# Ownership Reports and Trading by Officers, Directors and Principal Security Holders > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-20124 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** August 17, 1994 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 228, 229, 240 and 249 [Release Nos. 34-34514; 35-26100; IC-20467; File No. S7-21-94] RIN 3235-AF66 Ownership Reports and Trading by Officers, Directors and Principal Security Holders AGENCY: Securities and Exchange Commission. ACTION: Proposed Rule. ----------------------------------------------------------------------- SUMMARY: The Commission today is proposing amendments to its rules and forms regarding the filing of ownership reports by officers, directors, and principal security holders, and the exemption of certain transactions by those persons from the short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934 (``Exchange Act'') and related provisions of the Investment Company Act of 1940 (``Investment Company Act'') and the Public Utility Holding Company Act of 1935. The proposed rules are intended to streamline the Section 16 regulatory scheme, particularly with respect to employee benefit plans; broaden exemptions from short-swing profit recovery where consistent with the statutory purposes; and codify several staff interpretive positions. DATES: Comments should be received on or before October 17, 1994. ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Comment letters should refer to File No. S7-21-94. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C., 20549. FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special Counsel, Office of Chief Counsel, at (202) 942-2900, or Elizabeth M. Murphy, Special Counsel, Office of Disclosure Policy, at (202) 942-2910, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to Rules 16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3, and 16b- 51 promulgated under Section 162 of the Exchange Act.3 In addition, the Commission is proposing revisions to Item 405 of Regulation S-K4 and Regulation S-B,5 as well as to Forms 3, 4, and 5.6 --------------------------------------------------------------------------- \1\17 CFR 240.16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3, and 16b-5. \2\15 U.S.C. 78p (1982). \3\15 U.S.C. 78a et seq. \4\17 CFR 229.405. \5\17 CFR 228.405. \6\17 CFR 249.103, 104 and 105. --------------------------------------------------------------------------- I. Executive Summary and Background In February 1991, in response to developments in the trading of derivative securities, the growth of complex and diverse employee benefit plans, and substantial filing delinquencies, the Commission adopted extensive changes to the beneficial ownership and short-swing profit recovery rules and forms applicable to insiders7 pursuant to Section 16.8 After three years of experience, unanticipated practical difficulties still arise in applying the new Section 16 rules, particularly with respect to thrift and similar employee benefit plans.9 The rule changes proposed today address these practical problems and further streamline the rules, to the extent consistent with the purposes of Section 16. --------------------------------------------------------------------------- \7\The term ``insider,'' as used in this release, refers to officers, directors, and holders of more than ten percent of a class of equity securities who are subject to Section 16. \8\Release No. 34-28869 (February 8, 1991) [56 FR 7242] (``Adopting Release''). The rules generally became effective on May 1, 1991, except for the phase-in period for compliance with the substantive conditions of new Rule 16b-3. The phase-in period has been extended until September 1, 1995 or such different date as may be set in further rulemaking (Release No. 34-34513 (August 10, 1994)). See Section VI, below. \9\Following the Adopting Release, the Commission issued two other releases relating to the revised rules; one set forth the Commission's interpretive views regarding shareholder approval for amendments to employee benefit plans under Rule 16b-3, as well as certain technical amendments (Release No. 34-29131 (April 26, 1991) [56 FR 19925]), while the other adopted a technical amendment to Form 4 (Release No. 34-28869B (April 10, 1991) [56 FR 14467]). --------------------------------------------------------------------------- A. Employee Benefit Plan Transactions The focus of the proposed rules is the treatment of employee benefit plan transactions. In particular, the proposals would: Exempt from short-swing profit recovery all purchase transactions in thrift and other broad-based, tax-qualified plans, other than those involving transfers to and from an employer securities fund; Exempt from short-swing profit recovery transfers to and from employer securities funds in thrift and other plans that are effected either during a quarterly window period or pursuant to a diversification election under the Internal Revenue Code; Expand exemptions for plan distributions in connection with retirement or specified transactions authorized by the Internal Revenue Code; Provide that exempt dispositions within six months of an exempt grant would not destroy the exemption for the grant; Exclude from the definition of ``derivative security'' cash-only instruments issued as compensation by an employer to an employee; Exclude from the definition of ``derivative security'' rights that include non-market price based conditions; Exclude from the definition of ``derivative security'' rights to withhold (or to deliver securities already owned) to satisfy tax or exercise price obligations, and exempt cash settlement of such rights where granted pursuant to exempt employee benefit plans; Eliminate the transferability restrictions applicable to derivative securities issued under an employee benefit plan. B. Reporting The proposal also would simplify and clarify the reporting requirements by: Permitting joint and group reporting where more than one person is deemed to be a beneficial owner of the same securities; Providing that Section 16 applies to a trust only if the trust beneficially owns more than ten percent of a class of registered equity securities; Eliminating officers' and directors' post-termination reporting obligations with respect to exempt transactions and other transactions that are not matchable with a pre-termination transaction; Requiring a discrete caption for the disclosure about delinquent Section 16(a) reports required by Item 405 of Regulations S- K and S-B. The Release also solicits comment on a variety of approaches to simplify the reporting of exempt transactions, including elimination of the total holdings column in Forms 4 and 5, proposals to replace Form 5 with alternative reporting schemes (including a Form 10-K summary of insider transactions), and elimination of the requirement to report exempt employee benefit plan transactions. C. Other Issues Finally, the proposal would codify certain staff interpretive positions, and would establish new categories of transactions exempt from short-swing recovery by: Exempting the disposition of securities pursuant to a qualified domestic relations order, whether or not the securities are held by a Rule 16b-3 employee benefit plan; Revising the exemption for stock splits and stock dividends to include pro rata stock dividends in which securities of a different issuer are distributed. II. Employee Benefit Plans A. Expanded Exemptions for Broad-Based Plan Transactions and Intra- Plan Transactions The principal objection raised to the amended Section 16 rules has been that the treatment of thrift, stock purchase and other broad- based, tax-qualified plans is unduly cumbersome, presents significant record-keeping problems, and discourages insiders from participation in plan funds holding employer securities. These plans are subject to significant restrictions under both the Internal Revenue Code10 and the Employee Income Retirement Security Act of 1974 (``ERISA''),11 which establish an objective framework for the treatment of compensatory transactions and impose extensive administrative requirements, thereby making plan transactions less vulnerable to the abuses that the short-swing recovery provision of Section 16(b) was designed to prevent. Accordingly, the proposed rules would streamline the conditions necessary to exempt transactions in such plans from short-swing profit recovery. Comment is solicited not only on the proposals set forth, but also on whether there is any other aspect of the treatment of employee benefit plans that should be modified, either in Rule 16b-3 or any other rule relating to employee transactions. --------------------------------------------------------------------------- \1\026 U.S.C. et seq. (1986) (``I.R.C.''). \1\129 U.S.C. 1001 et seq. (1986). --------------------------------------------------------------------------- As discussed below, the revised rule would exempt, without conditions as to timing, any purchase transaction arising under a broad-based nondiscriminatory tax-qualified plan, other than an intra- plan transfer to or from an employer securities fund.12 The proposed exemption would have a broader scope than the current rule, since it would be available not only to participant-directed contributory plans, but also would apply specifically to related ``excess benefit'' or ``mirror'' plans and noncontributory plans such as many employee stock ownership plans (``ESOPs'').13 The timing restrictions governing the exemption for transfers to or from an employer stock fund in any thrift, stock purchase or similar plan, whether or not broad-based, nondiscriminatory and tax-qualified, would be more flexible. --------------------------------------------------------------------------- \1\2Proposed Rule 16b-3(d) would replace Rule 16b-3(d)(2) [17 CFR 240.16b-3(d)(2)] in its entirety. Other transactional exemptions currently available to participant-directed plans would continue to be available. Current Rules 16b-3(d)(1)(i) and (ii) [17 CFR 240.16b- 3(d)(1)(i) and (ii)] are proposed to be moved to Rules 16b-3(h) and (g), respectively. See Sections II.B. and II.H, below. \1\3See I.R.C. Sections 401(a) and 409. --------------------------------------------------------------------------- 1. Purchases Under Employee Benefit Plans In adopting the current exemption for transactions in a thrift, stock purchase, or similar ongoing securities acquisition plan,14 the Commission reasoned that ``wide participation and equal treatment of all participating employees limits insiders' opportunities to engage in short-swing speculation.''15 This reasoning may support a broader exemption. --------------------------------------------------------------------------- \1\4Rule 16b-3(d)(2)(i)(A) [17 CFR 240.16b-3(d)(2)(i)(A)]. \1\5Adopting Release at Section IV.D, text following n. 201. --------------------------------------------------------------------------- Under the proposal,16 all purchase transactions in a thrift, stock purchase or similar securities acquisition plan would be exempt if the plan provides for broad-based employee participation, does not discriminate in favor of highly compensated employees, and is qualified under the Internal Revenue Code.17 In light of the requirement for broad-based participation, the proposed rule would exempt one-time acquisitions, as well as ongoing acquisitions (such as regular purchases by payroll deduction pursuant to a thrift plan).18 The exemption would apply whether the transaction results from an employer or an employee contribution. --------------------------------------------------------------------------- \1\6Proposed Rule 16b-3(d)(1)(i). \1\7I.R.C. Section 401 establishes conditions for the tax qualification of pension, profit-sharing and stock bonus plans; and I.R.C. Section 423 establishes conditions for the tax qualification of employee stock purchase plans. \1\8Conforming changes are proposed to Rule 16b-3(c)(2)(i)(B) [17 CFR 240.16b-3(c)(2)(i)(B)], transaction code B in Forms 4 and 5, and General Instruction 4(a)(ii) to Form 5 to reflect deletion of the requirement that the plan be ``ongoing.'' --------------------------------------------------------------------------- The proposal would eliminate the exemptive requirement that insider participants who withdraw from a fund holding equity securities of the employer (``employer securities fund'')19 either cease further employer securities fund purchases for six months or hold the securities distributed for six months.20 Similarly, insider participants who stop participating in an employer securities fund no longer would be required to refrain from further participation for six months.21 The six-month holding period for securities offered without a fixed price under a stock purchase plan or similar plan also would be eliminated.22 The tax law restrictions applicable to broad-based, tax-qualified plans, such as plan contribution limits, plan benefit limits and nondiscrimination rules,23 should be sufficient to deter insiders from using such plans as vehicles for short-term speculation. --------------------------------------------------------------------------- \1\9Such funds would include both funds composed entirely of equity securities of the employer and mixed equity funds (except for mixed equity funds where employer equity securities do not exceed 20 percent of fund assets as of the end of the plan's latest fiscal year; see American Bar Association (June 28, 1993)). \2\0Rule 16b-3(d)(2)(i)(B) [17 CFR 240.16b-3(d)(2)(i)(B)]. \2\1Rule 16b-3(d)(2)(i)(C) [17 CFR 240.16b-3(d)(2)(i)(C)]. \2\2Rule 16b-3(d)(2)(i)(D) [17 CFR 240.16b-3(d)(2)(i)(D)]. \2\3See I.R.C. Section 401(a) (contribution limits applicable to both mandatory and voluntary contributions); I.R.C. Section 415 (limitation on ``maximum annual benefits'' for defined benefit plans and ``maximum annual additions'' for defined contribution plans); I.R.C. Section 401(m) (non-discrimination tests comparing the contribution percentage for highly compensated employees to that of all other employees); I.R.C. Section 416 (``top heavy'' rules providing rank and file employees with minimum benefits and more rapid vesting if plan benefits inure disproportionately to key employees); and I.R.C. Section 423 (prohibiting a grant to any employee who would own five percent of the stock following such grant). --------------------------------------------------------------------------- Finally, the proposed rule would provide an explicit exemption for purchase transactions pursuant to an ``excess benefit'' or ``mirror'' plan,24 defined as a plan, operated in conjunction with a tax- qualified plan, that provides only the benefits or contributions that would be provided under a tax-qualified plan but for the limitations imposed by the Internal Revenue Code.25 Although such plans technically are outside the scope of the ERISA regulatory scheme, they are operated in a manner that replicates plans that are so regulated, and accordingly are unlikely to be vehicles for speculative abuse. --------------------------------------------------------------------------- \2\4Proposed Rule 16b-3(d)(1)(ii). \2\5See, e.g., I.R.C. Sections 401(a)(17) and 415. See also Thacher Proffitt & Wood (Dec. 20, 1991) Q. 2 and Thacher Proffitt & Wood (Feb. 11, 1992) (excess benefit plans may be considered together with related tax-qualified plans for purposes of satisfying the broad-based participation and non-discrimination requirements of the current rules); and Sonnenschein, Nath & Rosenthal (July 6, 1992) Q. 4 (excess benefit plans may be implemented without shareholder approval although they are not organized in trust form). --------------------------------------------------------------------------- Commenters are requested to address whether it is necessary to limit the proposed purchase exemption to plans that are qualified pursuant to the Internal Revenue Code. Are the conditions of the proposed rule that a plan be broad-based and non-discriminatory sufficient safeguards? Does satisfaction of the minimum participation, minimum funding, non-discrimination and vesting standards specifically imposed by the Internal Revenue Code provide additional assurance that transactions pursuant to a plan will not be subject to abuse? Is the proposed exemption for excess benefit plan transactions consistent with the theory that wide participation and equal treatment of all participating employees limits insiders' opportunities to engage in short-swing speculation? 2. Intra-Plan Transfers The proposed rule would simplify and shorten the timing restriction that conditions the exemption for transfers of funds in an employee plan to or from an employer securities fund (``fund-switching transaction''). As proposed, any fund-switching transaction effected pursuant to an election made during any quarterly ``window period'' would be exempt.26 Moreover, the exemption no longer would be limited to transfers at least six months apart. The requirement that the election occur in the ``window period'' following the release of quarterly and annual financial data should provide an adequate safeguard.27 As under the current rules, the exemption would be available whether or not the plan is broad-based, tax-qualified and nondiscriminatory.28 Finally, because of changes to the basic exemption for plan purchases discussed above, transferring assets out of an employer securities fund would no longer trigger the requirement that the insider cease plan purchases for six months.29 --------------------------------------------------------------------------- \2\6Proposed Rule 16b-3(d)(2)(i). See Rule 16b-3(e)(3) [17 CFR 240.16b-3(e)(3)], defining the ``window period'' as the period beginning on the third business day following the date of release of quarterly and annual summary statements of sales and earnings, and ending on the twelfth business day following such date. \2\7Although the window period requirement reduces the likelihood that an insider possesses material information that is not publicly available, the window period should not be considered a safe harbor from the prohibitions of Exchange Act Section 10(b) and Rule 10b-5 thereunder [15 U.S.C. 78j(b) and 17 CFR 240.10b-5]. \2\8Plan participants also would continue to be able to effect fund-switching transactions by means of a six month advance election. See Section II.B, below. \2\9This would change the result in Cravath, Swaine & Moore (Oct. 22, 1991) Q. 4. See Section II.A.1, above. --------------------------------------------------------------------------- Comment is requested as to whether the six month timing restriction between transfers should be retained, and, if so, whether it should be limited to opposite way transactions, such as a transfer into an employer securities fund followed by a transfer out of an employer securities fund. In addition, commenters should address whether requiring that transactions be limited to every other window period, even if separated by a few days less than six months--rather than requiring the transactions themselves to be six months apart--would alleviate difficulties in administering the requirement while preventing opportunities for speculative abuse. Comment also is requested whether it would be consistent with the statutory purpose to exempt fund-switching transactions without any timing restrictions. In addressing these issues, commenters are asked to consider the manner in which the rule, as proposed, would function in tandem with concurrently applicable provisions of the Internal Revenue Code and ERISA regarding transfers.30 --------------------------------------------------------------------------- \3\0Commenters' attention is directed particularly to the rules that became effective January 1, 1994 under Section 404(c) of ERISA [29 USC 1104(c)] that specify circumstances in which employee plan sponsors will not be subject to fiduciary responsibility because investment decisions are made by plan participants. In order to benefit from the rules, a plan must make a variety of investment vehicles available to plan participants and permit participants to switch their investments among the different vehicles at a rate of frequency related to the volatility of the investment. The latter requirement may dictate that a plan permit fund-switching transactions more frequently than every six months. See 29 CFR 2550.404c-1. --------------------------------------------------------------------------- In addition, the proposed rule would exempt any fund-switching transaction that results from a diversification election satisfying the provisions of the Internal Revenue Code, without regard to the ``window period'' timing restriction.31 This would maintain the utility of the 90-day period following the close of the plan year specifically provided for such transactions by the Internal Revenue Code32 in order to facilitate proper planning for retirement. Distributions to participants pursuant to such diversification elections also are proposed to be exempted, as discussed below.33 Comment is requested as to whether such fund-switching transactions also should be subject to the ``window period'' requirement or any further timing restriction other than that imposed by the Internal Revenue Code. --------------------------------------------------------------------------- \3\1Proposed Rule 16b-3(d)(2)(ii). \3\2I.R.C. Section 401(a)(28), which requires an ESOP to permit a participant who has attained age 55 and has participated in the ESOP for 10 years to elect, within 90 days after the close of the plan year, to direct the diversification of at least 25 percent of the participant's account in the plan. \3\3See Section II.H, below. --------------------------------------------------------------------------- B. Participant-Directed Transactions--Six Month Advance Election The rule currently exempts participant-directed transactions made at least six months in advance of the effective date of the transaction. This exemption34 would be clarified by codifying the staff's interpretation that a subsequent election that does not take effect for six months does not destroy the exemption.35 --------------------------------------------------------------------------- \3\4This provision, now Rule 16b-3(d)(1)(i), would be moved to proposed Rule 16b-3(h). \3\5See Philip Morris Companies, Inc. (June 26, 1992). --------------------------------------------------------------------------- C. Compensatory Cash-Only Instruments Under the proposed rules, the derivative security definition would be modified to provide a more expansive exclusion for compensatory instruments that can be redeemed or exercised solely for cash (``cash- only instruments''),36 such as phantom stock. The proposed exclusion would apply to all cash-only instruments issued in the context of an employer-employee compensation arrangement,37 including compensation arrangements between a company and its non- employee directors.38 Historically the purpose of such plans has been to provide performance-based cash compensation to employees, using stock price as a measure of company performance, rather than to provide employees with an equity interest in the employer. --------------------------------------------------------------------------- \3\6Proposed Rule 16a-1(c)(3). Insider or employer discretion to require settlement in stock rather than cash would preclude reliance on the exclusion. See Thacher Proffitt & Wood (Dec. 20, 1991) Q. 1. \3\7For example, cash-settled put options written by a financial institution or cash-only securities awarded to shareholders in the context of a tender offer would not satisfy the exclusion. See Sullivan & Cromwell (Apr. 30, 1991); and Marion Merrell Dow, Inc. (Jan. 24, 1992), respectively. \3\8See Anheuser-Busch Companies, Inc. (Jul. 29, 1991). --------------------------------------------------------------------------- Commentators have cited a number of problems with using these types of performance-based plans arising from the 1991 rule changes. For example, change-in-control provisions and hardship withdrawal provisions could render the current exclusion unavailable because the rights would not be redeemable only on a fixed date or dates at least six months following the award. Given the difficulties that have arisen, and recognizing the historic role of stock return as a measure for long-term cash-based incentive plans, the proposals would restore these plans to a status similar to that which existed pre-1991.39 --------------------------------------------------------------------------- \3\9Proposed Rule 16a-1(c)(3). --------------------------------------------------------------------------- Comment is requested on the necessity or appropriateness of the proposed exclusion for compensatory cash-only instruments. Is there any basis for according disparate treatment, for reporting and/or short- swing profit purposes, to equity-based securities depending on whether they are settled exclusively in cash or stock (or in either stock or cash), where both types of derivative securities provide identical opportunities for profit predicated on the underlying stock price movement? Commenters should focus in particular on the need for retention of one or both of the current, alternative conditions to the availability of the exclusion (compliance with specified requirements of Rule 16b-3; fixed-date redemption or exercise).40 Alternatively, should the current exclusion for cash-only instruments be retained, with some relief provided for hardship withdrawals or other specified exceptions? What impact, if any, would the proposed exclusion have on executive and director stock-ownership programs that seek to align shareholder and managerial interests through awards of issuer stock or derivative securities payable in stock?41 --------------------------------------------------------------------------- \4\0Rule 16a-1(c)(3)(i) and (ii) [17 CFR 240.16a-1(c)(3)(i) and (ii)]. \4\1Commenters should consider in this regard the possibility that the Financial Accounting Standards Board may adopt uniform accounting treatment of compensatory fixed-price stock options, stock appreciation rights and other equity-based compensation that may reduce current incentives to use fixed-price stock options. --------------------------------------------------------------------------- D. Value Derived from Market Price of an Equity Security Numerous interpretive questions, particularly in the employee benefit area, have been raised concerning the treatment of performance units and similar instruments as derivative securities. To provide clarification, the proposed rules would revise the definition of derivative security to codify the staff interpretive view that an instrument is not within the scope of Section 16 if it includes a material non-market price based condition (such as return on equity) to exercise or settlement.42 As proposed, rights under which benefits are subject to a material condition (other than the passage of time or continued employment) not tied to the market price of an equity security of the issuer would be excluded from the definition of derivative security for purposes of Section 16.43 Commenters are requested to address whether the proposed rule sets forth an appropriate standard for exclusion, and whether the language of the proposed rule articulates the standard in a workable manner. --------------------------------------------------------------------------- \4\2See General Mills, Inc. (Jan. 31, 1992); and Certilman Balin Adler & Hyman (April 20, 1992). See also Boston Edison Company (Mar. 19, 1992); Merrill Lynch & Co. (Aug. 28, 1992) Q. 4. (Registrant discretion to adjust the applicable performance measure, as to either duration or level of performance, excludes a performance unit from being a derivative security.) \4\3Proposed Rule 16a-1(c)(9). --------------------------------------------------------------------------- E. Surrender and Withholding Rights in Connection With Exercise or Tax Withholding Employee benefit plans commonly provide participants with the right to have securities withheld, or to deliver securities already owned, either in payment of the exercise price of an option or to satisfy the tax withholding consequences of an option exercise or the vesting of restricted securities. While a tax withholding right currently is treated as a derivative security separate from the equity or derivative security to which it relates,44 it appears that this right, as well as the right to have securities withheld in satisfaction of an exercise price, properly may be viewed as an integral feature of the related security.45 Accordingly, a newly proposed rule would exclude from the definition of ``derivative security'' these withholding rights, as well as rights to surrender previously owned securities in satisfaction of either a tax obligation or an exercise price.46 --------------------------------------------------------------------------- \4\4As an alternative to separate reporting, a tax withholding right currently may be noted as a feature of the equity or derivative security to which it relates. See The Clorox Company (Mar. 27, 1992). A failure to report such right does not give rise to a disclosure obligation under Item 405 of Regulation S-B or Regulation S-K. See Skadden, Arps, Slate, Meagher & Flom (June 8, 1992). \4\5Cf. Xerox Corporation (Jul. 7, 1992) (the staff reached this conclusion with respect to a mandatory tax withholding feature). \4\6Proposed Rule 16a-1(c)(8). Of course, when the related derivative security is exercised, the surrender or withholding of shares would continue to be reported in connection with the exercise. See Kirkpatrick & Lockhart (Feb. 11, 1992). See Section III.B, below, regarding reporting of cashless exercises. --------------------------------------------------------------------------- Today, when withholding rights are exercised or securities delivered, the exemptive treatment of the exercise transactions differs, depending on whether securities are withheld by or tendered to the employer. The delivery of previously owned shares with respect to shares of the same class is exempt without further conditions except for compliance with the general plan requirements of Rule 16b-3.47 In contrast, the withholding of an equity security is exempt only when additional conditions applicable to stock appreciation rights-- information about the issuer, plan administration requirements, window period restrictions and a six-month holding period--are met.48 --------------------------------------------------------------------------- \4\7Rule 16b-3(f)(2) [17 CFR 240.16b-3(f)(2)] (exercise price). See also Simpson Thacher & Bartlett (Apr. 29, 1991) Q. 4 (c) (tax withholding). \4\8Rule 16b-3(e) [17 CFR 240.16b-3(e)]. --------------------------------------------------------------------------- Consistent with the view that each such right functions as an integral feature of the security to which it relates, the proposal would make the exemption for surrender transactions available to withholding transactions as well.49 --------------------------------------------------------------------------- \4\9Rule 16b-3(e) would be amended to delete the clause that deems the cash settlement of a tax withholding right to be a stock appreciation right. Rule 16b-3(f)(2) would be amended to exempt withholding by the issuer, as well as surrender or delivery to the issuer, of shares of its stock as payment for the exercise of a derivative security. Similarly, proposed Rule 16b-3(f)(3) would be added to exempt the cash settlement of a tax withholding right, either by withholding shares or the surrender of shares previously owned. The tax withholding right could be in connection with an option exercise or the vesting of restricted shares. Transaction Code F would continue to be used for withholding transactions, and would be expanded to cover the withholding and surrender of securities in connection with the vesting of restricted shares. Proposed Rule 16b-3(f)(3) would be substituted for current Rule 16b- 3(f)(3) [17 CFR 240.16b-3(f)(3)], which would be replaced substantively by proposed Rule 16b-5(b), as discussed in Section IV.A, below. --------------------------------------------------------------------------- Comment is requested as to whether this approach, if adopted, also should be applied to withholding and surrender transactions that occur in the employer-employee context but outside Rule 16b-3 plans. If so, commenters should describe the situations in which such an exemption would be useful. F. Stock Appreciation Rights In addition to deletion of the clause that deems the cash settlement of a tax withholding right to be a stock appreciation right,50 the rule would be amended so that it would not preclude insiders of newly public companies from relying on the exemption for the cash settlement of stock appreciation rights. --------------------------------------------------------------------------- \5\0See Section II.E, above. --------------------------------------------------------------------------- The current rule requires the issuer of the stock appreciation right to have been subject to the reporting requirements of Section 13(a) of the Exchange Act for at least a year prior to the transaction, and to have filed all reports and statements thereby required. Under the proposal, a one-year reporting history no longer would be required. Instead, the issuer simply would have to have filed all required reports and statements for a year prior to the transaction, or such shorter time as the issuer had been subject to Section 13(a). G. Grant and Award Transactions 1. Disinterested Administration Two amendments are proposed to the exemption of grant and award transactions based on disinterested administration of the employee benefit plan.51 First, the provision that permits a director to remain disinterested although he or she elects to receive in securities ``an annual retainer fee'' would be changed to permit receipt of ``a director's fee,'' thus broadening the term to clarify that a meeting fee or other director's fee would be included.52 Second, the requirement that the securities elected to be received constitute an ``equivalent amount'' to the cash would be deleted.53 The current requirement could impair companies' ability to provide directors with an adequate incentive to elect the receipt of compensation in securities. Comment is requested, however, as to whether some limitation should remain in order to assure that the director's receipt of stock is adequately linked to the fee, rather than a separate stock grant. --------------------------------------------------------------------------- \5\1See also n. 18, above. \5\2Proposed Rule 16b-3(c)(2)(i)(C). See General Signal Corporation (Feb. 5, 1993). \5\3The term ``equivalent amount'' has been construed to include the number of shares computed applying a price discount of five or ten percent of the fee. See Bowater Incorporated (Aug. 16, 1991) and General Signal Corporation (Feb. 5, 1993), respectively. --------------------------------------------------------------------------- 2. Formula Plans To assure that objective criteria govern the making of awards under formula plans, the rule currently requires that the plan itself restrict the frequency with which the terms of the formula may be amended to not more than once every six months, with limited exceptions.54 Under the proposal, no written restriction would need to be placed in the plan. Instead, the rule would require that the plan not be amended periodically and in no event more often than every six months, with the same exceptions as currently permitted.55 In addition, a reference to the automatic nature of a formula plan would be added to clarify that the rule does not permit discretionary awards.56 --------------------------------------------------------------------------- \5\4The terms of the formula may be amended to comport with changes in the Internal Revenue Code, ERISA, or the rules thereunder. \5\5Proposed Rule 16b-3(c)(2)(ii)(B). \5\6Proposed Rule 16b-3(c)(2)(ii)(A). --------------------------------------------------------------------------- 3. Six Month Holding Period Under the proposal, the six-month holding period for securities obtained in a grant and award transaction would not apply to securities disposed of in a transaction that is exempted by rule from Section 16(b), such as a bona fide gift.57 In addition, it is proposed that the six-month holding period for dividend equivalent rights (``DERs'') and shares purchased pursuant to the reinvestment of dividends should be deemed to commence on the date of acquisition of the shares on which the DERs or dividends are paid.58 If adopted, should this treatment apply only to dividends and DERs paid at a rate that does not exceed dividends paid on the issuer's common stock? Moreover, should this treatment be limited to dividends paid on a broadly held class of securities, so that neither the timing nor the amount of dividend paid would be subject to manipulation by insiders? --------------------------------------------------------------------------- \5\7Proposed Rule 16b-3(c)(1). \5\8Id. Under current interpretation, the six-month holding period is deemed to commence on the date the dividend or DER is granted or allocated to the participant. See Hewitt Associates (Apr. 30, 1991) Q. 2(b); and Davis Polk & Wardwell (Aug. 23, 1991). Of course, pro rata dividends paid in stock with respect to all securities of the same class would continue to be exempt pursuant to Rule 16a-9. --------------------------------------------------------------------------- H. Exemptions for Distributions Currently, distributions to plan participants of securities acquired in an exempt manner under Rule 16b-3 are also exempt.59 As proposed, this exemption would be broadened so it would apply to all distributions of plan securities, whether those securities were acquired pursuant to Rule 16b-3, an exemption under the former rules, or in a nonexempt manner.60 Such an exemption appears appropriate where these distributions merely change the form of the participant's beneficial ownership, not its extent. Of course, if the participant then sells the securities, the sale would be subject to Section 16. --------------------------------------------------------------------------- \5\9Rule 16b-3(g) [17 CFR 240.16b-3(g)]. \6\0This revised provision would be redesignated as Rule 16b- 3(g)(3). This would change the result in Cravath, Swaine & Moore (May 6, 1991) Q. 8, and Cravath, Swaine & Moore (Oct. 22, 1991) Q. 5. --------------------------------------------------------------------------- When a plan distributes the cash value of securities in participants' accounts, rather than the securities themselves, such a distribution would be viewed as a sale. As proposed, the rule would expand the categories of exempt cash distributions to plan participants. First, distributions of securities and cash, or the deferral of such distributions, incident to death, retirement, disability or termination of employment, would be exempt.61 Such distributions and deferrals currently are exempt if effected by means of a participant-directed election.62 The proposed rule would codify the staff's interpretation that the exemption is available even when the transaction is not made pursuant to a participant's election.63 --------------------------------------------------------------------------- \6\1Proposed Rule 16b-3(g)(1). \6\2Rule 16b-3(d)(1)(ii). \6\3See Merrill Lynch & Co. (Sept. 1, 1992) Q. 7. --------------------------------------------------------------------------- This new exemption also would apply to distributions of securities and cash pursuant to ESOP diversification elections permitted by the Internal Revenue Code.64 In addition, the proposed rule65 would provide that any involuntary distribution of securities or cash (including cash in lieu of fractional shares) for the purpose of satisfying the limitations on employee elective contributions and employer matching contributions imposed by the Internal Revenue Code is exempt.66 Comment is requested as to whether distributions of securities or cash mandated by the Internal Revenue Code67 to begin following the participant's attainment of age 70\1/2\ years, whether or not the participant has retired or otherwise terminated employment, also should be exempted. --------------------------------------------------------------------------- \6\4See Section II.A.2, above. \6\5Proposed Rule 16b-3(g)(2). \6\6The proposed rule would expand the staff's interpretive position in Health Management Associates, Inc. (Mar. 6, 1992), which provides that distributions of securities or cash to satisfy such I.R.C. limitations are not withdrawals for purposes of Rule 16b- 3(d)(2)(i)(B), and that an associated cash-out of fractional shares is exempt from short-swing profit recovery if the acquisition of the shares was exempt under Rule 16b-3. \6\7I.R.C. Section 401(a)(9). --------------------------------------------------------------------------- I. Maximum Number of Shares Requirement In order for a plan transaction to be exempt, the current rule requires that the plan set forth in writing the basis for determining insider eligibility to participate, and either the price at which securities may be offered and the amount of securities to be awarded or the method by which such price and amount are to be determined. Under the proposal,68 application of this exemptive condition would be restricted to plans subject to the shareholder approval requirement, as was the case under former Rule 16b-3. --------------------------------------------------------------------------- \6\8Proposed Rule 16b-3(a)(1). --------------------------------------------------------------------------- Additionally, it appears that the manner in which shares are counted in any Rule 16b-3 plan appropriately may be specified in the plan, or, to the extent not so specified, left to the discretion of plan administrators. Accordingly, effective as of the date of publication of this release, the staff no longer will answer interpretive requests regarding share counting, and the interpretive letters addressing this subject69 no longer will be required to be followed. Of course, the maximum number of shares issuable under a plan will be subject to disclosure in the course of obtaining shareholder approval for the plan. --------------------------------------------------------------------------- \6\9Palmer & Dodge (Oct. 2, 1991); Frederic W. Cook & Co., Inc. (May 15, 1992); Merrill Lynch & Co. (Aug. 28, 1992) Q. 1 and 2; and Merrill Lynch & Co. (Sept. 1, 1992) Q. 1. --------------------------------------------------------------------------- J. Transferability Restriction Currently, the availability of exemptions is conditioned on a written specification, in the plan or other written agreement, that a derivative security awarded under the plan may not be transferred by the participant other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order.70 The restriction on transferability initially was derived from the Internal Revenue Code as a reflection of prior business practice and was designed to limit opportunities for the speculative abuse of options. --------------------------------------------------------------------------- \7\0Rule 16b-3(a)(2) [17 CFR 240.16b-3(a)(2)]. By interpretation, plans that are not subject to I.R.C. Section 401(a) have been allowed to permit transfers of derivative securities pursuant to ``domestic relations orders'' that satisfy the requirements of I.R.C. Sections 414(p)(1) (A) and (B). See Premark International, Inc. (Mar. 6, 1992). --------------------------------------------------------------------------- However, questions have been raised about whether this restriction needs to be retained, given the presence of other safeguards in Rule 16b-3 and given the fact that the current Section 16 regulatory framework generally recognizes economic parity between derivative securities and their underlying equity securities. Accordingly, the proposed amendments to Rule 16b-3 would delete the transferability restriction.71 Commenters are asked to address whether there is any continuing need for this restriction, either in whole or in part, and should address the extent to which nontransferability may act as a safeguard, both in Rule 16b-3 and in the context of compensatory cash- only instruments as discussed above. --------------------------------------------------------------------------- \7\1Of course, in many cases transferability restrictions would continue to exist because of Internal Revenue Code requirements or companies' policies. --------------------------------------------------------------------------- Assuming the restriction is retained but modified, would it be appropriate to recast it as a transactional requirement, so that only derivative securities for which the exemption is claimed would need to satisfy this requirement?72 Comment also is solicited on whether, if the restriction is retained, additional kinds of transfers should be permitted, such as transfers to family members of insiders, family partnerships, charitable institutions, and trusts whose beneficiaries are insiders and their families, or transfers by a non-employee director to a third party entity (such as the director's law firm) without consideration pursuant to an agreement that provides that any compensation received for the director's services is received for the benefit of that entity. Comment also is solicited on whether the rule should permit only transfers that are exempt from short-swing profit recovery, such as bona fide gifts. --------------------------------------------------------------------------- \7\2Options that satisfy the transferability restrictions currently may be issued on an exempt basis pursuant to a plan that also issues on a non-exempt basis options that may be transferred, without consideration, to family members, family trusts and family partnerships. See Time Warner Inc. (Dec. 18, 1992) Q. 1. --------------------------------------------------------------------------- If transfers to family members and family entities are permitted, should these be limited to transfers for estate planning purposes? Should such transfers be limited to persons or entities composed of persons who are members of the insider's immediate family sharing the same household, such that the insider will retain an indirect pecuniary interest in the derivative securities following the transfer,73 and any subsequent disposition by the transferee would be attributed to the insider? Finally, comment is solicited on the combined effect of liberalizing or eliminating transferability restrictions and the proposal, discussed above, to provide that securities obtained in an exempt grant may be disposed of within six months if the disposition is a gift or otherwise exempt from short-swing profit recovery. Should the rules provide that the six-month holding period would continue to run in the hands of the transferee? --------------------------------------------------------------------------- \7\3Rule 16a-1(a)(2)(ii)(A) [17 CFR 240.16a-1(a)(2)(ii)(A)] provides a rebuttable presumption that an insider has an ``indirect pecuniary interest'' in securities held by members of the insider's family sharing the same household. --------------------------------------------------------------------------- III. Revisions to Reporting System A. Reporting of Exempt Transactions The Commission is reconsidering its approach to the reporting of transactions pursuant to the Section 16 regulatory scheme. Under the current rules, transactions exempt from short-swing profit recovery (other than exempt exercises and conversions of derivative securities) must be reported annually.74 Reporting of exempt transactions has been required to provide interested parties with the opportunity to evaluate insiders' claims to exemptions; facilitate reconciliation of insiders' holdings at the end of the fiscal year; and provide indications of insiders' views of their corporations' prospects, although annual reporting generally is permitted since these transactions are viewed as having less potential than non-exempt transactions to reflect insiders' investment assessments of their corporations. --------------------------------------------------------------------------- \7\4The report would be on Form 5, or, at the option of the reporting person, on a Form 4 filed before the Form 5 would be due. --------------------------------------------------------------------------- The Commission has received various suggestions that would further streamline Section 16(a) reporting. These proposals seek to simplify reporting through different basic approaches. One approach would delete or substantially reduce the reporting of exempt transactions. A second approach would not reduce significantly the reportable transactions, but rather would reduce the flexibility provided insiders with respect to using Form 4 or Form 5 to report a number of exempt transactions. A third approach would introduce issuer annual reporting of insider holdings and information as to transactions during the fiscal year. These proposals highlight several questions as to what extent, if at all, investors need information with respect to exempt transactions and whether investors need a reconciliation of insiders' equity holdings from year to year. The suggestions received by the Commission include: 1. Elimination of the requirement to report exempt transactions, or certain classes of exempt transactions, such as exempt employee benefit plan transactions;75 --------------------------------------------------------------------------- \7\5Many of these transactions currently may be reported on an aggregated basis, as of the most recent date for which plan information is available. Aggregated reporting also is permitted, by staff interpretation, for acquisitions and holdings resulting from reinvestment of dividends or interest in exempt transactions, and acquisitions of dividend equivalent rights in exempt employee benefit plan transactions. Palmer & Dodge (Jan. 31, 1992) and Skadden, Arps, Slate, Meagher & Flom (Jun. 23, 1992). This result would be codified by proposed amendments to Instructions 4(a) (ii) and (iv) to Form 5 and the Note to Instruction 4(a)(ii) to Form 4. Aggregated reporting is not available for additional securities acquired through voluntary cash contributions under dividend or interest reinvestment plans. See n. 89 of the Adopting Release. --------------------------------------------------------------------------- 2. Replacement of annual reporting on Form 5 with a table to be included in the issuer's Form 10-K annual report disclosing and reconciling transactions and insiders' holdings; 3. Replacement of annual reporting on Form 5 with a requirement that each Form 4 filed include information (as a separate line item, in a footnote or in a reconciliation column) with respect to exempt transactions that had occurred since the last Form 4; 4. Replacement of annual reporting on Form 5 with a requirement that each Form 4 filed include information with respect to exempt transactions that had occurred since the last Form 4, except that broad-based plan transactions would continue to be reportable annually (either on Form 5 or on Form 4); and 5. Elimination of the total holdings column in Forms 4 and 5 (which the current rules limit to the class of securities with respect to which a transaction is reported), or simplification of the reconciling data for such columns. The Commission is interested in obtaining the least burdensome reporting system that will effectively achieve the disclosure purposes of Section 16(a), and therefore solicits comment on each of the above proposals. While the above changes are not included in the text of the proposals published today, the Commission may adopt any of the alternatives specified above, or a combination of those alternatives, and also may in the final rule amendments incorporate any one or more of the approaches discussed above. Comment is solicited as to whether each of these suggested changes would simplify the reporting obligations on insiders without materially reducing the flow of information that is significant to investors. If the total holdings column is retained, comment also is requested as to whether any reconciling information could be eliminated. Additionally, comment is solicited as to whether a new column should be added to Forms 4 and 5 requiring insiders to reconcile their current holdings with those reported on the previous report. Would this reconciliation requirement be appropriate only if reporting of exempt transactions were eliminated? In addition, commenters recommending the elimination of Form 5 should address the mechanism by which information that currently is reportable only on an annual basis should be reported. Commenters also are asked to address whether Form 5 has continuing usefulness in reducing reporting delinquencies, 76 and, if so, what mechanism could serve this purpose if Form 5 were rescinded. In particular, what mechanism would enable issuers to determine, in connection with their disclosure obligations under Item 405 of Regulation S-K and S-B, whether all required Section 16(a) reports had been filed?77 --------------------------------------------------------------------------- \7\6See Rule 16a-3(f)(1)(ii) [17 CFR 240.16a-3(f)(1)(ii)]. \7\7See Section III.F below for discussion of Item 405. --------------------------------------------------------------------------- Although the current reporting scheme generally requires transactions exempt from short-swing profit recovery to be reported annually, certain transactions, such as stock splits and stock dividends, are exempt from the reporting requirement. The Commission proposes to eliminate the reporting requirement for the exempt cancellation or expiration of a long derivative security where no value is received.78 Comment is requested as to whether this reporting requirement should be retained, and whether there are other limited classes of exempt transactions that could be exempted from reporting without impairing the ability of the public to obtain useful information. --------------------------------------------------------------------------- \7\8Proposed Rule 16a-4(e). See Rule 16b-6(d) [17 CFR 240.16b- 6(d)]. --------------------------------------------------------------------------- Finally, a new transaction code K would be added to Forms 4 and 5 to report any transaction that changes only the form of beneficial ownership and not the extent of a reporting person's pecuniary interest in the subject securities. Such transactions are reportable on Form 5, but the code also would be added to Form 4 so it could be used for voluntary reporting on that form. Comment is requested as to whether any additional codes need to be added, or whether any existing codes may be deleted, consistent with the informational needs of persons who use Section 16(a) disclosure. B. Reporting of Small Acquisitions and Option Exercises At present, small acquisitions of equity securities and exercises and conversions of derivative securities are reported on an insider's next otherwise required Form 4 or Form 5, whichever is earlier.\79\ No change currently is proposed to the existing system of reporting these transactions, other than amendment of the small acquisitions reporting rule\80\ to exclude from the $10,000 threshold acquisitions occurring within the prior six months of the current acquisition that were exempted by rule from Section 16(b) or previously reported on Form 4 or 5, and to clarify that the current acquisition cannot be disregarded in calculating the $10,000 threshold. Comment also is solicited as to whether reporting would be made more convenient for insiders, consistent with the informational needs of other investors, by permitting small acquisitions and exempt exercises and conversions to be reported solely on Form 5; or by providing that small acquisitions be reported on Form 5 and exempt exercises and conversions be reported on Form 4. --------------------------------------------------------------------------- \79\The timing for reporting exercises and conversions was expedited from the proposed annual reporting in response to commenters' concerns, particularly the concerns of individual investors that option exercises represent important indicia of insiders' views of their companies' prospects. If a derivative security is exercised or converted before its exempt grant otherwise must be reported, the grant should be reported at the same time as the exercise or conversion. \80\Proposed Rule 16a-6. This rule provides only a deferral, not an exemption from reporting. All small acquisitions, unless otherwise exempt, must be reported on Form 4 or 5 as specified in the rule. --------------------------------------------------------------------------- Currently, when an insider exercises an option acquired pursuant to a Rule 16b-3 plan and immediately sells a portion of the shares to pay the exercise price under a cashless exercise program, the transaction generally is reported on Form 4 or 5 as the exercise of a derivative security and sale of a non-derivative security.\81\ Comment is solicited as to whether insiders should be either required or permitted to reflect the sale of the portion of shares necessary to satisfy the exercise price by using the transaction code for payment of an option exercise price by delivery or withholding of securities,\82\ rather than the general sale of security code currently used, since all of these transactions constitute cashless exercises. In addition, comment is solicited as to whether this transaction code also should be used in connection with the exercise of stock appreciation rights. --------------------------------------------------------------------------- \81\Transaction code ``M'' is used to reflect the exercise and code ``S'' is used to reflect the sale of the underlying shares. \82\Transaction code ``F.'' The proposed amendments would clarify that code ``F'' also should be used to report the withholding of securities incident to vesting of a restricted security to satisfy tax liabilities. --------------------------------------------------------------------------- C. Joint and Group Reporting Currently, when more than one person subject to Section 16 is deemed to be a beneficial owner of the same equity securities, all such persons must report as beneficial owners and file separate reports. To reduce this duplicative reporting, the proposed rules would permit such persons to file their reports either separately or jointly.\83\ --------------------------------------------------------------------------- \83\Proposed Rules 16a-3(i) and 16a-1(a)(3) would reflect this change. Forms 3, 4 and 5 and the Instructions thereto also would be modified to permit joint and group filings. --------------------------------------------------------------------------- Under the proposal, where persons in a group have reporting obligations, the filing of collective reports on behalf of all group members would be permitted.\84\ Such joint and group filings, and any amendments, could be submitted by any designated constituent beneficial owner. Required information would have to be given for each beneficial owner, and such filings would have to be signed by, or on behalf of, each beneficial owner by an authorized person, with statements confirming the delegation of signature authority attached to the filing. Beneficial owners making a joint or group filing could authorize one of the beneficial owners or a third party to sign on their behalf, provided that confirming statements are attached to the filing, or are provided by amendment as soon as practicable, with respect to each owner delegating signature authority, unless such a confirmation still in effect is on file with the Commission.\85\ Of course, to the extent a sufficiently broad power of attorney previously had been filed, such as with a Schedule 13D, that power of attorney could be incorporated by reference in a Section 16(a) filing. Each beneficial owner would, of course, retain individual liability for compliance with the filing requirements, including the obligation to assure that the filing is timely and accurately made.\86\ Comment is solicited as to whether, in the alternative, authority to make a group Section 16 filing could be presumed based on the filing of a group Schedule 13D,\87\ such that all group members thereby would be deemed to have granted authority to any group member to file a Section 16 form. --------------------------------------------------------------------------- \84\Joint and group filings could be used, for example, by parents and subsidiaries, partnerships, or Schedule 13D groups [17 CFR 240.13d-101]. The group itself is not a reporting person for Section 16 purposes; however, under the proposed rules, group members could choose to file collective reports to satisfy their individual filing obligations. A group member is not required to report transactions by another group member, however, unless he or she has or shares a pecuniary interest in the securities acquired or disposed of by such other member. \85\General Instruction 7 to Forms 3, 4 and 5 permits a form filed for an individual to be signed on behalf of the individual by an authorized person. General Instruction 5 to Form 3 and General Instruction 4 to Forms 4 and 5 would be amended to specify the means of reporting the pecuniary interest of multiple beneficial owners. A corresponding amendment also would be made to General Instruction 6 to each Form. \86\Cf. In the Matter of Bettina Bancroft, Release No. 34-32033, AP 3-7999 (Mar. 23, 1993). \87\A group's Schedule 13D filing obligation may be satisfied either by a single joint filing or by each of the group's members making an individual filing. The Schedule 13D must be signed by each person on whose behalf the statement is filed or his or her authorized representative. --------------------------------------------------------------------------- D. Trust Transactions Today, a trust is subject to Section 16 not only if it beneficially owns more than ten percent of a class of registered equity securities,\88\ but also if the trustee otherwise is an insider and has investment control over the issuer's securities held by the trust, and the trustee or a member of the trustee's immediate family has a pecuniary interest in such securities, except in limited circumstances. This dual standard, newly established under the rules adopted in 1991, created a new reporting obligation for some trusts, particularly family trusts where the insiders already were required to report most of the trust transactions involved.\89\ --------------------------------------------------------------------------- \88\See Proskauer Rose Goetz & Mendelsohn (Apr. 29, 1991) (a trust that holds more than ten percent of a class of equity securities registered under Section 12 is the beneficial owner of those securities for purposes of Section 16.) \89\See D'Ancona & Pflaum (Feb. 18, 1992); Sonnenschein Nath & Rosenthal (Mar. 23, 1992) (easing compliance with the reporting requirements for certain types of family trusts). --------------------------------------------------------------------------- Since the primary effect of the new standard was to create duplicative reporting obligations, imposing independent Section 16 obligations on the trusts does not appear necessary. Accordingly, the proposed rules would eliminate these overlapping obligations by subjecting a trust to Section 16 only if it holds more than ten percent of a class of registered equity securities of the issuer.\90\ --------------------------------------------------------------------------- \90\Proposed Rule 16a-8(a)(1). A conforming amendment to Rule 16a-2(d)(2) [17 CFR 240.16a-2(d)(2)] would reflect the proposed rescission of Rule 16a-8(a)(1)(ii) [17 CFR 240.16a-8(a)(1)(ii)]. --------------------------------------------------------------------------- Duplicative reporting also can result because in certain instances the trust and a trust beneficiary must report separately with respect to the same transaction. Accordingly, a proposed new note would provide that transactions attributed to a trust beneficiary may be reported by the trustee on behalf of the beneficiary.\91\ --------------------------------------------------------------------------- \91\Proposed note to Rule 16a-8(b)(3). --------------------------------------------------------------------------- E. Post-Termination Reporting Under the current rules, any transaction following the cessation of director or officer status is required to be reported, if executed within six months of a transaction that occurred while the person was a director or officer. However, it appears that the record-keeping burdens of tracking post-termination transactions should be imposed only with respect to those transactions where short-swing profit liability is likely. Accordingly, the proposal would eliminate insiders' post-termination reporting obligations with respect to post- termination transactions that are exempt and thus not subject to matching with pre-termination transactions.\92\ Similarly, a post- termination transaction would not be required to be reported unless it occurred within six months of an opposite (purchase vs. sale), non- exempt transaction that was effected while the reporting person was an officer or director.\93\ Comment is requested as to the continuing need to report these transactions. In particular, is it necessary to continue to require reporting of exempt post-termination transactions to assure that an exemption properly may be claimed? --------------------------------------------------------------------------- \92\Proposed Rule 16a-2(b)(2). \93\Proposed Rule 16a-2(b)(1). --------------------------------------------------------------------------- F. Compliance With the Reporting Requirements Since the adoption of the 1991 revisions to the Section 16 rules and forms, including issuer disclosure concerning insider compliance and annual reporting of exempt transactions, compliance with Section 16(a) reporting obligations generally has improved substantially.\94\ Accordingly, the Commission does not propose to change the disclosure requirements of Item 405 of Regulations S-B and S-K, which requires issuer disclosure concerning insider compliance with these reporting obligations, except that registrants would be required to set off any disclosure of non-compliance under an appropriate and discrete caption.\95\ This should enable interested parties to locate quickly this disclosure, which often consists of only a sentence or two, and to prevent it from being buried among unrelated disclosure. --------------------------------------------------------------------------- \94\During 1990, the year before the new rules were adopted, approximately 21 percent of the reportable market transactions were reported more than three days following the due date. From May 1991 through March 1994, the comparable figure was approximately five percent. \95\The caption would read: ``Section 16(a) Reporting Delinquencies.'' Additionally, a technical amendment to Item 405 of Regulation S-B would correct the reference to Rule 16a-3(d) [17 CFR 240.16a-3(d)] by replacing it with a reference to Rule 16a-3(e) [17 CFR 240.16a-3(e)]. --------------------------------------------------------------------------- In addition, Item 405 would be revised to clarify the nature of the issuer's obligation to review insiders' filings in order to determine whether there are any delinquent reports that must be disclosed. The issuer is entitled to rely on the Forms 3, 4, and 5 furnished to it, as well as written representations by the insider that no Form 5 is required. New language would be added to make it clear that the issuer is obligated to consider the absence of certain forms.\96\ The absence of a Form 3 from an insider is an indication that disclosure is required. Similarly, the absence of a Form 5 from an insider is an indication that disclosure is required, unless the issuer has received a written representation that no Form 5 is required,\97\ or the issuer otherwise knows that no such filing is required. --------------------------------------------------------------------------- \96\Proposed Item 405(a)(2) of Regulations S-K and S-B. See Adopting Release, n. 231 and surrounding text. \97\A ``safe harbor'' from disclosure is available for an issuer who receives a written representation and keeps it for two years. See Item 405(b)(2). --------------------------------------------------------------------------- Further, comment is solicited on whether Item 405 should be revised to require issuers to include in their filings an affirmative statement that there were no Section 16(a) delinquencies required to be reported, if such is the case.\98\ It has been suggested that there are instances where required disclosures are not made because Item 405 is overlooked. An affirmative statement of the absence of reportable delinquencies has been proposed to the Commission as a potential tool for minimizing this problem. Commenters should address whether the problem suggested does in fact exist, and, if so, whether the proposed solution would be effective. --------------------------------------------------------------------------- \98\If this requirement were adopted, registrants with no delinquencies to report would be permitted to use the caption ``Compliance with the Reporting Requirements of Section 16(a).'' --------------------------------------------------------------------------- Finally, the Commission is aware of and encourages the practice of many issuers to assist their officers and directors in complying with their Section 16(a) reporting obligations. Since the use of powers of attorney is permitted, it is also possible for an issuer to coordinate the filing of its officers' and directors' reports by having the corporate secretary or other agent obtain powers of attorney from these reporting persons, and act on their behalf to collect information every month about their transactions subject to Section 16 and make the filings by the due date.\99\ --------------------------------------------------------------------------- \99\Of course, insiders giving powers of attorney would still retain individual liability for compliance. See n. 86 above and accompanying text. --------------------------------------------------------------------------- G. Equity Swaps Questions have been asked concerning the proper method of reporting equity swaps for purposes of Section 16. Equity swaps are individually negotiated contracts in which the specific terms may vary from agreement to agreement. For instance, an equity swap may take the form of an agreement in which one party holding shares of equity securities agrees to pay, or ``swap,'' the return\100\ on those securities in exchange for the return on an equity index, basket of equities, or an interest rate-based cash flow. Section 16 consequences would arise from such a transaction where either party to the transaction is a Section 16 insider with respect to a security to which the swap agreement relates.\101\ --------------------------------------------------------------------------- \100\For purposes of this analysis, ``return'' may include dividends paid on the equity instrument, as well as change in market value. \101\No Section 16 consequences would flow from the transaction to the extent that the swap relates solely to interests in securities comprising part of a broad-based, publicly traded market basket or index of stocks, approved for trading by the appropriate federal governmental authority, that are deemed not to confer beneficial ownership for purposes of Section 16 pursuant to Rule 16a-1(a)(5)(iii) [17 CFR 240.16a-1(a)(5)(iii)] and/or are excluded from the definition of ``derivative securities'' pursuant to Rule 16a-1(c)(4) [17 CFR 240.16a-1(c)(4)]. --------------------------------------------------------------------------- In order to demonstrate how Section 16 would apply,\102\ assume that an insider agrees to pay to the counterparty for a period of three years the value of dividend payments on 100,000 shares of issuer common stock, in exchange for payment of a fixed interest rate based on the market value of the 100,000 shares of stock at the commencement of the swap term. The parties also agree that at the end of the swap term, the insider will pay to the counterparty the cash value of any appreciation on the shares during the term, or, conversely, the counterparty will pay to the insider the cash value of any depreciation. The insider retains title to and any voting rights in the securities.\103\ --------------------------------------------------------------------------- \102\This analysis addresses solely the application of Section 16 to these transactions to the extent that they are engaged in by insiders. The discussion does not analyze the status of these transactions or the parties thereto under any other provision of the federal securities laws. \103\It is not necessary, however, that either party to any equity swap have direct ownership of the underlying equity securities, index or basket. Rather, equity swaps may provide insiders with a synthetic means of realizing any changes in the value of the equity securities to which the swap agreement relates. For example, an insider may engage in a swap in which the insider contracts to receive any change in value of the issuer's common stock without making any direct investment in such stock. --------------------------------------------------------------------------- It appears that the following reporting scheme appropriately reflects the economic impact of the transaction on the insider. The insider should report entering into the swap on Form 4 as (i) the sale or writing of a stock appreciation right (``SAR''), and (ii) the purchase of a stock depreciation right (``SDR'').\104\ This result would reflect the fact that the insider has locked in the value of the 100,000 shares during the swap term to the same extent as if the shares had been sold.\105\ --------------------------------------------------------------------------- \104\If the counterparty is an insider, it would report the same swap as (i) the purchase of an SAR, and (ii) the sale or writing of an SDR. \105\The result would be a sale of the underlying securities pursuant to Rule 16b-6(a) [17 CFR 240.16b-6(a)] because the insider engaging in the swap has an increase in a put equivalent position. --------------------------------------------------------------------------- The manner in which an insider reports the closing of the swap would depend on the change in price of the underlying securities during the swap term.\106\ If the price increases, so that the insider must pay cash to the counterparty, the insider should report the exempt expiration without value of the SDR.\107\ The insider also should report on Form 4 the exempt exercise by the counterparty of the SAR, the insider's exempt deemed disposition of the underlying securities to the counterparty pursuant to the SAR, and the insider's non-exempt deemed re-acquisition of the underlying securities.\108\ --------------------------------------------------------------------------- \106\To the extent settlement of the parties' obligations occurs on an interim basis during the term of the swap, such as quarterly, the insider's Section 16 obligations would arise with respect to each settlement. \107\Because the SDR would be a long derivative security in the hands of the insider as holder, this expiration would be exempt from short-swing profit recovery pursuant to Rule 16b-6(d). Although proposed Rule 16a-4(e), discussed above in the text accompanying note 78, would exempt the expiration from reporting as well, in the context of an equity swap such an expiration should be reported because it is an integral component of the overall transaction. \108\Rule 16b-6(b) [17 CFR 240.16b-6(b)] would exempt the first two components of the exercise of the SAR because the deemed sale would have taken place at the time the SAR was sold by the insider; however, the deemed acquisition that occurs simultaneously would not be exempt. --------------------------------------------------------------------------- If the price decreases, so that the insider receives cash from the counterparty, the insider should report the expiration of the SAR.\109\ The insider also should report on Form 4 the exercise of the SDR as the simultaneous exempt disposition of a put derivative security as a result of its exercise, the exempt deemed disposition of the underlying securities as a result of the exercise, and the non-exempt deemed acquisition of the underlying securities.\110\ --------------------------------------------------------------------------- \109\With respect to the insider as the writer, rather than the buyer, of the SAR, Rule 16b-6(d) provides that upon any cancellation or expiration within six months of writing the option, profit recovery shall not exceed the premium received for writing the option. See also Sullivan & Cromwell (Nov. 17, 1993) regarding exemption for the writer of option cancellation or expiration more than six months following writing the option. \110\Rule 16b-6(b) would exempt the first two components of the exercise of the SDR because the deemed sale would have taken place at the time the SDR was acquired by the insider; however, the deemed acquisition that occurs simultaneously would not be exempt. --------------------------------------------------------------------------- Comment is requested as to whether the derivative security analysis described above accurately reflects the economic substance of the swap transaction described, or whether there is a more appropriate analysis for purposes of Section 16. Comment also is solicited as to whether there are other common forms of equity swaps for which a different Section 16 analysis may be appropriate. In setting forth the analysis above, the Commission does not wish to suggest that previously filed Forms reporting swap transactions in another manner need to be revised, or that swap transactions reported differently are subject to disclosure pursuant to Item 405 of Regulations S-B and S-K. Finally, comment is requested as to whether there is a need for separate reporting codes for these transactions. IV. Additional Exemptions and Revisions A. New Exemption for Qualified Domestic Relations Orders The current rules limit the exemption for the disposition of securities pursuant to a qualified domestic relations order (``QDRO''), as defined in the Internal Revenue Code or Title I of ERISA, and the rules thereunder, to employee plan securities. Since such dispositions are unlikely to be influenced by access to inside information, this limitation does not appear necessary. Accordingly, the proposal includes a general exemption for such dispositions.\111\ --------------------------------------------------------------------------- \111\Proposed Rule 16b-5(b), which would replace current Rule 16b-3(f)(3). Current Rule 16b-5 [17 CFR 240.16b-5], which exempts bona fide gifts and inheritance, would be redesignated as proposed Rule 16b-5(a). Transaction code Q, which is used for QDRO transactions, would be moved to the category ``Other Section 16(b) Exempt Transactions and Small Acquisition Codes'' in Forms 4 and 5. --------------------------------------------------------------------------- By interpretation, the current exemption has been construed to permit the transfer of securities, issued under a plan that is not subject to Section 401(a) of the Internal Revenue Code, pursuant to a ``domestic relations order'' that satisfies certain conditions of the Internal Revenue Code,\112\ but does not satisfy QDRO standards.\113\ Comment is requested as to whether the proposed exemption should require satisfaction of the QDRO standards in all circumstances, or whether satisfaction of the Internal Revenue Code ``domestic relations order'' standards would suffice.\114\ --------------------------------------------------------------------------- \112\I.R.C. Sections 414(p)(1)(A) and (B). Among other things, the order must create or recognize an alternate payee's right to receive all or a portion of the benefits payable to a participant under a plan; relate to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of the participant; and be made pursuant to a State domestic relations law (including a community property law). \113\The order need not satisfy, among other things, conditions applicable to payments made after the participant's earliest retirement age, and requirements to treat the former spouse as surviving spouse for purposes of determining survivor benefits. See Premark International, Inc. (Mar. 6, 1992), which further provides that the plan may permit such transfers consistent with the transferability restriction of Rule 16b-3(a)(2). \114\Any revisions to the standards of the proposed exemption also would be reflected in the transferability restriction, if retained. See Section II.J, above. --------------------------------------------------------------------------- B. Exemption for Stock Dividend Transactions As proposed, the exemption for stock splits and stock dividends would be expanded to include specifically a stock dividend in which equity securities of a different issuer are distributed.115 The primary application of this exemption would be to ``spinoff'' transactions, in which assets previously owned by the issuer are distributed pro rata to shareholders in the form of equity securities of another issuer. --------------------------------------------------------------------------- \1\15Proposed Rule 16a-9(a). --------------------------------------------------------------------------- The Division has interpreted the current rule to apply to stock splits or stock dividends involving the issuance, on a pro rata basis, of a different class of equity securities of the same issuer.116 The business purposes generally motivating spinoff transactions and the fact that the securities distributed represent assets owned indirectly by shareholders appear to justify further expanding this exemption to securities of a different issuer. --------------------------------------------------------------------------- \1\16See Emergent Group, Inc. (Apr. 6, 1992). --------------------------------------------------------------------------- C. Over-Allotment Options Questions have arisen as to whether an over-allotment option written by an insider could be characterized as the establishment of a put equivalent position and deemed sale of the underlying stock. Subsequent expiration of the unexercised option arguably could constitute a purchase of the underlying security, matchable with the over-allotment option grant or other sales by the insider within a six- month period. Recognizing that over-allotment options facilitate public offerings and do not lend themselves to the speculative abuse Section 16 was designed to prevent, the staff issued interpretive relief to prevent this unintended result.117 The proposal would codify this relief by explicitly excluding over-allotment options from the derivative security definition.118 Of course, a sale of securities to an underwriter upon exercise of the over-allotment option would remain a sale for Section 16 purposes. Comment is solicited on whether additional conditions should be placed on the exclusion, such as requiring that the option comply with all applicable regulations and policies of the National Association of Securities Dealers. --------------------------------------------------------------------------- \1\17See Video Technology (Overseas) Limited/Davis Polk & Wardwell (June 17, 1992), and Davis Polk & Wardwell (July 16, 1992). \1\18Proposed Rule 16a-1(c)(7). --------------------------------------------------------------------------- V. Request for Comment Any interested person wishing to submit written comments on the proposed revisions to the Commission's Section 16 rules and forms, and compliance disclosure requirements, as well as on other matters that might have an impact on the proposals contained herein, is requested to do so. In addition, the Commission requests comment on whether any further changes to the Section 16 rules, particularly Rule 16b-3, are necessary or appropriate at this time. Comment is requested specifically from persons subject to Section 16; issuers whose officers, directors and ten percent shareholders are subject to Section 16; and persons using the information afforded by the Section 16(a) reports. The Commission also requests comment on whether the proposed rules, if adopted, would have an adverse impact on competition or would impose a burden on competition that is neither necessary nor appropriate in furthering the purposes of the Exchange Act. Comments responsive to this inquiry will be considered by the Commission in complying with its responsibilities under Section 23(a) of the Exchange Act.119 --------------------------------------------------------------------------- \1\1915 U.S.C. 78w(a). --------------------------------------------------------------------------- VI. Transition to New Rules If the proposed rule revisions are adopted, provisions for a transition from the current rules will be necessary, particularly with respect to proposed Rule 16b-3. Although the discussion below represents the Commission's current intent regarding transition to the proposed revised rules, this schedule is subject to modification. The Commission intends to make the proposed rule amendments, other than those to Rule 16b-3, effective with respect to reports that are, or would have been, due on or after the 45th day following the date of adoption (the ``Effective Date''), with earlier compliance permitted. Of course, to the extent that proposed rules codify interpretive positions, those positions continue to be valid before the Effective Date. Trusts currently subject to Section 16 that would be relieved of Section 16 obligations under the proposed rules would not be subject to any post-termination reporting obligations or required to file a final Form 5. In extending the phase-in period for current Rule 16b-3, the Commission stated that this period would continue until September 1, 1994, or such earlier date as set in further rulemaking under Section 16. Given the timing of these rule proposals, the Commission is extending the phase-in date until September 1, 1995 or such different date as set in further rulemaking.120 Current and former Rule 16b- 3 would remain available until September 1, 1995,121 unless a different date is set by the Commission in the adopting release. Comment is solicited on how long a transition period issuers and insiders would need, assuming adoption of the proposals. Of course, issuers continue to be permitted to convert their plans to current Rule 16b-3 at any time, provided that all plans of the issuer are converted. After the phase-in date, issuers and insiders will no longer be able to rely on the former employee benefit plan exemptions, but instead will need to comply with current Rule 16b-3 (modified to the extent the Commission adopts these rule proposals). --------------------------------------------------------------------------- \1\20See Release No. 34-34513, also issued today. \1\21The exemptions afforded by former Rules 16a-8(b) and (g)(3) also would remain available. --------------------------------------------------------------------------- Because proposed Rule 16a-1(c)(8), which would exclude from the definition of ``derivative security'' the right or obligation to surrender a security or to have a security withheld in satisfaction of an exercise price or tax withholding obligation, is inextricably linked to the proposed amendment of Rule 16b-3(e), the Commission proposes to link the availability of proposed Rule 16a-1(c)(8) to conversion of the plan to proposed Rule 16b-3. VII. Cost-Benefit Analysis Commenters are requested to provide their views and data to assist the Commission in evaluating the costs and benefits associated with the proposed amendments. It is expected that the amendments would decrease significantly the compliance burden imposed on persons subject to Section 16 and attendant costs without undercutting the statutory objectives of disclosing information concerning insider trading and discouraging speculative short-term insider trading. The proposed simplification of the treatment of employee benefit plan transactions would constitute the most important reduction in compliance burden. The proposed rules also would reduce compliance costs by: permitting joint and group reporting where more than one person is deemed to be a beneficial owner of the same securities; providing that Section 16 applies to a trust only if the trust beneficially owns more than ten percent of a class of registered equity securities; and limiting officers' and directors' post-termination reporting obligations. Furthermore, the proposed rules would expand the exemption for stock splits and stock dividends to include stock dividends in which securities of a different issuer are distributed, and would provide a general exemption from reporting and short-swing profit recovery for the disposition of securities pursuant to a qualified domestic relations order. VIII. Summary of Initial Regulatory Flexibility Analysis An Initial Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603 concerning the proposed amendments. The analysis notes that the proposed amendments are intended to simplify the Section 16 regulatory scheme, particularly with respect to employee benefit plans, and codify several staff interpretive positions. As discussed more fully in the analysis, most of the reporting persons the proposed amendments would affect are small entities, as defined by the Commission's rules. The proposed amendments would decrease the reporting and compliance requirements imposed upon corporate insiders subject to Section 16. The analysis discusses several possible alternatives to the proposed amendments including, among others, establishing different compliance or reporting requirements for small entities or exempting them from all or part of the proposed requirements. As discussed more fully in the analysis, implementation of any of these alternatives either would be duplicative of the proposed amendments or inconsistent with the Exchange Act. Comments are encouraged on any aspect of the analysis. A copy of the analysis may be obtained by contacting Elizabeth Murphy, Office of Disclosure Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. IX. Statutory Basis The amendments to Regulation S-B, Regulation S-K, and the Section 16 rules and forms are being proposed by the Commission pursuant to Exchange Act Sections 3(a)(11),122 3(a)(12),123 3(b),124 9(b),125 10(a),126 12(h),127 13(a),128 14,129 16, and 23(a). As the Section 16 rules and forms relate to the Investment Company Act and the Public Utility Holding Company Act, they also are adopted pursuant to Investment Company Act Sections 30130 and 38,131 and Public Utility Holding Company Act Sections 17132 and 20,133 respectively. --------------------------------------------------------------------------- \1\2215 U.S.C. 78c(a)(11). \1\2315 U.S.C. 78c(a)(12). \1\2415 U.S.C. 78c(b). \1\2515 U.S.C. 78i(b). \1\2615 U.S.C. 78j(a). \1\2715 U.S.C. 78l(h). \1\2815 U.S.C. 78m(a). \1\2915 U.S.C. 78n. \1\3015 U.S.C. 80a-29. \1\3115 U.S.C. 80a-37. \1\3215 U.S.C. 79q. \1\3315 U.S.C. 79t. --------------------------------------------------------------------------- List of Subjects in 17 CFR Parts 228, 229, 240, and 249 Reporting, recordkeeping requirements, and Securities. Text of the Proposals In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS 1. The authority citation for part 228 continues to read as follows: Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b- 11, unless otherwise noted. 2. By amending Sec. 228.405 by revising the reference to ``Rule 16a-3(d)'' in paragraph (a) to read ``Rule 16a-3(e)'' and by revising paragraphs (a)(1) and (a)(2) before the Note to read as follows: Sec. 228.405 (Item 405) Compliance with section 16(a) of the Exchange Act. (a) * * * (1) Under the caption ``Section 16(a) Reporting Delinquencies,'' identify each person who, at any time during the fiscal year, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the registrant registered pursuant to section 12 of the Exchange Act, or any other person subject to section 16 of the Exchange Act with respect to the registrant because of the requirements of section 30 of the Investment Company Act or section 17 of the Public Utility Holding Company Act (``reporting person'') that failed to file on a timely basis, as disclosed in the above Forms, reports required by section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. (2) For each such person, set forth the number of late reports, the number of transactions that were not reported on a timely basis, and any known failure to file a required Form. A known failure to file would include, but not be limited to, a failure to file a Form 3, which is required of all reporting persons, and a failure to file a Form 5 in the absence of the written representation referred to in paragraph (b)(2)(i) of this section, unless the registrant otherwise knows that no Form 5 is required. * * * * * PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975--REGULATION S-K 3. The authority citation for part 229 continues to read in part as follows: Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted. * * * * * 4. By amending Sec. 229.405 by revising paragraphs (a)(1) and (a)(2) before the Note to read as follows: Sec. 229.405 (Item 405) Compliance with section 16(a) of the Exchange Act. * * * * * (a) * * * (1) Under the caption ``Section 16(a) Reporting Delinquencies,'' identify each person who, at any time during the fiscal year, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the registrant registered pursuant to section 12 of the Exchange Act, or any other person subject to section 16 of the Exchange Act with respect to the registrant because of the requirements of section 30 of the Investment Company Act or section 17 of the Public Utility Holding Company Act (``reporting person'') that failed to file on a timely basis, as disclosed in the above Forms, reports required by section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. (2) For each such person, set forth the number of late reports, the number of transactions that were not reported on a timely basis, and any known failure to file a required Form. A known failure to file would include, but not be limited to, a failure to file a Form 3, which is required of all reporting persons, and a failure to file a Form 5 in the absence of the written representation referred to in paragraph (b)(2)(i) of this section, unless the registrant otherwise knows that no Form 5 is required. * * * * * PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 5. The authority citation for part 240 continues to read in part as follows: Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, unless otherwise noted. * * * * * 6. By amending Sec. 240.16a-1 by revising paragraphs (a)(3) and (c)(3), (c)(5) and (c)(6), and adding paragraphs (c)(7), (c)(8) and (c)(9) to read as follows: Sec. 240.16a-1 Definition of Terms. (a) * * * (3) Where more than one person subject to Section 16 of the Act is deemed to be a beneficial owner of the same equity securities, all such persons must report as beneficial owners of the securities, either separately or jointly, as provided in Sec. 240.16a-3(i). In such cases, the amount of short-swing profit recoverable shall not be increased above the amount recoverable if there were only one beneficial owner. * * * * * (c) * * * (3) Securities received pursuant to a compensation arrangement between the issuer and an employee or director that may be redeemed or exercised only for cash and do not permit the receipt of equity securities in lieu of cash; * * * * * (5) Interests or rights to participate in employee benefit plans of the issuer; (6) Rights with an exercise or conversion privilege at a price that is not fixed; (7) Options granted to an underwriter in a registered public offering for the purpose of satisfying over-allotments in such offering; (8) The right or obligation to surrender a security, or have a security withheld, upon exercise of a derivative security or vesting of restricted shares to satisfy the exercise price or tax withholding consequences of exercise or vesting; or (9) Rights under which the benefits are subject to a material condition (other than the passage of time or continued employment) not tied to the market price of an equity security of the issuer. * * * * * 7. By amending Sec. 240.16a-2 by revising paragraphs (b) and (d)(2) to read as follows: Sec. 240.16a-2 Persons and transactions subject to section 16. * * * * * (b) A transaction(s) following the cessation of director or officer status shall be subject to Section 16 of the Act only if: (1) Executed within six months of an opposite transaction subject to Section 16(b) of the Act that occurred while that person was a director or officer; and (2) Not otherwise exempted from Section 16(b) of the Act pursuant to the provisions of this chapter. Note: For purposes of this paragraph, a purchase and a sale each shall be an opposite transaction with respect to the other. * * * * * (d)(1) * * * (2) Transactions by such person or entity acting in a capacity specified in paragraph (d)(1) of this section after the period specified in that paragraph shall be subject to Section 16 of the Act only where the estate, trust or other entity is a beneficial owner of more than ten percent of any class of equity security registered pursuant to Section 12 of the Act. 8. By amending Sec. 240.16a-3 by adding paragraph (i) to read as follows: Sec. 240.16a-3 Reporting transactions and holdings. * * * * * (i) Where more than one person subject to Section 16 of the Act is deemed to be a beneficial owner of the same equity securities, all such persons must report as beneficial owners of the securities, either separately or jointly. Where persons in a group are deemed to be beneficial owners of equity securities pursuant to Sec. 240.16a-1(a)(1) due to the aggregation of holdings, a single Form 3, 4 or 5 may be filed on behalf of all persons in the group. Joint and group filings must include all required information for each beneficial owner, and such filings must be signed by each beneficial owner, or on behalf of such owner by an authorized person. 9. By amending Sec. 240.16a-4 by adding paragraph (e) before the Note to read as follows: Sec. 240.16a-4 Derivative securities. * * * * * (e) The disposition or closing of a long derivative security position, as a result of cancellation or expiration, shall be exempt from Section 16(a) of the Act if exempt from Section 16(b) of the Act pursuant to Sec. 240.16b-6(d). * * * * * 10. By amending Sec. 240.16a-6 by revising paragraph (a)(1) to read as follows: Sec. 240.16a-6 Small acquisitions. (a) * * * (1) Such acquisition, when aggregated with other acquisitions of securities of the same class (including securities underlying derivative securities, but excluding acquisitions exempted by rule from Section 16(b) or previously reported on Form 4 or Form 5) within the prior six months, does not exceed a total of $10,000 in market value; and * * * * * 11. By amending Sec. 240.16a-8 by revising paragraph (a)(1) and adding a note at the end of paragraph (b)(3) to read as follows: Sec. 240.16a-8 Trusts. (a) Persons Subject to Section 16--(1) Trusts. A trust shall be subject to Section 16 of the Act with respect to securities of the issuer if the trust is a beneficial owner, pursuant to Sec. 240.16a- 1(a)(1), of more than ten percent of any class of equity securities of the issuer registered pursuant to Section 12 of the Act (``ten percent beneficial owner''). * * * * * (b) * * * (3) * * * Note: Transactions attributed to a trust beneficiary may be reported by the trustee on behalf of the beneficiary. * * * * * 12. By amending Sec. 240.16a-9 by revising paragraph (a) to read as follows: Sec. 240.16a-9 Stock splits, stock dividends, and pro rata rights. * * * * * (a) The increase or decrease in the number of securities held as a result of a stock split or stock dividend applying equally to all securities of that class, including a stock dividend in which equity securities of a different issuer are distributed; and * * * * * 13. By amending Sec. 240.16b-3 by revising paragraphs (a), (c)(1), (c)(2)(i)(B) and (C), (c)(2)(ii), (d), the introductory text of paragraph (e), paragraph (e)(1)(i), the heading for paragraph (f), paragraphs (f)(2), (f)(3) and (g), removing paragraph (a)(2), and adding paragraph (h) before the Note to read as follows: Sec. 240.16b-3 Employee benefit plan transactions. (a) Plan Conditions. A transaction by an officer or director shall be exempt from section 16(b) of the Act if it is pursuant to an employee benefit plan that satisfies the conditions of this paragraph and of paragraph (b) of this section, if applicable; and the transaction satisfies one of the transaction exemptions of paragraphs (c), (d), (e), (f), or (g) of this section. The plan shall set forth in writing the means or basis for determining eligibility to participate, as it relates to officers and directors, and either the price at which the securities may be offered and the amount of securities to be awarded or the method by which the price and the amount of the award are to be determined; provided, however, that plans for which paragraph (b)(3) of this section provides an exemption from the shareholder approval requirement of paragraph (b) of this section need not specify the amount of securities to be awarded. * * * * * (c) * * * (1) Six Month Holding Period. The equity security is held for six months from the date of grant or, in the case of a derivative security, at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security; provided, however, that compliance with this paragraph (c)(1) is not required with respect to a disposition by a plan participant that is exempted by rule from Section 16(b) of the Act. Dividend equivalent rights and stock acquired upon the reinvestment of dividends, other than stock dividends exempted pursuant to Sec. 240.16a-9, shall be deemed to have been acquired as of the date of acquisition of the securities on which such dividends or dividend equivalent rights were paid. (2) Plan Administration. * * * (i) Disinterested Administration. * * * (B) Participation in a securities acquisition plan meeting the conditions in paragraph (d)(1) of this section shall not disqualify a director from being a disinterested person; (C) An election to receive a director's fee in either cash or securities, or partly in cash and partly in securities, shall not disqualify a director from being a disinterested person; and * * * * * (ii) Formula Awards. The grant or award is made pursuant to a plan that: (A) By its terms permits officers and/or directors to receive automatic awards; and either: states the amount and price of securities to be awarded to designated officers and directors or categories of officers and directors, though not necessarily to others who may participate in the plan, and specifies the timing of awards to officers and directors; or sets forth a formula that automatically determines the amount, price and timing, using objective criteria such as earnings of the issuer, value of the securities, years of service, job classification, and compensation levels; provided that (B) Such terms are not amended periodically, and in no event more often than every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. * * * * * (d) Broad-Based Plans and Intra-Plan Transfers. A transaction in a thrift, stock purchase or similar securities acquisition plan shall be exempt from Section 16(b) of the Act if the plan satisfies the conditions of paragraph (a) and paragraph (b) of this section, if applicable, and the transaction satisfies the conditions of either paragraph (d)(1) or (d)(2) of this section. (1) For any purchase transaction resulting from an employee contribution and/or an employer contribution, other than an intra-plan transfer, the transaction is pursuant to: (i) A plan that provides for broad-based employee participation, by its terms does not discriminate in favor of highly compensated employees, and is qualified pursuant to Section 401 or Section 423 of the Internal Revenue Code; or (ii) A plan that: (A) Operates in conjunction with a plan that satisfies the requirements of paragraph (d)(1)(i) of this section; and (B) Provides only the benefits or contributions that would be provided under a tax-qualified plan but for the limitations of Sections 401(a)(17), 415 and any other applicable contribution limitation set forth in the Internal Revenue Code. (2) For intra-plan transfers between an equity securities of the issuer fund and another fund: (i) The transaction is pursuant to an election made during a quarterly time period specified in paragraph (e)(3) of this section; or (ii) The transaction results from a diversification election that satisfies the requirements of Section 401(a)(28) of the Internal Revenue Code. (e) Cash settlements of stock appreciation rights. A transaction involving the exercise and cancellation of a stock appreciation right (whether or not the transaction also involves the related surrender and cancellation of a stock option), and the receipt of cash in complete or partial settlement of that right, shall be exempt from Section 16(b) of the Act if the plan satisfies the conditions of paragraph (a) and paragraph (b) of this section, if applicable, and the following conditions are met: (1) Information about the issuer. (i) The issuer of the stock appreciation right has filed all reports and statements required pursuant to Section 13(a) of the Act for at least a year prior to the transaction or such shorter time as the issuer has been subject to that section; and * * * * * (f) Cancellations, expirations, and surrenders. * * * (2) The surrender or delivery to the issuer, or the withholding by the issuer, of shares of its stock as payment for the exercise of an option, warrant or right with respect to shares of the same class; and (3) The surrender or delivery to the issuer, or the withholding by the issuer, of an equity security to satisfy the tax withholding consequences of either the receipt or vesting of the equity security or the exercise of a derivative security related to the equity security. (g) Distributions of plan securities or cash. The following distributions are exempt from Section 16(b) of the Act; provided that paragraphs (g)(1) and (g)(2) of this section shall be available only if the plan pursuant to which the distribution is made satisfies the conditions of paragraph (a) and paragraph (b) of this section, if applicable, and the securities with respect to which the distribution is made were acquired in a transaction exempt pursuant to Sec. 240.16b- 3: (1) A distribution of either securities or cash, or a combination of securities and cash; or a deferral of a distribution of securities or cash in whole or in part, provided such distribution or deferral is incident to death, retirement, disability, termination of employment, or a diversification election permitted by Section 401(a)(28) of the Internal Revenue Code; (2) An involuntary distribution of either securities or cash, including cash in lieu of fractional shares, for the purpose of satisfying the limitations on employee elective contributions and employer matching contributions imposed by the Internal Revenue Code; and (3) Any other distribution to a participant of securities that have been held pursuant to any employee benefit plan for the benefit of that participant. (h) Participant-directed transactions. A participant-directed transaction and any related employer matching contribution shall be exempt from Section 16(b) of the Act if the plan satisfies the conditions of paragraph (a) and paragraph (b) of this section, if applicable, and the transaction is pursuant to an election made by the participant at least six months in advance of the effective date of the transaction; provided that such election is irrevocable or may be revoked or changed only by means of a subsequent election that shall not take effect until six months elapse from the date of such subsequent election. * * * * * 14. By amending Sec. 240.16b-5 by revising the section heading, redesignating the existing text as paragraph (a) and adding new paragraph (b) to read as follows: Sec. 240.16b-5 Bona fide gifts, inheritance and qualified domestic relations orders. * * * * * (b) The disposition of equity securities pursuant to a qualified domestic relations order, as defined in the Internal Revenue Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, shall be exempt from the operation of section 16(b) of the Act. PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934 15. The authority citation for Part 249 continues to read in part as follows: Authority: 15 U.S.C. 78a, et seq., unless otherwise noted; * * * * * 16. By amending Form 3 (referenced in Sec. 249.103) and the General Instructions thereto by adding paragraph (b)(v) to General Instruction 5, by revising the first sentence of General Instruction 6, and by revising Item 1 and adding Item 7 to the information preceding Table I to read as follows: Note--The text of Form 3 does not and this amendment will not appear in the Code of Federal Regulations. Form 3--Initial Statement of Beneficial Ownership of Securities * * * * * General Instructions * * * * * 5. Holdings Required to be Reported * * * * * (b) Beneficial Ownership Reported (Pecuniary Interest). * * * * * (v) Where more than one person beneficially owns the same equity securities, such owners may file Form 3 individually or jointly. Joint and group filings may be made by any designated constituent beneficial owner. Indicate only the name and address of the designated filer in Item 1 of Form 3 and attach a listing of the names and IRS or social security numbers (or addresses in lieu thereof) of each other reporting person and number the listing as part of the Form 3 report. Joint and group filings must include all required information for each beneficial owner, and such filings must be signed by each beneficial owner, or on behalf of such owner by an authorized person. If the space provided for signatures is insufficient, attach a signature page and number it as part of the Form 3 report. * * * * * 6. Additional Information If the space provided in the line items of this Form or space provided for additional comments is insufficient, attach another Form (or copy of the Form) completed as appropriate (except for the listing and additional signature pages required by General Instruction 5(b)(v), which may be attached on 8\1/2\ by 11 inch white paper). * * * * * * * * 1. Name and Address of Reporting Person* --------------------------------------------------------------------------- *If the Form is filed by more than one Reporting Person, see Instruction 5(b)(v). --------------------------------------------------------------------------- (Last) (First) (Middle) (Street) (City) (State) (Zip) * * * * * 7. Individual or Joint/Group Filing (Check applicable line) ______ Form filed by One Reporting Person ______ Form Filed by More than One Reporting Person * * * * * 16. By amending Form 4 (referenced in Sec. 249.104) and the General Instructions thereto by revising the Note following General Instruction 4(a)(ii) and adding paragraph (b)(v) to General Instruction 4; by revising the first sentence of General Instruction 6; by revising General Instruction 8; and by revising Item 1 and adding Item 7 to the information preceding Table I to read as follows: Note--The text of Form 4 does not and this amendment will not appear in the Code of Federal Regulations. Form 4--Statement of Changes in Beneficial Ownership of Securities * * * * * General Instructions * * * * * 4. Transactions and Holdings Required To Be Reported * * * * * (a) General Requirements. * * * * * (ii)* * * Note: Transactions reportable on Form 5 may, at the option of the reporting person, be reported on a Form 4 filed before the due date of the Form 5, and may be aggregated to the extent permitted by Instruction 4(a)(ii) to Form 5. Exercises or conversions of derivative securities and small acquisitions specified in Rule 16a- 6(a) must be reported on the next required Form 4 or Form 5 but may be reported voluntarily on Form 4 at an earlier date. (See Instruction 8 for the code for voluntarily reported transactions.) (b) Beneficial Ownership Reported (Pecuniary Interest). * * * * * (v) Where more than one beneficial owner of the same equity securities must report transactions on Form 4, such owners may file Form 4 individually or jointly. Joint and group filings may be made by any constituent beneficial owner. Indicate only the name and address of the designated filer in Item 1 of Form 4 and attach a listing of the names and IRS or social security numbers (or addresses in lieu thereof) of each other reporting person and number the listing as part of the Form 4 report. Joint and group filings must include all required information for each beneficial owner, and such filings must be signed by each beneficial owner, or on behalf of such owner by an authorized person. If the space provided for signatures is insufficient, attach a signature page and number it as part of the Form 4 report. * * * * * 6. Additional Information If space provided in the line items of this Form or space provided for additional comments is insufficient, attach another Form (or copy of the Form) completed as appropriate (except for the listing and additional signature pages required by General Instruction 4(b)(v), which may be attached on 8\1/2\ by 11 inch white paper).* * * * * * * * 8. Transaction Codes Use the codes listed below to indicate in Table I, Column 3 and Table II, Column 4 the character of the transaction reported. Use the code that most appropriately describes the transaction. If the transaction is not specifically listed, use transaction Code ``J'' and describe the nature of the transaction in the space for explanation of responses. If a transaction is voluntarily reported earlier than required, place ``V'' in the appropriate column to so indicate; otherwise the column should be left blank. General Transaction Codes P--Open market or private purchase of non-derivative or derivative security S--Open market or private sale of non-derivative or derivative security V--Transaction voluntarily reported earlier than required Employee Benefit Plan Transaction Codes A--Grant or award transaction pursuant to Rule 16b-3(c) M--Exercise of in-the-money or at-the-money derivative security acquired pursuant to Rule 16b-3 plan B--Transaction in acquisition plan pursuant to Rule 16b-3(d)(1) N--Participant-directed transaction pursuant to Rule 16b-3(f)(4) F--Payment of option exercise price or tax liability by delivering or withholding securities incident to exercise of a derivative security or vesting of a restricted security issued in accordance with Rule 16b-3 I--Intra-plan transfer in accordance with Rule 16b-3(d)(2) resulting in acquisition or disposition of issuer securities T--Acquisition or disposition transaction under an employee benefit plan other than pursuant to Rule 16b-3 Derivative Securities Codes C--Conversion of derivative security E--Expiration of short derivative position H--Expiration (or cancellation) of long derivative position O--Exercise of out-of-the-money derivative security X--Exercise of in-the-money or at-the-money derivative security Other Section 16(b) Exempt Transactions and Small Acquisition Codes (Except for Employee Benefit Plan Codes Above) G--Bona fide gift R--Acquisition pursuant to reinvestment of dividends or interest (DRIPS) W--Acquisition or disposition by will or the laws of descent and distribution L--Small acquisition under Rule 16a-6 Q--Transfer pursuant to a qualified domestic relations order Z--Deposit into or withdrawal from voting trust K--Exempt change in form of beneficial ownership Other Transaction Codes J--Other acquisition or disposition (describe transaction) U--Disposition pursuant to a tender of shares in a change of control transaction * * * * * 1. Name and Address of Reporting Person* --------------------------------------------------------------------------- *If the Form is filed by more than one Reporting Person, see Instruction 4(b)(v). --------------------------------------------------------------------------- (Last) (First) (Middle) (Street) (City) (State) (Zip) * * * * * 7. Individual or Joint/Group Filing (Check applicable line) ______ Form filed by One Reporting Person ______ Form Filed by More than One Reporting Person * * * * * 17. By amending Form 5 (referenced in Sec. 249.105) and the General Instructions thereto by revising General Instructions 4(a)(ii), 4(a)(iv) and adding paragraph (b)(v) to General Instruction 4; by revising the first sentence of General Instruction 6; by revising General Ins [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-20124. Public record. Not legal advice.