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Insider Trades During Pension Fund Blackout Periods

SEC | January 15, 2003

Section 306(a) of the Sarbanes-Oxley Act of 2002 prohibits any director or executive officer of an issuer from, directly or indirectly, purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during a pension plan blackout period that prevents plan participants and beneficiaries from engaging in transactions involving issuer equity securities held in their plan accounts. These prohibitions apply only if the securities acquired or disposed of by the director or executive officer were acquired in connection with his or her service or employment as a director or executive officer. Section 306(a) also requires an issuer to notify its directors and executive officers, as well as the Commission, of an impending blackout period on a timely basis.

As directed by the statute, on Oct. 30, 2002, the Commission, after consultation with the Secretary of Labor, proposed new Regulation Blackout Trading Restriction (BTR) under the Securities Exchange Act of 1934 to clarify the scope and application of Section 306(a) and to prevent evasion of the statutory trading prohibition. The Commission received 18 comment letters in response to its proposal.

Regulation BTR will incorporate a number of concepts developed under Section 16 of the Exchange Act. This will enable issuers to use the well-established body of rules and interpretations concerning the trading activities of corporate insiders under Section 16 in interpreting how Section 306(a) operates and, as to directors and executive officers of domestic issuers, facilitate enforcement of the statutory trading prohibition through monitoring of the reports publicly filed by directors and officers pursuant to Section 16(a).

Persons Subject to Trading Prohibition

Section 306(a) applies to the directors and executive officers of an issuer:

  • with a class of securities registered under Section 12 of the Exchange Act;
  • that is required to file reports under Section 15(d) of the Exchange Act; or
  • that files or has filed a registration statement that has not yet become effective under the Securities Act and that has not been withdrawn.

Accordingly, Regulation BTR will apply to the directors and executive officers of domestic issuers, foreign private issuers, banks and savings associations, small business issuers and, in rare instances, registered investment companies.

Under Regulation BTR, the term "director" will have the same meaning as under the general Exchange Act definition, and the term "executive officer" will have the same meaning as the term "officer" under the Section 16 rules.

Securities Subject to Trading Prohibition

By its terms, Section 306(a) applies to any equity security of an issuer. Regulation BTR will define the term "equity security" to include both equity securities and derivative securities relating to an equity security, whether or not issued by the issuer. To promote consistency and streamline compliance, Regulation BTR will provide that the term "derivative security" has the same meaning as under the Section 16 rules.

Transactions Subject to Trading Prohibition

The statutory trading prohibition of Section 306(a) is limited to equity securities that a director or executive officer "acquires in connection with his or her service or employment as a director or executive officer." Regulation BTR will specify the instances where an acquisition of equity securities by a director or executive officer is "in connection with" his or her service to, or employment with, an issuer. In addition, Regulation BTR will provide that any equity securities sold or otherwise transferred during a blackout period will be treated as "acquired in connection with service or employment as a director or executive officer" unless he or she establishes that the equity securities were acquired from another source and this identification is consistent with the treatment of the securities for tax purposes and all other disclosure and reporting requirements.

To prevent evasion of the statutory trading prohibition, Regulation BTR will apply to indirect, as well as direct, acquisitions and dispositions of equity securities where a director or executive officer has a "pecuniary interest" in the transaction. "Pecuniary interest" will have the same meaning as under the Section 16 rules. Accordingly, acquisitions or dispositions of equity securities by family members, partnerships, corporations, limited liability companies and trusts will be deemed to be acquisitions or dispositions by a director or executive officer if he or she has a pecuniary interest in the equity securities.

Regulation BTR will exempt from the statutory trading prohibition several categories of transactions that occur automatically, are made pursuant to an advance election or are otherwise outside the control of the director or executive officer, including:

  • acquisitions of equity securities under dividend or interest reinvestment plans;
  • purchases or sales of equity securities that satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c);
  • purchases or sales of equity securities, other than "discretionary transactions" (as defined under the Section 16 rules) pursuant to certain employee benefit plans;
  • compensatory grants and awards of equity securities pursuant to programs under which grants and awards occur automatically;
  • exercises, conversions or terminations of certain derivative securities, which, by their terms, occur only on a fixed date, or are exercised, converted or terminated by a counter-party who is not subject to the influence of the director or executive officer;
  • acquisitions or dispositions of equity securities involving a bona fide gift or a transfer by will or the laws of descent and distribution;
  • acquisitions or dispositions of equity securities pursuant to a domestic relations order;
  • sales or other dispositions of equity securities compelled by the laws or other requirements of an applicable jurisdiction;
  • acquisitions or dispositions of equity securities in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law; and
  • increases or decreases in equity securities holdings resulting from a stock split, stock dividend or pro rata rights distribution.

Blackout Period

The Section 306(a) trading prohibition is triggered only if a blackout period lasts more than three consecutive business days and temporarily suspends the ability of at least 50% of the participants or beneficiaries under all individual account plans maintained by the issuer to purchase, sell or otherwise acquire or transfer an interest in issuer equity securities held in an account plan.

Regulation BTR will provide that, in the case of a domestic issuer, the Section 306(a) trading prohibition is triggered only if the ability of U.S. pension plan participants to trade in an issuer's equity securities through their individual plan accounts is temporarily suspended for more than three consecutive business days and this temporary suspension affects 50% or more of the participants under all pension plans with individual accounts maintained by the issuer.

Regulation BTR will provide that, in the case of a foreign private issuer, the Section 306(a) trading prohibition is triggered only if the 50% test is satisfied and the number of U.S. plan participants subject to the temporary trading suspension is either (1) greater than 15% of the issuer's worldwide workforce, or (2) greater than 50,000 in number.

Remedies

A violation of the Section 306(a) trading prohibition by a director or executive officer is a violation of the Exchange Act, subject to possible Commission enforcement action. In addition, Section 306(a) provides that an issuer, or a security holder on its behalf, may bring an action to recover the profits realized by a director or executive officer from a prohibited transaction during a blackout period. Regulation BTR will provide that, generally, the amount recoverable in a private action is the difference between the amount paid or received for the equity security on the date of the transaction during the blackout period and the amount that would have been paid or received for the equity security if the transaction had taken place outside the blackout period.

Notice

Regulation BTR will specify the content and timing of the notice that an issuer is required to provide to its directors and executive officers and to the Commission about an impending blackout period. In the case of a domestic issuer, the notice to the Commission will be provided in a Form 8-K report.

Section 306(a) takes effect on Jan. 26, 2003. Regulation BTR will take effect at the same time.

 



NOTE: Please note that this is a summary of a proposed SEC rule, and should not be construed to be a complete or final rule. Please refer to the SEC's Web site for updated and final rule information.

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