Cleary Gottlieb Steen & Hamilton

August 15, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Proposed Rules Regarding Section 16(a) and Related Rules
(File No. S7-31-02)

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rules regarding Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), set forth in Release No. 34-46313 (the "Release"). The proposed rules would implement Section 403 of the Sarbanes-Oxley Act of 2002 (the "Act"). We appreciate the opportunity to comment on the matters discussed in the Release. This letter supplements the comments made in our letter to you, dated June 24, 2002, regarding the Commission's original proposal for enhanced insider reporting (the "Prior Letter").

We commend the Commission for its efforts to improve investor access to information concerning insider transactions in issuer equity securities. However, we believe that a number of matters addressed in the Release should be clarified. We also believe that the Commission must be careful not to undermine the usefulness of increased and more timely reporting by inundating investors with reports about routine and often nonvolitional transactions. We offer the following suggestions to aid the Commission in developing rules that will benefit investors without subjecting issuers and insiders to undue burdens.

1. Retention of Certain Existing Rules and Interpretations.

A. Section 16(a) Exempted Transactions and Other Reporting Rules. The Release implies that the Commission will not change existing rules and interpretations under Section 16(a) that provide exemptions from reporting or other reporting guidance not directly concerning the timing of reports.1 These rules include, for example, Rule 16a-3(f)(1)(i)(B) (exemption for transactions exempt from Section 16(b) under Rule 16b-3(c)), Rule 16a-4 (exemption and reporting rules related to derivative securities), Rule 16a-8 (reporting rules related to trusts), and Rule 16a-11 (exemption for the acquisition of securities under certain dividend or interest reinvestment plans) and related interpretations. We believe that the basis for these exemptions and interpretations continues to be valid. Moreover, we believe that the administrative burdens associated with required reporting (whether or not on an accelerated basis) of the limited types of transactions now entirely exempt from reporting would far exceed the benefits to investors from such reporting. We believe that it would be helpful for the Commission to confirm the continued validity of these rules and interpretations.

B. Good Faith and Best Estimate Rules. An insider is now required to report on Form 4 the aggregate amount of each class of securities beneficially owned by the insider with respect to which any transaction is being reported. The Commission should confirm that it will continue to allow insiders to rely in good faith on the last plan statement provided to them with respect to securities beneficially owned under certain employee benefit plans.2 The Commission should also confirm the ability of insiders to provide a "best estimate" of the holdings under certain programs if current information is not readily available.3

C. Reporting on Form 5 for Certain Exempt Transactions and Small Acquisitions. The Release implies that transactions exempt from Section 16(b) pursuant to rules other than Rule 16b-3 will continue to be reportable on Form 5.4 We believe that this approach is consistent with the purposes of the Act in light of the abuses that it intended to address. Similarly, Rule 16a-6 provides that small acquisitions may be reported on Form 5, subject to certain conditions. We believe that Form 5 reporting of these de minimis transactions continues to be appropriate as they are not material to investors and accelerated reporting would be unduly burdensome. Furthermore, the Commission should clarify that transactions that are exempt under Rule 16b-3, but are also described in Rule 16a-6, may be reported on Form 5.

2. Discretionary Transactions. We note that the Commission is considering delaying the reporting of "discretionary transactions" (as defined in Rule 16b-3(b)(1)) involving employee benefit plans, whether or not exempted by Rule 16b-3, to a date that would be tied to the insider's actual receipt of notice of the transaction.5 We believe that such a delay is appropriate. Based on our experience, delays between the time that an insider notifies plan administrators that he or she desires to execute such a transaction and the insider's actual receipt of the details of execution are common. They generally result from the detailed record keeping and other time-intensive administrative procedures associated with plan maintenance.

3. Non-Discretionary Transactions. For the reasons set forth in paragraph 2 above with regard to discretionary transactions, we also believe that nondiscretionary transactions reportable under Section 16(a) (e.g., nondiscretionary transactions under employee benefit plans that are not tax-conditioned plans) should be subject to delayed reporting tied to the insider's actual receipt of notice of the transaction.6 It would be anomalous to permit delayed reporting of discretionary transactions, which are volitional, but not provide at least the same relief for nondiscretionary transactions.

4. Transactions Pursuant to "10b5-1" Arrangements and Other Pre-Existing Arrangements. The Release states that the Commission is considering delayed reporting of transactions under a pre-existing arrangement the timing of which is not known to the insider before a confirmation or other notice of the transaction is sent to the insider. The Release provides that the permitted delay would not exceed a specified number of days. By contrast, the period of delay for discretionary transactions involving an employee benefit plan would be tied to the insider's actual receipt of notice. We believe that reporting tied to the insider's actual receipt of notice would also be appropriate for transactions, such as transactions under 10b5-1 arrangements, in which the timing is outside the knowledge of the insider pending his or her receipt of a confirmation or other notice of the transaction. We do not believe that the adoption of such a rule would undermine the prompt disclosure to investors of material information, because in such cases the interest of the insider in receiving prompt notice of such transactions would be aligned with that of the investors.

5. Trade Date v. Settlement Date. The Act requires accelerated reporting for transactions that are not exempt pursuant to a rule adopted under Section 16. We request that the Commission clarify the date on which such transactions would be deemed to be "executed" for purposes of reporting. (We note that Section 16(a) prior to amendment by the Act referred to the date on which a transaction "occurred," not the date on which it was "executed.") Previously, transactions have been viewed generally as having occurred on the trade date, not the settlement date.7 However, since market transactions generally are required to be settled three business days after the trade date, under the current interpretation an insider could be forced to report transactions prior to settlement, which could result in reporting of failed transactions.

6. Reporting Transactions on Form 8-K. We agree with the Commission's decision not to consider further its proposal to require issuers to report transactions by management in issuer equity securities on a Form 8-K (the "Form 8-K Release").8 However, we believe for similar reasons that the Commission should not consider further the other proposals made in the Form 8-K Release.

A. "10b5-1" Arrangements. We stated in the Prior Letter that we do not believe that the establishment, modification or termination of arrangements adopted pursuant to Rule 10b5-1 should be reported on Form 8-K. These events are not necessarily indicative of an insider's views of an issuer's prospects. We believe that prospective arrangements for transactions in an issuer's securities, which may be conditional or otherwise subject to material limitations, are not of comparable significance to the actual sales and purchases. Given accelerated reporting of insider transactions, we believe that reporting arrangements, as opposed to transactions, could be confusing to investors.

B. Company Loans and Guarantees. The Commission's original proposal to improve and accelerate disclosure of insider loans reflected the Commission's concern for the potentially serious conflicts of interest that these loans may present. In Section 402 of the Act, Congress identified and flatly prohibited specified types of loans. By doing so, we believe Congress expressed its clear intention regarding the types of insider loans that present the greatest likelihood of conflict. Loans that are permitted under Section 402 would therefore also seem to be of less urgent interest to investors. We believe that the benefit to investors of accelerated reporting of these loans would not outweigh the increased administrative burden to issuers that would result.

7. Cashless Exercises of Employee Stock Options. We request that the Commission provide guidance as to the application of Section 402 of the Act to cashless exercises of employee stock options. In particular, we ask that the Commission exempt, pursuant to its authority under the Act and Section 36 of the Exchange Act, cashless exercises of compensatory options granted by issuers to directors and executive officers from the prohibition on loans under Section 402 of the Act if (x) the issuing company itself is a broker-dealer or an affiliate of a broker-dealer or (y) the issuing company is the sponsor of a cashless exercise program with a broker-dealer that meets the requirements of Regulation T. We believe that cashless exercises of compensatory options should not be prohibited by Section 402 since they are subject to regulation under Regulation T and are ordinary course transactions that do not implicate the policy concerns underlying Section 402 of the Act. Specifically, the extension of credit involved in cashless exercise programs is not likely to be of concern to investors, because the loans involved have terms of three days or less, the programs are routine and the collateral securing the loan is sold simultaneously with the making of the loan.

8. Corporate Website Disclosure. The Act mandates that, not later than July 30, 2003, an issuer that maintains a corporate website must post change of beneficial ownership reports by insiders on its website not later than the end of the business day following the filing of such reports with the Commission. We believe it would be helpful for the Commission to confirm that an issuer would comply with the Act by providing on its corporate website a hyperlink to the Commission's website where all such reports will be posted on the same day they are filed.

9. Regulation S-K Item 405 Safe Harbor. Item 405 of Regulation S-K requires issuers generally to disclose in their annual proxy statements late Section 16(a) filings. The information required in the proxy statement includes the identity of the late filer, the number of late filings and the number of transactions not reported on time. In light of the accelerated filing deadlines for such reports and the efforts that issuers and insiders will need to make to adjust to them, we recommend that the Commission adopt a one-year safe harbor rule with respect to such disclosure. We suggest that issuers be permitted to exclude from disclosure under Item 405, with respect to transactions executed on or after August 29, 2002 but before August 29, 2003, any Section 16(a) filing made within two weeks of the date it was due to be filed with the Commission.

* * *

We thank you for the opportunity to submit this comment letter. We would be pleased to discuss with you any of the comments described above or any other matters you feel would be helpful in your review of the proposals. Please do not hesitate to contact A. Richard Susko, Arthur H. Kohn or Mary E. Alcock (212-225-2000) if you would like to discuss these matters further.

Very truly yours,


cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Paul S. Atkins, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
The Honorable Roel C. Campos, Commissioner

1 Numbered paragraphs 1 and 2 in Part II of the Release indicate that the Commission anticipates accelerated reporting for transactions that must now be reported on Form 4 and for Rule 16b-3 exempt transactions that may now be reported on Form 5, but does not indicate that reporting will be required for transactions that are currently not required to be reported. Similarly, a subsequent sentence in Part II of the Release states that Rule 16a-3(f) would subject to accelerated reporting all "reportable" transactions exempted by Rule 16b-3. The language of Section 403 of the Act does not appear to dictate the opposite result, insofar as it largely parallels the old language of Section 16(a), under which the existing exemptions and other rules were of course adopted.
2 Telephone Interpretations Manual, No. R. 69 (July 1997).
3 Release No. 34-37260, n.104 and n.105 (May 31, 1996).
4 See note 1 above.
5 We note further that discretionary transactions, as defined, may occur under tax-conditioned plans (within the meaning of Rule 16b-3) and under plans that are not tax-conditioned plans.
6 For example, many issuers maintain plans in which directors automatically receive directors' fees in stock in lieu of cash. A director may know that he or she will be awarded meeting fees in shares of stock in lieu of cash but may not know how many shares he or she has earned until the fees have been converted into a number of shares and credited to the director's account. In some plans, the conversion ratio may not be fixed at the time of the meeting and therefore could not be known until some later time.
7 See, e.g., Winston v. Federal Express Corp., 853 F.2d 455, 456 (6th Cir. 1988).
8 Release No. 34-45742 (Apr. 12, 2002).