, each beneficial owner
by an authorized person, with statements confirming the
delegation of signature authority attached to the filing.
Beneficial owners making a joint or group filing may
authorize one of the beneficial owners or a third party to sign
on their behalf, provided that confirming statements are attached
to the filing, or are provided by amendment as soon as
practicable, with respect to each owner delegating signature
authority, unless such a confirmation still in effect is on file
---------FOOTNOTES----------
-[127]-(...continued)
group filings. In response to a commenter's
request for clarification, the revised
instructions to the forms indicate that, for their
convenience, joint filers may reflect transactions
in separately owned securities either in an
individually filed or jointly filed report.
-[128]- Joint and group filings can be used, for example,
by parents and subsidiaries, trusts and trust
beneficiaries, partnerships, or Schedule 13D
groups [17 CFR 240.13d-101]. The group itself is
not a reporting person for Section 16 purposes,
but under the revised rules, group members may
choose to file collective reports to satisfy their
individual filing obligations. A group member is
not required to report transactions by another
group member, however, unless he or she has or
shares a pecuniary interest in the securities held
by such other member.
==========================================START OF PAGE 57======
with the Commission. -[129]- Of course, to the extent a
sufficiently broad power of attorney previously was filed, such
as with a Schedule 13D, that power of attorney may be
incorporated by reference in a Section 16(a) filing. Each
beneficial owner will retain individual liability for compliance
with the filing requirements, including the obligation to assure
that the filing is timely and accurately made. -[130]-
Comment was solicited in the 1994 Release as to whether, in
the alternative, authority to make a group Section 16 filing
could be presumed based on the filing of a group Schedule 13D,
such that all group members thereby would be deemed to have
granted authority to any group member to file a Section 16 form.
The commenters rejected the creation of such a presumption under
any circumstances other than a sufficiently broad power of
attorney, i.e., one that specifically authorizes the beneficial
owner to file Section 16 reports on his or her behalf. One of
the commenters noted that a Schedule 13D group member could file
Section 16 reports on behalf of another group member who may not
even be aware that he or she has become subject to Section 16, or
---------FOOTNOTES----------
-[129]- Currently, General Instruction 7 to Forms 3, 4 and
5 permits a form filed for an individual to be
signed on behalf of the individual by an
authorized person. This instruction remains the
same. General Instruction 5 to Form 3 and General
Instruction 4 to Forms 4 and 5 are amended to
specify the means of reporting pecuniary interest
of multiple beneficial owners. A corresponding
amendment also has been made to General
Instruction 6 to each Form.
-[130]- Cf. In the Matter of Bettina Bancroft, Release No.
34-32033, AP 3-7999 (Mar. 23, 1993).
==========================================START OF PAGE 58======
who may file duplicative reports. Therefore, authority to make a
group Section 16 filing will not be presumed based upon the
filing of a group Schedule 13D.
F. Trust Transactions
Under the revised rules, and as proposed in the 1994
Release, a trust is subject to Section 16 only if it beneficially
owns more than ten percent of a class of registered equity
securities of an issuer. -[131]- The Commission has
rescinded the provision imposing Section 16 reporting obligations
on a trust that does not own more than ten percent of an issuer's
securities if it has an insider trustee with investment control
over the issuer's securities held by the trust, and the trustee
or a member of the trustee's immediate family has a pecuniary
interest in the securities. -[132]- Since the primary
effect of the current dual reporting standard is to create
duplicative reporting obligations, particularly with respect to
family trusts, the imposition of independent Section 16
obligations on the trusts does not appear necessary.
There will continue to be some instances where a trust and a
trust beneficiary that both are subject to Section 16 must report
---------FOOTNOTES----------
-[131]- New Rule 16a-8(a)(1). See Proskauer Rose Goetz &
Mendelsohn (Apr. 29, 1991) (a trust that holds
more than ten percent of a class of equity
securities registered under Section 12 is the
beneficial owner of those securities for purposes
of Section 16).
-[132]- Current Rule 16a-8(a)(1)(ii) [17 CFR 240.16a-
8(a)(1)(ii)]. A conforming amendment to Rule 16a-
2(d)(2) [17 CFR 16a-2(d)(2)] reflects the
rescission of Rule 16a-8(a)(1)(ii).
==========================================START OF PAGE 59======
separately with respect to the same transaction because they
share investment control. The 1994 Release proposed adding a new
note to the reporting rules to provide that transactions
attributed to a trust beneficiary may be reported by the trustee
on behalf of the beneficiary. A commenter objected to the
proposed note on grounds that a trustee should not report on
behalf of a trust beneficiary unless formally authorized to do
so. Therefore, the note has been modified to indicate that, as
currently, a trustee may file a separate report on behalf of a
beneficiary if a statement confirming the delegation of signature
authority is filed with the Commission. -[133]- The
trustee also may file a consolidated report on behalf of the
trust and one or more trust beneficiaries if authorized to do so
by the beneficiaries. Regardless of whether the trustee reports
on behalf of a beneficiary or the beneficiary personally files
reports, the beneficiary subject to a reporting requirement
retains individual liability for compliance with that
requirement.
G. Compliance with the Reporting Requirements
Under the revised rules, as proposed, registrants will be
required to set off any disclosure required by Item 405 of
Regulation S-K or S-B of insider non-compliance with Section
16(a) reporting obligations under an appropriate and discrete
---------FOOTNOTES----------
-[133]- Note to new Rule 16a-8(b)(3).
==========================================START OF PAGE 60======
caption. -[134]- In response to commenters' remarks, this
new caption will read "Section 16(a) Beneficial Ownership
Reporting Compliance" rather than "Section 16(a) Reporting
Delinquencies," as proposed in the 1994 Release. The new caption
should enable interested parties readily to locate this
disclosure, which often consists of only a sentence or two, and
prevent the information from being buried among unrelated
disclosure.
In addition, Item 405 is revised to clarify the nature of
the issuer's obligation to review insiders' filings in order to
determine whether there are any delinquent reports that must be
disclosed. The issuer is entitled to rely on the Forms 3, 4 and
5 furnished to it, as well as written representations by the
insider that no Form 5 is required.
New language has been added, as proposed, to make it clear
that the issuer is obligated to consider the absence of certain
forms. -[135]- The absence of a Form 3 is an indication
that disclosure is required. Similarly, the absence of a Form 5
is an indication that disclosure is required, unless the issuer
has received a written representation that no Form 5 is required,
---------FOOTNOTES----------
-[134]- New Item 405(a)(1) of Regulations S-K and S-B.
Additionally, a technical amendment has been made
to Item 405 of Regulation S-B to correct the
reference to Rule 16a-3(d) [17 CFR 240.16a-(d)] by
replacing it with a reference to Rule 16a-3(e) [17
CFR 240.16a-3(e)].
-[135]- New Item 405(a)(2) of Regulations S-K and S-B.
This obligation was set forth in the 1991 Adopting
Release, n. 231 and surrounding text.
==========================================START OF PAGE 61======
or otherwise knows that no such filing is required.
-[136]- While some commenters objected to this
clarification on grounds that it would place an inappropriate
burden of investigation on issuers to determine that a form is
not required, the Commission views it merely as a codification of
previous Commission guidance concerning issuers' obligations.
The 1994 Release solicited comment on whether Item 405
should require issuers to include in their filings an affirmative
statement that no Section 16(a) delinquencies were required to be
reported, if such was the case. It had been suggested that an
affirmative statement requirement would prevent issuers from
overlooking the Item 405 disclosure requirement. Since most of
the commenters addressing the issue opposed an affirmative
statement requirement, and there is little evidence that issuers
are overlooking Item 405 disclosure, the Commission is not
adopting such a requirement.
Finally, as noted in the 1994 Release, the Commission is
aware of and encourages the practice of many issuers to assist
their officers and directors in complying with their Section
16(a) reporting obligations. -[137]- Since the use of
---------FOOTNOTES----------
-[136]- A "safe harbor" from disclosure is available for
an issuer who receives a written representation
and keeps it for two years. See Item 405(b)(2).
-[137]- On February 14, 1996, the Commission included in
the SEC News Digest and posted on the Commission's
Internet Web Site an announcement encouraging the
electronic filing of Forms 3, 4 and 5 (as well as
Form 144) and providing guidance on how companies
that choose to do so may assist filers in the
electronic filing process.
==========================================START OF PAGE 62======
powers of attorney is permitted, it is also possible for an
issuer to coordinate the filing of its officers' and directors'
reports by having the corporate secretary or other agent obtain
powers of attorney from these reporting persons, collect
information every month about their transactions subject to
Section 16, and file required reports by the due date.
-[138]-
H. Equity Swaps
The 1994 Release contained a section analyzing Section 16
issues relating to equity swaps, and soliciting comments upon the
analysis and related issues. -[139]- Equity swaps are
individually negotiated contracts in which the specific terms may
vary from agreement to agreement. For instance, an equity swap
may take the form of an agreement in which one party holding
shares of equity securities agrees to pay, or "swap," the return
-[140]- on those securities in exchange for the return on
an equity index, basket of equities, or an interest rate-based
cash flow. Generally, commenters agreed that the Commission's
analysis of equity swaps as involving the economic equivalent of
tandem stock appreciation and depreciation rights reflects
---------FOOTNOTES----------
-[138]- Of course, insiders giving powers of attorney
would still retain individual liability for
compliance. See n. 130, above.
-[139]- See Section III.G of the 1994 Release for the
Commission's detailed analysis.
-[140]- For purposes of this analysis, "return" may
include dividends paid on the equity instrument,
as well as the change in market value.
==========================================START OF PAGE 63======
economic reality. Some, however, suggested simplified approaches
to analysis and reporting.
The Commission reiterates that Section 16 consequences arise
from an equity swap transaction where either party to the
transaction is a Section 16 insider with respect to a security to
which the swap agreement relates. -[141]- The Commission
agrees with commenters, however, that any manner of reporting an
equity swap, or an instrument with similar characteristics, that
provides an adequate description is appropriate. The specific
method of reporting described in the 1994 Release is not the only
acceptable method. However, there are certain items of
information that must be set forth for an adequate presentation.
To provide an adequate description, an insider must report the
entry into and termination of the equity swap, as well as any
interim events to the extent such events change the insider's
---------FOOTNOTES----------
-[141]- This analysis addresses solely the application of
Section 16 to equity swaps to the extent that they
are engaged in by insiders. The discussion does
not analyze the status of these transactions or
the parties thereto under any other provision of
the federal securities laws.
However, as stated in the 1994 Release, no Section 16
consequences would flow from an equity swap to the extent
that the equity swap relates solely to interests in
securities comprising part of a broad-based, publicly traded
market basket or index of stocks, approved for trading by
the appropriate federal governmental authority, that are
deemed not to confer beneficial ownership for purposes of
Section 16 pursuant to Rule 16a-1(a)(5)(iii) [17 CFR
240.16a-1(a)(5)(iii)] and/or are excluded from the
definition of "derivative securities" pursuant to current
Rule 16a-1(c)(4).
==========================================START OF PAGE 64======
call or put equivalent position. -[142]- To be adequate,
each report must provide the following information: (1) the date
of the transaction; (2) the term; (3) the number of underlying
shares; (4) the exercise price (i.e., the dollar value locked
in); (5) the non-exempt disposition (acquisition) of shares at
the outset of the term; (6) the non-exempt acquisition
(disposition) of shares at the end of the term (and at such
earlier dates, if any, where events under the equity swap cause a
change in a call or put equivalent position); (7) the total
number of shares held after the transaction; and (8) any other
material terms. -[143]-
Some commenters suggested that equity swaps in general or
certain aspects of them should be regarded as excluded or exempt
from Section 16. The Commission is not persuaded, however, that
any exclusion or exemption currently is available or that equity
swaps should be so excluded or exempted.
Numerous issues are raised under the federal securities laws
by equity swaps and other instruments that shift some or all of
---------FOOTNOTES----------
-[142]- See 1994 Release n. 106, which stated that to the
extent settlement of the parties' obligations
occurs on an interim basis during the term of the
swap the insider's Section 16 obligations would
arise with respect to each settlement, commenters
expressed concern over the need to report interim
events. As noted above and consistent with the
Section 16 reporting scheme in general, such
events need be reported only to the extent that
they cause a change in an insider's call or put
equivalent position.
-[143]- New Code K is added to Forms 4 and 5 for reporting
equity swaps and instruments with similar
characteristics. See Section IV.I, below.
==========================================START OF PAGE 65======
the economic interests and risks of an equity security. Since
record and beneficial ownership does not necessarily reflect who
holds the voting, investment or income interests of a security,
it may be appropriate in areas other than Section 16 to assure
that the regulatory structure reflects the economic realities of
these transactions. The Commission is continuing to consider the
legal and disclosure issues raised by these arrangements under
the federal securities laws, including Schedule 13D reporting,
Rule 144, -[144]- Rule 144A, Regulation S, -[145]-
and disclosure of security holdings and executive compensation.
-[146]-
---------FOOTNOTES----------
-[144]- See Release No. 33-7187 (June 27, 1995) [60 FR
35645].
-[145]- See Release No. 33-7190 (June 27, 1995) [60 FR
35663].
-[146]- See the Commission's Report of the Task Force on
Disclosure Simplification, Part III.A.3.b.
==========================================START OF PAGE 66======
I. Changes in Forms and Reporting Codes
As proposed in the 1994 Release, when an insider exercises
an option acquired pursuant to a Rule 16b-3 plan and immediately
sells a portion of the shares to pay the exercise price under a
cashless exercise program, the insider will be able to reflect
the sale of the portion of shares necessary to satisfy the
exercise price by using the transaction code for payment of an
option exercise price by delivery or withholding of securities,
-[147]- rather than the general sale of security code,
-[148]- provided that the sale is to the issuer.
Commenters agreed that it was appropriate to use the same code
for these transactions since they all constitute cashless
exercises.
A new transaction code also has been included in Forms 4 and
5 to be used for transactions in equity swaps and instruments
with similar characteristics. -[149]- This will be in
---------FOOTNOTES----------
-[147]- Transaction code "F." The sale of shares to pay
the exercise price of an option under a cashless
exercise program is exempt from Section 16(b) if
the issuer is the purchaser, but not if the shares
are sold on the open market by a broker or other
third party. Code "F" may be used to reflect only
exempt transactions. The amendments clarify that
code "F" also should be used to report the
withholding of securities incident to satisfaction
of tax liability incurred upon the receipt,
exercise or vesting of a security.
-[148]- Transaction code "S."
-[149]- New transaction code "K" and General Instruction 8
to Forms 4 and 5.
==========================================START OF PAGE 67======
addition to whatever other codes are used to describe the
transaction. -[150]- The new code will assist the
Commission and users of Section 16 information in identifying
these transactions.
Additionally, the Instructions to Forms 3, 4 and 5 are
revised to state that the forms may be submitted to the
Commission in electronic format at the option of the reporting
person. -[151]- The Instructions also are modified to
indicate that insiders may attach a page of 8 1/2 by 11 inch
white paper to reflect additional comments to the forms, if the
space provided on the forms is insufficient. -[152]- The
current rules require insiders to reflect supplemental
information on additional copies of the forms.
Several transaction codes have been modified or deleted
from the Instructions to Forms 4 and 5 in accordance with the
---------FOOTNOTES----------
-[150]- For example, an equity swap transaction reported
as a disposition will be reported as S/K, using
the codes for "sale" and "equity swap."
-[151]- General Instruction 3(a) to Form 3, and General
Instruction 2(a) to Forms 4 and 5.
-[152]- General Instruction 6 to Forms 3, 4 and 5.
Specified information must be included at the top
of the page so that the filing can be identified
if the page is detached.
==========================================START OF PAGE 68======
revisions. -[153]- Finally, Forms 3, 4 and 5 have been
revised to accommodate joint and group filing. -[154]-
V. ADDITIONAL EXEMPTIONS AND REVISIONS
A. Dividend or Interest Reinvestment Plans
Current Rule 16b-2 exempts from the short-swing profit
recovery provisions of Section 16(b) the acquisition of issuer
equity securities resulting from reinvestment of dividends or
interest on securities of the same class, if made pursuant to a
plan, available on the same terms to all holders of that class of
securities, providing for regular reinvestment of dividends or
interest. Concerns have been expressed that the requirement that
the plan be made available to all holders of the class (the "all-
holders requirement") can impose significant burdens, such as the
outlay of significant sums to comply with laws governing
securities offerings in foreign jurisdictions, on companies that
wish to allow for insider participation.
Accordingly, in 1995 the Commission proposed to modify this
requirement, noting that such a stringent participation
requirement did not appear necessary to preclude the opportunity
for speculative abuse by insiders. The rule was proposed to be
---------FOOTNOTES----------
-[153]- Transaction codes "A," "F," "H," "I," and "M" have
been modified and codes "B," "N," "Q," "R" and "T"
have been deleted.
-[154]- Item 1 of the forms has been revised to explain
how the names and addresses of more than one
reporting person should be indicated, and a new
Item 7 has been added to the forms to indicate
whether the form is being filed by one or more
reporting persons.
==========================================START OF PAGE 69======
amended to exempt acquisitions resulting from reinvestment of
dividends or interest on securities of the same class if made
pursuant to a plan that meets three conditions: First, it must
provide for the regular reinvestment of dividends or interest.
Second, the plan must be broad-based and not discriminate in
favor of employees of the issuer. -[155]- Third, the plan
must operate on substantially the same terms for all plan
participants. -[156]-
Commenters agreed that the proposed modification is
appropriate and serves the goal of reducing administrative
---------FOOTNOTES----------
-[155]- This standard would be evaluated by reference to
all shareholders of the class. For example, the
requirement would not be satisfied merely by
making the plan available to all employees of the
issuer.
-[156]- Consistent with current interpretation, the rule
as amended would exempt only the reinvestment of
dividends or interest. Additional securities
acquired through voluntary cash contributions to
such plans will not be exempt pursuant to this
rule, but may be exempt under new Rule 16b-3,
assuming other conditions are met. See Release
No. 34-28869, n. 89. The amended rule also
continues to exempt the acquisition of issuer
equity securities pursuant to a dividend
reinvestment feature of an employee benefit plan
so long as the company maintains a separate
dividend reinvestment plan that satisfies the
conditions of the rule. See Simpson Thacher &
Bartlett (Jun. 19, 1991) and Release No. 34-18114,
Q. 76. Finally, consistent with current
interpretations, the amended rule will continue to
be available to exempt the reinvestment of
dividends in the securities of a publicly traded
parent or subsidiary, and will exempt the
reinvestment of all pro rata distributions to
security holders, not just dividends and interest.
See Middle South Utilities, Inc. (Aug. 21, 1982)
and Investment Company Institute (Sept. 18, 1992).
==========================================START OF PAGE 70======
burdens while protecting against possible speculative abuse by
officers and directors. Commenters noted particularly that the
"all-holders" provision is not essential to eliminate abuse, and
that modification of this provision would substantially reduce
the costs imposed by the requirement that such plans be made
available to odd-lot holders and shareholders domiciled abroad.
The amendment is adopted as proposed, with minor clarifying
changes. -[157]-
B. New Exemption for Domestic Relations Orders
The current rules limit the exemption for the disposition of
securities pursuant to a qualified domestic relations order
("QDRO"), as defined in the Internal Revenue Code or Title I of
ERISA, and the rules thereunder, to employee plan securities.
-[158]- Since such dispositions are unlikely to be
influenced by access to inside information, this limitation
appears unnecessary. Accordingly, the 1994 proposal included a
general exemption for such dispositions.
By interpretation, the current exemption has been construed
to permit the transfer of securities, issued under a plan that is
not subject to Section 401(a) of the Internal Revenue Code,
pursuant to a "domestic relations order" that satisfies certain
---------FOOTNOTES----------
-[157]- New Rule 16a-11. The rule has been renumbered as
a Section 16(a) rule, since reporting of these
transactions no longer will be required, as
discussed above.
-[158]- Current Rule 16b-3(f)(3).
==========================================START OF PAGE 71======
conditions of the Internal Revenue Code, -[159]- but does
not satisfy QDRO standards. -[160]- Comment was requested
as to whether the proposed exemption should require satisfaction
of the QDRO standards in all circumstances, or whether
satisfaction of the Internal Revenue Code "domestic relations
order" standards would suffice.
Commenters who addressed this proposal supported it
overwhelmingly, noting that these dispositions are unlikely to
give rise to the types of abuse of inside information that the
Section 16 rules are designed to prevent and that satisfaction of
the "domestic relations order" standards should suffice.
Commenters also suggested that the rule should exempt
acquisitions as well as dispositions. The Commission is
persuaded that the likelihood of abuse is equally remote whether
the transaction is an acquisition or disposition, so long as the
---------FOOTNOTES----------
-[159]- I.R.C. Sections 414(p)(1)(A) and (B). Among other
things, the order must create or recognize an
alternate payee's right to receive all or a
portion of the benefits payable to a participant
under a plan; relate to the provisions of child
support, alimony payments, or marital property
rights to a spouse, former spouse, child, or other
dependent of the participant; and be made pursuant
to a state domestic relations law (including a
community property law).
-[160]- The order need not satisfy, among other things,
conditions applicable to payments made after the
participant's earliest retirement age, and
requirements to treat the former spouse as
surviving spouse for purposes of determining
survivor benefits. See Premark International,
Inc. (Mar. 6, 1992), which further provides that
the plan may permit such transfers consistent with
the transferability restriction of current Rule
16b-3(a)(2).
==========================================START OF PAGE 72======
"domestic relations order" standards are satisfied. The rule as
adopted reflects these modifications. -[161]-
---------FOOTNOTES----------
-[161]- New Rule 16a-12, which replaces current Rule 16b-
3(f)(3). This amendment was proposed in the 1994
Release as proposed Rule 16b-5(b), but instead is
adopted as a Section 16(a) rule since reporting of
these transactions no longer will be required, as
discussed above.
==========================================START OF PAGE 73======
C. Exemption for Stock Dividend Transactions
The Commission proposed in 1994 to expand the exemption for
stock splits and stock dividends to include specifically a stock
dividend in which equity securities of a different issuer are
distributed. The primary application of this exemption would be
to "spinoff" transactions, in which assets previously owned by
the issuer are distributed pro rata to shareholders in the form
of equity securities of another issuer.
The Division has interpreted the current rule to apply to
stock splits or stock dividends involving the issuance, on a pro
rata basis, of a different class of equity securities of the same
issuer. -[162]- Commenters addressing this proposal
expressed support, noting that this type of dividend involves the
distribution of an ownership interest already held indirectly
through the distributing entity, and thus involves a change in
the form of ownership from indirect through the distributing
entity to direct by the recipient. Commenters also noted that
since there is no purchase or sale, there is no significant
opportunity for abuse. The proposal is adopted substantially as
proposed, with minor technical revisions. -[163]-
VI. 1995 SOLICITATION OF COMMENT REGARDING THE ON-GOING MERIT OF
THE SHORT-SWING PROFIT RECOVERY PROVISIONS OF SECTION 16
---------FOOTNOTES----------
-[162]- See Emergent Group, Inc. (Apr. 6, 1992).
-[163]- New Rule 16a-9(a).
==========================================START OF PAGE 74======
The 1995 Release solicited comment as to whether the
Commission should recommend that Congress rescind the short-swing
profit recovery provisions of Section 16(b). Commenters were
asked to address whether insider trading and market manipulation
would be deterred adequately by Rule 10b-5, as interpreted by
case law, and whether state laws establishing a fiduciary duty on
the part of officers and directors would protect adequately the
interests of public company shareholders.
Although the majority of commenters addressing this issue
favored the legislative rescission of Section 16(b), the
Commission is of the view that the short-swing profit recovery
provisions continue to fulfill a useful and effective role in
maintaining investor confidence in the integrity of United States
securities markets and accordingly should be retained. Instead,
the Commission has attempted to craft the amended rules in a
manner that retains the market protections provided by Section
16(b) while curtailing compliance costs, thereby striking an
appropriate balance between benefits and costs.
VII. TRANSITION TO NEW RULES
A. General Application
All of the rules adopted today, except for new Rule 16b-3,
become effective August 15, 1996 (the "Effective Date").
Accordingly, the Section 16 treatment of all transactions
effected on or after the Effective Date will be governed by the
new rules. As discussed below, a phase-in period until November
1, 1996 is provided for new Rule 16b-3. Of course, to the extent
==========================================START OF PAGE 75======
that the new rules codify current interpretive positions,
-[164]- those positions continue to be valid before the
Effective Date. Trusts currently subject to Section 16 that will
be relieved of Section 16 obligations under the new rules will
not be subject to any post-termination reporting obligations or
required to file a final Form 4 or Form 5. The amendments to
Item 405 of Regulations S-K and S-B will apply to documents
containing Item 405 disclosure that are filed after the Effective
Date. The new Forms should be used for filings made on and after
the Effective Date.
Cash-only instruments excludable from the definition of
"derivative security" under current Rule 16a-1(c)(3) originally
issued before the Effective Date will remain exempt from the
reporting requirements of Section 16(a) after the Effective Date.
With respect to such cash-only securities, a transaction on or
after the Effective Date that is consistent with the conditions
of the exclusion pursuant to which the security was issued also
will not to be subject to Section 16. -[165]-
Transactions not exempt from Section 16(b) under the current
rules that are conducted prior to the Effective Date will
continue to be matchable with non-exempt transactions conducted
---------FOOTNOTES----------
-[164]- E.g., new Rule 16a-1(c)(7) and Item 405(a)(2) of
Regulations S-K and S-B.
-[165]- Post-Effective Date transactions in cash-only
securities that were originally issued prior to
May 1, 1991 will continue not to be subject to
Section 16 to the extent provided in Cravath,
Swaine & Moore (Oct. 22, 1991).
==========================================START OF PAGE 76======
after the Effective Date for short-swing profit recovery
purposes.
B. New Rule 16b-3
In extending the phase-in date for current Rule 16b-3, the
Commission stated that this period would continue until September
1, 1996. -[166]- However, given the timing of the
adoption of new Rule 16b-3, the Commission is extending the
phase-in date until November 1, 1996. -[167]- While new
Rule 16b-3 will become available for issuers that wish to use it
on August 15, 1996, current and former Rule 16b-3 -[168]-
will remain available for transactions effected prior to November
1, 1996. When an issuer adopts a plan that complies with new
Rule 16b-3 or converts one of its existing plans to the new rule,
all plans must be converted, -[169]- provided that any
transaction between an issuer and its officers or directors that
occurs outside the scope of a formal plan or pursuant to a plan
---------FOOTNOTES----------
-[166]- See the 1995 Phase-in Release.
-[167]- See Release No. 34-37261, issued today.
-[168]- Former Rules 16a-8(b) and 16a-8(g)(3) also remain
available for purposes of providing an exemption
from Section 16(b). See the 1991 Adopting Release
at Section VII.C.
-[169]- Following conversion of an existing plan to new
Rule 16b-3, the amendment of outstanding
derivative securities to permit their transfer
will not be deemed a cancellation of such
securities and a grant of new securities for
Section 16 purposes. Compare Time Warner (Dec.
18, 1992) Q.3 and Jesse M. Brill (Mar. 25, 1994)
Q.4, where following amendment outstanding options
no longer were exempt pursuant to current and
former Rule 16b-3, respectively.
==========================================START OF PAGE 77======
that permits only the issuance of cash-only instruments may rely
on new Rule 16b-3 without triggering this conversion requirement.
Current and former Rule 16b-3 may not continue to be relied on by
issuers and insiders after November 1, 1996. Transactions exempt
under current and former Rule 16b-3 should be reported as
provided by the new rules during the phase-in period.
-[170]-
As stated above, the new Forms should be used for filings
made on and after the Effective Date. Since the new transaction
codes are keyed to transactions exempted by new Rule 16b-3,
insiders reporting transactions under the former or current rule
may either use the new code most analogous to the transaction or
code "J" (for "other" transactions) with an explanatory footnote.
---------FOOTNOTES----------
-[170]- The new reporting exemption for tax-conditioned
plans will not be available until new Rule 16b-3
is used because that reporting exemption applies
only to transactions exempted by new Rule 16b-
3(c).
==========================================START OF PAGE 78======
VIII. COST-BENEFIT ANALYSIS
The amendments adopted herein are expected to decrease
significantly the compliance burden imposed on persons subject to
Section 16 and attendant costs without undercutting the statutory
objectives of disclosing information concerning insider trading
and discouraging speculative short-term insider trading.
The simplified treatment of transactions between an issuer
and its officers and directors, whether or not pursuant to a
formal employee benefit plan, will constitute the most important
reduction in compliance burden. With respect to these
transactions, the conditions that must be met for an exemption to
be available have been substantially simplified. The amended
rules also will simplify issuers' administration of dividend and
interest reinvestment plans, and expand the exemption for stock
splits and stock dividends to include stock dividends in which
securities of a different issuer are distributed.
The rules also will reduce compliance costs by: providing
that many transactions no longer need be reported at all;
permitting joint and group reporting where more than one person
is deemed to be a beneficial owner of the same securities;
providing that Section 16 applies to a trust only if the trust
beneficially owns more than ten percent of a class of registered
equity securities; and limiting officers' and directors' post-
termination reporting obligations. Where the amendments may
increase compliance costs, such as by requiring reporting with
==========================================START OF PAGE 79======
respect to transactions in cash-only securities and by
accelerating the reporting of option exercises, such costs should
be outweighed by the benefit of having additional information
available to the public on an accelerated basis, as well as the
ease of compliance with a simplified reporting scheme. The
amendments also will eliminate regulatory complexity and
uncertainty that discourages the use of equity as compensation.
IX. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared a final regulatory flexibility
analysis in accordance with 5 U.S.C. 604 regarding the adoption
of new Rules 16a-11, 16a-12 and 16a-13, and the changes to Rules
16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3 and 16b-6,
Forms 3, 4 and 5, and Item 405 of Regulations S-B and S-K. A
summary of the corresponding Initial Regulatory Flexibility
Analysis was included in the 1994 Release and the 1995 Release.
A copy of the final regulatory flexibility analysis may be
obtained by contacting Anne M. Krauskopf, Division of Corporation
Finance, U.S. Securities and Exchange Commission, 450 Fifth
Street N.W., Washington, D.C. 20549 at (202) 942-2900.
As more fully discussed in the analysis, since 1994 the
Commission has been engaged in rulemaking to modify the Rules
under Section 16, particularly to alleviate unanticipated
practical difficulties that arose since adoption of the 1991
amendments, simplify Section 16 requirements applicable to
employee benefit plans, and codify several staff interpretive
positions. The amendments to Rule 16b-3 adopted today will
==========================================START OF PAGE 80======
significantly expand the exemption as it applies to broad-based
non-discriminatory plans, will impose different conditions
applicable to grants, awards and other acquisitions from the
issuer, and will provide new exemptions for the disposition of
issuer equity securities to the issuer.
Other rule amendments will modify the Section 16(a)
reporting system to provide that most exempt transactions and
small acquisitions will be reported annually on Form 5, with
earlier reporting on Form 4 permitted. Exercises and conversions
of derivative securities, whether or not exempt from Section
16(b), will be reported on Form 4. However, routine transactions
pursuant to tax-conditioned plans, dividend or interest
reinvestment plan transactions, transactions pursuant to domestic
relations orders and transactions that change only the form of
beneficial ownership will be exempt from reporting. The
exemption for reinvestment transactions pursuant to dividend and
interest reinvestment plans is amended to replace the requirement
that such a plan must be available to all holders of the class of
securities with a condition that the plan require both wide
participation and equal treatment of all participants.
No significant issues were raised by public comment in
response to the initial regulatory flexibility analysis.
The amendments adopted today primarily will affect
individuals who are corporate insiders, the majority of whom may
fall within the definition of "small business" under the Exchange
Act. To the extent that these persons are affected, it is
==========================================START OF PAGE 81======
expected that the proposals will reduce their compliance burdens
associated with Section 16.
It is expected that the amendments adopted today will result
in a material decrease in reporting and compliance requirements
since they will streamline the requirements applicable to
employee benefit plans. Although exercises and conversions of
derivative securities will be reported earlier than previously
required, and certain types of cash-only instruments will become
reportable, many other transactions no longer will be reported at
all, and the overall reporting scheme will be simplified as a
result.
The amendments adopted today will benefit corporate insiders
by simplifying the Section 16 rules and eliminating unnecessary
requirements. Separate requirements for small issuers are
inappropriate because most of the corporate insiders subject to
the Section 16 rules are individuals who meet the small business
definition. The use of performance rather than design standards
for small issuers is inconsistent with the Commission's mandate
of investor protection. Other proposals to further reduce the
compliance requirements were considered but rejected on grounds
that they would be inconsistent with the Section 16 statutory
objectives.
X. STATUTORY BASIS
The amendments to Regulation S-B, Regulation S-K, and the
Section 16 rules and forms are adopted by the Commission pursuant
==========================================START OF PAGE 82======
to Exchange Act Sections 3(a)(11), -[171]- 3(a)(12),
-[172]- 3(b), -[173]- 9(b), -[174]- 10(a),
-[175]- 12(h), -[176]- 13(a), -[177]- 14,
-[178]- 16, and 23(a). As the Section 16 rules and
---------FOOTNOTES----------
-[171]- 15 U.S.C. 78c(a)(11).
-[172]- 15 U.S.C. 78c(a)(12).
-[173]- 15 U.S.C. 78c(b).
-[174]- 15 U.S.C. 78i(b).
-[175]- 15 U.S.C. 78j(a).
-[176]- 15 U.S.C. 78l(h).
-[177]- 15 U.S.C. 78m(a).
-[178]- 15 U.S.C. 78n.
==========================================START OF PAGE 83======
forms relate to the Investment Company Act and the Public
Utility Holding Company Act, they also are adopted pursuant to
Investment Company Act Sections 30 -[179]- and
38, -[180]- and Public Utility Holding Company Act
Sections 17 -[181]- and 20, -[182]- respectively.
List of Subjects in 17 CFR 228, 229, 240, and 249
Reporting, recordkeeping requirements, and Securities.
---------FOOTNOTES----------
-[179]- 15 U.S.C. 80a-29.
-[180]- 15 U.S.C. 80a-37.
-[181]- 15 U.S.C. 79q.
-[182]- 15 U.S.C. 79t.