[Federal Register Volume 60, Number 200 (Tuesday, October 17, 1995)]
[Proposed Rules]
[Pages 53832-53840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25626]
[[Page 53831]]
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Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 240
Ownership Reports and Trading by Officers, Directors, and Principal
Security Holders; Proposed Rule
Federal Register / Vol. 60, No. 200 / Tuesday, October 17, 1995 /
Proposed Rules
[[Page 53832]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release Nos. 34-36356; 35-26389; IC-21406; 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: Proposed Rule; Extension of Comment Period and Further Request
for Comment.
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SUMMARY: In connection with proposals issued on August 10, 1994,
Release No. 34-34514 [59 FR 42449] (the ``Proposing Release'') and the
request for further comment issued on September 16, 1994, Release No.
34-34681 [59 FR 48579] (the ``Cash-Only Release'') regarding the
treatment of compensatory cash-only instruments under its rules
regarding the filing of ownership reports by officers, directors, and
principal security holders, the Commission today is issuing an
alternative proposal. This proposal would amend the rule that exempts
certain employee benefit plan transactions from the short-swing profit
recovery provisions of Section 16(b) of the Securities Exchange Act of
1934 (``Exchange Act'') by broadening the exemption and extending it to
other transactions between issuers and their officers and directors.
There is also a proposal to amend the rule exempting transactions in
dividend or interest reinvestment plans to reduce regulatory burdens.
Comment also is solicited on other issues related to Section 16,
including the manner in which exempt transactions should be reported
and possible legislative rescission of Section 16(b). In addition, the
comment periods for the Proposing Release and Cash-Only Release are
extended until December 15, 1995.
DATES: Comments should be received on or before December 15, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Comment letters should refer to File No.
S7-21-94. All comments received will be available for public inspection
and copying in the Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C., 20549.
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Office of Chief
Counsel, at (202) 942-2900, Division of Corporation Finance, Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION: On August 10, 1994, the Commission released
for public comment proposals to amend certain of its rules under
Section 161 of the Exchange Act.2 On September 16, 1994, the
Commission solicited additional comment with respect to the Section 16
treatment of cash-only instruments. The Commission now proposes an
alternative scheme to amend Rule 16b-33 (the ``Alternative
Proposal'') that differs from the amendments to Rule 16b-3 that were
proposed in the Proposing Release. All rule proposals, including
proposed amendments to Rule 16b-3, and requests for comment made in
both the Proposing Release and the Cash-Only Release (the ``1994
proposals'') remain under consideration, and the Commission may adopt
any combination of the 1994 proposals and the Alternative Proposal.
However, it is contemplated that if the Alternative Proposal is adopted
in its entirety, the exclusion from the definition of ``derivative
security'' for cash-only instruments provided by the current
rules4 would be rescinded, and the Section 16 status of such
instruments would be governed by the Section 16(a) reporting rules and
Rule 16b-3 as amended by the Alternative Proposal.
\1\15 U.S.C. 78p (1988).
\2\15 U.S.C. 78a et seq. (1988).
\3\Rule 16b-3 [17 CFR 240.16b-3].
\4\Rule 16a-1(c)(3) [17 CFR 240.16a-1(c)(3)].
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I. Summary
The strict liability and short-swing profit recovery provisions of
Section 16(b)5 and the exemptive rules thereunder have been
criticized as unnecessarily complex, unduly burdensome with respect to
innocent transactions, and inappropriately intrusive in the area of
corporate governance. Rule 16b-3 has generated the most significant
controversy with respect to these issues. In the Proposing Release, the
Commission published numerous proposed amendments to the Section 16
rules in an attempt to simplify and clarify this subject. In
particular, amendments were proposed to Rule 16b-3 that responded to
objections that the conditions of that rule applicable to broad-based
plans are difficult to administer and unduly restrictive, given the
lack of opportunity for speculative abuse in connection with most plan
transactions. Although public comment on the 1994 proposals generally
was favorable, the Commission has continued to consider whether issues
arising from the treatment of employee benefit plan transactions, as
well as other officer and director transactions, could be better
resolved through a simpler and more flexible approach that fully serves
the policy underpinnings of the Section 16 regulatory scheme.
\5\15 U.S.C. 78p(b) (1988).
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To this end, the Commission has focused on the distinction between
market transactions by officers and directors (``insiders''),6
which present opportunities for profit based on non-public information
that Section 16(b) is intended to discourage, and transactions between
an issuer and its officers and directors, which typically constitute a
legitimate and increasingly popular mechanism for an issuer to
compensate persons in its service. The Commission is of the view that
the inherent differences in the usual purpose and effects of these two
classes of transactions may establish a more cogent rationale upon
which to base an exemption from the strict liability, short-swing
profit recovery provisions of Section 16(b).7
\6\Like current Rule 16b-3, the Alternative Proposal would not
exempt transactions with persons who beneficially own greater than
ten percent of a class of an issuer's equity securities.
\7\Although some transactions between officers or directors and
issuer-sponsored employee benefit plans technically are not
transactions with the issuer, such transactions should be within the
scope of an exemption premised on the compensatory 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.
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Congress adopted Section 16(b) in 1934 ``to deter insiders from
using inside information to aid them in their trading
activities.''8 According to the relevant legislative history, the
drafters intended specifically to target ``directors and officers of
corporations who used their positions of trust and the confidential
information which came to them in such positions, to aid them in their
market activities.''9 To ameliorate the potential harshness of
applying strict liability to classes of transactions that are not
susceptible to insider misuse of non-public corporate information, the
Commission was
[[Page 53833]]
granted express exemptive authority under Section 16(b).10
\8\P. Romeo and A. Dye, Section 16 Treatise and Reporting Guide
Sec. 1.03[b][i], at 1-23 (1994) (hereinafter ``Romeo and Dye'')
(discussing the legislative history of Section 16(b)).
\9\S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934). Congress
also was concerned about ``the unscrupulous employment of inside
information by large stockholders who, while not directors and
officers, exercised sufficient control over the destinies of their
companies to enable them to acquire and profit by information not
available to others.'' Id.
\10\See Section 16(b) (``This subsection shall not be construed
to cover any transaction * * * which the Commission by rules and
regulations may exempt as not comprehended within the purpose of
this subsection[;]'' i.e., ``[f]or the purpose of preventing the
unfair use of information which may have been obtained by such
beneficial owner, director, or officer by reason of his relationship
with the issuer. * * *''); see also Romeo and Dye, supra n. 8,
Sec. 1.03[b][i], at 1-24.
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Generally, transactions between issuers and their officers or
directors do not appear to present the same opportunities for insider
profit on the basis of non-public information. Typically, where the
company, rather than the trading markets, is on the other side of an
insider transaction in that company's securities, any profit obtained
is not at the expense of uninformed shareholders and other market
participants of the type contemplated by the statute.11 This may
be the case even if the insider is in possession of confidential
company information that otherwise might permit him or her to reap
unfair gains from a market transaction.
\11\An insider's breach of fiduciary duty to profit from self-
dealing transactions with the company is a concern of state
corporate law; most states have created potent deterrents to insider
self-dealing and other breaches of fiduciary duty. See generally 3
Fletcher Cyc. Corp. Sec. 837.60 (Perm. ed. 1994); D. Block, S. Radin
and N. Barton, The Business Judgment Rule: Fiduciary Duties of
Corporate Directors 124-137 (4th ed. 1993). There are also potential
considerations under Rule 10b-5 [17 CFR 240.10b-5].
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Nevertheless, the Commission believes that imposition of
traditional state-law procedural protections can be useful in further
ensuring compliance with the underlying purposes of Section 16 by
creating effective prophylactics against possible insider trading
abuses. Consequently, as is the case with respect to the existing rules
and the 1994 Proposals, this Alternative Proposal retains the concepts,
where applicable, of approval by shareholder vote or non-employee
directors.12
\12\Cf. Del. Gen. Corp. Law Secs. 144 (a)(1) and (a)(2); N.Y.
Bus. Corp. Law Sec. 713; Model Business Corp. Act Secs. 8.60(1),
8.62 and 8.63. See also Oberly v. Kirby, 592 A.2d 445, 466-67 (Del.
1991) (dictum).
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Through the Alternative Proposal, the Commission has sought to
craft a rule that, consistent with the statutory purpose of Section
16(b), erects meaningful safeguards against the abuse of inside
information by officers and directors without impeding their
participation in legitimate compensatory transactions that do not
present the possibility of such abuse, and facilitates compliance. In
so doing, the Commission has recognized that most, if not all,
transactions between an issuer and its officers and directors are
intended to provide a benefit or other form of compensation to reward
service or to incentivize performance. Shareholders, economists,
compensation experts and others increasingly have been urging public
companies to compensate their officers and directors in stock rather
than cash, in order to align more closely the interests of management
and shareholders.13 Many companies have begun to use stock and
stock-based instruments in lieu of traditional cash incentives to
encourage managers to adopt a longer-term perspective by sharing the
risks and rewards of equity ownership.
\13\See, e.g., Report of the NACD Blue Ribbon Commission on
Director Compensation (1995); M. Klein, Top Executives Pay for
Performance (Conference Board 1995); Loucks, ``An Equity Cure for
Managers,'' Wall St. J., Tues., Sept. 26, 1995.
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At the same time, the Commission's exemptive rules under Sections
16(a) and 16(b), including the regulatory exclusion of SARs payable
solely in cash and other cash-only derivative securities from both
statutory provisions, have been criticized for creating an undue
regulatory bias in favor of cash compensation. The restrictions,
complexity and uncertainties attendant to compliance with Rule 16b-3
tend to discourage the use of equity and thus further bias compensation
arrangements toward cash. Additionally, some believe that the current
exclusion from treatment as ``derivative securities'' of cash-only
instruments promotes issuer use of such instruments, rather than the
identical instruments payable in stock, to compensate their insiders.
In proposing to bring within the definition of derivative security
cash-only instruments that are the economic equivalents of derivative
securities payable in stock,14 the Commission has sought, in part,
to reduce this bias. Today's proposal reflects an approach that
recognizes that companies could just as easily compensate their
insiders through cash or other non-equity instruments to avoid
compliance with the perceived burdens of the Section 16(b) exemptive
rules.
\14\See the Cash-Only Release.
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In brief, the Alternative Proposal would exempt, subject to certain
conditions, most transactions--both acquisitions and dispositions--
between an officer or director and the issuer. First, the Alternative
Proposal would exempt without condition almost all transactions
pursuant to plans that satisfy specified provisions of the Internal
Revenue Code, such as thrift and stock purchase plans, and certain
related plans. Since volitional intra-plan transfers involving issuer
equity securities funds and cash distributions funded by volitional
dispositions of issuer equity securities are the equivalent of
discretionary purchase and sale transactions, these transactions would
be exempt only if effected pursuant to an election by the insider made
at least six months after an election pursuant to which the last such
transaction was effected.15 Except for the foregoing transactions,
the anti-discrimination provisions of the tax laws applicable to broad-
based plans should suffice to minimize the potential for insider profit
through unfair use of confidential corporate information. An
acquisition pursuant to a plan or transaction that satisfies the
conditions applicable to performance-based compensation imposed by
Section 162(m) of the Internal Revenue Code16 also would be exempt
without further condition on the basis that the tax conditions
applicable to such transactions (some of which such conditions closely
mirror the first two conditions specified in the next paragraph
describing part of the Alternative Proposal) provide an adequate
safeguard for Section 16(b) purposes.
\15\Volitional intra-plan transfers and cash distributions
funded by issuer equity securities that are in connection with a
participant's death, disability, retirement or termination of
employment, or are required to be made available to participants
pursuant to a provision of the Internal Revenue Code would not be
subject to this proviso, but instead would be exempt without
condition.
\16\26 U.S.C. 162(m) (1993).
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Second, with respect to grants and awards of issuer equity
securities, whether made pursuant to an employee benefit plan or
directly by an issuer, the Alternative Proposal would provide three
alternative conditions to exemption: (1) Prior approval of the
transaction by the issuer's board of directors or a committee comprised
solely of two or more non-employee directors; (2) shareholder approval
(or subsequent ratification) of the transaction; or (3) satisfaction of
a six-month holding period.
Third, the Alternative Proposal would provide a general exemption
for insider dispositions to the issuer, provided the terms of the
disposition are approved in advance by the board of directors, a non-
employee director committee, or shareholders.
As noted above, cash-only instruments whose value is derived from
the market value of an issuer equity security no longer would be
excluded from the coverage of Section 16 in a manner different from
[[Page 53834]]
instruments that can be settled in such securities. Thus, cash-only
instruments would be subject to Section 16(a) reporting, but usually
would be exempt from Section 16(b) in accordance with Rule 16b-3, as
amended by the Alternative Proposal.
The Alternative Proposal would eliminate:
General written plan conditions,\17\ including
specification of the basis on which insiders may participate,
specification of the price or amount of the securities to be offered,
and the restriction prohibiting transferability of derivative
securities;
\17\Such conditions are set forth in current Rule 16b-3(a).
Instead, the Alternative Proposal focuses on the inherently
compensatory nature of transactions between the issuer and its
officers and directors, and does not require that such transactions
occur pursuant to an employee benefit plan as a condition for
exemption.
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Shareholder approval as a general condition for plan
exemption;\18\
\18\This condition is set forth in current Rule 16b-3(b).
However, shareholder approval would be retained as an alternative
basis for exempting grants or awards.
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The six-month holding period as a general condition for
the exemption of grant and award transactions;\19\
\19\This condition is set forth in current Rule 16b-3(c)(1).
However, a six-month holding period would be proposed as an
alternative basis for exempting a grant or award.
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The disinterested administration requirement with
respect to grant transactions;\20\
\20\This condition is set forth in current Rule 16b-3(c)(2)(i).
However, approval by the full board or a committee comprised solely
of two or more non-employee directors would be retained as an
alternative basis for exempting grants or awards.
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The formula plan requirement with respect to grant
transactions, both as a substitute for disinterested administration and
as a means by which administrators may receive securities awards while
remaining disinterested;\21\
\21\These standards are set forth in current Rules 16b-
3(c)(2)(ii) and 16b-3(c)(2)(i)(A), respectively.
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Any conditions with respect to any transaction in a
broad-based plan other than a volitional intra-plan transfer or a cash
distribution funded by a volitional disposition of an issuer equity
security;\22\ and
\22\These conditions are set forth in current Rules 16b-
3(d)(2)(i) (B), (C) and (D) and 16b-3(d)(2)(ii).
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The current public information, disinterested
administration, window period and six-month holding period conditions
with respect to the exercise of stock appreciation rights for cash.\23\
\23\These conditions are set forth in current Rules 16b-3(e)
(1), (2), (3) and (4), respectively. It should be noted that these
conditions do not currently apply at all to cash-only instruments
that satisfy the conditions of Rule 16a-1(c)(3) and are thus
excluded from the definition of ``derivative security.''
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As a corollary to adoption of the Alternative Proposal, the
Commission contemplates modifying the Section 16(a) reporting system so
that most transactions exempt pursuant to Rule 16b-3 would be required
to be reported on a current basis on Form 4,\24\ rather than annually
on Form 5, as now permitted for transactions exempt under current Rule
16b-3, and certain other exempt transactions. However, reporting no
longer would be required for routine transactions pursuant to broad-
based plans, dividend or interest reinvestment plan transactions,
gifts, and transactions pursuant to qualified domestic relations
orders.
\24\For example, grants and awards under Section 162(m)-eligible
plans that would be exempted by Alternative Proposed Rule 16b-3
would be required to be reported on current Forms 4.
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In addition, the Commission proposes to make the exemption for
reinvestment transactions pursuant to dividend and interest
reinvestment plans\25\ more readily available by amending the rule so
that it no longer requires the plan to be available to all holders of
the class of securities. Finally, public comment is solicited as to the
merit of legislative rescission of Section 16(b).
\25\Rule 16b-2 [17 CFR 240.16b-2].
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II. Transactions Between an Issuer and its Officers or Directors
A. Tax-Conditioned and Related Plans
As discussed in the Proposing Release,\26\ one of the principal
objections raised to current Rule 16b-3 has been that the treatment of
thrift, stock purchase and other broad-based, tax-qualified plans is
unduly cumbersome, presents significant record-keeping problems, and
discourages insiders from participation in plan funds holding issuer
equity securities. The proposals set forth in the Proposing Release
would streamline the treatment of such plans, and the Alternative
Proposal goes still further.
\26\See Proposing Release at Section II.A.
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Specifically, under the Alternative Proposal, any acquisition or
disposition of issuer equity securities, other than a volitional intra-
plan transfer involving an issuer equity securities fund or a cash
distribution funded by a volitional disposition of an issuer equity
security, would be exempt without condition if made pursuant to a plan
that satisfies the definition of a ``Qualified Plan,'' an ``Excess
Benefit Plan,'' or a ``Stock Purchase Plan.''\27\ The broad-based, non-
discriminatory character of these plans, together with their relatively
inflexible administrative requirements, indicate that transactions
pursuant to such plans are strictly for compensatory purposes and are
not amenable to the type of abuse that Section 16(b) was intended to
proscribe.
\27\Alternative Proposed Rule 16b-3(b)(1). Definitions of these
terms would be provided in Alternative Proposed Rule 16b-3(b)(4).
Note that the plan itself would not be required to be tax-qualified,
but would need to satisfy specified conditions applicable to tax-
qualified plans.
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A volitional intra-plan transfer involving an issuer equity
securities fund or a cash distribution involving a volitional
disposition of an issuer equity security\28\ would be exempt only if
effected pursuant to an election made at least six months following the
date of the election that effected the most recent prior transaction
subject to the same condition.\29\ Assuming satisfaction of this
condition, an insider participant would be able to dispose of his or
her entire interest in a plan's issuer equity securities fund for cash.
\28\A loan funded by the disposition of issuer equity securities
would be considered a cash distribution involving a volitional
disposition of an issuer equity security unless the insider
continued 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 would be exempt
without condition because such transactions do not occur at the
insider's volition.
\29\Alternative Proposed Rule 16b-3(b)(2). Because it is
anticipated that the actual date on which such a plan transaction
occurs will be outside the control of an insider participant, the
proposed rule is premised on a six-month interval between the date
of subsequent elections. The proposed rule does not require that
such an election be made six months in advance of the related
transaction.
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However, only transactions that arise solely from an insider's
volitional investment decision would be subject to this condition. In
contrast, 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 employment,\30\ as well as
transactions that effect a diversification or distribution which the
Internal Revenue Code requires an employee plan to make available to a
participant,\31\ would be exempt without regard to this condition.
Although such transactions may be volitional to the insider, the
insider's opportunity to speculate in the context of a death,
disability, retirement or termination would seem well circumscribed, as
is also the case with regard to the specified diversification and
distribution elections.
\30\Such transactions are exempted by current Rule 16b-
3(d)(1)(ii).
\31\Such transactions would 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).
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Just as with the tax code provisions relating to Qualified Plans
and Stock Purchase Plans, as discussed above, Section 162(m) of the
Internal Revenue
[[Page 53835]]
Code and the regulations thereunder\32\ impose conditions that may
serve as an effective safeguard for Section 16(b) purposes.
Accordingly, it appears appropriate to exempt, without further
condition, an acquisition pursuant to a plan or transaction that
satisfies these conditions.\33\ The Section 162(m) provisions require
that compensation be paid solely on the attainment of one or more
performance goals, such goals be established by a compensation
committee consisting solely of two or more outside directors,\34\ the
terms of the plan be disclosed to and approved by shareholders, and the
compensation committee certify that the performance goals were
satisfied prior to making payment. With respect to options and stock
appreciation rights, these provisions require that the grant be made by
the compensation committee, the plan state the maximum number of shares
for which options or rights may be granted during a specified period to
any employee, and the terms of the option or right provide that the
amount of compensation to be received be based solely on an increase in
the value of the stock after the date of grant.\35\ Because a
substantial number of plans must satisfy Section 162(m) in order to
obtain a tax deduction, this would appear to provide a simple method
for exempting grants and awards from Section 16(b) without the need to
satisfy additional Commission-imposed requirements.\36\
\32\Proposed Regulation Sec. 1.162-27(e). It is contemplated
that this prong of Alternative Proposed Rule 16b-3 will function in
tandem with final tax regulations that contain provisions
substantially similar to Proposed Regulation Sec. 1.162-27(e). If a
substantially different tax regulation is adopted, the Commission
may revisit this prong of the Alternative Proposal.
\33\Alternative Proposed Rule 16b-3(b)(3).
\34\As defined in Proposed Regulation Sec. 1.162-27(e)(3), a
director is an outside director if the director (i) is not a current
employee of the company; (ii) is not a former employee of the
company who receives compensation for prior services; (iii) has not
been an officer of the company; and (iv) does not receive
remuneration from the company, either directly or indirectly, in any
capacity other than as a director. This definition is somewhat
different from the proposed definition of Non-Employee Director set
forth in the Alternative Proposal.
\35\Proposed Regulation Sec. 1.162-27(e)(2)(vi). Alternatively,
if the compensation to be received is not based solely on an
increase in the value of the stock after the date of grant, the
grant nevertheless may be considered performance-based compensation
if it is made on account of attainment of a performance goal that
otherwise satisfies the requirements of Proposed Regulation
Sec. 1.162-27(e)(2), or the vesting or exercisability of the grant
is contingent on attainment of such a performance goal.
\36\The scope of this proposed condition would not be limited to
persons who are ``covered employees'' for purposes of the $1,000,000
deduction limit of Section 162(m), i.e., the issuer's chief
executive officer and four other most highly compensated officers
under Item 402 of Regulation S-K [17 CFR 229.402], but would be
available to exempt grants to any officer or director, provided that
all Section 162(m) regulatory conditions applicable to performance-
based compensation are met with respect to the individual grant. Of
course, grants that do not satisfy this condition would be eligible
for exemption pursuant to the proposed specific conditions
applicable to grants and awards discussed in Section II.B, below.
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Commenters are asked to address the proposed unconditional general
exemption for transactions pursuant to Qualified Plans, Excess Benefit
Plans and Stock Purchase Plans. Do the proposed references to the
objective standards of the Internal Revenue Code adequately define
classes of plans that, by virtue of their broad-based character and/or
specific administrative requirements, do not present opportunities for
the abuse of inside information that Section 16(b) was crafted to
prevent?\37\ Should the exemption for Excess Benefit Plans be revised
to require that transactions in such plans must be in tandem with
transactions pursuant to a related Qualified Plan?
\37\Although Excess Benefit Plans by their terms are not broad-
based, they have not been viewed under current staff interpretations
or the 1994 proposals as susceptible to abuse because they are
operated in a manner that replicates tax-qualified plans.
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Is the proposed exemptive condition that volitional intra-plan
transfers and cash distributions resulting from a volitional
disposition of an issuer equity security be effected pursuant to
elections at least six months apart an appropriate requirement? Should
an insider be permitted to cash-out his or her entire interest in an
issuer equity securities fund in reliance on satisfaction of this
condition? Should the proposed condition also apply to such a
transaction that is expressly authorized by the Internal Revenue Code
or that otherwise implements a retirement planning decision? Would the
proposed condition be easier to administer than the current window-
period requirement? Should the proposed condition only apply if the
transaction would be opposite way (e.g., purchase vs. sale) to the
prior transaction? Should a quarterly window period requirement be
included in the rule as an alternative basis for exemption, with or
without an additional requirement that elections take place in window
periods that are at least six months apart?
Comment also is solicited on whether the conditions of Section
162(m) provide an appropriate basis for an exemption from Section
16(b), and whether there are other types of compensation and/or
transactions involving issuer equity grants to insiders that should be
exempt from Section 16(b) because of protections afforded by provisions
of the Internal Revenue Code. To what extent are plans operated in a
manner that satisfies the conditions of Internal Revenue Code Section
162(m) with respect to grants to persons other than the issuer's chief
executive officer and four other most highly compensated officers?
B. Grants and Awards
The Alternative Proposal would provide three alternative bases for
exempting the grant or award of issuer equity securities (including
derivative securities). The first two prongs would exempt an award if
the specific award is either: (i) approved in advance by the board of
directors or a committee of the board comprised solely of two or more
``Non-Employee Directors;'' or (ii) or approved in advance or
subsequently ratified\38\ by the affirmative vote or written consent of
the holders of the majority of the issuer's securities entitled to
vote, solicited in compliance with Section 14 of the Securities
Exchange Act.\39\ The purpose of these prongs is to ensure that
appropriate company gate-keeping procedures are in place to monitor any
grants or awards and to ensure acknowledgement and accountability on
the part of the company when it makes such grants or awards. Finally, a
grant or award that did not satisfy any of these exemptive conditions
would become exempt if the securities awarded were held by the insider
for six months following the grant, or in the case of a derivative
security, at least six months had elapsed between the grant of the
derivative security and the disposition of the underlying security.\40\
\38\Such ratification would be required to be obtained not later
than the date of the next annual meeting of shareholders.
\39\15 U.S.C. 78n. Alternative Proposed Rules 16b-3(c)(1)(i) and
16b-3(c)(1)(ii).
\40\Alternative Proposed Rule 16b-3(c)(1)(iii).
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With respect to the first basis for exemption, a ``Non-
Employee Director'' would be defined simply 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.\41\ This definition differs
from the requirements of the current ``disinterested director''
standard in that any employment or consulting relationship with the
issuer expressly
[[Page 53836]]
would be precluded.\42\ Further, as an alternative to approval by Non-
Employee Directors, approval by the full board would constitute a basis
for exemption.\43\
\41\Alternative Proposed Rule 16b-3(c)(2). For purposes of this
proposed rule, ``consultant'' would include attorneys, accountants
or others who indirectly receive compensation from the issuer
through firms that provide services to the issuer.
\42\Additionally, the proposed definition would not include the
current requirement that, during the one year prior to service as a
``disinterested director,'' the director not be granted issuer
equity securities other than pursuant to a formula plan,
participation in a broad-based securities acquisition plan, or an
election to receive an annual retainer in an equivalent amount of
securities.
\43\Current Rule 16b-3(c)(2)(i) provides for administration by
the full board of directors if all members are disinterested.
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It should be noted that the first two bases for exemption
would require approval of specific transactions, not merely approval of
a plan in its entirety, as is sufficient for the current shareholder
approval requirement. This is because approval of a specific grant
appears to provide a more effective procedure, which may be appropriate
when approval is a stand-alone basis for exemption rather than a
condition imposed in combination with other conditions. However, it is
contemplated that approval of a plan pursuant to which the terms and
conditions of each grant are fixed in advance, such as a formula plan,
would satisfy this basis for exemption, and the exemption also would be
available for a plan with an attachment providing for specific grants
to specific individuals. Of course, the transaction approval only
relates to Section 16 insiders. Transactional approval of grants to
other persons would not be required for the purpose of obtaining the
exemption under Alternative Proposed Rule 16b-3. Comment is solicited
as to whether there are any other circumstances under which whole-plan
approval, standing alone, would be a sufficient safeguard.
Finally, the six-month holding period exemption would be
available to exempt grants that, for reasons of timing or otherwise,
fail to satisfy any of the other alternative conditions.
Commenters are asked to address whether approval by shareholders
should be required in advance of a grant or award, or would subsequent
ratification be sufficient, provided that such ratification is obtained
not later than the date of the next annual meeting of shareholders?
Comment is solicited on whether full board approval, as an alternative
to Non-Employee Director approval, would be useful to issuers and
whether it would provide an adequate standard. Should a director who is
hired as a consultant to the issuer be considered an employee of the
issuer, and hence be ineligible to serve as a Non-Employee Director?
Should equity grants received by Non-Employee Directors be required
to be made pursuant to a formula plan, as is currently required, or is
satisfaction of any of the other alternatives an adequate standard to
assure impartiality?44 Why would equity grants be treated
differently for this purpose than any other arrangement pursuant to
which a Non-Employee Director is compensated? If formula plan grants
are required as such a condition, should there be a separate exemption
for formula plans, or should such plans be subjected to shareholder
approval as a condition to exemption? As a general matter, is either
(i) administration by the board of directors or Non-Employee Directors
or (ii) shareholder approval, standing alone, effective to prevent
abuse of the type addressed by Section 16(b) when only transactions
with the issuer are included, or must either of such procedures be
coupled with a six-month holding period to be effective with respect to
such transactions? Is satisfaction of a six-month holding period,
absent any other condition, an adequate procedure on which to premise
an exemption for grants?
\44\Although the Alternative Proposed Rule would not expressly
forbid Non-Employee Directors from awarding themselves grants of
issuer equity securities, such grants would need to be reviewed in
the context of state laws governing corporate self-dealing.
---------------------------------------------------------------------------
Should a grant or award that satisfies any of the proposed
alternative conditions be exempt only if the officer or director to
whom the award is made had not disposed of issuer equity securities on
a non-exempt basis during the previous six months at a price higher
than the price at which such grant or award is made? Would such a
timing condition, which is not present in either current Rule 16b-3 or
the 1994 proposals, be necessary in order to preclude the use of the
proposed broader exemptive rule, which would eliminate significant
conditions attached to the current exemption for grants and awards, as
a vehicle for abuse?
C. Dispositions to the Issuer
Consistent with its focus on the compensatory nature of
transactions between an issuer and its officers and directors, the
Commission is of the view that transactions pursuant to which an
insider is deemed to have made a disposition of issuer equity
securities to the issuer under appropriate conditions may merit
exemption from the short-swing profit recovery provisions of Section
16(b). Accordingly, the Alternative Proposal would exempt any
transaction involving a disposition 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.45 This
provision would provide for the flexibility to redeem issuer equity
securities from insiders in connection with non-exempt replacement
grants, and in such discrete compensatory situations as individual buy-
backs in connection with estate planning. As drafted, this provision
also would exempt the exercise of out-of-the-money options, provided
that the requisite approval is obtained.46 The shareholder
approval prong could provide exemptive relief in such scenarios as
mergers that had received majority shareholder approval that
specifically addressed such disposition.
\45\Alternative Proposed Rule 16b-3(d). Unlike the exemption for
grants and awards, subsequent ratification by shareholders would not
be included as an alternative condition to the exemption for
dispositions. Because such transactions are more likely to be at the
volition of the insider and thus more susceptible to abuse with
respect to timing, prior approval is considered necessary.
Commenters should address whether subsequent shareholder
ratification of a disposition would provide an effective procedure.
\46\Reliance on this proposed exemption would not be necessary
with respect to the exercise or conversion of a derivative security
that is at- or in-the-money because such transactions would continue
to be exempt pursuant to Rule 16b-6(b) [17 CFR 240.16b-6(b)].
---------------------------------------------------------------------------
Should a disposition that satisfies either condition be exempt only
if the officer or director making the disposition has not acquired
issuer equity securities on a non-exempt basis during the previous six
months at a price lower than the price at which such disposition is
made? Would such a timing condition be necessary to preclude the use of
this proposed exemption as a vehicle for abuse?
It should be noted that the Alternative Proposal does not
separately address dispositions 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
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. As proposed, all of these
transactions would automatically satisfy the exemptive condition of
prior approval by the board of directors, a committee of Non-Employee
Directors or shareholders if the grant that contained these
[[Page 53837]]
provisions had been so approved. Commenters are asked to address
whether additional and/or different conditions would be more
appropriate to exempt these transactions.
III. Dividend or Interest Reinvestment Plans
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. Companies have raised concerns that the
requirement that the plan be made available to all holders of the class
can impose significant burdens on companies that wish to allow for
officer and director participation. For example, companies have
indicated that because of this requirement, they may have to spend
potentially significant sums to comply with foreign laws relating to
the offering of securities to shareholders in foreign jurisdictions if
they want to have Rule 16b-2 available to their officers and directors.
The requirement to include all shareholders does not appear
necessary to address Section 16(b) concerns--that is, to assure that
these plans do not provide an opportunity for speculative abuse by
officers and directors. Consequently, the Commission is proposing to
tailor the dividend reinvestment plan exemptive rule to address
concerns about possible opportunities for abuse, while removing
unnecessary burdens. As proposed to be amended, Rule 16b-2 would be
available 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.47 Third, the plan must operate on substantially the same
terms for all plan participants. These proposed standards should assure
that officers and directors do not use the plan in a manner
inconsistent with the purposes of Section 16(b).
\47\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. 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 would not be exempt pursuant to this rule, but could
be exempt under Alternative Proposed Rule 16b-3, assuming other
conditions are met. See Release 34-28869, n. 89.
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If Rule 16b-2 is amended as proposed, companies would have more
flexibility to structure their dividend reinvestment plans. Commenters
are asked to address whether the proposed standards are appropriate and
serve the intended goals of reducing burdens while retaining
protections against possible speculative abuse, or whether the current
standard should be retained. Would it be consistent with the purposes
of Section 16(b) to provide an exemption for officers and directors
participating in plans that exclude certain holders, as would be
permissible under the proposed amendments? Would such exclusions permit
opportunities for speculative abuse in a manner inconsistent with
Section 16(b)? Should there be a limitation on the ability to exclude
certain shareholders, as permitted under this proposal, such as those
with small holdings or those residing in foreign jurisdictions or
certain states? Are there other standards that are consistent with
Section 16(b) that should be considered, such as exempting transactions
in plans that permit certain holders to be excluded only if their
inclusion would impose unreasonable burdens and expense?
IV. Reporting
In the interest of establishing the least burdensome reporting
system that effectively will achieve the disclosure purposes of Section
16(a),48 the Proposing Release, without endorsing a specific
proposal, solicited comment on various alternative schemes to modify
the reporting of exempt transactions. In addition to the alternatives
discussed there, which remain under consideration, the Commission
contemplates a different reporting treatment with respect to
transactions that would be exempted pursuant to the Alternative
Proposal.
\48\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 announced its intention to expand the capacity of the EDGAR
system to accommodate the electronic filing of ownership and
transaction reports pursuant to both Section 16(a) of the Exchange
Act and Rule 144 [17 CFR 230.144] under the Securities Act [15
U.S.C. 77a et seq.]. See Release No. 33-7231 (October 5, 1995). The
necessary programming already has been initiated, and filers should
be able to file these documents electronically on a voluntary basis
by late 1995 or early 1996. A further announcement will be made when
the effective date is determined.
---------------------------------------------------------------------------
In order to simplify the reporting scheme while assuring that
adequate and timely public information is provided with respect to
these transactions, it is anticipated that essentially all reporting be
done on a current basis; that is, on a Form 4 no later than ten days
following the close of the month in which a transaction occurs. Since
the Alternative Proposal would exempt a greater variety of transactions
than either current Rule 16b-3 or the 1994 proposals, it would be
appropriate to provide the public with information about these
transactions on a more timely basis than if annual reporting on Form 5
were permitted. Such transparency would help the markets monitor
Section 16(b) compliance on a real-time basis. At the same time,
officers and directors subject to reporting, many of whom now
voluntarily file reports on a current basis, would benefit from the
simplicity of the proposed revised reporting system, as well as from
the broader exemptive provisions of the Alternative Proposal.
Generally, it is contemplated that exempt grants and awards, as
well as dispositions, would be reportable on Form 4 no later than ten
days following the close of the month in which the grant or award is
made to the insider. Exercises of options49 that are exempt
pursuant to Rule 16b-6(b) either would remain reportable on the earlier
of the next otherwise due Form 4 or Form 5, or simply would be required
to be reported on Form 4.50
\49\To the extent withholding or surrender rights are exercised
in conjunction with the exercise or conversion of a derivative
security, they would be reported at the same time as such exercise
or conversion. The exercise of a tax-withholding right in connection
with vesting of a security would be reported on Form 4. Similarly,
the exercise of a stock appreciation right to receive cash, the
exercise of an out-of-the-money option, and any other disposition
transaction that would be exempted under the Alternative Proposal
also would be reported on Form 4.
\50\Comment previously was solicited concerning this potential
revision to the reporting system. See Proposing Release at Section
III.B.
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In recognition of the practical difficulties presented by requiring
Form 4 reporting of transactions in Qualified Plans, Excess Benefit
Plans and Stock Purchase Plans, as well as the relatively lesser public
need for this information to be reported, most of these transactions no
longer would be required to be reported. However, intra-plan transfers
and cash distributions would be reportable on Form 4 no later than ten
days following the close of the month in which such transaction
occurs.51 Assuming that the Alternative Proposal is adopted in its
entirety, gifts, transactions pursuant to dividend or
[[Page 53838]]
interest reinvestment plans and transactions pursuant to qualified
domestic relations orders (``QDROs''), all of which would remain exempt
from the short-swing profit recovery provisions of Section 16(b)
pursuant to other rules,52 also would be exempted from reporting.
\51\Form 4 reporting thus would be required for all transactions
exempt under Alternative Proposed Rule 16b-3 except for those
exempted pursuant to Alternative Proposed Rule 16b-3(b)(1).
\52\Dividend or interest reinvestment plan transactions would
continue to be exempt pursuant to Rule 16b-2. Gifts (currently
exempt pursuant to Rule 16b-5 [17 CFR 240.16b-5]) and QDRO
transactions (currently exempt pursuant to current Rule 16b-3(f)(3)
[17 CFR 240.16b-3(f)(3)]) would remain exempt pursuant to Rule 16b-5
as proposed to be amended. See Proposing Release at Section IV.A.
---------------------------------------------------------------------------
Commenters are asked to address whether these modifications to the
reporting scheme would be appropriate. With respect to transactions
that would be exempted from reporting, to what extent, and for what
purposes, is there a public need for such information? In lieu of
eliminating any reporting requirement for these transactions, should
they be reported on an annual basis on Form 5, as currently required?
Alternatively, should Form 5 be rescinded, with annual reporting, where
permitted, accomplished on Form 4? Assuming Form 5 is rescinded, how
would the current requirement to report on Form 5 all holdings and
transactions that should have been, but were not, previously
reported53 be revised? Should such holdings and transactions be
reported on the last Form 4 filed with respect to the calendar year?
\53\Rule 16a-3(f)(1)(i) and (ii) [17 CFR 240.16a-3(f)(1)(i) and
(ii)].
---------------------------------------------------------------------------
Would accelerated reporting for other transactions that would be
exempted by the Alternative Proposal, but currently may be reported on
an annual basis, impose significant burdens on insiders and/or issuers,
or provide significant benefits to users of the reported information?
Would such accelerated reporting simplify the overall reporting system
by eliminating the need to keep track of exempt transactions during the
year in anticipation of filing the Form 5? Commenters are requested to
address these questions from the viewpoint of users of the information
that would be reported, as well as from the viewpoint of filing
parties.
V. Request For Comment
Any interested person wishing to submit written comments on the
Alternative Proposal, the Proposing Release, the Cash-Only Release, and
any other matters that might have an impact on such proposals, is
requested to do so. Comment is requested specifically from persons
subject to Section 16; issuers whose officers, directors and ten
percent shareholders are subject to Section 16; and persons using the
information afforded by the Section 16(a) reports.
Commenters should address whether the Alternative Proposal, as
drafted, is easy to understand and practicable to implement. Commenters
also should address whether the Alternative Proposal would be
preferable to the proposed amendments to Rule 16b-3 set forth in the
Proposing Release. The Commission also requests comment on whether the
Alternative Proposal, if adopted, would have an adverse impact on
competition or would impose a burden on competition that is neither
necessary nor appropriate in furthering the purposes of the Exchange
Act.
Finally, commenters are asked to consider the on-going merit of the
strict liability short-swing profit recovery provisions of Section
16(b), and whether the Commission should recommend that Congress
rescind this section of the statute. Some have suggested that the
prohibitions of Exchange Act Rule 10b-5, as interpreted by case law,
adequately address the abuse of inside information and obviate the need
for a strict liability statute. Others point out that the scienter and
other standards of the Rule 10b-5 remedy suggest the contrary. Assuming
Congress, which has the sole authority to do so, were to rescind
Section 16(b), would insider trading and market manipulation adequately
be deterred by Rule 10b-5, or does Section 16(b) continue to serve a
useful purpose? In the absence of Section 16(b), would state laws
establishing a fiduciary duty on the part of officers and directors
adequately protect the interests of public company shareholders?
Comments responsive to these inquiries will be considered by the
Commission in complying with its responsibilities under Section
23(a)54 of the Exchange Act. In order to give commenters
sufficient time to consider this Alternative Proposal and request for
further comment, the comment periods on the Proposing Release and the
Cash-Only Release are extended to December 15, 1995.
\54\15 U.S.C. 78w(a).
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VI. Transition To New Rules
Upon adoption of the Alternative Proposal, the 1994 proposals, or
any combination thereof, provisions for a transition from the current
rules will be necessary. Although the Commission's current intent
regarding transition to the proposed revised rules remains as expressed
in the Proposing Release,55 this schedule is subject to
modification. Most recently, the Commission has extended the phase-in
period for current Rule 16b-3 until September 1, 1996, or such
different date as set in further rulemaking.56 Current and former
Rule 16b-3 would remain available until September 1, 1996,57
unless a different date is set by the Commission in the adopting
release. Comment is solicited on how long a transition period issuers
and insiders would need, assuming adoption of the Alternative Proposal.
Of course, issuers continue to be permitted to convert their plans to
current Rule 16b-3 at any time, or to convert back to the former
exemptions, provided that all plans of the issuer are so converted.
After the phase-in date, issuers and insiders no longer will be able to
rely on the former exemptions, but instead will be required to comply
with Rule 16b-3 as amended.
\55\See Proposing Release at Section VI.
\56\See Release 34-36063 [60 FR 40994].
\57\The exemptions afforded by former Rules 16a-8(b) [17 CFR
240.16a-8(b)] and 16a-8(g)(3) [17 CFR 240.16a-8(g)(3)] also would
remain available.
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VII. Cost-Benefit Analysis
The Alternative Proposal is intended to simplify the conditions
under which insider's transactions in issuer equity securities are
deemed to be exempt from the short-swing profit recovery provisions of
Section 16(b), while ensuring that the statutory purposes continue to
be served. The Commission views this as a way of correcting unintended
consequences of the present regulatory scheme in terms of creating a
bias against equity-based compensation and insider participation in
broad-based plans, and significantly reducing the compliance burden
imposed on persons subject to Section 16 without undercutting the
statutory objectives of disclosing information concerning insider
trading and discouraging speculative short-term insider trading.
Although some reporting would be accelerated under the Alternative
Proposal, other reporting requirements would be eliminated. Even where
accelerated reporting might increase compliance costs, these costs may
be outweighed by the benefit of having the information available to the
public on a more timely basis, as well as the ease of compliance with a
simpler reporting scheme.
In order to assist the Commission in assessing the costs and
benefits of the Alternative Proposal, commenters are requested to
provide their views and data on the following issues. In addressing
these issues, commenters should be as specific and detailed with their
views and data as possible, and quantify the costs and benefits to the
extent practicable.
[[Page 53839]]
(1) To what extent would the newly proposed exemptive conditions
increase or decrease the compliance burden imposed on persons subject
to Section 16?
(2) Could any of the exemptive provisions be crafted in a manner
that would further reduce compliance burdens, consistent with the
statutory objectives of Section 16? If so, how could that be done?
(3) What would be the costs and benefits of the proposed
accelerated reporting of transactions on Form 4, together with the
elimination of reporting of certain other transactions? In particular,
to what extent do insiders currently choose voluntarily to report
exempt transactions on Form 4 rather than annually on Form 5?
(4) Could the reporting requirements be crafted in a manner that
would further reduce compliance burdens, consistent with the statutory
objectives of Section 16? If so, how could that be done?
VIII. Summary of Initial Regulatory Flexibility Analysis
An Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603 concerning the Alternative Proposal. The
analysis notes that the Alternative Proposal is intended to simplify
the Section 16 regulatory scheme with respect to employee benefit
plans.
As discussed more fully in the analysis, most of the reporting
persons the Alternative Proposal would affect are small entities, as
defined by the Commission's rules. The Alternative Proposal would
decrease the compliance requirements imposed upon corporate insiders
subject to Section 16.
The analysis discusses several possible alternatives to the
Alternative Proposal. As discussed more fully in the analysis,
implementation of any of these alternatives either would be duplicative
of the Alternative Proposal or the Prior Proposals, or would be
inconsistent with the Exchange Act.
Comments are encouraged on any aspect of the analysis. A copy of
the analysis may be obtained by contacting Elizabeth Murphy, Office of
Disclosure Policy, Division of Corporation Finance, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
IX. Statutory Basis
The amendments to the Section 16 rules are being proposed by the
Commission pursuant to Exchange Act Sections 3(a)(11),58
3(a)(12),59 3(b),60 9(b),61 10(a),62 12(h),63
13(a),64 14, 16, and 23(a). As the Section 16 rules relate to the
Investment Company Act and the Public Utility Holding Company Act, they
also are proposed pursuant to Investment Company Act Sections 3065
and 38,66 and Public Utility Holding Company Act Sections
1767 and 20,68 respectively.
\58\15 U.S.C. 78c(a)(11).
\59\15 U.S.C. 78c(a)(12).
\60\15 U.S.C. 78c(b).
\61\15 U.S.C. 78i(b).
\62\15 U.S.C. 78j(a).
\63\15 U.S.C. 78l(h).
\64\15 U.S.C. 78m(a).
\65\15 U.S.C. 80a-29.
\66\15 U.S.C. 80a-37.
\67\15 U.S.C. 79q.
\68\15 U.S.C. 79t.
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List of Subjects in 17 CFR 240
Reporting, Recordkeeping requirements, and Securities.
Text of Proposals
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4, and 80b-11, unless otherwise noted.
* * * * *
2. By revising Sec. 240.16b-2 to read as follows:
Sec. 240.16b-2 Dividend or interest reinvestment plans.
Any acquisition of securities resulting from the reinvestment of
dividends or interest on securities of the same issuer shall be exempt
from Section 16(b) of the Act if made pursuant to a plan providing for
the regular reinvestment of dividends or interest, if the plan provides
for broad-based participation, does not discriminate in favor of
employees of the issuer and operates on substantially the same terms
for all plan participants.
3. By revising Sec. 240.16b-3 to read as follows:
Sec. 240.16b-3 Transactions between an issuer and its officers or
directors.
(a) General. A transaction between the issuer (including an
employee benefit plan sponsored by the issuer) and an officer or
director of the issuer that involves issuer equity securities shall be
exempt from Section 16(b) of the Act if the transaction satisfies the
applicable conditions set forth in this section.
Note to Paragraph (a): The exercise or conversion of a
derivative security that has a fixed exercise price and is not out-
of-the-money is eligible for exemption from Section 16(b) of the Act
to the extent that the conditions of Rule 16b-6(b) are satisfied.
(b) Tax-conditioned and related plans.
(1) Any transaction pursuant to a Qualified Plan, an Excess Benefit
Plan, or a Stock Purchase Plan shall be exempt without condition,
except as provided in paragraph (b)(2) of this section.
(2) A transaction pursuant to a Qualified Plan, an Excess Benefit
Plan, or a Stock Purchase Plan that is at the volition of a plan
participant; is not made in connection with the participant's death,
disability, retirement or termination of employment; is not required to
be made available to a plan participant pursuant to a provision of the
Internal Revenue Code; and results in either: an intra-plan transfer
involving an issuer equity securities fund, or a cash distribution
funded by a volitional disposition of an issuer equity security, shall
be exempt only if effected pursuant to an election made at least six
months following the date of the most recent election that effected a
transaction subject to this paragraph (b)(2).
(3) An acquisition pursuant to a plan or transaction that satisfies
the conditions applicable to performance-based compensation imposed by
Section 162(m) of the Internal Revenue Code and the regulations
thereunder shall be exempt without condition.
(4) Definitions.
(i) A Qualified Plan shall mean 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.
(ii) An Excess Benefit Plan shall mean an employee benefit plan
that is operated in conjunction with a Qualified Plan, and provides
only the benefits or contributions that would be provided under a
Qualified Plan but for the limitations of Sections 401(a)(17), 415 and
any other applicable contribution limitation set forth in the Internal
Revenue Code, or any successor provisions thereof.
(iii) A Stock Purchase Plan shall mean an employee benefit plan
that satisfies the coverage and participation standards of Sections
410, 423(b)(3) and
[[Page 53840]]
423(b)(5) of the Internal Revenue Code of 1986, or any successor
provisions thereof.
(c) Grant and Award Transactions.
(1) General. A grant or award transaction shall be exempt if:
(i) The transaction is approved by the board of directors of the
issuer, or a committee of the board of directors that is comprised
solely of two or more Non-Employee Directors;
(ii) The transaction is approved or ratified by the affirmative
vote or written consent of the holders of the majority of the
securities of the issuer entitled to vote, in compliance with Section
14 of the Act, provided that such ratification occurs no later than the
date of the next annual meeting of shareholders; or
(iii) The issuer equity securities so awarded are held by the
officer or director for a period of six months following the date of
such grant or award, provided that this condition shall be satisfied
with respect to a derivative security if at least six months elapse
from the date of acquisition of the derivative security to the date of
disposition of the derivative security (other than upon exercise or
conversion) or its underlying equity security.
(2) Definition. A Non-Employee Director shall mean a director who
is not currently an officer (as defined in Sec. 240.16a-1(f)) of the
issuer or a parent or subsidiary of the issuer, or otherwise currently
employed by or a consultant to the issuer or a parent or subsidiary of
the issuer.
(d) Dispositions to the issuer. Any transaction involving the
disposition to the issuer of issuer equity securities shall be exempt
from Section 16(b) of the Act, provided that the terms of such
disposition are approved in advance in the manner prescribed by either
paragraph (c)(1)(i) or paragraph (c)(1)(ii) of this section.
Dated: October 11, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25626 Filed 10-16-95; 8:45 am]
BILLING CODE 8010-01-P
