William H. Schmidt
December 12, 2002
Jonathan G. Katz
Re: Regulation BTR; File No. S7-44-02
Dear Mr. Katz:
We are submitting this comment to proposed Rule BTR on behalf of a client of this firm (hereinafter the "Company"). The Company is an issuer subject to Section 306(a) of the Sarbanes-Oxley Act.
The Company maintains a 401(k) plan (the "Plan"). Participants under the Plan may invest their contributions in a fund which contains stock of the Company (the Stock Fund"), as well as in several different mutual funds. Participants are permitted to make transfers between funds on a daily basis.
The Stock Fund is a unitized fund consisting of Company stock plus a small percentage (generally between 1% and 5%) of cash. In essence, the Stock Fund operates like a mutual fund and participants who have invested in the Stock Fund are credited with a number of units in the Stock Fund reflecting the value of their respective interests in the Stock Fund. A transfer of funds to or from the Stock Fund settles in one day, in the same manner as transfers to and from the mutual funds which are investment vehicles under the Plan.
Under a policy adopted by the administrator of the Plan pursuant to its powers under the Plan, a participant can transfer out of the Stock Fund at any time, but if the participant transfers out of the Stock Fund, the participant cannot transfer funds back into the Stock Fund until 90 days has elapsed. Even though a participant is barred for 90 days from transferring assets from a mutual fund to the Stock Fund, the participant is still allowed to purchase interests in the Stock Fund through payroll deductions and is allowed to make further transfers out of the Stock Fund. The purposes of this policy are to discourage frequent, speculative trading in and out of the Stock Fund and also to eliminate the need to hold a large proportion of the Stock Fund in cash to handle frequent transfers. The Company believes that many plan sponsors have adopted policies similar to this policy to discourage speculative trading in employer stock.
As a result of the policy, it is possible that more than 50 percent of the plan participants could be in some portion of the blackout during a period of more than three consecutive business days. However, because this blackout results from individual investment decisions, it will not be possible to predict whether or when this blackout period will occur or predict how long the blackout period will last. As a result, if this practice results in a blackout period, it will be impossible for the Company to comply with the advance reporting obligation imposed by Regulation BTR.
II. Request for Relief.
The Company believes that the policy in question has had a salutary effect on the operation of the Plan and wishes to keep it in force. However, unless relief is provided under Regulation BTR it may be forced for practical reasons to abandon the policy.
This policy has been carefully crafted to make sure that a plan participant is always in a position to be able to sell his or her interest in the Stock Fund. For that reason, the policy should not cause the imposition of the trading prohibition under Section 306(a). As the Commission stated in the preamble to Regulation BTR, "Section 306(a) is designed to address the apparent unfairness of an issuer's directors and executive officers being able to sell their equity securities when the issuer's employees cannot. The statute's trading prohibition should mitigate the risk that corporate executives are putting their personal interests ahead of their responsibilities to their companies, their employees and their companies, their employees and their companies' security holders." The policy does not cause the unfairness referred to above because it never prevents employees from selling their equity securities. Based on the foregoing, the Company requests the Commission to take appropriate actions to exempt this policy from coverage under Section 306(a).
The Company suggests that exemption could be accomplished by the Commission in any of the following ways:
The Commission has exempted certain transactions under Rule 101(c) and has requested comments on whether those transactions should be exempted. The Company believes that all of those transactions should be exempt. In particular, the exemption under Rule 101(c)(3) dealing with purchases or sales pursuant to a Qualified Plan is especially important to the Plan. As mentioned above, the Stock Fund contains a small amount of cash. The amount of cash fluctuates from time to time, so that the number of shares of Company stock represented by a particular number of units of the Stock Fund will fluctuate from time to time. The proposed exemption prevents this fluctuation from resulting in liability under Section 306(a) and is worthy of retaining.
Please let me know if you need any further information concerning this issue.