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Release No. 34-46778 Release No. IC-25795 67 Fed. Reg. 69429 - Nov. 15, 2002
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 Table of Contents
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I. Introduction
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the ''Act'') was enacted.9 Section 306(a) of the Act, entitled ''Prohibition of Insider Trading During Pension Fund Blackout Periods,'' expressly prohibits any director or executive officer of an issuer of any equity security, directly or indirectly, from purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during any blackout period with respect to such equity security, if the director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer.10 Section 306(a) further directs us, in consultation with the Secretary of Labor, to issue rules to clarify the application of this provision and to prevent evasion thereof.11
Pension plan ''blackout periods'' occur for a variety of administrative purposes. Their occurrence and timing are often, but not always, within the control of the plan administrator.12 The most common reasons for imposing a blackout period include:
Changes in investment alternatives;
Changes in the frequency of portfolio valuations;
Changes in plan record-keepers or other service providers;
Changes in plan trustees; and
Corporate mergers, acquisitions and spin-offs that affect the pension coverage of groups of participants.13
Generally, during a blackout period, plan participants can contribute to their accounts, but cannot switch their account funds between investment options. Understandably, plan participants often are troubled by the prospect of a blackout, which may lock them into their existing investment choices for an extended period of time. Even participants who view their plan accounts as part of an overall long- term investment strategy may be uncomfortable with the possibility of being unable to change investment choices when an unforeseen event, such as a sudden stock price decline, occurs during a blackout period.
In the past year, several highly-publicized cases have demonstrated the catastrophic consequences that can befall employees who have invested substantially all of their retirement savings in their employer's equity securities when the issuer's securities fall sharply during a blackout period.14 There also have been allegations that, at the time that rank-and-file employees were precluded from selling their employer's equity securities in their individual pension plan accounts, corporate executives were exercising and cashing out their employee stock options and selling other securities acquired through the company's equity compensation plans.
Section 306(a) is intended to address this problem. It prohibits an issuer's directors and executive officers from trading in equity securities of the issuer when a substantial number of the issuer's employees are unable to engage in transactions involving equity securities of the issuer through their individual pension plan accounts. 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
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interests ahead of their responsibilities to their companies, their employees and their companies' security holders. The required notice should ensure that directors and executive officers of an issuer, as well as investors, are aware of an impending blackout period on a timely basis.
Section 306(a) becomes effective on January 26, 2003, 180 days after the date of enactment of the Act.15 We are proposing new Regulation Blackout Trading Restriction (''BTR'') to clarify the scope and application of section 306(a).16
II. Regulation BTR
A. Statutory Trading Prohibition
Section 306(a) of the Act seeks to equalize the treatment of corporate executives and rank-and-file employees with respect to their ability to engage, during a pension plan blackout period, in transactions in an issuer's equity securities that were acquired in connection with their service to, or employment with, the issuer. As proposed, Regulation BTR would clarify, and seek to prevent evasion of, section 306(a)'s statutory trading prohibition as follows:
Proposed Exchange Act rule 100 would define terms used in the regulation.
Proposed Exchange Act rule 101 would clarify the operation of the general statutory prohibition on trading by directors and executive officers during a pension plan blackout period and set forth exceptions to the prohibition.
Proposed Exchange Act rule 102 would set forth exceptions to the definition of ''blackout period.''
Proposed Exchange Act rule 103 would clarify the operation of the general statutory private remedy for violation of section 306(a).
Proposed Exchange Act rule 104 would set forth the content and delivery requirements for the notice that an issuer must provide in connection with a blackout period.
In order to give effect to section 306(a) in a manner consistent with Congressional intent, we propose to use a number of concepts that have been developed under section 16 of the Exchange Act.17 This approach provides an appropriately broad scope to the statutory trading prohibition of section 306(a), seeks to prevent evasion of the prohibition, takes advantage of a well-established body of rules and interpretations concerning the trading activities of corporate insiders and facilitates enforcement of the trading prohibition of section 306(a) by generally allowing reference to trading reports filed pursuant to section 16(a) of the Exchange Act.18 A discussion of each of these proposed rules and related issues follows.
B. Discussion
1. Issuers Subject to Trading Prohibition
Section 306(a) of the Act applies to directors and executive officers of issuers as defined in the Act. Section 2(a)(7) of the Act provides that the term ''issuer'' means an issuer (as defined in section 3(a)(8) of the Exchange Act): 19
The securities of which are registered under section 12 of the Exchange Act; 20
That is required to file reports under section 15(d) of the Exchange Act; 21 or
That files, or has filed, a registration statement that has not yet become effective under the Securities Act of 1933 (the ''Securities Act'') 22 and that has not been withdrawn.23
Accordingly, section 306(a) applies, and proposed Regulation BTR would apply, to the directors and executive officers of domestic issuers, foreign private issuers, banks and savings associations, small business issuers and, in rare instances, to registered investment companies.24
(a) Foreign Private Issuers
Section 306(a) of the Act, by its terms, applies to foreign private issuers.25 Under proposed Regulation BTR, the statutory trading prohibition of section 306(a) would apply to equity security transactions by directors and executive officers of a foreign private issuer when 50% or more of the participants or beneficiaries in pension plans maintained by the issuer who are located in the United States and its territories and possessions 26 are subject to a blackout period, and the affected employees represent a significant portion of the issuer's plan participants.27 It would not apply if a blackout period affected only plan participants or beneficiaries located outside the United States.
This approach is consistent with the purposes of the statute. We believe that, in enacting section 306(a), Congress was seeking principally to protect pension plan participants and beneficiaries located in the United States, and generally leaving to foreign authorities issues related to the interests of plan participants located outside the United States. It also conforms to our policy of focusing the protections of the federal securities laws on U.S.-based investors.
Request for Comment
What impact would section 306(a) and proposed Regulation BTR have on
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the willingness of foreign private issuers to raise capital in the public U.S. capital markets, to list on U.S. markets and to register their securities under the Securities Act or the Exchange Act?
Will the application of proposed Regulation BTR to foreign private issuers unduly discourage these issuers from implementing equity-based compensation plans for the benefit of their U.S.-based employees?
Should section 306(a) and proposed Regulation BTR apply more broadly to foreign private issuers? If so, explain how.
(b) Banks and Saving Associations
The statutory trading prohibition of section 306(a) of the Act applies to directors and executive officers of banks and savings associations that satisfy the definition of ''issuer'' under section 2(a)(7) of the Act. The Act amended section 12(i) of the Exchange Act 28 to make it clear that the federal banking agencies have the authority to administer and enforce various provisions of the Act, including the statutory trading prohibition of section 306(a), with respect to banks and savings associations.29
(c) Small Business Issuers
Section 306(a) of the Act generally does not distinguish between large and small issuers. Accordingly, section 306(a)'s trading prohibition applies to any entity that satisfies the definition of ''issuer'' under section 2(a)(7) of the Act without regard to the entity's size, including small business issuers.30 We note, however, that because many small companies do not file Exchange Act reports or registration statements under the Securities Act, not all small companies would be subject to section 306(a) and proposed Regulation BTR.
Request for Comment
Is the compliance burden for small business issuers disproportionate to the benefits to be obtained from compliance with section 306(a) and proposed Regulation BTR? If so, should we exclude them from section 306(a) and proposed Regulation BTR? Would some other threshold for exclusion be more appropriate than the small business issuer definition?
Is there any basis for treating pension plans sponsored by small business issuers differently than other pension plans? If blackout periods imposed on pension plans sponsored by small business issuers were excluded from proposed Regulation BTR, what would be the impact on plan participants?
(d) Registered Investment Companies
The statutory trading prohibition of section 306(a) of the Act applies to directors and executive officers of registered investment companies that register a class of securities under section 12 of the Exchange Act or that are required to file reports under section 15(d) of the Exchange Act or that file, or have filed, a registration statement that has not yet become effective under the Securities Act and that has not been withdrawn. Investment companies, however, typically do not have employees because they are externally managed, with investment advisory and other services provided by affiliated and unaffiliated parties pursuant to contracts with the investment company. Without employees, investment companies typically do not maintain employee pension plans, and, as a practical matter, there would generally be no blackout periods triggering the statutory trading prohibition. Nonetheless, there are some cases, for example, internally managed investment companies, where a registered investment company that compensates its officers and directors with its own shares may have employees of its own and the statutory trading prohibition could apply in practice.31
Under proposed Exchange Act rule 104, the required notice to the Commission of a blackout period must be filed on form 8-K. However, Exchange Act rules 13a-11(b) 32 and 15d-11(b) 33 exempt registered management investment companies from form 8-K filing requirements. Accordingly, we are proposing an amendment to those rules that would subject such investment companies to form 8-K filing requirements for the sole purpose of meeting any filing obligation that might arise under proposed Regulation BTR.
Request for Comment
Should we exclude investment companies from proposed Regulation BTR? If so, what would be the rationale for the exclusion?
With regard to the proposed form 8-K filing requirement, we request public comment on feasible alternatives that minimize the reporting burdens on registered investment companies. In addition, we request comment on the utility to investors of the reports to the Commission in relation to the costs to registered investment companies and their affiliated persons of providing those reports.
2. Persons Subject to Trading Prohibition
Section 306(a) of the Act applies to directors and executive officers of issuers subject to the Act. Proposed Exchange Act rule 100 would define these terms for purposes of section 306(a).
(a) Directors
Under proposed Exchange Act rule 100(c)(1), for purposes of section 306(a) of the Act and proposed Regulation BTR, the term ''director'' would have the meaning set forth in section 3(a)(7) of the Exchange Act.34 In determining whether an individual would be a director of an issuer for purposes of section 306(a) and proposed Regulation BTR, the individual's title would not be dispositive as to whether he or she is a director.35 An individual may be a
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director without holding the title, if he or she functions as a director.36
Request for Comment
Is it appropriate to use the definition in section 3(a)(7) of the Exchange Act to define the term ''director'' for purposes of section 306(a) and proposed Regulation BTR? If not, what definition should we use?
(b) Executive Officers
Under proposed Exchange Act rule 100(h)(1), for purposes of section 306(a) of the Act and proposed Regulation BTR, the term ''executive officer'' would be defined in the same manner as the term ''officer'' is defined in Exchange Act rule 16a-1(f).37 While the Exchange Act rules contain a separate definition of the term ''executive officer,'' 38 we believe that, for purposes of section 306(a) and proposed Regulation BTR, the broader definition in Exchange Act rule 16a-1(f) is more appropriate because of its focus on the policy-making functions of the subject individual.39 In addition, by using this definition, issuers that are subject to section 16 of the Exchange Act would be better able to coordinate the operation of their insider trading programs and to monitor the individuals subject to the provisions of both section 16 and section 306(a).
Request for Comment
Is it appropriate to use the definition of the term ''officer'' in Exchange Act Rule 16a-1(f) to define the term ''executive officer'' for purposes of section 306(a) and proposed Regulation BTR?
If not, should we use the definition in Exchange Act rule 3b-7, or some other definition? Should the scope of the definition be broader or narrower? If so, explain why.
(c) Foreign Private Issuers
Under proposed Exchange Act rule 100(c)(2), for purposes of section 306(a) of the Act and proposed Regulation BTR, in the case of a foreign private issuer, the term ''director'' would mean a director who is a management employee of the issuer. Under proposed Exchange Act rule 100(h)(2), for purposes of section 306(a) and proposed Regulation BTR, in the case of a foreign private issuer, the term ''executive officer'' would mean the principal executive officer or officers, the principal financial officer or officers and the principal accounting officer or officers (or, if there is none, the controller) of the issuer. Because foreign private issuers are not subject to section 16 of the Exchange Act,40 we believe that it is appropriate to specifically enumerate the directors and executive officers of a foreign private issuer who would be subject to section 306(a) and proposed Regulation BTR rather than relying on a section 16 definition. This would assist foreign private issuers in identifying the individuals who would be subject to section 306(a) and proposed Regulation BTR. In addition, many foreign private issuers have lower-level employee representatives on their boards of directors, and we do not believe that section 306(a) and proposed Regulation BTR should be extended to these individuals or to other non-employee directors of foreign companies.
Request for Comment
Is it appropriate to use a different definition of the terms ''director'' and ''executive officer'' for foreign private issuers than for domestic issuers?
Is it appropriate to limit the individuals who would be considered the directors and executive officers of a foreign private issuer for purposes of section 306(a) and proposed Regulation BTR? If not, explain why.
Should the proposed definition cover other executive officers of a foreign private issuer in addition to the three enumerated officers? Should we exclude the principal accounting officer from the definition? In each case, explain why.
Are there other directors of a foreign private issuer who should be included in the definition other than management directors? If so, explain who and why.
(d) Termination of Status
Because of the definitions described above, the statutory trading prohibition of section 306(a) of the Act and the provisions of proposed Regulation BTR would no longer apply to an individual who ceases to be a director or executive officer of an issuer.
3. Securities Subject to Trading Prohibition
Section 306(a) of the Act applies to any equity security of an issuer other than an exempt security.41 To effectuate the intended purpose of section 306(a) and to prevent evasion of the statutory trading prohibition, proposed Exchange Act rule 100(f) would define ''equity security of the issuer'' to include any equity security or derivative security relating to an issuer, whether or not issued by that issuer.42 Thus, section 306(a) and proposed Regulation BTR would apply to any equity security that
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relates to an equity security of the director or executive officer's company, even if the security is issued by a third party.43
(a) Equity Security
Under proposed Exchange Act Rule 100(e), for purposes of section 306(a) of the Act and proposed Regulation BTR, the term ''equity security'' would have the same meaning as in the definition set forth in section 3(a)(11) of the Exchange Act 44 and Exchange Act rule 3a11-1.45 In the case of foreign issuers, this definition would include depositary shares evidenced by American Depositary Receipts (''ADRs'').46
Request for Comment
Is it appropriate to use the definitions in section 3(a)(11) of the Exchange Act and Exchange Act rule 3a11-1 to define the term ''equity security'' for purposes of section 306(a) and proposed Regulation BTR? If not, what definition should we use?
(b) Derivative Securities
Under proposed Exchange Act rule 100(d), for purposes of section 306(a) of the Act and proposed Regulation BTR, the term ''derivative security'' would have the same meaning as the definition of the term ''derivative security'' set forth in Exchange Act rule 16a-1(c).47 As previously indicated, this definition would be interpreted in a manner consistent with the rules and interpretations that have developed under section 16 of the Exchange Act. For example, an interest that may be settled only in cash, but the value of which is denominated or based on an equity security, such as phantom stock, would be considered a derivative security for purposes of section 306(a) and proposed Regulation BTR. Consequently, an acquisition of a ''cash-only'' derivative security or the exercise, sale or other transfer of the security during a blackout period would be subject to the statutory trading prohibition unless pursuant to an exempt transaction.
Request for Comment
Is it appropriate to use the Exchange Act Rule 16a-1(c) definition of ''derivative security'' for purposes of section 306(a) and proposed Regulation BTR? If not, what definition should we use?
Are there instruments included in the definition of ''derivative security'' for purposes of section 16 of the Exchange Act that we should exclude from the definition of ''derivative security'' for purposes of section 306(a) and proposed Regulation BTR?
--Should we exclude an interest that may be settled solely in cash, the value of which is denominated or based on an equity security, from the definition of ''derivative security'' used for purposes of section 306(a) and proposed Regulation BTR?
Are there instruments excluded from the definition of ''derivative security'' for purposes of section 16 of the Exchange Act that we should include in the definition of ''derivative security'' for purposes of section 306(a) and proposed Regulation BTR?
--Should we include derivative securities without a fixed exercise price in the definition of ''derivative security'' used for purposes of section 306(a) and proposed Regulation BTR?
4. Transactions Subject to Trading Prohibition
Section 306(a) of the Act prohibits a director or executive officer from purchasing, selling or otherwise acquiring or transferring any equity security of an issuer during a pension plan blackout period, if the equity security was acquired in connection with the director or executive officer's service or employment as a director or executive officer. Thus, the scope of the statutory trading prohibition is limited to:
An acquisition of equity securities during a blackout period if the acquisition is in connection with service or employment as a director or executive officer; and
A disposition of equity securities during a blackout period if the disposition involves equity securities acquired in connection with service or employment as a director or executive officer.48
Proposed Regulation BTR would clarify how section 306(a) is intended to apply to each of these two categories of transactions.
(a) ''Acquired in Connection with Service or Employment''
Section 306(a) of the Act limits the statutory trading prohibition to equity securities that a director or executive officer acquires in connection with his or her service or employment as a director or executive officer.49 To implement this limitation, proposed
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Exchange Act rule 100(a) defines this term to include equity securities acquired by a director or executive officer:
At a time when he or she was a director or executive officer of the issuer, under a compensatory plan, contract, authorization or arrangement, including, but not limited to, plans relating to options, warrants or rights, pension, retirement or deferred compensation or bonus, incentive or profit-sharing (whether or not set forth in any formal plan document), including a compensatory plan, contract, authorization or arrangement with a parent, subsidiary or affiliate of the issuer;
At a time when he or she was a director or executive officer of the issuer, as a result of any transaction or business relationship that is described in paragraph (a) or (b) of item 404 of Regulation S-K 50 or, in the case of foreign private issuers, item 7.B of form 20-F 51 (but without application of the disclosure thresholds of such provisions), to the extent that he or she has a pecuniary interest 52 in the equity securities;
As ''director's qualifying shares'' or other securities that he or she must hold to meet an issuer's minimum ownership requirements for directors or executive officers; or
Prior to becoming, or while, a director or executive officer of the issuer if the equity security was acquired as an inducement to service or employment with the issuer or a parent, subsidiary or affiliate of the issuer or as a result of a merger, consolidation or other acquisition transaction involving the issuer.
While it is clear that Congress intended section 306(a) to cover transactions involving equity securities that are acquired through grants and awards under employee stock option, restricted stock and other common equity compensation plans, we believe that the broad language of the statute encompasses any plan, contract, authorization or arrangement that results in the acquisition of issuer equity securities in exchange for the performance of services for, or employment with, an issuer. The definition in proposed Exchange Act rule 100(a)(1) is intended to reach these types of plans and arrangements. This would ensure that issuers do not shift the form of their compensation programs to enable directors and executive officers to evade the application of section 306(a).
The definition in proposed Exchange Act rule 100(a)(2) would include equity securities that have been acquired solely or primarily as a result of an individual's status as a director or executive officer. While this definition may reach equity securities that were, in fact, acquired in arms-length commercial transactions, we believe that inclusion of these transactions is necessary to prevent evasion of the statutory trading prohibition.
The definition in proposed Exchange Act rule 100(a)(3) would include securities that an individual has acquired to satisfy requirements that the individual be a security holder of the issuer in order to serve on the issuer's board of directors (so-called ''directors' qualifying shares'') and securities that a director or executive officer has acquired to satisfy an issuer's minimum ownership guidelines or requirements for directors or executive officers, including equity securities acquired on the open market for such purposes. Finally, the definition in proposed Exchange Act rule 100(a)(4) would include equity securities acquired at a time when an individual has not yet become a director or executive officer of the issuer, but which are clearly related to his or her service or employment, such as a grant or award made to induce an individual to join an issuer's board of directors or to become an employee of the issuer or as a result of a merger, consolidation or other acquisition transaction involving the issuer.
Request for Comment
Are the transactions involving the acquisition of equity securities described in proposed Exchange Act rule 100(a) consistent with purposes of section 306(a) and proposed Regulation BTR? Should any of the described transactions be excluded from the definition of ''acquired in connection with service or employment''? If so, what would be the rationale for the exclusion?
Are there any other situations where equity securities acquired by a director or executive officer should be considered ''acquired in connection with service or employment'' as a director or executive officer?
For purposes of determining whether equity securities received under a compensatory plan, contract or arrangement were ''acquired in connection with service or employment,'' would it be helpful to reference the existing definition of an ''employee benefit plan'' under the federal securities laws?
In the case of equity securities acquired by an individual as result of a merger, consolidation or other acquisition transaction involving the issuer, should such equity securities be considered ''acquired in connection with service or employment as a director or executive officer'' only where they replace equity securities that otherwise would satisfy the requirements of the definition? For example, where an employee of a target company becomes an executive officer of an acquiring company and, in connection with the merger, consolidation or other acquisition transaction of the two entities, is issued equity securities of the acquiring company to replace equity securities of the target company, should these equity securities received be considered ''acquired in connection with service or employment as a director of executive officer'' only to the extent that they were otherwise acquired in connection with service or employment as a director or executive officer of the target company?
Should proposed Regulation BTR contain a ''safe harbor'' provision specifying acquisitions of an issuer's equity securities by directors and executive officers of the issuer that are not ''acquired in connection with service or employment'' as a director or executive officer? If so, what acquisitions of an issuer's equity securities should fall within the ''safe harbor'?
(b) Indirect Interests
The statutory trading prohibition of section 306(a) of the Act applies to both indirect, as well as direct, purchases, sales or other acquisitions or transfers of equity securities of the issuer by a director or executive officer.53 Similarly, to prevent evasion of the statutory trading prohibition, the definition of ''acquired in connection with service or employment'' in proposed Exchange Act rule 100(a) would apply to indirect, as well as direct, acquisitions of equity securities for the benefit of a director or executive officer. For purposes of section 306(a), an acquisition or disposition of equity securities would be considered an acquisition or disposition by a director or executive officer if the director or
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executive officer has a pecuniary interest 54 in the transaction.
To promote consistency and to simplify compliance, the term ''pecuniary interest'' would be interpreted in a manner consistent with the rules and interpretations that have developed under section 16 of the Exchange Act. Accordingly, a purchase, sale or other acquisition or transfer of equity securities by immediate family members 55 sharing the same household, a partnership, corporation, limited liability company or trust would be attributable to a director or executive officer for purposes of the statutory trading prohibition of section 306(a)(1) and proposed Exchange Act rule 101(a) if he or she is deemed to have an indirect pecuniary interest 56 in the equity securities in question. An acquisition of equity securities by an immediate family member sharing the same household, a partnership, corporation, limited liability company or trust would be attributable to a director or executive officer for purposes of determining whether the acquisition is ''in connection with service or employment'' if the acquisition otherwise satisfies the definition in proposed Exchange Act rule 100(a) and he or she is deemed to have an indirect pecuniary interest in the equity securities in question.
Request for Comment
Is it appropriate to use the definition in Exchange Act rule 16a-1(a)(2) to define the term ''pecuniary interest'' for purposes of section 306(a) and proposed Regulation BTR? If not, what definition should we use?
--Are the definitions that determine the operation of the definition of the term ''pecuniary interest'' for purposes of section 16 of the Exchange Act appropriate for determining the application of section 306(a) and proposed Regulation BTR to indirect acquisitions of equity securities? --Instead, should the application of section 306(a) and proposed Regulation BTR to indirect acquisitions of equity securities use a different standard, such as the beneficial ownership rules under section 13(d) of the Exchange Act,57 for purposes of determining whether equity securities were acquired ''in connection with service or employment'' as a director or executive officer? If so, explain why.
--Should the application of section 306(a) and proposed Regulation BTR to indirect acquisitions and dispositions of equity securities use a different standard, such as the beneficial ownership rules under section 13(d) of the Exchange Act, for purposes of determining whether an acquisition or disposition of equity securities during a blackout period is subject to the statutory trading prohibition? If so, explain why.
(c) Service or Employment Presumption
Since the statutory trading prohibition of section 306(a) of the Act applies only to equity securities acquired in connection with service or employment as a director or executive officer, the statute, by its terms, does not completely preclude a director or executive officer from engaging in an acquisition or disposition of the equity securities of the issuer during a blackout period. This possibility may present difficulties in determining whether a particular transaction during a blackout period, such as a sale on the open market, involves equity securities that are subject to section 306(a) or other equity securities.
To simplify identification and eliminate tracing the source of equity securities involved in a disposition transaction and to prevent possible evasion of the statute, proposed Exchange Act rule 101(b) establishes an irrebuttable presumption that any equity securities sold or otherwise transferred during a blackout period were acquired in connection with service or employment as a director or executive officer to the extent that the director or executive officer holds such securities, without regard to the actual source of the securities disposed. To avoid an overly-broad application of the presumption, however, in a given blackout period, equity securities held by a director or executive officer that were acquired in connection with service or employment could only count against a single disposition transaction during that blackout period.
For example, if an executive officer owned 1,000 shares of the issuer's common stock, 250 of which were acquired as the result of the exercise of an employee stock option, a sale of 250 shares of common stock during a blackout period would be presumed to be a sale of the option shares and therefore subject to the statutory trading prohibition of section 306(a) and proposed Exchange Act rule 101(a), without regard to the actual source of the shares sold. A subsequent sale of 250 shares of common stock during the same blackout period, however, would not trigger the statutory trading prohibition since the option shares would have been deemed sold in the first transaction.
Request for Comment
Is it appropriate to presume that any equity securities acquired or disposed of during a blackout period were acquired in connection with service or employment as a director or executive officer? If not, is there an alternative way to determine the source of equity securities acquired or disposed of during a blackout period that effectively prevents evasion of the statutory trading prohibition of section 306(a) and proposed Regulation BTR?
Where the presumption is applied, should the equity securities acquired in connection with service or employment as a director or executive officer that were deemed sold or otherwise disposed of be excluded for purposes of applying the presumption to a sale or other disposition of equity securities in a subsequent blackout period? If so, explain why.
Should the presumption that equity securities acquired or disposed of during a blackout period were acquired in connection with service of employment as a director or executive officer be rebuttable? If so, under what circumstances?
(d) Transitional Matters
Except as provided in proposed Exchange Act rule 100(a), equity securities acquired by an individual before he or she became a director or executive officer of an issuer would not be subject to section 306(a) of the Act or proposed Regulation BTR.58 This would exclude from the statutory trading prohibition any equity securities acquired under a plan, contract, authorization or arrangement while the individual was an employee, but not a director or executive officer, of the issuer.
On the other hand, equity securities acquired by an individual in connection with service or employment as a director or executive officer before a company constituted an ''issuer'' under the definition contained in section 2(a)(7) of the Act would be subject to the statutory trading prohibition of section 306(a) and proposed Regulation BTR. Similarly, equity securities acquired in connection with an individual's service or employment as a director or executive officer before the effective date of the Act would be subject to
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section 306(a) and proposed Regulation BTR.
Request for Comment
Should we exclude equity securities acquired by an individual before he or she became a director or executive officer of an issuer from section 306(a) of the Act and proposed Regulation BTR?
Is it necessary or appropriate to treat equity securities acquired by a director or executive officer before a company became an ''issuer'' as defined in section 2(a)(7) of the Act as equity securities subject to section 306(a) and proposed Regulation BTR to prevent evasion of the statutory trading prohibition?
(e) Exempt Transactions
Section 306(a)(3) of the Act permits us to provide appropriate exemptions from the statutory trading prohibition of section 306(a), including purchases pursuant to an automatic dividend reinvestment program or purchases or sales made pursuant to an advance election. Because we believe that there are a number of transactions involving the acquisition or disposition of an equity security of an issuer that do not appear to present the concerns that section 306(a) is intended to remedy, we propose to exempt several types of transactions from the statutory trading prohibition if adequate safeguards exist. Proposed Exchange Act rule 101(c) would exempt:
Acquisitions of equity securities under dividend or interest reinvestment plans;
Purchases or sales of equity securities pursuant to a contract, instruction or written plan that satisfies the affirmative defense conditions of Exchange Act rule 10b5-1(c); 59
Purchases or sales of equity securities pursuant to certain ''tax-conditioned'' plans,60 other than discretionary transactions; 61 and
Increases or decreases in the number of equity securities held as a result of a stock split or stock dividend applying equally to all equity securities of that class, including a stock dividend in which equity securities of a different issuer are distributed, and acquisitions of rights, such as shareholder or pre-emptive rights, pursuant to a pro rata grant to all holders of the same class of equity securities registered under section 12 of the Exchange Act.
In the case of the acquisition of an equity security pursuant to a dividend or interest reinvestment plan, under proposed Exchange Act rule 101(c)(1) the acquisition would be exempt from the statutory trading prohibition of section 306(a) and proposed Regulation BTR if made under a broad-based plan providing for the regular reinvestment of dividends or interest that does not discriminate in favor of employees of the issuer and operates on substantially the same terms for all plan participants.62 Similarly, under proposed Exchange Act rule 101(c)(4), an increase or decrease in the number of equity securities held by a director or executive officer resulting from a stock split or stock dividend would be exempt where the transaction applies equally to all equity securities of that class, including a stock dividend in which equity securities of a different issuer are distributed, as would an acquisition of rights, such as shareholder or pre-emptive rights, pursuant to a pro rata grant to all holders of the same class of equity securities registered under section 12 of the Exchange Act.63
Because a purchase or sale of equity securities pursuant to a contract, instruction or written plan for the purchase or sale of equity securities of the issuer that satisfies the affirmative defense conditions of Exchange Act rule 10b5-1(c) is made pursuant to an advance election, such a transaction does not necessarily give rise to the problem that section 306(a) is intended to address as long as the individual was not aware of the impending blackout.64 Under proposed Exchange Act rule 101(c)(2), transactions that satisfy the affirmative defense conditions of Exchange Act rule 10b5-1(c) would be exempt from the statutory trading prohibition of section 306(a) and proposed Regulation BTR as long as the advance election was not made or modified during the blackout period or at the time the director or executive officer was aware of the impending blackout. To be eligible for the exemption, the binding contract must have been executed, the instruction must have been given or the written plan must have been adopted, before the director or executive officer received notice of the imposition of the blackout period. In addition, a director or executive officer must not be aware of the impending blackout at the time the contract is executed, the instruction is given or the plan is adopted, including any modifications to the contract, instruction or plan.
Under proposed Exchange Act rule 101(c)(3), a purchase or sale of equity securities pursuant to a Qualified Plan,65 Excess Benefit Plan 66 or Stock Purchase Plan 67 would be exempt from the statutory trading prohibition of section 306(a) and proposed Regulation BTR.68 These plans must satisfy specified provisions of the Internal Revenue Code that are designed to ensure non-discriminatory treatment of plan participants and generally involve automatic, periodic acquisitions of equity securities made pursuant to advance elections. Foreign private issuers may have employee benefit plans that are not required to satisfy the Internal Revenue Code, but instead satisfy foreign tax and other laws. As proposed, these plans would not come within the exemption under proposed Exchange Act rule 101(c)(3).
Generally, the exemption would not extend to ''discretionary transactions,'' 69 such as an intra-plan transfer involving an issuer equity securities fund or a cash distribution funded by a volitional disposition of an issuer equity security, that occurred during a blackout period. Except as described in the following sentence, these transactions would be considered
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a purchase or sale of equity securities of the issuer subject to the statutory trading prohibition of section 306(a) and proposed Regulation BTR. Notwithstanding the foregoing, a discretionary transaction that occurred during a blackout period pursuant to an advance election that satisfies the affirmative defense conditions of Exchange Act rule 10b5- 1(c) as described above would be eligible for exemption from the statutory trading prohibition of section 306(a) and proposed Regulation BTR.
Request for Comment
Is it appropriate to exempt the described transactions from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If not, explain why.
Should we consider other transactions for exemption from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption?
--Should we exempt a transfer of equity securities without the receipt of consideration, such as a bona fide gift, from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption? --Should we exempt an acquisition or disposition of equity securities resulting from an involuntary event, such as the death of a director or executive officer or pursuant to an order of a court or other judicial or administrative authority, from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption? --Should we exempt the closing of a derivative security position as a result of its exercise or conversion, and the acquisition of underlying securities at a fixed exercise price due to the exercise or conversion of a call equivalent position, such as an employee stock option, from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption? Commenters are requested to justify their views in light of the express statutory prohibition against acquiring equity securities of an issuer in connection with service or employment as a director or executive officer during a blackout period. Should such an exemption be limited to situations where the position was established without awareness of an impending blackout period? Should such an exemption be limited to situations where the position would expire, mature or otherwise terminate during the blackout period?
--Should we exempt the closing of a derivative security position as a result of its exercise or conversion, and the disposition of underlying securities at a fixed exercise price due to the exercise of a put equivalent position, from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption? Should such an exemption be limited to situations where the position was established without awareness of an impending blackout period?
Should we provide an express exemption for the exercise of a put equivalent position during a blackout period written by a director or executive officer before a blackout period that is exercised by a counterparty during the blackout period? Should such an exemption be limited to circumstances where the director or executive officer does not exercise any influence over the timing of the exercise?
Should we provide an express exemption for a sale or other transfer of the equity security by a director or executive officer that is compelled by the laws or other requirements of an applicable jurisdiction? If so, what should be the scope of the exemption?
Is it appropriate to exempt a discretionary transaction from the statutory trading prohibition of section 306(a) and proposed Regulation BTR where the transaction occurs pursuant to an advance election that satisfies the affirmative defense conditions of Exchange Act rule 10b5-1(c)? If not, should a discretionary transaction that otherwise would occur during a blackout period be deferred until the end of the blackout period rather than prohibited?
Should an acquisition or disposition of equity securities made in connection with death, disability, retirement or termination of employment or transactions involving a diversification or distribution required by the Internal Revenue Code to be made available to plan participants be subject to the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, explain why.
Do foreign private issuers have employee benefit plans that are substantially similar to Qualified Plans, Excess Benefit Plans and Stock Purchase Plans that should be exempt from the statutory trading prohibition of section 306(a) and proposed Regulation BTR? If so, what would be the rationale for the exemption?
Because there may be a variety of employee benefit plans and other compensatory arrangements under foreign law that may not be eligible for the exemption under proposed Exchange Act rule 100(c)(3) because they do not satisfy the requirements of the Internal Revenue Code, should we exempt purchases and sales of equity securities pursuant to compensatory plans and arrangements of a foreign private issuer that are substantially similar to Qualified Plans, Excess Benefit Plans and Stock Purchase Plans? Alternatively, because of the potential number of variations in plans and arrangements, should we address exemptions in this area on a case-by-case basis?
5. Blackout Period
Section 306(a)(4)(A) of the Act defines the term ''blackout period'' to mean any period of more than three consecutive business days during which the ability of not fewer than 50% of the participants or beneficiaries under all individual account plans maintained by the issuer to purchase, sell or otherwise acquire or transfer an interest in any equity security of such issuer held in such an individual account plan is temporarily suspended by the issuer or by a fiduciary of the plan. Proposed Exchange Act rule 100(b) would clarify the scope of this provision and address the application of this definition to both domestic and foreign private issuers.
Request for Comment
Should we define the term ''blackout period'' to be shorter than the three consecutive business days specified in the statute? If so, how long should the period be and why? Are there particular types of abuses that we should consider in determining the appropriate length of the period?
--In view of the fact that the statutory definition will automatically become effective on January 26, 2003, would there be any adverse consequences from having a more restrictive definition in our rules than the definition that will become effective under the statute? --If we were to define the term ''blackout period'' to be shorter than three consecutive business days, how should we harmonize the definition with the definition of ''blackout period'' contained in the interim final rule recently issued by the Department of Labor under section 306(b) of the Act?
(a) Individual Account Plans
Section 306(a)(5) of the Act defines the term ''individual account plan'' by
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reference to section 3(34) of the Employee Retirement Income Security Act of 1974 (''ERISA'').70 Section 3(34) defines the term ''individual account plan'' to mean ''a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.'' 71 This definition encompasses a variety of pension plans, including section 401(k) plans, profit-sharing and savings plans, stock bonus plans and money purchase pension plans. Proposed Exchange Act rule 100(j) would clarify that, for purposes of section 306(a) of the Act, this definition also includes non-qualified deferred compensation arrangements that reflect the elements described in the definition. As provided under section 306(a)(5), proposed Exchange Act rule 100(j) would exclude a one-participant retirement plan from the definition.72
Request for Comment
Does the general statement about non-qualified deferred arrangements provide sufficient guidance as to when these arrangements would be considered ''individual account plans'' for purposes of section 306(a)(5) and proposed Exchange Act rule 100(j)? If not, what additional guidance should we give in this area?
(b) 50% Test
Under section 306(a)(4)(A) of the Act, a blackout period occurs only where at least 50% of the participants or beneficiaries under all individual account plans maintained by the issuer are subject to a temporary suspension by the issuer or by a fiduciary of the plan of more than three consecutive business days that prevents the participants or beneficiaries from purchasing, selling or otherwise acquiring or transferring an interest in any equity security of the issuer held in the individual account plans. Proposed Exchange Act rule 100(b) would clarify that, for purposes of making this calculation, the individual account plans ''maintained by the issuer'' would include only individual account plans in which participants or beneficiaries held or could hold equity securities of the issuer, whether or not the account plan actually contained equity securities of the issuer at the time of the calculation. This would include individual account plans that:
Permit participants or beneficiaries to invest their plan contributions in the equity securities of the issuer;
Include an ''open brokerage window'' that permit participants or beneficiaries to invest in the equity securities of any publicly-traded company, including the issuer;
Match employee contributions with equity securities of the issuer; or
Reallocate forfeitures that included equity securities of the issuer to the remaining plan participants.
The proposed rule also would provide that, for purposes of determining the individual account plans ''maintained by the issuer,'' the rules under section 414(b), (c), (m) and (o) of the Internal Revenue Code 73 with respect to entities treated as a single employer with respect to an issuer would apply.74 The ''single employer'' rules of section 414 are designed to aggregate the employees of an affiliated group of businesses to ensure compliance with the limitations on the absolute and relative amounts of benefits that can be provided to individual employees or groups of employees under tax- qualified employee benefit programs.75 While each business within a controlled group 76 may have its own employee benefit plan or plans, and each plan can provide different benefit structures, profiles of the covered employee groups, including the compensation and benefit levels for each participant, must be maintained and monitored to enable the single employer, deemed to exist for the controlled group, to determine that the plans are in compliance with the applicable requirements. We believe that these rules reflect the appropriate principles for determining the individual account plans of an issuer and its parent, subsidiary and affiliated entities that should be aggregated for purposes of determining whether a blackout period affects 50% or more of the individual account plans maintained by an issuer.
Request for Comment
Is it necessary or appropriate to apply the ''single employer'' rule of section 414(b), (c), (m) and (o) of the Internal Revenue Code for purposes of determining the individual account plans ''maintained by the issuer'' for purposes of the 50% test? If not, why not? Should some of the provisions be applied, but not others? If so, which ones? For example, is it necessary or appropriate to apply the rules under section 414(m), which address whether separate service organizations constitute an affiliated group, for purposes of identifying individual account plans maintained by the issuer?
Is there an alternative ''control group'' concept that we should use to determine the individual account plans that are to be considered ''maintained by the issuer'' for purposes of the 50% test? For example, would it be appropriate to use the definition of an ''affiliate'' set forth in section 407(d)(7) of the Employee Retirement Income Security Act of 1974 to determine which individual account plans are ''maintained by the issuer'' for purposes of section 306(a)(4)(A)?
Is it necessary or appropriate to include individual account plans that merely provide for an ''open brokerage window'' that permit participants or beneficiaries to invest in the equity securities of any publicly-traded company in the description of individual account plans that should be considered in the 50% test? If not, explain why.
(c) Application of 50% Test
For purposes of section 306(a) of the Act, once an issuer identified the relevant individual account plans for purposes of the 50% test, it would apply the test by comparing the number of participants or beneficiaries located in the United States and its territories and possessions under all individual account plans maintained by the issuer that will be subject to a temporary
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suspension of trading in such equity securities to the overall number of participants or beneficiaries located in the United States and its territories and possessions under all individual account plans maintained by the issuer.77 If this percentage is at least 50%, the statutory trading prohibition would apply to the directors and executive officers of a domestic issuer.
In the case of a foreign private issuer, however, a concurrent second calculation would be applied to determine if the statutory trading prohibition was triggered. This calculation would compare the number of participants or beneficiaries located in the United States and its territories and possessions under all individual account plans maintained by the issuer subject to the temporary suspension of trading in such equity securities to the overall number of participants or beneficiaries under all individual account plans maintained by the issuer worldwide.78 If this percentage is greater than 15% and the concurrent 50% test also is met, the statutory trading prohibition would apply to the directors and executive officers of the foreign private issuer. As previously discussed, although this second calculation is not reflected in section 306(a), we believe that such a test should be applied to ensure that the statutory trading prohibition is limited to the directors and executive officers of foreign private issuers where a significant portion of their overall plan participants or beneficiaries are located in the United States.
The application of these principles is illustrated by the following examples:
Example 1. Company X is a foreign private issuer with 100,000 employees worldwide who participate in pension plans maintained by the issuer. 30,000 participants are located in the United States. A fiduciary of the issuer's U.S. pension plan initiates a blackout that will affect 16,000 of the U.S. participants. Since plan participants located in the United States who are subject to the blackout comprise 50% or more of the total number of participants located in the United States (16,000/30,000), and plan participants located in the United States who are subject to the blackout represent more than 15% of the total number of plan participants worldwide (16,000/100,000), the statutory trading prohibition of section 306(a) would apply to the foreign private issuer's directors and executive officers.
Example 2. Company X is a foreign private issuer with 100,000 employees worldwide who participate in pension plans maintained by the issuer. 10,000 participants are located in the United States. A fiduciary of the issuer's U.S. pension plan initiates a blackout that will affect 7,000 of the U.S. participants. Although plan participants located in the United States who are subject to the blackout comprise 50% or more of the total number of participants located in the United States (7,000/ 10,000), because plan participants located in the United States who are subject to the blackout represent less than 15% of the total number of plan participants worldwide (7,000/100,000), the statutory trading prohibition of Section 306(a) would not apply to the directors and executive officers of the foreign private issuer.
Request for Comment
Is it appropriate to limit the scope of the definition of the term ''blackout period'' to situations where the participants or beneficiaries under individual account plans that are affected by the temporary trading suspension represent 50% or more of the participants or beneficiaries under individual account plans located in the United States and its territories and possessions?
Is it appropriate to limit the scope of the definition of the term ''blackout period'' in the case of a foreign private issuer to situations where the participants or beneficiaries located in the United States under all individual account plans maintained by the issuer subject to the temporary trading suspension also represent a significant portion of the overall number of the participants or beneficiaries under all individual account plans maintained by the issuer worldwide? If so, should the threshold for applying section 306(a) be higher or lower (such as 20% or 10%) than 15% of worldwide individual account plan participants or beneficiaries? If not, what would be the rationale for applying section 306(a) to a broader group of foreign private issuers?
What would be an appropriate measurement date for determining the number of participants or beneficiaries in an individual account plan for purposes of conducting the 50% test? Should this number be determined as of the end of the most recent plan fiscal year, the end of the most recent fiscal quarter or some other date? What are the relevant considerations in selecting an appropriate measurement date?
Is it necessary or appropriate for the proposed rules to ensure that the 50% test considers plan participants or beneficiaries who are United States citizens or residents who are on temporary assignment abroad?
Would it be helpful for us to provide additional examples of the application of the 50% test? If so, are there specific fact patterns that we should address in the examples?
(d) Exceptions to Definition of Blackout Period
Section 306(a)(4)(B) of the Act expressly excludes two categories of transactions from the definition of ''blackout period.'' These exceptions include:
A regularly scheduled period in which the participants and beneficiaries may not purchase, sell or otherwise acquire or transfer an interest in any equity security of an issuer, if such period is:
--Incorporated into the individual account plan; and --Timely disclosed to employees before they become participants under the individual account plan or as a subsequent amendment to the plan; and --Any suspension described in the general definition of ''blackout period'' that is imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, in an individual account plan by reason of a corporate merger, acquisition, divestiture or similar transaction involving the plan or plan sponsor.79
Section 306(a)(4)(B) further directs us to prescribe regulations to implement these exceptions. Accordingly, proposed Exchange Act rule 102 clarifies the application of the exceptions.80 Proposed Exchange Act rule 102(a) would address the exception for regularly scheduled blackout periods by providing that the requirement that the blackout period be incorporated in the individual account plan could be satisfied by including a description of the regularly scheduled blackout period, including the plan transactions to be suspended during, or otherwise affected by, the blackout and its frequency and duration, in the documents or instruments under which the plan operates. The proposed rule also would provide that disclosure of the blackout period to an employee would be timely if the employee was provided notice of the blackout period at any time prior to when, or within 30 calendar days after, he or she formally enrolled in the plan, or, in the case of a subsequent amendment to the plan, within 30 calendar days after the adoption of the amendment. The notice could be in any
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graphic form that is reasonably accessible to the intended recipient.
In the case of a blackout imposed to consolidate plans following a merger acquisition, divestiture or similar transaction, proposed Exchange Act rule 102(b) would clarify that the blackout period would not trigger the statutory trading prohibition of section 306(a) if its principal purpose is to enable individuals to become participants or beneficiaries in the plan, or to terminate participation in the plan, even though the blackout also is used to effect other administrative actions that are incidental to the admission or withdrawal of plan participants or beneficiaries. In addition, the proposed rule would provide that the exception would be available only with respect to the participants or beneficiaries of the acquired or divested entity.
Request for Comment
Is it necessary or appropriate to clarify in proposed Exchange Act rule 102(a) that a regularly scheduled blackout period will be considered ''incorporated'' into an individual account plan if it is included in any of the documents or instruments, such as the summary plan description, under which the account plan operates? If so, explain why.
Is it necessary or appropriate to clarify in proposed Exchange Act rule 102(a) that disclosure of a regularly scheduled blackout period to an employee would be timely if the employee was provided notice of the blackout period at any time prior to when, or within 30 calendar days after, he or she formally enrolls in the plan? If not, explain why. Should the timeliness of disclosure be measured with respect to an event other than formal enrollment in an individual account plan?
Is it necessary or appropriate to clarify in proposed Exchange Act rule 102(a) that disclosure of a regularly scheduled blackout period to an employee would be timely in the event of a subsequent amendment to an individual account plan if the employee was provided notice of the blackout period within 30 calendar days after the adoption of the amendment? If not, explain why. Should the timeliness of disclosure be measured with respect to an event other than formal enrollment in an individual account plan?
Is it necessary or appropriate to clarify in proposed Exchange Act rule 102(a) the method by or form in which an issuer may timely disclose to employees the existence of a regularly scheduled blackout period? If so, explain why.
Should the exception in proposed Exchange Act rule 102(a) contain a de minimis threshold that would not cause the loss of the exception in the event that some plan participants or beneficiaries failed to receive timely notice of the regularly scheduled blackout period? If so, should the de minimis threshold be a number (such as fewer than 5 or 10) or a percentage (such as fewer than 1% or 2%) of participants or beneficiaries that have individual account plans? What should the threshold be?
Is it necessary or appropriate to clarify in proposed Exchange Act rule 102(b) that a blackout period following a merger, acquisition, divestiture or similar transaction would be excepted if it principally involves the enrollment of individuals in an individual account plan? If not, why not? Should we identify the type of administrative activities that would be considered incidental to the principal purpose of the blackout period?
Is it necessary or appropriate to limit the exception in proposed Exchange Act rule 102(b) to the participants or beneficiaries of the acquired or divested entity? If not, why not?
6. Remedies
Section 306(a) of the Act contains two distinct remedies. First, a violation of the statutory trading prohibition of section 306(a) is subject to a possible Commission enforcement action.81 In addition, where a director or executive officer realizes a profit from a prohibited transaction during a blackout period, an issuer, or a security holder of the issuer on its behalf, may bring an action to recover the profit.82 Accordingly, liability under section 306(a) of the Act is not limited solely to recovery of the profit realized by a director or executive officer from a prohibited transaction.83 Proposed Regulation BTR embodies both of these contemplated remedies.
(a) Commission Enforcement
Section 306(a)(1) of the Act provides that it is unlawful for a director or executive officer of an issuer of any equity security, directly or indirectly, to purchase, sell or otherwise acquire or transfer any equity security of the issuer during a blackout period with respect to the equity security if the director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer. This express prohibition against the trading of equity securities during a blackout period, as contemplated by section 306(a)(1) of the Act, provides the necessary predicate for enforcement actions and sanctions under the Exchange Act.84
Consequently, a director or executive officer who violates the statutory trading prohibition of section 306(a) would be subject to possible civil injunctive actions, cease-and-desist proceedings, civil penalties and all other remedies available to the Commission to redress violations of the Exchange Act.85 Under appropriate circumstances, a director or executive officer also could be subject to possible criminal liability.86
(b) Private Right of Action
Section 306(a)(2) of the Act provides that any profit realized by a director or executive officer subject to the statutory trading prohibition of section 306(a)(1) of the Act inures to, and is recoverable by, the issuer, irrespective of the director or executive officer's motive or intention upon entering into the transaction. This remedy reflects a strict standard of liability for prohibited transactions that is similar to the standard that forms the basis for a private right of action under section 16(b) of the Exchange Act.87
Under section 306(a)(2)(B) of the Act, the issuer may institute an action to recover a director or executive officer's realized profits from a prohibited transaction at law or in equity in any court of competent jurisdiction. If the issuer fails or refuses to bring an action within 60 days after the date of request, or fails diligently to prosecute the action
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thereafter, the owner of any equity security of the issuer may bring such an action in the name, and on behalf of, the issuer.
Because section 306(a) protects pension plan participants or beneficiaries, we believe that Congress intended to provide standing to bring an action to all holders of the equity securities of the issuer, including plan participants and beneficiaries who hold equity securities of the issuer in their individual account plans, as of the date of the subject transaction. Proposed Exchange Act rule 103 would reflect this approach. As set forth in section 306(a)(2)(B), no suit may be brought more than two years after the date on which the recoverable profits were realized.
Request for Comment
Where a transaction involving the equity securities of an issuer gives rise to both private right of action under section 306(a) and section 16(b) of the Exchange Act, should a recovery under one provision be offset against a recovery under the other provision? If so, explain why.
Similarly, where a transaction involving the equity securities of an issuer gives rise to both private right of action under section 306(a) and an action under Exchange Act rule 10b-5, should a recovery under one provision be offset against a recovery under the other provision? If so, explain why.
As noted above, the private right of action under section 306(a)(2) serves a remedial purpose that is similar to the purpose of section 16(b). While foreign private issuers would be subject to section 306(a)(2), they are not subject to the profit recovery and other provisions of section 16. This treatment reflects foreign private issuers' concerns relating to the strict liability nature of section 16(b), as well as jurisdictional issues that would likely arise in connection with applying section 16(b) to offshore transactions involving the equity securities of foreign private issuers by non-U.S. resident directors and officers.
Request for Comment
Should foreign private issuers be exempt from the private right of action under section 306(a)(2)? If so, what are the jurisdictional and policy reasons that would support such an exemption? Are there other ways to address the jurisdictional issues and other matters relating to foreign private issuers in this area? Is the potential for Commission enforcement action under section 306(a) a sufficient remedy with respect to foreign private issuers?
(c) Realized Profits
For purposes of section 306(a) of the Act, a security holder could initiate a private action only if a director or executive officer realized a profit as a result of a purchase, sale or other acquisition or transfer of an equity security during a blackout period. As under section 16(b) of the Exchange Act, this concept of realized profit would mean that the director or executive officer received a direct or indirect pecuniary benefit from the transaction.88 The question of whether a transaction has resulted in the realization of recoverable profits is complex. It is further complicated where the prohibited transaction is a purchase or other acquisition of equity securities during a blackout period.
There are several possible ways to calculate realized profits. In the case of a sale or other disposition of equity security during a blackout period, this includes:
The difference between the purchase or acquisition price, if any, of the equity security and (a) the actual amount received in the case of a sale or (b) the market value of the equity security at the time of transfer in the case of a transfer without receipt of consideration;
The difference between the most recent purchase or acquisition price, if any, of an equity security acquired in connection with service or employment as a director or executive officer before the commencement of the blackout period and (a) the actual amount received in the case of a sale or (b) the market value of the equity security at the time of transfer in the case of a transfer without receipt of consideration;
The difference between the lowest purchase or acquisition price, if any, of an equity security acquired in connection with service or employment as a director or executive officer during a specified period before the commencement of the blackout period and (a) the actual amount received in the case of a sale or (b) the market value of the equity security in the case of a transfer without receipt of consideration;
The difference between the average market value of the equity securities of the issuer during a specified period before the commencement of the blackout period and (a) the actual amount received in the case of a sale or (b) the market value of the equity security at the time of transfer in the case of a transfer without receipt of consideration; and
The difference between the actual amount received as a result of the sale or other transfer of the equity security and the market value of the equity securities of the issuer on the first date after the end of the blackout period.89
In the case of a purchase or other acquisition of an equity security during a blackout period, this includes:
The difference between the purchase or acquisition price, if any, of the equity security and (a) the actual amount received in the case of a sale of the equity security or (b) the market value of the equity security at the time of transfer in the case of a transfer without receipt of consideration;
The difference between the purchase or acquisition price, if any, of the equity security and the market value of the equity securities of the issuer on the first date after the end of the blackout period;
The difference between the purchase or acquisition price, if any, of the equity security and (a) the actual amount received or (b) the market value of the equity security at the time of transfer without receipt of consideration in the case of a sale or other transfer of any equity security (whether or not the security purchased or acquired) after the end of the blackout period; and
The difference between the purchase or acquisition price, if any, of the equity security and the earlier of (a) the actual amount received upon the sale or other disposition of the equity security or (b) the market value of the equity security on the first anniversary of the last day of the blackout period.
In view of the complexity associated with this issue, we are not proposing a specific approach for calculating realized profits at this time. Instead, we solicit comment on the various approaches described above, as well as any other approaches that would be consistent with the purposes of section 306(a).
Request for Comment
Should we propose a specific formula for the calculation of ''realized profits'' that are recoverable under the private right of action provided in section 306(a)?
--If so, what would be an appropriate calculation for a transaction involving a sale or other transfer of equity securities during a blackout period?
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--Similarly, what would be an appropriate calculation for a transaction involving a purchase or other acquisition of equity securities during a blackout period? In either case, explain how the suggested calculation specifically relates to the ability to profit by trading during the blackout period.
Should we refrain from providing guidance, and instead leave profit calculations to the courts based on the facts and circumstances of the particular case?
7. Notice
Section 306(a)(3) of the Act requires an issuer to provide timely notice to its directors and executive officers and to the Commission of the imposition of a blackout period that would trigger the statutory trading prohibition of section 306(a)(1). Proposed Exchange Act rule 104 would clarify how issuers would satisfy this statutory directive.
(a) Notice Requirement
Proposed Exchange Act rule 104(a) would reflect the general requirement of section 306(a)(3) of the Act that, in any case in which a director or executive officer of an issuer of any equity security is subject to the statutory trading prohibition of section 306(a) and proposed Regulation BTR, the issuer of the equity securities must provide notice of the blackout period to the director or executive officer, as well as to the Commission.90
(b) Content of Notice
The required content of the notice would be set forth in proposed Exchange Act rule 104(b)(1).91 As proposed, the notice would include the following information:
The reason or reasons for the blackout period;
A description of the plan transactions to be suspended during, or otherwise affected by, the blackout period;
The description of the class of equity securities subject to the blackout period;
The actual or expected beginning and ending dates of the blackout period; and
The name, address and telephone number of the person designated by the issuer to respond to inquiries about the blackout period, or, in the absence of such a designation, the issuer's human resources director or person performing equivalent functions.
An indication of the beginning and ending dates of the blackout period is intended to enable directors and executive officers to factor the anticipated duration of the blackout into their pre-blackout period investment activities and decisions and to apprise them as to when they would be able to recommence their trading activities. Given the potential impact of a blackout period on a director or executive officer's ability to engage in transactions involving equity securities of the issuer, it is likely that they may have questions about a blackout period. For this reason, the proposed notice would have to contain the name, address and telephone number of the person designated by the issuer to answer questions concerning the blackout period.
Request for Comment
Is the information proposed to be included in the required notice useful? Should the required notice include additional or different information?
(c) Notice to Directors and Executive Officers
Proposed Exchange Act rule 104(b)(2) would require notice to directors and executive officers to be provided at least 15 calendar days in advance of commencement of the blackout period. The notice could be in any graphic form that is reasonably accessible to the intended recipient. For purposes of the proposed rule, notice would be considered provided as of the date of mailing, if mailed by first class mail, or as of the date of electronic transmission, if transmitted electronically.
In some instances, it may not be practicable for an issuer to provide the required notice to its directors and executive officers within the time period specified in the proposed rule. For example, where commencement of the blackout period was due to events that were unforeseeable, or to circumstances that were beyond the reasonable control of, the issuer, such as a major computer or other technical failure, a 15-day advance notice requirement may be impracticable.92 The proposed rule would excuse an issuer from the 15-day notice requirement where the issuer makes a written determination that the circumstances preclude compliance with the requirement and notifies the affected directors and executive officers as soon as reasonably practicable. We anticipate that issuers would need to rely on this exception only in rare circumstances.
If there was a subsequent change in the beginning or ending dates of the blackout period, an issuer would be required to provide directors and executive officers with an updated notice explaining the reasons for the change in the date or dates and identifying all material changes in the information contained in the prior notice. The updated notice would be required to be provided as soon as reasonably practicable, unless such notice in advance of the termination of a blackout period is impracticable.
Request for Comment
Is 15 days advance notice sufficient? Should the advance notice period be longer or shorter (such as 30 days or 10 days)? Should the reference to days be ''business,'' rather than ''calendar,'' days? Should we adopt a more flexible ''reasonable time'' standard?
For purposes of the notice requirement as it applies to directors and executive officers, should we establish an outside maximum period (such as 30 days) in which to provide the notice to ensure that notice is not provided so far in advance of the blackout period commencement date as to undermine its importance to directors and executive officers?
Is the proposed exception to the 15-day notice requirement of proposed Exchange Act rule 104 appropriate? Is the proposed exception too broad? If so, how should it be revised to ensure that issuers provide timely notice while still providing flexibility for unforeseeable events?
Does a general exception for ''unforeseeable circumstances'' and ''circumstances that are beyond the control of the issuer'' provide issuers with sufficient guidance as to the types of situations that would not be subject
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to the 15-day notice requirement? If not, what additional guidance should we give in this area?
Is there a better means of ensuring that directors and executive officers receive timely notification of an impending blackout period? Does the required notice need to be in graphic form or would directors and executive officers find oral notice sufficient?
(d) Notice to the Commission
While section 306(a)(6) of the Act merely requires that an issuer provide notice of an impending blackout period to the Commission, we believe that the principal purpose of this requirement is to ensure that an issuer's security holders have notice of the blackout period so that they can monitor compliance with the statutory trading prohibition. This objective is best achieved by requiring that the notice to the Commission be provided in a publicly-available document. Accordingly, proposed Exchange Act rule 104(b)(3) would require that notice to the Commission be provided on form 8-K. The content of the required report on form 8-K would be the same as the content of the required notice to directors and executive officers.
The proposed new disclosure item under form 8-K would require an issuer to disclose the imposition of a blackout period (as defined in proposed Exchange Act rule 100(b)) upon the earlier of receipt of notice of the blackout from the plan administrator 93 or actual knowledge of the blackout period by the person designated by the issuer to oversee the issuer's pension plans, or, in the absence of such a designation, the issuer's human resources director or person performing equivalent functions.94
Foreign private issuers are not required to file current reports on form 8-K.95 We are not proposing to change this reporting requirement at this time. Instead, we are proposing changes to forms 20-F and 40-F that would require a foreign private issuer to file as an exhibit to the report copies of all notices provided to directors and executive officers pursuant to section 306(a)(3) of the Act and proposed Exchange Act rule 104 during the previous fiscal year, unless the notices previously have been provided to the Commission in a report on form 6- K. Of course, a foreign private issuer may make the required disclosure under cover of form 6-K, and we encourage foreign private issuers to do so.
Request for Comment
Should the required notice to the Commission have to be filed on form 8-K? Is another approach for filing the required notice with the Commission, such as a posting on an issuer's Internet web site, more appropriate? If so, how would the imposition of the blackout period be communicated to investors?
Is the information in the proposed form 8-K item useful? Should the proposed form 8-K item include additional or different information?
Is the proposed triggering event for the form 8-K filing appropriate? Is the person designated by the issuer to oversee the issuer's pension plans the proper person to whom the issuer should look for determining when a form 8-K is required? Would another person, such as the agent for service of legal process for the issuer, be more appropriate?
Should we require foreign private issuers to file the notice required under section 306(a)(3) and proposed Exchange Act rule 104 under cover of form 6-K? Should we otherwise require a foreign private issuer to make such notices public before the filing of an annual report on form 20-F or 40-F? If so, how?
Where the pension plan of a foreign private issuer is subject to section 15(d) of the Exchange Act and files reports on form 11-K,96 should the plan be required to file a form 8-K disclosing the blackout period? If so, should such a requirement be in addition to, or replace, the requirement that the foreign private issuer provide notice to the Commission?
(e) Transition Period
Section 306(c) of the Act provides that section 306 will take effect on January 26, 2003. Consequently, for purposes of proposed Regulation BTR, the notice requirement would apply to blackout periods commencing on or after January 26, 2003. For blackout periods occurring between January 26, 2003 and February 10, 2003 (the date 15 days after the effectiveness of the statute), issuers should furnish notice as soon as reasonably possible. This approach is intended to ensure that the statutorily-required notice is provided with respect to blackout periods that commence before February 11, 2003.
III. General Request for Comment
We are proposing Regulation BTR to implement section 306(a) of the Sarbanes-Oxley Act. We solicit comment, both specific and general, upon each aspect of the proposed rules. If you would like to submit written comments on the proposed rules, to suggest changes or to submit comments on other matters that might affect the proposed rules, we encourage you to do so.
We also solicit comment on the following general aspects of the proposed rules:
Are there aspects of the proposed rules that we should eliminate? Are there aspects that we should supplement?
Are there aspects of the proposed rules where the concepts developed under section 16 of the Exchange Act should not be used as a guide to clarify the scope and application of section 306(a)?
Are the proposed transition provisions with respect to the required notice to directors and executive officers and the Commission appropriate? Should different transition provisions be considered?
In addition, we request comment on whether any further changes to our rules and forms are necessary or appropriate to implement the objectives of section 306(a) of the Act and proposed Regulation BTR.
IV. Paperwork Reduction Act
The proposed rules and form amendments contain ''collection of information'' requirements within the meaning of the Paperwork Reduction Act of 1995 (''PRA'').97 We are submitting the proposed rules and form amendments to the Office of Management and Budget (''OMB'') for review in accordance with the PRA.98 The title for the proposed collection of information with respect to the proposed rules will be ''Regulation BTR.'' The title for the collections of information with respect to the
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proposed form amendments are ''Form 20-F,'' ''Form 40-F'' and ''Form 8- K.''
Form 20-F (OMB Control No. 3235-0288) is used by foreign private issuers to either register a class of securities under the Exchange Act or provide an annual report required under the Exchange Act. Form 40-F (OMB Control Number 3235-0381) is used by foreign private issuers to file reports under the Exchange Act after having registered securities under the Securities Act and by certain Canadian registrants.
Form 8-K (OMB Control No. 3235-0060) prescribes information, such as material events or corporate changes, that an issuer that is subject to the reporting requirements of sections 13(a) or 15(d) of the Exchange Act must disclose on a current basis. Form 8-K also may be used, at an issuer's option, to report any events that the issuer deems to be of importance to security holders. Issuers also may use the form to satisfy the public disclosure requirements of Regulation FD.99 An agency may not conduct or sponsor, and a person is not required to respond to, an information collection unless it displays a currently valid OMB control number.
A. Summary of Proposed Rules
The proposed rules would clarify the application and prevent evasion of section 306(a) of the Sarbanes-Oxley Act. Section 306(a) prohibits the directors and executive officers of an issuer from, directly or indirectly, purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during a pension plan blackout period that prevents plan participants or beneficiaries from engaging in equity securities transactions, if the equity security was acquired in connection with the director's or executive officer's service or employment as a director or executive officer. Section 306(a) also requires an issuer to provide timely notice to its directors and executive officers and to the Commission of the commencement of a blackout period. The proposed rules would specify the content and timing of this notice. The required notice is a ''collection of information'' requirement.
Compliance with the proposed rules would be mandatory. The information required by the proposed rules would not be kept confidential.
B. Reporting and Cost Burden Estimates
In order to estimate the potential compliance burden for the proposed collection of information, we have made the following assumptions. The notice requirements of section 306(a) of the Act apply to issuers that have a class of securities registered under section 12 of the Exchange Act. These requirements also apply, via section 15(d) of the Exchange Act, to issuers with an effective registration statement under the Securities Act that are not otherwise subject to the registration requirements of section 12 of the Exchange Act, and to issuers that have filed a registration statement that has not yet become effective under the Securities Act and that has not been withdrawn. We estimate that there are approximately 18,200 entities that fit these descriptions.100
We then calculated the number of issuers that are likely to maintain participant-directed individual account plans and the likely number of plans maintained by these issuers. Based on statistics tabulated by the Department of Labor with respect to the number of individual account plans currently in existence, we estimate that 30% of issuers maintain individual account plans and that, on average, these issuers maintain 1.5 plans each.101
We then developed an assumption to account for the fact that not all potentially affected plans will impose blackout periods that would trigger the notice requirement, and not all of those imposing blackout periods would do so in a given year. Based on research conducted by the Department of Labor to estimate the frequency of the imposition of blackout periods that would trigger the notice requirement,102 as adjusted to reflect the narrower definition of the term ''blackout period'' for purposes of section 306(a),103 we estimate that potentially affected plans will impose blackout periods on average once every five years. Among these, some plans will not impose blackout periods, some will impose blackout periods that do not trigger the notice requirement (that is, a temporary suspension for a period of three or fewer consecutive business days) and some may have blackout periods more frequently.
We therefore assume that 20% of potentially affected plans will impose a blackout period in any given year. We request comment and any additional information that would confirm or otherwise inform this assumption. The resulting number of plans assumed to be affected by the notice requirement is approximately 1,230 plans per year.104
In developing burden estimates, we estimated that it will take an issuer, on average, two hours to draft the notice to directors and executive officers and three hours to draft a current report on form 8- K which must be filed to provide the required notice to the
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Commission.105 We then estimated that 75% of the burden associated with the preparation of the required notices will be borne by the issuer and that 25% of the burden will be borne by outside counsel retained by the issuer to assist in preparing the notices to directors and executive officers and to the Commission.106 Preparation of the required notice for directors and executive officers is estimated to require approximately 1,845 hours 107 and cost approximately $250,000 annually,108 and preparation of current reports on form 8-K to provide the required notice to the Commission is estimated to require approximately 2,490 hours 109 and cost approximately $336,000 annually.110 The inclusion of the required information in annual reports on form 20-F is estimated to require approximately 249 hours 111 and cost approximately $33,625 annually,112 and the inclusion of the required information in annual reports on form 40-F is estimated to require approximately 28 hours 113 and cost approximately $3,735 annually.114
The estimated burden for distribution of the notices takes several factors into account, including an assumed number of blackout periods triggering required notices, an assumed number of directors and executive officers affected annually, the number of notices that will be provided electronically and on paper and the differential costs of electronic and paper distribution methods.115 Notices provided to the Commission on a current report on form 8-K and in the annual reports on form 20-F and 40-F would be transmitted electronically via the Commission's Electronic Data Gathering, Analysis and Retrieval (''EDGAR'') system. Those directors and executive officers not estimated to receive notice electronically are assumed to receive the notice on paper. No time or direct cost is attributed to electronic distribution methods other than the time required to prepare the notice or form, as the case may be, because it is assumed that notices are drafted in electronic form, issuers use existing infrastructure to communicate electronically and the cost of electronic transmission is negligible. Paper notice distribution to directors and executive officers is estimated to require approximately 512 hours 116 and cost approximately $3,075 annually.117
The total burden of providing the required notice to an issuer's directors and executive officers are estimated to be approximately 2,357 hours 118 and approximately $253,075 annually.119 The total burden hours of complying with form 8-K, revised to include the burden hours expected from providing the required notice to the Commission, are estimated to be 733,990 hours, an increase of 2,490 hours 120 from the current annual burden of 731,500 hours. The total burden hours of complying with form 20-F, revised to include the burden hours expected from providing the required notice to the Commission, are estimated to be 652,472 hours, an increase of 249 hours 121 from the current annual burden of 652,223 hours. The total burden hours of complying with form 40-F, revised to include the burden hours expected from providing the required notice to the Commission, are estimated to be 1,134 hours, an increase of 28 hours 122 from the current annual burden of 1,106 hours.
The total dollar cost of complying with form 8-K, revised to include outside counsel costs expected from providing the required notice to the Commission, is estimated to be $73,492,000, an increase of $336,000 123 from the current annual burden of $73,156,000. The total dollar cost of complying with form 20-F, revised to include outside counsel costs expected from providing the required notice to the Commission, is estimated to be $587,033,625, an increase of $33,625 124 from the current annual burden of $587,000,000. The total dollar cost of complying with form 40-F, revised to include outside counsel costs expected from providing the required notice to the Commission, is estimated to be $998,736, an increase of $3,736 125 from the current annual burden of $995,000. Comments concerning the accuracy of these burden estimates, and any suggestions for reducing the burden, should be directed to the Commission as described below.
C. Request for Comment
We request comment in order to: (a) Evaluate whether the proposed information collection is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (b) evaluate the accuracy of our estimate of the burden of the proposed rules; (c) determine whether there are ways to enhance the quality, utility and clarity of the information to be collected; and (d) evaluate whether there are ways to minimize the burden of the proposed rules on those who respond, including through the use of automated collection techniques or other forms of information technology.126
Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing the burdens. Persons who desire to submit comments on the proposed collection of information requirement should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy of the comments to Jonathan G. Katz, Secretary, Securities and Exchange
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Commission, 450 Fifth Street NW., Washington, DC 20549-0609, with reference to File No. S7-44-02. Requests for materials submitted to the OMB by us with regard to this collection of information should be in writing, refer to File No. S7-44-02 and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street NW., Washington, DC 20549. Because the OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, your comments are best assured of having their full effect if the OMB receives them within 30 days of publication.
V. Cost-Benefit Analysis
Section 306(a) of the Act prohibits directors and executive officers of an issuer from purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during a pension plan blackout period that prevents plan participants or beneficiaries from engaging in equity security transactions, if the equity security was acquired by the director or executive officer in connection with his or her service or employment as a director or executive officer. In addition, section 306(a) requires an issuer to provide timely notice to its directors and executive officers, and the Commission, of the imposition of a pension plan blackout period. The statute is intended to restrict the ability of corporate insiders to trade in the equity securities of an issuer at a time when a substantial number of the issuer's employees are unable to engage in transactions involving equity securities of the issuer through their individual pension plan accounts.
The proposed rules would, upon adoption, clarify the application of section 306(a) and prevent evasion of its statutory trading prohibition. We recognize that any implementation of the Sarbanes-Oxley Act likely will result in costs as well as benefits and have an effect on the economy. We are sensitive to the costs and benefits of proposed rules that would specify the content and timing of the notice that issuers are required to provide to their directors and executive officers and that would mandate the required notice to the Commission to be provided on a form 8-K or, in the case of foreign private issuers, in their annual reports on form 20-F or 40-F. We discuss these costs and benefits below.
A. Benefits
Section 306(a) will, and the proposed rules would, have several important benefits. By restricting the ability of directors and executive officers to trade in an issuer's equity securities when plan participants are unable to do so, the proposed rules would mitigate the differential treatment between plan participants and beneficiaries and the directors and executive officers of the issuer with respect to such securities. This should tie the interests of directors and executive officers more closely to that of other security holders.
The content and timing requirements for the notice contemplated by section 306(a) would help ensure that directors and executive officers of an issuer have all relevant information about an impending blackout period. This will enable these individuals to conform their activities to the statutory trading prohibition and to avoid any appearance of a co