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

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

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

request for further comment issued on September 16, 1994, Release No.

34-34681 [59 FR 48579] (the ``Cash-Only Release'') regarding the

treatment of compensatory cash-only instruments under its rules

regarding the filing of ownership reports by officers, directors, and

principal security holders, the Commission today is issuing an

alternative proposal. This proposal would amend the rule that exempts

certain employee benefit plan transactions from the short-swing profit

recovery provisions of Section 16(b) of the Securities Exchange Act of

1934 (``Exchange Act'') by broadening the exemption and extending it to

other transactions between issuers and their officers and directors.

There is also a proposal to amend the rule exempting transactions in

dividend or interest reinvestment plans to reduce regulatory burdens.

Comment also is solicited on other issues related to Section 16,

including the manner in which exempt transactions should be reported

and possible legislative rescission of Section 16(b). In addition, the

comment periods for the Proposing Release and Cash-Only Release are

extended until December 15, 1995.

DATES: Comments should be received on or before December 15, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549. Comment letters should refer to File No.

S7-21-94. All comments received will be available for public inspection

and copying in the Commission's Public Reference Room, 450 Fifth

Street, N.W., Washington, D.C., 20549.

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Office of Chief

Counsel, at (202) 942-2900, Division of Corporation Finance, Securities

and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.

20549.

SUPPLEMENTARY INFORMATION: On August 10, 1994, the Commission released

for public comment proposals to amend certain of its rules under

Section 161 of the Exchange Act.2 On September 16, 1994, the

Commission solicited additional comment with respect to the Section 16

treatment of cash-only instruments. The Commission now proposes an

alternative scheme to amend Rule 16b-33 (the ``Alternative

Proposal'') that differs from the amendments to Rule 16b-3 that were

proposed in the Proposing Release. All rule proposals, including

proposed amendments to Rule 16b-3, and requests for comment made in

both the Proposing Release and the Cash-Only Release (the ``1994

proposals'') remain under consideration, and the Commission may adopt

any combination of the 1994 proposals and the Alternative Proposal.

However, it is contemplated that if the Alternative Proposal is adopted

in its entirety, the exclusion from the definition of ``derivative

security'' for cash-only instruments provided by the current

rules4 would be rescinded, and the Section 16 status of such

instruments would be governed by the Section 16(a) reporting rules and

Rule 16b-3 as amended by the Alternative Proposal.

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

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

\3\Rule 16b-3 [17 CFR 240.16b-3].

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

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I. Summary

The strict liability and short-swing profit recovery provisions of

Section 16(b)5 and the exemptive rules thereunder have been

criticized as unnecessarily complex, unduly burdensome with respect to

innocent transactions, and inappropriately intrusive in the area of

corporate governance. Rule 16b-3 has generated the most significant

controversy with respect to these issues. In the Proposing Release, the

Commission published numerous proposed amendments to the Section 16

rules in an attempt to simplify and clarify this subject. In

particular, amendments were proposed to Rule 16b-3 that responded to

objections that the conditions of that rule applicable to broad-based

plans are difficult to administer and unduly restrictive, given the

lack of opportunity for speculative abuse in connection with most plan

transactions. Although public comment on the 1994 proposals generally

was favorable, the Commission has continued to consider whether issues

arising from the treatment of employee benefit plan transactions, as

well as other officer and director transactions, could be better

resolved through a simpler and more flexible approach that fully serves

the policy underpinnings of the Section 16 regulatory scheme.

\5\15 U.S.C. 78p(b) (1988).

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To this end, the Commission has focused on the distinction between

market transactions by officers and directors (``insiders''),6

which present opportunities for profit based on non-public information

that Section 16(b) is intended to discourage, and transactions between

an issuer and its officers and directors, which typically constitute a

legitimate and increasingly popular mechanism for an issuer to

compensate persons in its service. The Commission is of the view that

the inherent differences in the usual purpose and effects of these two

classes of transactions may establish a more cogent rationale upon

which to base an exemption from the strict liability, short-swing

profit recovery provisions of Section 16(b).7

\6\Like current Rule 16b-3, the Alternative Proposal would not

exempt transactions with persons who beneficially own greater than

ten percent of a class of an issuer's equity securities.

\7\Although some transactions between officers or directors and

issuer-sponsored employee benefit plans technically are not

transactions with the issuer, such transactions should be within the

scope of an exemption premised on the compensatory nature of

insiders' transactions with issuers. Employee benefit plans are the

most common vehicle by which issuers provide for securities-based

compensation of employees, including officers and directors.

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Congress adopted Section 16(b) in 1934 ``to deter insiders from

using inside information to aid them in their trading

activities.''8 According to the relevant legislative history, the

drafters intended specifically to target ``directors and officers of

corporations who used their positions of trust and the confidential

information which came to them in such positions, to aid them in their

market activities.''9 To ameliorate the potential harshness of

applying strict liability to classes of transactions that are not

susceptible to insider misuse of non-public corporate information, the

Commission was

[[Page 53833]]

granted express exemptive authority under Section 16(b).10

\8\P. Romeo and A. Dye, Section 16 Treatise and Reporting Guide

Sec. 1.03[b][i], at 1-23 (1994) (hereinafter ``Romeo and Dye'')

(discussing the legislative history of Section 16(b)).

\9\S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934). Congress

also was concerned about ``the unscrupulous employment of inside

information by large stockholders who, while not directors and

officers, exercised sufficient control over the destinies of their

companies to enable them to acquire and profit by information not

available to others.'' Id.

\10\See Section 16(b) (``This subsection shall not be construed

to cover any transaction * * * which the Commission by rules and

regulations may exempt as not comprehended within the purpose of

this subsection[;]'' i.e., ``[f]or the purpose of preventing the

unfair use of information which may have been obtained by such

beneficial owner, director, or officer by reason of his relationship

with the issuer. * * *''); see also Romeo and Dye, supra n. 8,

Sec. 1.03[b][i], at 1-24.

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Generally, transactions between issuers and their officers or

directors do not appear to present the same opportunities for insider

profit on the basis of non-public information. Typically, where the

company, rather than the trading markets, is on the other side of an

insider transaction in that company's securities, any profit obtained

is not at the expense of uninformed shareholders and other market

participants of the type contemplated by the statute.11 This may

be the case even if the insider is in possession of confidential

company information that otherwise might permit him or her to reap

unfair gains from a market transaction.

\11\An insider's breach of fiduciary duty to profit from self-

dealing transactions with the company is a concern of state

corporate law; most states have created potent deterrents to insider

self-dealing and other breaches of fiduciary duty. See generally 3

Fletcher Cyc. Corp. Sec. 837.60 (Perm. ed. 1994); D. Block, S. Radin

and N. Barton, The Business Judgment Rule: Fiduciary Duties of

Corporate Directors 124-137 (4th ed. 1993). There are also potential

considerations under Rule 10b-5 [17 CFR 240.10b-5].

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Nevertheless, the Commission believes that imposition of

traditional state-law procedural protections can be useful in further

ensuring compliance with the underlying purposes of Section 16 by

creating effective prophylactics against possible insider trading

abuses. Consequently, as is the case with respect to the existing rules

and the 1994 Proposals, this Alternative Proposal retains the concepts,

where applicable, of approval by shareholder vote or non-employee

directors.12

\12\Cf. Del. Gen. Corp. Law Secs. 144 (a)(1) and (a)(2); N.Y.

Bus. Corp. Law Sec. 713; Model Business Corp. Act Secs. 8.60(1),

8.62 and 8.63. See also Oberly v. Kirby, 592 A.2d 445, 466-67 (Del.

1991) (dictum).

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Through the Alternative Proposal, the Commission has sought to

craft a rule that, consistent with the statutory purpose of Section

16(b), erects meaningful safeguards against the abuse of inside

information by officers and directors without impeding their

participation in legitimate compensatory transactions that do not

present the possibility of such abuse, and facilitates compliance. In

so doing, the Commission has recognized that most, if not all,

transactions between an issuer and its officers and directors are

intended to provide a benefit or other form of compensation to reward

service or to incentivize performance. Shareholders, economists,

compensation experts and others increasingly have been urging public

companies to compensate their officers and directors in stock rather

than cash, in order to align more closely the interests of management

and shareholders.13 Many companies have begun to use stock and

stock-based instruments in lieu of traditional cash incentives to

encourage managers to adopt a longer-term perspective by sharing the

risks and rewards of equity ownership.

\13\See, e.g., Report of the NACD Blue Ribbon Commission on

Director Compensation (1995); M. Klein, Top Executives Pay for

Performance (Conference Board 1995); Loucks, ``An Equity Cure for

Managers,'' Wall St. J., Tues., Sept. 26, 1995.

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At the same time, the Commission's exemptive rules under Sections

16(a) and 16(b), including the regulatory exclusion of SARs payable

solely in cash and other cash-only derivative securities from both

statutory provisions, have been criticized for creating an undue

regulatory bias in favor of cash compensation. The restrictions,

complexity and uncertainties attendant to compliance with Rule 16b-3

tend to discourage the use of equity and thus further bias compensation

arrangements toward cash. Additionally, some believe that the current

exclusion from treatment as ``derivative securities'' of cash-only

instruments promotes issuer use of such instruments, rather than the

identical instruments payable in stock, to compensate their insiders.

In proposing to bring within the definition of derivative security

cash-only instruments that are the economic equivalents of derivative

securities payable in stock,14 the Commission has sought, in part,

to reduce this bias. Today's proposal reflects an approach that

recognizes that companies could just as easily compensate their

insiders through cash or other non-equity instruments to avoid

compliance with the perceived burdens of the Section 16(b) exemptive

rules.

\14\See the Cash-Only Release.

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In brief, the Alternative Proposal would exempt, subject to certain

conditions, most transactions--both acquisitions and dispositions--

between an officer or director and the issuer. First, the Alternative

Proposal would exempt without condition almost all transactions

pursuant to plans that satisfy specified provisions of the Internal

Revenue Code, such as thrift and stock purchase plans, and certain

related plans. Since volitional intra-plan transfers involving issuer

equity securities funds and cash distributions funded by volitional

dispositions of issuer equity securities are the equivalent of

discretionary purchase and sale transactions, these transactions would

be exempt only if effected pursuant to an election by the insider made

at least six months after an election pursuant to which the last such

transaction was effected.15 Except for the foregoing transactions,

the anti-discrimination provisions of the tax laws applicable to broad-

based plans should suffice to minimize the potential for insider profit

through unfair use of confidential corporate information. An

acquisition pursuant to a plan or transaction that satisfies the

conditions applicable to performance-based compensation imposed by

Section 162(m) of the Internal Revenue Code16 also would be exempt

without further condition on the basis that the tax conditions

applicable to such transactions (some of which such conditions closely

mirror the first two conditions specified in the next paragraph

describing part of the Alternative Proposal) provide an adequate

safeguard for Section 16(b) purposes.

\15\Volitional intra-plan transfers and cash distributions

funded by issuer equity securities that are in connection with a

participant's death, disability, retirement or termination of

employment, or are required to be made available to participants

pursuant to a provision of the Internal Revenue Code would not be

subject to this proviso, but instead would be exempt without

condition.

\16\26 U.S.C. 162(m) (1993).

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Second, with respect to grants and awards of issuer equity

securities, whether made pursuant to an employee benefit plan or

directly by an issuer, the Alternative Proposal would provide three

alternative conditions to exemption: (1) Prior approval of the

transaction by the issuer's board of directors or a committee comprised

solely of two or more non-employee directors; (2) shareholder approval

(or subsequent ratification) of the transaction; or (3) satisfaction of

a six-month holding period.

Third, the Alternative Proposal would provide a general exemption

for insider dispositions to the issuer, provided the terms of the

disposition are approved in advance by the board of directors, a non-

employee director committee, or shareholders.

As noted above, cash-only instruments whose value is derived from

the market value of an issuer equity security no longer would be

excluded from the coverage of Section 16 in a manner different from

[[Page 53834]]

instruments that can be settled in such securities. Thus, cash-only

instruments would be subject to Section 16(a) reporting, but usually

would be exempt from Section 16(b) in accordance with Rule 16b-3, as

amended by the Alternative Proposal.

The Alternative Proposal would eliminate:

General written plan conditions,\17\ including

specification of the basis on which insiders may participate,

specification of the price or amount of the securities to be offered,

and the restriction prohibiting transferability of derivative

securities;

\17\Such conditions are set forth in current Rule 16b-3(a).

Instead, the Alternative Proposal focuses on the inherently

compensatory nature of transactions between the issuer and its

officers and directors, and does not require that such transactions

occur pursuant to an employee benefit plan as a condition for

exemption.

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Shareholder approval as a general condition for plan

exemption;\18\

\18\This condition is set forth in current Rule 16b-3(b).

However, shareholder approval would be retained as an alternative

basis for exempting grants or awards.

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The six-month holding period as a general condition for

the exemption of grant and award transactions;\19\

\19\This condition is set forth in current Rule 16b-3(c)(1).

However, a six-month holding period would be proposed as an

alternative basis for exempting a grant or award.

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The disinterested administration requirement with

respect to grant transactions;\20\

\20\This condition is set forth in current Rule 16b-3(c)(2)(i).

However, approval by the full board or a committee comprised solely

of two or more non-employee directors would be retained as an

alternative basis for exempting grants or awards.

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The formula plan requirement with respect to grant

transactions, both as a substitute for disinterested administration and

as a means by which administrators may receive securities awards while

remaining disinterested;\21\

\21\These standards are set forth in current Rules 16b-

3(c)(2)(ii) and 16b-3(c)(2)(i)(A), respectively.

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Any conditions with respect to any transaction in a

broad-based plan other than a volitional intra-plan transfer or a cash

distribution funded by a volitional disposition of an issuer equity

security;\22\ and

\22\These conditions are set forth in current Rules 16b-

3(d)(2)(i) (B), (C) and (D) and 16b-3(d)(2)(ii).

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The current public information, disinterested

administration, window period and six-month holding period conditions

with respect to the exercise of stock appreciation rights for cash.\23\

\23\These conditions are set forth in current Rules 16b-3(e)

(1), (2), (3) and (4), respectively. It should be noted that these

conditions do not currently apply at all to cash-only instruments

that satisfy the conditions of Rule 16a-1(c)(3) and are thus

excluded from the definition of ``derivative security.''

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As a corollary to adoption of the Alternative Proposal, the

Commission contemplates modifying the Section 16(a) reporting system so

that most transactions exempt pursuant to Rule 16b-3 would be required

to be reported on a current basis on Form 4,\24\ rather than annually

on Form 5, as now permitted for transactions exempt under current Rule

16b-3, and certain other exempt transactions. However, reporting no

longer would be required for routine transactions pursuant to broad-

based plans, dividend or interest reinvestment plan transactions,

gifts, and transactions pursuant to qualified domestic relations

orders.

\24\For example, grants and awards under Section 162(m)-eligible

plans that would be exempted by Alternative Proposed Rule 16b-3

would be required to be reported on current Forms 4.

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In addition, the Commission proposes to make the exemption for

reinvestment transactions pursuant to dividend and interest

reinvestment plans\25\ more readily available by amending the rule so

that it no longer requires the plan to be available to all holders of

the class of securities. Finally, public comment is solicited as to the

merit of legislative rescission of Section 16(b).

\25\Rule 16b-2 [17 CFR 240.16b-2].

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II. Transactions Between an Issuer and its Officers or Directors

A. Tax-Conditioned and Related Plans

As discussed in the Proposing Release,\26\ one of the principal

objections raised to current Rule 16b-3 has been that the treatment of

thrift, stock purchase and other broad-based, tax-qualified plans is

unduly cumbersome, presents significant record-keeping problems, and

discourages insiders from participation in plan funds holding issuer

equity securities. The proposals set forth in the Proposing Release

would streamline the treatment of such plans, and the Alternative

Proposal goes still further.

\26\See Proposing Release at Section II.A.

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Specifically, under the Alternative Proposal, any acquisition or

disposition of issuer equity securities, other than a volitional intra-

plan transfer involving an issuer equity securities fund or a cash

distribution funded by a volitional disposition of an issuer equity

security, would be exempt without condition if made pursuant to a plan

that satisfies the definition of a ``Qualified Plan,'' an ``Excess

Benefit Plan,'' or a ``Stock Purchase Plan.''\27\ The broad-based, non-

discriminatory character of these plans, together with their relatively

inflexible administrative requirements, indicate that transactions

pursuant to such plans are strictly for compensatory purposes and are

not amenable to the type of abuse that Section 16(b) was intended to

proscribe.

\27\Alternative Proposed Rule 16b-3(b)(1). Definitions of these

terms would be provided in Alternative Proposed Rule 16b-3(b)(4).

Note that the plan itself would not be required to be tax-qualified,

but would need to satisfy specified conditions applicable to tax-

qualified plans.

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A volitional intra-plan transfer involving an issuer equity

securities fund or a cash distribution involving a volitional

disposition of an issuer equity security\28\ would be exempt only if

effected pursuant to an election made at least six months following the

date of the election that effected the most recent prior transaction

subject to the same condition.\29\ Assuming satisfaction of this

condition, an insider participant would be able to dispose of his or

her entire interest in a plan's issuer equity securities fund for cash.

\28\A loan funded by the disposition of issuer equity securities

would be considered a cash distribution involving a volitional

disposition of an issuer equity security unless the insider

continued to bear the risk of loss with respect to such issuer

equity securities during the term of the loan. Involuntary

distributions of cash for the purpose of satisfying the limitations

on employee elective contributions and employer matching

contributions imposed by the Internal Revenue Code would be exempt

without condition because such transactions do not occur at the

insider's volition.

\29\Alternative Proposed Rule 16b-3(b)(2). Because it is

anticipated that the actual date on which such a plan transaction

occurs will be outside the control of an insider participant, the

proposed rule is premised on a six-month interval between the date

of subsequent elections. The proposed rule does not require that

such an election be made six months in advance of the related

transaction.

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However, only transactions that arise solely from an insider's

volitional investment decision would be subject to this condition. In

contrast, transactions resulting from an election to receive, or to

defer the receipt of, securities and/or cash in connection with death,

disability, retirement or termination of employment,\30\ as well as

transactions that effect a diversification or distribution which the

Internal Revenue Code requires an employee plan to make available to a

participant,\31\ would be exempt without regard to this condition.

Although such transactions may be volitional to the insider, the

insider's opportunity to speculate in the context of a death,

disability, retirement or termination would seem well circumscribed, as

is also the case with regard to the specified diversification and

distribution elections.

\30\Such transactions are exempted by current Rule 16b-

3(d)(1)(ii).

\31\Such transactions would include diversification elections

and distributions provided for by Internal Revenue Code Section

401(a)(28), and distributions required by Internal Revenue Code

Section 401(a)(9).

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Just as with the tax code provisions relating to Qualified Plans

and Stock Purchase Plans, as discussed above, Section 162(m) of the

Internal Revenue

[[Page 53835]]

Code and the regulations thereunder\32\ impose conditions that may

serve as an effective safeguard for Section 16(b) purposes.

Accordingly, it appears appropriate to exempt, without further

condition, an acquisition pursuant to a plan or transaction that

satisfies these conditions.\33\ The Section 162(m) provisions require

that compensation be paid solely on the attainment of one or more

performance goals, such goals be established by a compensation

committee consisting solely of two or more outside directors,\34\ the

terms of the plan be disclosed to and approved by shareholders, and the

compensation committee certify that the performance goals were

satisfied prior to making payment. With respect to options and stock

appreciation rights, these provisions require that the grant be made by

the compensation committee, the plan state the maximum number of shares

for which options or rights may be granted during a specified period to

any employee, and the terms of the option or right provide that the

amount of compensation to be received be based solely on an increase in

the value of the stock after the date of grant.\35\ Because a

substantial number of plans must satisfy Section 162(m) in order to

obtain a tax deduction, this would appear to provide a simple method

for exempting grants and awards from Section 16(b) without the need to

satisfy additional Commission-imposed requirements.\36\

\32\Proposed Regulation Sec. 1.162-27(e). It is contemplated

that this prong of Alternative Proposed Rule 16b-3 will function in

tandem with final tax regulations that contain provisions

substantially similar to Proposed Regulation Sec. 1.162-27(e). If a

substantially different tax regulation is adopted, the Commission

may revisit this prong of the Alternative Proposal.

\33\Alternative Proposed Rule 16b-3(b)(3).

\34\As defined in Proposed Regulation Sec. 1.162-27(e)(3), a

director is an outside director if the director (i) is not a current

employee of the company; (ii) is not a former employee of the

company who receives compensation for prior services; (iii) has not

been an officer of the company; and (iv) does not receive

remuneration from the company, either directly or indirectly, in any

capacity other than as a director. This definition is somewhat

different from the proposed definition of Non-Employee Director set

forth in the Alternative Proposal.

\35\Proposed Regulation Sec. 1.162-27(e)(2)(vi). Alternatively,

if the compensation to be received is not based solely on an

increase in the value of the stock after the date of grant, the

grant nevertheless may be considered performance-based compensation

if it is made on account of attainment of a performance goal that

otherwise satisfies the requirements of Proposed Regulation

Sec. 1.162-27(e)(2), or the vesting or exercisability of the grant

is contingent on attainment of such a performance goal.

\36\The scope of this proposed condition would not be limited to

persons who are ``covered employees'' for purposes of the $1,000,000

deduction limit of Section 162(m), i.e., the issuer's chief

executive officer and four other most highly compensated officers

under Item 402 of Regulation S-K [17 CFR 229.402], but would be

available to exempt grants to any officer or director, provided that

all Section 162(m) regulatory conditions applicable to performance-

based compensation are met with respect to the individual grant. Of

course, grants that do not satisfy this condition would be eligible

for exemption pursuant to the proposed specific conditions

applicable to grants and awards discussed in Section II.B, below.

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Commenters are asked to address the proposed unconditional general

exemption for transactions pursuant to Qualified Plans, Excess Benefit

Plans and Stock Purchase Plans. Do the proposed references to the

objective standards of the Internal Revenue Code adequately define

classes of plans that, by virtue of their broad-based character and/or

specific administrative requirements, do not present opportunities for

the abuse of inside information that Section 16(b) was crafted to

prevent?\37\ Should the exemption for Excess Benefit Plans be revised

to require that transactions in such plans must be in tandem with

transactions pursuant to a related Qualified Plan?

\37\Although Excess Benefit Plans by their terms are not broad-

based, they have not been viewed under current staff interpretations

or the 1994 proposals as susceptible to abuse because they are

operated in a manner that replicates tax-qualified plans.

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Is the proposed exemptive condition that volitional intra-plan

transfers and cash distributions resulting from a volitional

disposition of an issuer equity security be effected pursuant to

elections at least six months apart an appropriate requirement? Should

an insider be permitted to cash-out his or her entire interest in an

issuer equity securities fund in reliance on satisfaction of this

condition? Should the proposed condition also apply to such a

transaction that is expressly authorized by the Internal Revenue Code

or that otherwise implements a retirement planning decision? Would the

proposed condition be easier to administer than the current window-

period requirement? Should the proposed condition only apply if the

transaction would be opposite way (e.g., purchase vs. sale) to the

prior transaction? Should a quarterly window period requirement be

included in the rule as an alternative basis for exemption, with or

without an additional requirement that elections take place in window

periods that are at least six months apart?

Comment also is solicited on whether the conditions of Section

162(m) provide an appropriate basis for an exemption from Section

16(b), and whether there are other types of compensation and/or

transactions involving issuer equity grants to insiders that should be

exempt from Section 16(b) because of protections afforded by provisions

of the Internal Revenue Code. To what extent are plans operated in a

manner that satisfies the conditions of Internal Revenue Code Section

162(m) with respect to grants to persons other than the issuer's chief

executive officer and four other most highly compensated officers?

B. Grants and Awards

The Alternative Proposal would provide three alternative bases for

exempting the grant or award of issuer equity securities (including

derivative securities). The first two prongs would exempt an award if

the specific award is either: (i) approved in advance by the board of

directors or a committee of the board comprised solely of two or more

``Non-Employee Directors;'' or (ii) or approved in advance or

subsequently ratified\38\ by the affirmative vote or written consent of

the holders of the majority of the issuer's securities entitled to

vote, solicited in compliance with Section 14 of the Securities

Exchange Act.\39\ The purpose of these prongs is to ensure that

appropriate company gate-keeping procedures are in place to monitor any

grants or awards and to ensure acknowledgement and accountability on

the part of the company when it makes such grants or awards. Finally, a

grant or award that did not satisfy any of these exemptive conditions

would become exempt if the securities awarded were held by the insider

for six months following the grant, or in the case of a derivative

security, at least six months had elapsed between the grant of the

derivative security and the disposition of the underlying security.\40\

\38\Such ratification would be required to be obtained not later

than the date of the next annual meeting of shareholders.

\39\15 U.S.C. 78n. Alternative Proposed Rules 16b-3(c)(1)(i) and

16b-3(c)(1)(ii).

\40\Alternative Proposed Rule 16b-3(c)(1)(iii).

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With respect to the first basis for exemption, a ``Non-

Employee Director'' would be defined simply as a director who is not

currently an officer of, or otherwise employed by or a consultant to,

the issuer, its parent or its subsidiary.\41\ This definition differs

from the requirements of the current ``disinterested director''

standard in that any employment or consulting relationship with the

issuer expressly

[[Page 53836]]

would be precluded.\42\ Further, as an alternative to approval by Non-

Employee Directors, approval by the full board would constitute a basis

for exemption.\43\

\41\Alternative Proposed Rule 16b-3(c)(2). For purposes of this

proposed rule, ``consultant'' would include attorneys, accountants

or others who indirectly receive compensation from the issuer

through firms that provide services to the issuer.

\42\Additionally, the proposed definition would not include the

current requirement that, during the one year prior to service as a

``disinterested director,'' the director not be granted issuer

equity securities other than pursuant to a formula plan,

participation in a broad-based securities acquisition plan, or an

election to receive an annual retainer in an equivalent amount of

securities.

\43\Current Rule 16b-3(c)(2)(i) provides for administration by

the full board of directors if all members are disinterested.

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It should be noted that the first two bases for exemption

would require approval of specific transactions, not merely approval of

a plan in its entirety, as is sufficient for the current shareholder

approval requirement. This is because approval of a specific grant

appears to provide a more effective procedure, which may be appropriate

when approval is a stand-alone basis for exemption rather than a

condition imposed in combination with other conditions. However, it is

contemplated that approval of a plan pursuant to which the terms and

conditions of each grant are fixed in advance, such as a formula plan,

would satisfy this basis for exemption, and the exemption also would be

available for a plan with an attachment providing for specific grants

to specific individuals. Of course, the transaction approval only

relates to Section 16 insiders. Transactional approval of grants to

other persons would not be required for the purpose of obtaining the

exemption under Alternative Proposed Rule 16b-3. Comment is solicited

as to whether there are any other circumstances under which whole-plan

approval, standing alone, would be a sufficient safeguard.

Finally, the six-month holding period exemption would be

available to exempt grants that, for reasons of timing or otherwise,

fail to satisfy any of the other alternative conditions.

Commenters are asked to address whether approval by shareholders

should be required in advance of a grant or award, or would subsequent

ratification be sufficient, provided that such ratification is obtained

not later than the date of the next annual meeting of shareholders?

Comment is solicited on whether full board approval, as an alternative

to Non-Employee Director approval, would be useful to issuers and

whether it would provide an adequate standard. Should a director who is

hired as a consultant to the issuer be considered an employee of the

issuer, and hence be ineligible to serve as a Non-Employee Director?

Should equity grants received by Non-Employee Directors be required

to be made pursuant to a formula plan, as is currently required, or is

satisfaction of any of the other alternatives an adequate standard to

assure impartiality?44 Why would equity grants be treated

differently for this purpose than any other arrangement pursuant to

which a Non-Employee Director is compensated? If formula plan grants

are required as such a condition, should there be a separate exemption

for formula plans, or should such plans be subjected to shareholder

approval as a condition to exemption? As a general matter, is either

(i) administration by the board of directors or Non-Employee Directors

or (ii) shareholder approval, standing alone, effective to prevent

abuse of the type addressed by Section 16(b) when only transactions

with the issuer are included, or must either of such procedures be

coupled with a six-month holding period to be effective with respect to

such transactions? Is satisfaction of a six-month holding period,

absent any other condition, an adequate procedure on which to premise

an exemption for grants?

\44\Although the Alternative Proposed Rule would not expressly

forbid Non-Employee Directors from awarding themselves grants of

issuer equity securities, such grants would need to be reviewed in

the context of state laws governing corporate self-dealing.

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Should a grant or award that satisfies any of the proposed

alternative conditions be exempt only if the officer or director to

whom the award is made had not disposed of issuer equity securities on

a non-exempt basis during the previous six months at a price higher

than the price at which such grant or award is made? Would such a

timing condition, which is not present in either current Rule 16b-3 or

the 1994 proposals, be necessary in order to preclude the use of the

proposed broader exemptive rule, which would eliminate significant

conditions attached to the current exemption for grants and awards, as

a vehicle for abuse?

C. Dispositions to the Issuer

Consistent with its focus on the compensatory nature of

transactions between an issuer and its officers and directors, the

Commission is of the view that transactions pursuant to which an

insider is deemed to have made a disposition of issuer equity

securities to the issuer under appropriate conditions may merit

exemption from the short-swing profit recovery provisions of Section

16(b). Accordingly, the Alternative Proposal would exempt any

transaction involving a disposition to the issuer, provided that such

disposition is approved in advance by the board of directors, a

committee of Non-Employee Directors, or the shareholders.45 This

provision would provide for the flexibility to redeem issuer equity

securities from insiders in connection with non-exempt replacement

grants, and in such discrete compensatory situations as individual buy-

backs in connection with estate planning. As drafted, this provision

also would exempt the exercise of out-of-the-money options, provided

that the requisite approval is obtained.46 The shareholder

approval prong could provide exemptive relief in such scenarios as

mergers that had received majority shareholder approval that

specifically addressed such disposition.

\45\Alternative Proposed Rule 16b-3(d). Unlike the exemption for

grants and awards, subsequent ratification by shareholders would not

be included as an alternative condition to the exemption for

dispositions. Because such transactions are more likely to be at the

volition of the insider and thus more susceptible to abuse with

respect to timing, prior approval is considered necessary.

Commenters should address whether subsequent shareholder

ratification of a disposition would provide an effective procedure.

\46\Reliance on this proposed exemption would not be necessary

with respect to the exercise or conversion of a derivative security

that is at- or in-the-money because such transactions would continue

to be exempt pursuant to Rule 16b-6(b) [17 CFR 240.16b-6(b)].

---------------------------------------------------------------------------

Should a disposition that satisfies either condition be exempt only

if the officer or director making the disposition has not acquired

issuer equity securities on a non-exempt basis during the previous six

months at a price lower than the price at which such disposition is

made? Would such a timing condition be necessary to preclude the use of

this proposed exemption as a vehicle for abuse?

It should be noted that the Alternative Proposal does not

separately address dispositions pursuant to: (1) the right to have

securities withheld, or to deliver securities already owned, either in

payment of the exercise price of an option or to satisfy the tax

withholding consequences of an option exercise or the vesting of

restricted securities, (2) the expiration, cancellation, or surrender

to the issuer of a stock option or stock appreciation right in

connection with the grant of a replacement option or right, or (3) the

election to receive, and the receipt of, cash in complete or partial

settlement of a stock appreciation right. As proposed, all of these

transactions would automatically satisfy the exemptive condition of

prior approval by the board of directors, a committee of Non-Employee

Directors or shareholders if the grant that contained these

[[Page 53837]]

provisions had been so approved. Commenters are asked to address

whether additional and/or different conditions would be more

appropriate to exempt these transactions.

III. Dividend or Interest Reinvestment Plans

Rule 16b-2 exempts from the short-swing profit recovery provisions

of Section 16(b) the acquisition of issuer equity securities resulting

from reinvestment of dividends or interest on securities of the same

class, if made pursuant to a plan, available on the same terms to all

holders of that class of securities, providing for regular reinvestment

of dividends or interest. Companies have raised concerns that the

requirement that the plan be made available to all holders of the class

can impose significant burdens on companies that wish to allow for

officer and director participation. For example, companies have

indicated that because of this requirement, they may have to spend

potentially significant sums to comply with foreign laws relating to

the offering of securities to shareholders in foreign jurisdictions if

they want to have Rule 16b-2 available to their officers and directors.

The requirement to include all shareholders does not appear

necessary to address Section 16(b) concerns--that is, to assure that

these plans do not provide an opportunity for speculative abuse by

officers and directors. Consequently, the Commission is proposing to

tailor the dividend reinvestment plan exemptive rule to address

concerns about possible opportunities for abuse, while removing

unnecessary burdens. As proposed to be amended, Rule 16b-2 would be

available to exempt acquisitions resulting from reinvestment of

dividends or interest on securities of the same class if made pursuant

to a plan that meets three conditions. First, it must provide for the

regular reinvestment of dividends or interest. Second, the plan must be

broad-based and not discriminate in favor of employees of the

issuer.47 Third, the plan must operate on substantially the same

terms for all plan participants. These proposed standards should assure

that officers and directors do not use the plan in a manner

inconsistent with the purposes of Section 16(b).

\47\This standard would be evaluated by reference to all

shareholders of the class. For example, the requirement would not be

satisfied merely by making the plan available to all employees of

the issuer. Consistent with current interpretation, the rule as

amended would exempt only the reinvestment of dividends or interest.

Additional securities acquired through voluntary cash contributions

to such plans would not be exempt pursuant to this rule, but could

be exempt under Alternative Proposed Rule 16b-3, assuming other

conditions are met. See Release 34-28869, n. 89.

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If Rule 16b-2 is amended as proposed, companies would have more

flexibility to structure their dividend reinvestment plans. Commenters

are asked to address whether the proposed standards are appropriate and

serve the intended goals of reducing burdens while retaining

protections against possible speculative abuse, or whether the current

standard should be retained. Would it be consistent with the purposes

of Section 16(b) to provide an exemption for officers and directors

participating in plans that exclude certain holders, as would be

permissible under the proposed amendments? Would such exclusions permit

opportunities for speculative abuse in a manner inconsistent with

Section 16(b)? Should there be a limitation on the ability to exclude

certain shareholders, as permitted under this proposal, such as those

with small holdings or those residing in foreign jurisdictions or

certain states? Are there other standards that are consistent with

Section 16(b) that should be considered, such as exempting transactions

in plans that permit certain holders to be excluded only if their

inclusion would impose unreasonable burdens and expense?

IV. Reporting

In the interest of establishing the least burdensome reporting

system that effectively will achieve the disclosure purposes of Section

16(a),48 the Proposing Release, without endorsing a specific

proposal, solicited comment on various alternative schemes to modify

the reporting of exempt transactions. In addition to the alternatives

discussed there, which remain under consideration, the Commission

contemplates a different reporting treatment with respect to

transactions that would be exempted pursuant to the Alternative

Proposal.

\48\To facilitate the filing of Section 16(a) reports and

encourage the speedy dissemination of information considered

valuable by many members of the investment community, the Commission

has announced its intention to expand the capacity of the EDGAR

system to accommodate the electronic filing of ownership and

transaction reports pursuant to both Section 16(a) of the Exchange

Act and Rule 144 [17 CFR 230.144] under the Securities Act [15

U.S.C. 77a et seq.]. See Release No. 33-7231 (October 5, 1995). The

necessary programming already has been initiated, and filers should

be able to file these documents electronically on a voluntary basis

by late 1995 or early 1996. A further announcement will be made when

the effective date is determined.

---------------------------------------------------------------------------

In order to simplify the reporting scheme while assuring that

adequate and timely public information is provided with respect to

these transactions, it is anticipated that essentially all reporting be

done on a current basis; that is, on a Form 4 no later than ten days

following the close of the month in which a transaction occurs. Since

the Alternative Proposal would exempt a greater variety of transactions

than either current Rule 16b-3 or the 1994 proposals, it would be

appropriate to provide the public with information about these

transactions on a more timely basis than if annual reporting on Form 5

were permitted. Such transparency would help the markets monitor

Section 16(b) compliance on a real-time basis. At the same time,

officers and directors subject to reporting, many of whom now

voluntarily file reports on a current basis, would benefit from the

simplicity of the proposed revised reporting system, as well as from

the broader exemptive provisions of the Alternative Proposal.

Generally, it is contemplated that exempt grants and awards, as

well as dispositions, would be reportable on Form 4 no later than ten

days following the close of the month in which the grant or award is

made to the insider. Exercises of options49 that are exempt

pursuant to Rule 16b-6(b) either would remain reportable on the earlier

of the next otherwise due Form 4 or Form 5, or simply would be required

to be reported on Form 4.50

\49\To the extent withholding or surrender rights are exercised

in conjunction with the exercise or conversion of a derivative

security, they would be reported at the same time as such exercise

or conversion. The exercise of a tax-withholding right in connection

with vesting of a security would be reported on Form 4. Similarly,

the exercise of a stock appreciation right to receive cash, the

exercise of an out-of-the-money option, and any other disposition

transaction that would be exempted under the Alternative Proposal

also would be reported on Form 4.

\50\Comment previously was solicited concerning this potential

revision to the reporting system. See Proposing Release at Section

III.B.

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In recognition of the practical difficulties presented by requiring

Form 4 reporting of transactions in Qualified Plans, Excess Benefit

Plans and Stock Purchase Plans, as well as the relatively lesser public

need for this information to be reported, most of these transactions no

longer would be required to be reported. However, intra-plan transfers

and cash distributions would be reportable on Form 4 no later than ten

days following the close of the month in which such transaction

occurs.51 Assuming that the Alternative Proposal is adopted in its

entirety, gifts, transactions pursuant to dividend or

[[Page 53838]]

interest reinvestment plans and transactions pursuant to qualified

domestic relations orders (``QDROs''), all of which would remain exempt

from the short-swing profit recovery provisions of Section 16(b)

pursuant to other rules,52 also would be exempted from reporting.

\51\Form 4 reporting thus would be required for all transactions

exempt under Alternative Proposed Rule 16b-3 except for those

exempted pursuant to Alternative Proposed Rule 16b-3(b)(1).

\52\Dividend or interest reinvestment plan transactions would

continue to be exempt pursuant to Rule 16b-2. Gifts (currently

exempt pursuant to Rule 16b-5 [17 CFR 240.16b-5]) and QDRO

transactions (currently exempt pursuant to current Rule 16b-3(f)(3)

[17 CFR 240.16b-3(f)(3)]) would remain exempt pursuant to Rule 16b-5

as proposed to be amended. See Proposing Release at Section IV.A.

---------------------------------------------------------------------------

Commenters are asked to address whether these modifications to the

reporting scheme would be appropriate. With respect to transactions

that would be exempted from reporting, to what extent, and for what

purposes, is there a public need for such information? In lieu of

eliminating any reporting requirement for these transactions, should

they be reported on an annual basis on Form 5, as currently required?

Alternatively, should Form 5 be rescinded, with annual reporting, where

permitted, accomplished on Form 4? Assuming Form 5 is rescinded, how

would the current requirement to report on Form 5 all holdings and

transactions that should have been, but were not, previously

reported53 be revised? Should such holdings and transactions be

reported on the last Form 4 filed with respect to the calendar year?

\53\Rule 16a-3(f)(1)(i) and (ii) [17 CFR 240.16a-3(f)(1)(i) and

(ii)].

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Would accelerated reporting for other transactions that would be

exempted by the Alternative Proposal, but currently may be reported on

an annual basis, impose significant burdens on insiders and/or issuers,

or provide significant benefits to users of the reported information?

Would such accelerated reporting simplify the overall reporting system

by eliminating the need to keep track of exempt transactions during the

year in anticipation of filing the Form 5? Commenters are requested to

address these questions from the viewpoint of users of the information

that would be reported, as well as from the viewpoint of filing

parties.

V. Request For Comment

Any interested person wishing to submit written comments on the

Alternative Proposal, the Proposing Release, the Cash-Only Release, and

any other matters that might have an impact on such proposals, is

requested to do so. Comment is requested specifically from persons

subject to Section 16; issuers whose officers, directors and ten

percent shareholders are subject to Section 16; and persons using the

information afforded by the Section 16(a) reports.

Commenters should address whether the Alternative Proposal, as

drafted, is easy to understand and practicable to implement. Commenters

also should address whether the Alternative Proposal would be

preferable to the proposed amendments to Rule 16b-3 set forth in the

Proposing Release. The Commission also requests comment on whether the

Alternative Proposal, if adopted, would have an adverse impact on

competition or would impose a burden on competition that is neither

necessary nor appropriate in furthering the purposes of the Exchange

Act.

Finally, commenters are asked to consider the on-going merit of the

strict liability short-swing profit recovery provisions of Section

16(b), and whether the Commission should recommend that Congress

rescind this section of the statute. Some have suggested that the

prohibitions of Exchange Act Rule 10b-5, as interpreted by case law,

adequately address the abuse of inside information and obviate the need

for a strict liability statute. Others point out that the scienter and

other standards of the Rule 10b-5 remedy suggest the contrary. Assuming

Congress, which has the sole authority to do so, were to rescind

Section 16(b), would insider trading and market manipulation adequately

be deterred by Rule 10b-5, or does Section 16(b) continue to serve a

useful purpose? In the absence of Section 16(b), would state laws

establishing a fiduciary duty on the part of officers and directors

adequately protect the interests of public company shareholders?

Comments responsive to these inquiries will be considered by the

Commission in complying with its responsibilities under Section

23(a)54 of the Exchange Act. In order to give commenters

sufficient time to consider this Alternative Proposal and request for

further comment, the comment periods on the Proposing Release and the

Cash-Only Release are extended to December 15, 1995.

\54\15 U.S.C. 78w(a).

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VI. Transition To New Rules

Upon adoption of the Alternative Proposal, the 1994 proposals, or

any combination thereof, provisions for a transition from the current

rules will be necessary. Although the Commission's current intent

regarding transition to the proposed revised rules remains as expressed

in the Proposing Release,55 this schedule is subject to

modification. Most recently, the Commission has extended the phase-in

period for current Rule 16b-3 until September 1, 1996, or such

different date as set in further rulemaking.56 Current and former

Rule 16b-3 would remain available until September 1, 1996,57

unless a different date is set by the Commission in the adopting

release. Comment is solicited on how long a transition period issuers

and insiders would need, assuming adoption of the Alternative Proposal.

Of course, issuers continue to be permitted to convert their plans to

current Rule 16b-3 at any time, or to convert back to the former

exemptions, provided that all plans of the issuer are so converted.

After the phase-in date, issuers and insiders no longer will be able to

rely on the former exemptions, but instead will be required to comply

with Rule 16b-3 as amended.

\55\See Proposing Release at Section VI.

\56\See Release 34-36063 [60 FR 40994].

\57\The exemptions afforded by former Rules 16a-8(b) [17 CFR

240.16a-8(b)] and 16a-8(g)(3) [17 CFR 240.16a-8(g)(3)] also would

remain available.

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VII. Cost-Benefit Analysis

The Alternative Proposal is intended to simplify the conditions

under which insider's transactions in issuer equity securities are

deemed to be exempt from the short-swing profit recovery provisions of

Section 16(b), while ensuring that the statutory purposes continue to

be served. The Commission views this as a way of correcting unintended

consequences of the present regulatory scheme in terms of creating a

bias against equity-based compensation and insider participation in

broad-based plans, and significantly reducing the compliance burden

imposed on persons subject to Section 16 without undercutting the

statutory objectives of disclosing information concerning insider

trading and discouraging speculative short-term insider trading.

Although some reporting would be accelerated under the Alternative

Proposal, other reporting requirements would be eliminated. Even where

accelerated reporting might increase compliance costs, these costs may

be outweighed by the benefit of having the information available to the

public on a more timely basis, as well as the ease of compliance with a

simpler reporting scheme.

In order to assist the Commission in assessing the costs and

benefits of the Alternative Proposal, commenters are requested to

provide their views and data on the following issues. In addressing

these issues, commenters should be as specific and detailed with their

views and data as possible, and quantify the costs and benefits to the

extent practicable.

[[Page 53839]]

(1) To what extent would the newly proposed exemptive conditions

increase or decrease the compliance burden imposed on persons subject

to Section 16?

(2) Could any of the exemptive provisions be crafted in a manner

that would further reduce compliance burdens, consistent with the

statutory objectives of Section 16? If so, how could that be done?

(3) What would be the costs and benefits of the proposed

accelerated reporting of transactions on Form 4, together with the

elimination of reporting of certain other transactions? In particular,

to what extent do insiders currently choose voluntarily to report

exempt transactions on Form 4 rather than annually on Form 5?

(4) Could the reporting requirements be crafted in a manner that

would further reduce compliance burdens, consistent with the statutory

objectives of Section 16? If so, how could that be done?

VIII. Summary of Initial Regulatory Flexibility Analysis

An Initial Regulatory Flexibility Analysis has been prepared in

accordance with 5 U.S.C. 603 concerning the Alternative Proposal. The

analysis notes that the Alternative Proposal is intended to simplify

the Section 16 regulatory scheme with respect to employee benefit

plans.

As discussed more fully in the analysis, most of the reporting

persons the Alternative Proposal would affect are small entities, as

defined by the Commission's rules. The Alternative Proposal would

decrease the compliance requirements imposed upon corporate insiders

subject to Section 16.

The analysis discusses several possible alternatives to the

Alternative Proposal. As discussed more fully in the analysis,

implementation of any of these alternatives either would be duplicative

of the Alternative Proposal or the Prior Proposals, or would be

inconsistent with the Exchange Act.

Comments are encouraged on any aspect of the analysis. A copy of

the analysis may be obtained by contacting Elizabeth Murphy, Office of

Disclosure Policy, Division of Corporation Finance, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

IX. Statutory Basis

The amendments to the Section 16 rules are being proposed by the

Commission pursuant to Exchange Act Sections 3(a)(11),58

3(a)(12),59 3(b),60 9(b),61 10(a),62 12(h),63

13(a),64 14, 16, and 23(a). As the Section 16 rules relate to the

Investment Company Act and the Public Utility Holding Company Act, they

also are proposed pursuant to Investment Company Act Sections 3065

and 38,66 and Public Utility Holding Company Act Sections

1767 and 20,68 respectively.

\58\15 U.S.C. 78c(a)(11).

\59\15 U.S.C. 78c(a)(12).

\60\15 U.S.C. 78c(b).

\61\15 U.S.C. 78i(b).

\62\15 U.S.C. 78j(a).

\63\15 U.S.C. 78l(h).

\64\15 U.S.C. 78m(a).

\65\15 U.S.C. 80a-29.

\66\15 U.S.C. 80a-37.

\67\15 U.S.C. 79q.

\68\15 U.S.C. 79t.

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List of Subjects in 17 CFR 240

Reporting, Recordkeeping requirements, and Securities.

Text of Proposals

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF

1934

1. The authority citation for part 240 continues to read in part as

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,

78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4, and 80b-11, unless otherwise noted.

* * * * *

2. By revising Sec. 240.16b-2 to read as follows:

Sec. 240.16b-2 Dividend or interest reinvestment plans.

Any acquisition of securities resulting from the reinvestment of

dividends or interest on securities of the same issuer shall be exempt

from Section 16(b) of the Act if made pursuant to a plan providing for

the regular reinvestment of dividends or interest, if the plan provides

for broad-based participation, does not discriminate in favor of

employees of the issuer and operates on substantially the same terms

for all plan participants.

3. By revising Sec. 240.16b-3 to read as follows:

Sec. 240.16b-3 Transactions between an issuer and its officers or

directors.

(a) General. A transaction between the issuer (including an

employee benefit plan sponsored by the issuer) and an officer or

director of the issuer that involves issuer equity securities shall be

exempt from Section 16(b) of the Act if the transaction satisfies the

applicable conditions set forth in this section.

Note to Paragraph (a): The exercise or conversion of a

derivative security that has a fixed exercise price and is not out-

of-the-money is eligible for exemption from Section 16(b) of the Act

to the extent that the conditions of Rule 16b-6(b) are satisfied.

(b) Tax-conditioned and related plans.

(1) Any transaction pursuant to a Qualified Plan, an Excess Benefit

Plan, or a Stock Purchase Plan shall be exempt without condition,

except as provided in paragraph (b)(2) of this section.

(2) A transaction pursuant to a Qualified Plan, an Excess Benefit

Plan, or a Stock Purchase Plan that is at the volition of a plan

participant; is not made in connection with the participant's death,

disability, retirement or termination of employment; is not required to

be made available to a plan participant pursuant to a provision of the

Internal Revenue Code; and results in either: an intra-plan transfer

involving an issuer equity securities fund, or a cash distribution

funded by a volitional disposition of an issuer equity security, shall

be exempt only if effected pursuant to an election made at least six

months following the date of the most recent election that effected a

transaction subject to this paragraph (b)(2).

(3) An acquisition pursuant to a plan or transaction that satisfies

the conditions applicable to performance-based compensation imposed by

Section 162(m) of the Internal Revenue Code and the regulations

thereunder shall be exempt without condition.

(4) Definitions.

(i) A Qualified Plan shall mean an employee benefit plan that

satisfies the coverage and participation requirements of Sections 410

and 401(a)(26) of the Internal Revenue Code of 1986, or any successor

provisions thereof.

(ii) An Excess Benefit Plan shall mean an employee benefit plan

that is operated in conjunction with a Qualified Plan, and provides

only the benefits or contributions that would be provided under a

Qualified Plan but for the limitations of Sections 401(a)(17), 415 and

any other applicable contribution limitation set forth in the Internal

Revenue Code, or any successor provisions thereof.

(iii) A Stock Purchase Plan shall mean an employee benefit plan

that satisfies the coverage and participation standards of Sections

410, 423(b)(3) and

[[Page 53840]]

423(b)(5) of the Internal Revenue Code of 1986, or any successor

provisions thereof.

(c) Grant and Award Transactions.

(1) General. A grant or award transaction shall be exempt if:

(i) The transaction is approved by the board of directors of the

issuer, or a committee of the board of directors that is comprised

solely of two or more Non-Employee Directors;

(ii) The transaction is approved or ratified by the affirmative

vote or written consent of the holders of the majority of the

securities of the issuer entitled to vote, in compliance with Section

14 of the Act, provided that such ratification occurs no later than the

date of the next annual meeting of shareholders; or

(iii) The issuer equity securities so awarded are held by the

officer or director for a period of six months following the date of

such grant or award, provided that this condition shall be satisfied

with respect to a derivative security if at least six months elapse

from the date of acquisition of the derivative security to the date of

disposition of the derivative security (other than upon exercise or

conversion) or its underlying equity security.

(2) Definition. A Non-Employee Director shall mean a director who

is not currently an officer (as defined in Sec. 240.16a-1(f)) of the

issuer or a parent or subsidiary of the issuer, or otherwise currently

employed by or a consultant to the issuer or a parent or subsidiary of

the issuer.

(d) Dispositions to the issuer. Any transaction involving the

disposition to the issuer of issuer equity securities shall be exempt

from Section 16(b) of the Act, provided that the terms of such

disposition are approved in advance in the manner prescribed by either

paragraph (c)(1)(i) or paragraph (c)(1)(ii) of this section.

Dated: October 11, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-25626 Filed 10-16-95; 8:45 am]

BILLING CODE 8010-01-P