Ownership Reports and Trading by Officers, Directors and Principal Security Holders

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 34-34681; 35-26127; IC-20557; File No. S7-21-94]

RIN 3235-AF66

Ownership Reports and Trading by Officers, Directors and

Principal Security Holders

AGENCY: Securities and Exchange Commission.

ACTION: Proposed Rule; Extension of Comment Period and Further Request

for Comment.

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SUMMARY: In connection with proposals issued on August 10, 1994,

Release No. 34-34514 [59 FR 42449] (the ``Proposing Release''), the

Commission today is requesting further comment on the treatment of

compensatory cash-only instruments under its rules 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''). The comment period

for the Proposing Release also is extended until November 1, 1994.

DATES: Comments should be received on or before November 1, 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 or Mark W. Green,

Office of Chief Counsel, at (202) 942-2900, or Elizabeth M. Murphy,

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: On August 10, 1994, the Commission released

for public comment proposals to amend certain of its rules under

Section 161 of the Exchange Act.2 The Commission now seeks to

clarify and amplify certain comment requests made in the Proposing

Release. Specifically, the Commission is soliciting additional comment

with respect to Rule 16a-1(c)(3),3 which excludes cash-only

instruments from the definition of ``derivative securities'' if they

meet certain conditions.

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\1\15 U.S.C. 78p (1988).

\2\15 U.S.C. 78a et seq. (1988).

\3\17 CFR 240.16a-1(c)(3).

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The current Rule 16a-1(c)(3) definitional exclusion covers any

compensatory instrument issued in an employment context that can be

redeemed or exercised solely for cash, provided that the instrument

either: (1) Is awarded under an employee benefit plan that satisfies

certain conditions prescribed by Rule 16b-3;4 or (2) can be

redeemed or exercised only upon a fixed date or dates at least six

months from the date of the award, or incident to death, retirement,

disability or termination of employment.5 Both prongs of this

exclusion are based on the principle that removal of the insider-

recipient's discretion with respect to the timing of grant and/or

realization of a cash-only instrument would minimize the opportunity

for speculative abuse that Section 16 was designed to prevent.

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\4\Rule 16a-1(c)(3)(i) [17 CFR 240.16a-1(c)(3)(i)].

\5\Rule 16a-1(c)(3)(ii) [17 CFR 240.16a-1(c)(3)(ii)].

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As proposed to be amended in the Proposing Release, the Rule 16a-

1(c)(3) exclusion would extend to all compensatory cash-only

instruments issued pursuant to an employer-employee relationship, even

if the insider-recipient could control or influence the timing of such

an instrument's grant or payout. In soliciting public comment, the

Commission urged commenters to address whether

There [is] 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 [].6

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\6\Proposing Release, Section II.C.

As reflected in the above-quoted request for comment, the

Commission is interested in comments on whether the current

definitional exclusion for compensatory cash-only instruments codified

in Rule 16a-1(c)(3) is appropriate. The Commission is interested in

determining whether, for example, stock appreciation rights (``SARs'')

that have a multi-year term and may be exercised at the volition of the

insider-recipient may provide opportunities for speculative profit that

are identical, regardless of whether the SARs are payable exclusively

in cash, stock, or some combination of the two and, from the

perspective of shareholders and analysts, have the same Section

16(a)7 informational value.

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\7\15 U.S.C. 78p(a).

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Accordingly, in addition to considering the proposals and

alternatives addressed in the Proposing Release, the Commission invites

commenters to express their views on whether the current exclusions for

cash-only instruments set forth in Rules 16a-1(c)(3)(i) and (ii),

respectively, are overly broad in light of the purposes of Section 16,

and thus should be limited to a smaller class of such instruments. In

responding to this question, commenters should discuss whether any

continued exclusion for cash-only compensatory instruments should be

limited to those for which the timing of settlement is not subject to

the insider's volition. For example, should Rule 16a-1(c)(3)(i) be

rescinded, so the exemption would be available only if the instrument

met the fixed-date conditions of Rule 16a-1(c)(3)(ii)? If an exemption

for cash-only instruments is appropriate, should it be made available

only under the short-swing profit recovery provision of Section

16(b),8 rather than also providing an exemption from the reporting

requirements of Section 16(a)? If a separate Section 16(a) exclusion is

retained for certain compensatory cash-only instruments, comment is

sought on whether it should be recast as an exemptive rule, rather than

the current rule, which excludes these instruments from the definition

of ``derivative securities'' and therefore from the class of ``equity

securities'' covered by Section 16.

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\8\15 U.S.C. 78p(b).

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Were the Commission to eliminate the definitional exclusion for

volitional compensatory cash-only instruments, transactions involving

these instruments would be reportable under Section 16(a) but still

could qualify for Section 16(b) exemptive treatment. Specifically, Rule

16b-3 coverage would be available for these instruments if all

applicable conditions were satisfied, including non-transferability (if

retained as a condition9), six-month holding period, shareholder

approval, disinterested administration (or formula), and window-period

settlement. Comment is requested as to whether fewer or additional

conditions should be imposed as a prerequisite to Rule 16b-3

qualification of cash-only instruments. Or should a separate exemption

from Section 16(b) be created for the grant and/or settlement of these

instruments? If so, what exemptive conditions would be necessary and

appropriate in furtherance of the purpose of Section 16(b)?

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\9\See Proposing Release, Section II.J.

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In order to give commenters sufficient time to consider this

request for further comment, the comment period on the Proposing

Release is extended to November 1, 1994.

Dated: September 16, 1994.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-23480 Filed 9-21-94; 8:45 am]

BILLING CODE 8010-01-P