FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THOMAS R. DREILING, on behalf of 

InfoSpace Inc.,

Plaintiff-Appellant,

v.

AMERICAN EXPRESS COMPANY, a

No. 04-35715 New York corporation, including

its divisions and subsidiaries, D.C. No.  Defendant, CV-03-03740-TSZ

and OPINION

INFOSPACE, INC., a Delaware

Corporation; AMERICAN EXPRESS

TRAVEL RELATED SERVICES

COMPANY INC.,

Defendants-Appellees. 

Appeal from the United States District Court

for the Western District of Washington

Thomas S. Zilly, District Judge, Presiding

Argued and Submitted

May 3, 2006—Seattle, Washington

Filed August 14, 2006

Before: Stephen Reinhardt, M. Margaret McKeown, and

Richard R. Clifton, Circuit Judges.

Opinion by Judge McKeown

9563
COUNSEL

Jonathan P. Meier, Sirianni Youtz Meier & Spoonemore,

Seattle, Washington, for the plaintiff-appellant.

Jason C. Vigna and Robert E. Zimet, Skadden, Arps, Slate,

Meagher & Flom, LLP, New York, New York, for the

defendant-appellee.

9566 DREILING v. AMERICAN EXPRESS CO.
Allan A. Capute, Securities and Exchange Commission,

Washington, D.C., for amicus curiae. 

OPINION

McKEOWN, Circuit Judge: 

Section 16(b) of the Exchange Act bars corporate insiders,

such as directors, from profiting on short-swing trades,

defined as the purchase and sale of stock within a six-month

period. 15 U.S.C. § 78p(b). Rule 16b-3(d), promulgated by

the Securities and Exchange Commission (“SEC”), exempts

an insider from § 16(b) liability when the transaction takes

place with the issuer and is specifically approved by the issuer’s board of directors or majority of shareholders. 17 C.F.R.

§ 240.16b-3(d). 

Thomas Dreiling, a shareholder in InfoSpace, Inc., alleges

that American Express Travel Related Services (“TRS”) violated Section 16(b) by engaging in a short-swing trade in InfoSpace stock. Dreiling claims TRS was an insider, specifically

a “director by deputization,” because a TRS executive officer

sat on the InfoSpace board during the trade. The district court

dismissed Dreiling’s complaint, concluding that Rule 16b3(d) exempted TRS from liability because the InfoSpace

board approved the stock grant to insider TRS. 

On appeal, Dreiling argues that the SEC lacked the authority to promulgate Rule 16b-3(d) or, in the alternative, that

Rule 16b-3(d) can not apply to TRS because the InfoSpace

board did not know that TRS was a “director by deputization.” The SEC filed an amicus curiae brief, siding with TRS

as to the validity of Rule 16b-3(d) but agreeing with Dreiling

that TRS would not be entitled to the protection of the rule if

it were an undisclosed director by deputization. 

DREILING v. AMERICAN EXPRESS CO. 9567
We agree with the district court that the SEC had authority

to adopt Rule 16b-3(d), and that we owe deference to the

SEC’s interpretation of the rule to cover directors by deputization. These are legal questions appropriately reached on

appeal. Whether the TRS executive was a director by deputization and whether the InfoSpace board was knowledgeable

as to that relationship are questions of fact that defeat dismissal under Federal Rule of Civil Procedure 12(b)(6). We

thus reverse and remand for further proceedings. 

BACKGROUND

I. TRS AND THE PRIO-INFOSPACE MERGER

In the late 1990s, TRS, a subsidiary of the American

Express Company, made strategic equity investments in various e-commerce companies. During this period, TRS became

a significant minority investor in Prio, Inc. In December 1999,

Prio entered a merger agreement with InfoSpace in which

InfoSpace agreed to issue 5.37 million shares of stock, worth

about $400 million, to buy Prio from its former shareholders.

InfoSpace provides infrastructure services for wireless, wireline and broadband platforms. 

David House joined the InfoSpace board of directors in

January 2000, which was after the merger agreement was executed but before the merger closed. When appointed to the

InfoSpace board, House was a TRS executive officer who had

served as a Prio director just before the merger was

announced. House served as an InfoSpace director for 16

months, through May 2001. Before joining the board, House

himself owned no shares of InfoSpace. 

The merger closed February 25, 2000, and Prio was integrated into InfoSpace. As of the merger, TRS owned about

12% of Prio, but after the merger, TRS owned less than 10%

of InfoSpace’s shares. According to Dreiling, just after the

merger agreement, InfoSpace’s share price increased by

9568 DREILING v. AMERICAN EXPRESS CO.
350%, only to lose almost 80% in value during the six months

after the merger was completed. 

II. DREILING’S § 16(b) ACTION

Dreiling’s First Amended Complaint alleged that “[w]ithin

periods of less than six months, [TRS] engaged in purchases

and corresponding sales and or sales and a corresponding purchase of Infospace stock” and that TRS should disgorge any

gains. After the merger announcement but before closing,

Dreiling bought 100 shares of InfoSpace, which he has held

ever since. In September 2003, Dreiling submitted a demand

letter to InfoSpace, asking it to bring a § 16(b) action against

TRS. InfoSpace advised that it would not pursue an action

against TRS because TRS was not a director on the InfoSpace

board: “Although Mr. House was an executive officer of

AmEx during that time period, the facts show that he did not

in any way represent AmEx on the Board of Directors of the

Company. Accordingly, AmEx was not a director by deputization and was not subject to Section 16 of the Exchange

Act.” 

After this rejection,1 Dreiling filed a complaint in November 2003, alleging that TRS was a director on the InfoSpace

board, and thus an insider pursuant to § 16(b), and that TRS

had profited from a short-swing trade in InfoSpace stock in

violation of § 16(b). Although TRS itself was not on the InfoSpace board, Dreiling claimed that it had deputized David

House to represent TRS interests on the board. Dreiling also

1Before bringing an action against TRS, Dreiling was obligated by

§ 16(b) to wait until InfoSpace failed or refused to do so: 

Suit to recover such profit may be instituted . . . by the issuer, or

by the owner of any security of the issuer in the name and in

behalf of the issuer if the issuer shall fail or refuse to bring such

suit within sixty days after request or shall fail diligently to prosecute the same thereafter . . . . 

15 U.S.C. § 78p(b). 

DREILING v. AMERICAN EXPRESS CO. 9569
alleged that TRS acquired InfoSpace stock on February 25,

2000, and sold much of it sometime before August 24, 2000.

As a remedy, Dreiling sought disgorgement of short-swing

profits TRS received from trading InfoSpace stock.

TRS moved to dismiss under Rule 12(b)(6). The district

court dismissed the complaint on the basis that Rule 16b3(d)(1) exempted TRS from § 16(b) liability, as TRS had

acquired InfoSpace shares directly from the issuer with the

approval of the InfoSpace board. The district court declined

to hold, as Dreiling urged, that Rule 16b-3(d) applied only to

compensatory grants of stock to officers or directors, and

rejected the argument that Rule 16b-3(d) was an invalid rulemaking.

ANALYSIS

Dreiling argues that the SEC had no authority to promulgate Rule 16b-3(d) because it was contrary to § 16(b).2

 Alternately, he urges that Rule 16b-3(d) does not apply to TRS

because the InfoSpace board failed to explicitly approve the

stock grant to TRS as an insider—specifically through director David House, who had access to inside information and

who, as a director by deputization, effectively represented

TRS’s interests on the InfoSpace board. 

I. STATUTORY AND REGULATORY FRAMEWORK OF INSIDER

TRADING UNDER § 16(b) AND RULE 16b-3(d) 

A. OVERVIEW OF § 16(b)

Congress enacted § 16(b) as part of the Securities

2We review de novo a dismissal under Rule 12(b)(6), Arrington v.

Wong, 237 F.3d 1066, 1069 (9th Cir. 2001), and may consider documents

referred to in the complaint or any matter subject to judicial notice, such

as SEC filings. MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504

(9th Cir. 1986). 

9570 DREILING v. AMERICAN EXPRESS CO.
Exchange Act of 1934 to prevent corporate insiders from

exploiting their access to “information not generally available

to others.” Kern County Land Co. v. Occidental Petroleum

Corp., 411 U.S. 582, 592 (1973). Section 16(b) reads in relevant part:

For 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 to the issuer, any profit realized by him

from any purchase and sale . . . of any equity security of such issuer . . . within any period of less than

six months . . . shall . . . be recoverable by the issuer,

irrespective of any intention on the part of such beneficial owner, director, or officer in entering into

such transaction of holding the security . . . . This

subsection shall not be construed to cover . . . any

transaction or transactions which the Commission

by rules and regulations may exempt as not comprehended within the purpose of this subsection.

15 U.S.C. § 78p(b) (emphasis added). 

[1] In passing the statute, “Congress recognized that shortswing speculation by stockholders with advance, inside information would threaten the goal of the Securities Exchange

Act to ‘insure the maintenance of fair and honest markets.’ ”

Kern County, 411 U.S. at 591 (quoting 15 U.S.C. § 78b). Section 16(b) flatly prohibits a “class of transactions in which the

possibility of abuse was believed to be intolerably great,” id.

at 592, and does so by “impos[ing] a strict prophylactic rule

with respect to insider, short-swing trading.” ForemostMcKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 251

(1976). The statute identifies three classes of insiders—

directors, officers and beneficial owners—and makes them

liable, without fault or intended wrongdoing, for trading in

their company’s shares. 15 U.S.C. § 78p(b). 

DREILING v. AMERICAN EXPRESS CO. 9571
[2] Section 16(b) does not, however, reach all insider trading. Foremost-McKesson, 423 U.S. at 253 (“Congress itself

limited carefully the liability imposed by § 16(b).”). The statute imposes strict liability on insiders only for “shortswing”

trades—specifically, a coupled purchase-and-sale, or sale-and

purchase, completed within six months. 15 U.S.C. § 78p(b).3

Courts have recognized that § 16(b) is a blunt instrument, at

once both over- and under-inclusive. See Citadel Holding

Corp. v. Roven, 26 F.3d 960, 965 (9th Cir. 1994) (“[Section]

16(b) is a relatively arbitrary, ‘flat rule’ . . . .” ) (quoting Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422

(1972)). The statute is over-inclusive in that it imposes strict

liability regardless of motive, including trades not actually

based on inside information. Kern, 411 U.S. at 595 (noting

that § 16(b) requires disgorgement of profits “without proof

of actual abuse of insider information, and without proof of

intent to profit on the basis of such information”). It is underinclusive in that there is no liability for trades made on inside

information if more than six months transpire between purchase and sale. Foremost-McKesson, 423 U.S. at 252 (“Even

an insider may trade freely without incurring statutory liability if, for example, he spaces his transactions at intervals

greater than six months.”). 

[3] In response to the statute’s over-inclusiveness, Congress

exempted two classes of transactions from the “flat rule” of

liability. See 15 U.S.C. § 78p(b) (exempting from liability

securities “acquired in good faith in connection with a debt

previously contracted” and transactions in which a “beneficial

owner was not such both at the time of the purchase and sale,

or the sale and purchase”). Aside from these specific transac3

See also Allis-Chalmers Mfg. Co. v. Gulf & Western Indus., Inc., 527

F.2d 335, 346 (7th Cir. 1975) cert. denied 96 S.Ct. 1142 (1976) (“Our

review of the history of the statute convinces us that in enacting section

16(b) Congress had in mind a specific type of two-part transaction consisting either of a purchase and subsequent sale, or a sale and subsequent

repurchase . . . .”). 

9572 DREILING v. AMERICAN EXPRESS CO.
tion exemptions, Congress provided an open-ended delegation

to the SEC, authorizing it to exempt other transactions “not

comprehended within the purpose of [§ 16(b)].” Id. § 78p(b).

B. OVERVIEW OF RULE 16b-3(d)—INSIDER-ISSUER

TRANSACTIONS

Before 1996, Rule 16b-3 and its pre-cursor Rule X-16B-3

exempted only insider-issuer transactions, approved by the

board of directors, that were related to officer or director compensation. The 1996 revision of Rule 16b-3 exempted all

grants or awards of stock or options by an issuer to an insider,

compensatory or not, if the transaction was approved by the

board or majority of shareholders. 17 C.F.R. § 240.16b-3(d).

In relevant part, the rule reads:

(d) Acquisitions from the issuer. Any transaction,

other than a Discretionary Transaction, involving an

acquisition from the issuer (including without limitation a grant or award), whether or not intended for

a compensatory or other particular purpose, shall be

exempt if: 

(1) The transaction is approved by the

board of directors of the issuer, or a committee of the board of directors that is composed solely of two or more Non-Employee

Directors; . . . 

17 C.F.R. § 240.16b-3. 

[4] The SEC adopted the 1996 version of Rule 16b-3(d) as

part of a number of amendments to Rule 16b-3 to present a

“simplified, flexible approach” to insider transactions. Ownership Reports and Trading by Officers, Directors and Principal

Security Holders, 61 Fed. Reg. 30,376, 30,377 (June 14,

1996). The SEC exempted non-compensatory issuer-insider

trades because they “do not appear to present the same opporDREILING v. AMERICAN EXPRESS CO. 9573
tunities for insider profit on the basis of non-public information as do market transactions by officers and directors,” id.,

and “where the issuer, rather than trading markets, is on the

other side of an officer or director’s transaction in the issuer’s

equity securities, any profit obtained is not at the expense of

uninformed shareholders and other market participants of the

type contemplated by the statute.” Id. The SEC based these

observations “on its experience with the Section 16 rules,”

and concluded that short-swing transactions between an

insider and an issuer that “satisfy . . . objective gate-keeping

conditions[ ] are not vehicles for the speculative abuse that

section 16(b) was designed to prevent.” Id. Thus, the SEC

enacted Rule 16b-3(d) because board or shareholder-approved

insider-issuer transactions were “not contemplated within the

purpose” of § 16(b). 

The SEC’s decision to revise Rule 16b-3(d) in 1996 was

founded not just on its years of experience making rules under

§ 16 rules, 61 Fed. Reg. at 30,377, but also, according to the

SEC’s amicus brief, “careful study, notice and public comment.” The SEC received 38 letters in its solicitation for comments on early versions of Rule 16b-3(d), mostly positive. Id.

at 30,377 & 30,380. Rule 16b-3(d) also reconciles competing

policies.4

Finally, Rule 16b-3(d) implements certain of the “objective

gate-keeping conditions,” such as approval by the issuer’s

board of directors or ratification by a majority of shareholders. 17 C.F.R. § 240.16b-3(d)(1) & (2). In identifying these

“gate-keeping” conditions, the SEC noted that “[a]lthough the

new rule would not prohibit Non-Employee Directors or the

full board from awarding themselves grants of issuer equity

4The SEC noted in its amicus brief that before the 1996 version amendment to Rule 16b-3, the old exemption immunized only “approved written

employee benefit plan[s]” which “did not work and actually discouraged

some insiders from acquiring issuer securities through employee benefit

plans.” 

9574 DREILING v. AMERICAN EXPRESS CO.
securities, such grants would be subject to state laws governing corporate self-dealing.” 61 Fed. Reg. at 30,381. 

II. VALIDITY OF RULE 16b-3

[5] Because the statute explicitly delegates to the SEC the

authority to promulgate other transaction exemptions, the

question is not whether Rule 16b-3(d) can be found explicitly

in the text of § 16(b).5 Rather, the more nuanced question is

whether Rule 16b-3(d) exempts transactions “not comprehended within the purpose” of § 16(b). This posture, in turn,

requires us to discern the limits of the open-ended expression

of congressional intent that is § 16(b). In analyzing Rule 16b3(d), we give the SEC’s view “controlling weight”—unless

the regulation is “arbitrary, capricious, or manifestly contrary

to the statute”—because “Congress has explicitly left a gap

for the agency to fill.” Chevron, U.S.A., Inc. v. Natural Res.

Def. Council, 467 U.S. 837, 843-44 (1984).6

[6] The SEC has publicly and carefully considered the issue

of speculative abuse before finalizing Rule 16b-3(d). Consequently, we give significant weight to the SEC’s determina5Dreiling is thus wrong to assert that § 16(b) on its face bars the SEC

from promulgating a rule exempting issuer-insider transactions. The text

of § 16(b) does not explicitly exempt board-approved insider-issuer transactions, as written in Rule 16b-3, but neither does it explicitly bar the SEC

from enacting such an exemption. Congress has not “directly spoken to the

precise question at issue,” so the silence of § 16(b) on board-approved

insider-issuer transactions is not “the end of the matter.” Chevron U.S.A.,

Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842 (1984). 

6Reviewing an agency’s construction of a statute, we consider two questions. Chevron, 467 U.S. at 842-43. First, has Congress “directly spoken

to the precise question at issue”? If so, the court must “give effect to the

unambiguously expressed intent of Congress.” Id. at 842. If not, the second is whether the agency’s construction of the statute is permissible. Id.

at 843. If Congress has expressly delegated “authority to the agency to

elucidate a specific provision of the statute by regulation,” the court must

give the regulations “controlling weight unless they are arbitrary, capricious or manifestly contrary to the statute.” Id. at 844. 

DREILING v. AMERICAN EXPRESS CO. 9575
tion that board-approved insider-issuer transactions were “not

vehicles for the speculative abuse that section 16(b) was

designed to prevent,” 61 Fed. Reg. at 30,377, and hold that

Rule 16b-3(d) was validly promulgated. Chevron, 467 U.S. at

865 (noting that agency interpretation of statute entitled to

deference when “the regulatory scheme is technical and complex,” the agency “considered the matter in a detailed and reasoned fashion,” and “the decision involves reconciling

conflicting policies.”). 

Dreiling challenges the SEC’s authority and argues that

Rule 16b-3(d) is contrary to the purposes of § 16(b)—to prevent speculative abuse and harm uninformed market

participants—for the following reasons: (1) the SEC may only

exempt transactions for which there is no risk of speculative

abuse; (2) empirical evidence indicates that Rule 16b-3(d)

immunizes transactions likely to result in speculative abuse;

(3) certain hypotheticals suggest that Rule 16b-3(d) exempts

speculative abuse; and (4) the SEC enacted Rule 16b-3(d) for

reasons unrelated to speculative abuse. 

Dreiling attempts to place the burden with the SEC to show

that any transaction exemptions under § 16(b) give rise to

“absolutely no possibility of speculative abuse,” citing Kern

as support. See 411 U.S. at 600. In other words, according to

Dreiling, the SEC may not exempt certain transactions otherwise subject to § 16(b) merely because these transactions give

rise to a “diminished risk” of speculative abuse. Imposing

such a burden on the SEC is inconsistent with both the statute

and Chevron deference. 

[7] Dreiling’s position demands an airtight solution with

“no possibility” of abuse. Neither § 16(b) nor its judicial gloss7

7The Supreme Court’s interpretations of § 16(b) are relevant to determining if a SEC rule is consistent with statutory purpose because “[t]he

judiciary is the final authority on issues of statutory construction . . . .”

Chevron, 467 U.S. at 843 n.9. 

9576 DREILING v. AMERICAN EXPRESS CO.
suggests, as Dreiling does, that the SEC may only exempt

transactions for which there is zero risk of speculative abuse.

Rather, the Supreme Court has indicated that the SEC is free

to exempt transactions for which the “possibility of abuse” is

not “believed to be intolerably great.” Reliance Elec., 404

U.S. at 422 (emphasis added). The SEC need not show that

the transactions exempted from § 16(b) pose absolutely no

risk of speculative abuse. Foremost-McKesson, 423 U.S. at

244 (finding “unsatisfactory” the argument that the court must

reject any reading of a statutory exemption to § 16(b) that

misses “some possible abuses of inside information”); id. at

252 (“[S]erving the congressional purpose does not require

resolving every ambiguity in favor of liability under

§ 16(b).”). The relevant question is whether Rule 16b-3(d)

exempts transactions for which the risk of speculative abuse

is intolerable or, more broadly, in the words of the statute,

whether the transaction is “not comprehended within the purpose of [§ 16(b)].” 15 U.S.C. § 78p(b). 

As a second prong of attack, Dreiling purports to identify

empirical evidence showing that the risk of speculative abuse

for board-approved, insider-issuer transactions is intolerable.

As we explained, the SEC came to exactly the opposite conclusion in adopting Rule 16b-3(d). After notice and comment,

the SEC determined that board-approved transactions between

an issuer and an insider were unlikely to result in speculative

abuse, and that the risk of such abuse was therefore tolerable.

As amicus curiae, the SEC adds that in considering Rule 16b3(d), it found that insider-issuer transactions did not pose an

intolerably great risk of abuse because “[b]oard or shareholder

approval will remove the timing of the acquisition from the

control of any one insider and also tend to assure that the

acquisition is for a legitimate corporate purpose.” See also

Gryl v. Shire Pharm. Group PLC, 298 F.3d 136, 145-46 (2d

Cir. 2002). 

Yet Dreiling claims to refute this conclusion by identifying

empirical evidence that Rule 16b-3(d) immunizes transactions

DREILING v. AMERICAN EXPRESS CO. 9577
for which the risk of abuse is intolerable. As evidence, he

cites a single article that shares his general concern with certain insider-issuer transactions8

 but explicitly says that § 16(b)

and Rule 16b-3(d) are “of limited relevance to the award of

executive stock options.”

9

 Thus, Dreiling offers nothing substantive to challenge the SEC’s analysis and conclusion that

board-approved, insider-issuer trades do not give rise to an

intolerable level of speculative abuse. See 61 Fed. Reg. at

30,377 (“Based on its experience with the Section 16 rules,

the Commission is persuaded that transactions between the

issuer and its officers and directors . . . that satisfy other

objective gate-keeping conditions[ ] are not vehicles for the

speculative abuse that section 16(b) was designed to prevent.”); id. (“Generally, these transactions do not appear to

present the same opportunities for insider profit on the basis

of non-public information as do market transactions by officers and directors.”). 

Dreiling also argues that certain hypotheticals show that

Rule 16b-3(d) shields abusive transactions. He posits a set of

imagined, though plausible, facts leading to TRS’s use of

inside information in selling InfoSpace shares, such as a quick

sale to the public market once TRS learns that InfoSpace’s

stock is inflated. Dreiling also identifies a hypothetical

described in Levy v. Sterling Holding Co., 314 F.3d 106, 124

(3d Cir. 2002), in which insiders of a closely-held corporation

grant themselves options on the cheap and sell quickly after

an initial public offering. Once again, this argument presumes

the only legitimate transaction is a zero-risk transaction. 

8

Iman Anabtawi, Secret Compensation, 82 N.C. L. REV. 835, 852-56

(2004). 

9

Id. at 860 n.113 (“Because, under Rule 16b-3(d), a stock option grant

made by an independent compensation committee is generally exempt

from section 16(b), and because section 16(b) reaches only transactions

that occur within six months of each other, it is of limited relevance to the

award of executive stock options.”). 

9578 DREILING v. AMERICAN EXPRESS CO.
Without citing any authority, Dreiling argues that a transaction for which there is the mere possibility of abuse may not

be exempted by a SEC-promulgated rule. But such hypothetical concerns cannot outweigh the SEC’s 60-year experience

with rules interpreting § 16(b), 61 Fed. Reg. at 30,377, and

promulgation of Rule 16b-3(d) based on a full notice-and

comment process, resulting in a “detailed and reasoned” consideration of the rule.10 See Chevron, 467 U.S. at 865. We

may not invalidate the rule simply because Dreiling questions

the policy underpinnings of Rule 16b-3(d). Id. at 866 (“When

a challenge to an agency construction of a statutory provision,

fairly conceptualized, really centers on the wisdom of the

agency’s policy, rather than whether it is a reasonable choice

within a gap left open by Congress, the challenge must fail.”).

Finally, Dreiling seeks to invalidate Rule 16b-d(3) because

the SEC justified the rule based on policy concerns unrelated

to speculative abuse. Dreiling presents two variants of this

argument. He first contends that regulatory simplicity—one

reason the SEC revised Rule 16b-d(3) in 1996—by itself cannot justify exempting all board-approved, insider-issuer transactions from § 16(b) liability. In his view, the SEC in effect

“took the position that abusive short-swing trading must be

tolerated in the name of easing compliance.” 

But the SEC did not rely solely on administrative simplicity

in amending the rule. As we have explained, the SEC determined that the transactions covered by Rule 16b-3(d) were

“not vehicles for the speculative abuse that section 16(b) was

designed to prevent.” 61 Fed. Reg. at 30,377. Thus the SEC

10Indeed, the SEC acknowledged in its amicus brief the possibility of

abuse in the hypotheticals described by Dreiling. A “dominant insider

[may be] privy to insider information that he conceals from the board or

shareholders in obtaining approval for a transaction.” But, in adopting

Rule 16b-3(d), the SEC determined that exempted transactions “did not

pose a significant risk of abusive insider trading with less informed investors.” (Emphasis added.) 

DREILING v. AMERICAN EXPRESS CO. 9579
was surely entitled to consider administrative simplicity or

flexibility as an additional basis for revising Rule 16b-3(d).

Dreiling also argues that, in amending Rule 16b-3(d), the

SEC wrongly assumed that speculative abuse caused by the

exempted transactions could be remedied by state laws. It is

true that the mere existence of other legal remedies for insider

trading is irrelevant to determining whether a particular class

of transactions should be exempt from § 16(b) liability. See

Foremost-McKesson, 423 U.S. at 255 (“Section 16(b)’s

scope, of course, is not affected by whether alternative sanctions might inhibit the abuse of inside information.”). Had the

SEC justified Rule 16b-3(d) solely on the basis that state laws

could fill the enforcement lacuna left by the rule, it would be

invalid. 

But, again, this argument does not stand on its own. The

SEC did not justify Rule 16b-3(d) solely on the grounds that

state laws could replace § 16(b) as the remedy for short-swing

insider trading. Rather, the transactions covered by Rule 16b3(d) were ones the SEC determined did not give rise to an

intolerable risk of speculative abuse. The SEC also noted that

state laws on fiduciary duty and self-dealing might help remedy any residual speculative abuse that did occur. See 61 Fed.

Reg. at 30,381. The SEC should not be penalized for explaining multiple reasons why the rule makes sense. 

[8] Congress delegated to the SEC the express authority “to

elucidate a specific provision of [§ 16(b)] by regulation.”

Chevron, 467 U.S. at 844. Considering the careful review

afforded by the SEC, including its analysis of the comments

and decades of experiences in the securities arena, we hold

that Rule 16b-3(d) is not arbitrary, capricious, or contrary to

§ 16(b), and is a valid exercise of SEC authority under

§ 16(b).

III. RULE 16b-3(d) AND DIRECTORS BY DEPUTIZATION

[9] Although Rule 16b-3(d) does not, on its face, include

“directors by deputization,” the SEC interprets the rule to

9580 DREILING v. AMERICAN EXPRESS CO.
include such directors. Dreiling challenges this interpretation

as the SEC overstepping its authority. Alternatively, Dreiling,

supported by the SEC as amicus, argues that Rule 16b-3(d)

does not apply to a director by deputization if the board did

not know of the deputization when it approved the transaction. 

Before analyzing the merits of these claims, we pause to

define the term “director by deputization.” The Supreme

Court has recognized that a corporation may be a virtual

director, and thus an insider for purposes of § 16(b) liability,

by deputizing a natural person to perform its duties on the

board. Blau v. Lehman, 368 U.S. 403, 410 (1962) (“Lehman

Brothers would be a ‘director’ of Tide Water, if as petitioner’s

complaint charged Lehman actually functioned as a director

through Thomas, who had been deputized by Lehman to perform a director’s duties not for himself but for Lehman.”).

Whether a company is a director by deputization is “a question of fact to be settled case by case and not a conclusion of

law.” Feder v. Martin Marietta Corp., 406 F.2d 260, 263 (2d

Cir. 1969); accord Blau, 368 U.S. at 408-09. 

[10] A company may be a director by deputization without

intending to be and without acknowledging that a deputy represents its interests on the issuer’s board. See Feder, 406 F.2d

at 265 (“[A] person . . . could act as a deputy . . . even in the

absence of factors indicating an intention or belief on the part

of both companies that he was so acting.”). In light of these

cases, the SEC has recognized the doctrine of directors by

deputization but has left it to courts to decide how to apply

§ 16(b), and rules promulgated under it, to such directors. See

Ownership Reports and Trading By Officers, Directors and

Principal Securities Holders, SEC Release No. 34-26333, 53

Fed. Reg. 49,997 (proposed Dec. 2, 1988) (recognizing doctrine of directors by deputization but noting that the SEC

“does not propose to codify case law relating to deputization.”). 

DREILING v. AMERICAN EXPRESS CO. 9581
A. GENERAL APPLICATION OF RULE 16b-3(d) TO DIRECTORS

BY DEPUTIZATION

Since directors by deputization are subject to § 16(b) liability, it should follow, without controversy, that they may also

seek the protection of Rule 16b-3(d). Dreiling nevertheless

insists that directors by deputization are categorically barred

from invoking Rule 16b-3(d). He reaches this conclusion by

asserting that the sole purpose of Rule 16b-3(d) is to immunize issuer-insider transactions that compensate individual

directors or officers for their work. Because most directors by

deputization are corporate entities, according to this logic, any

stock grants they receive would not be compensatory. 

[11] Dreiling bases his understanding of the post-1996 revision of Rule 16b-3(d) on the SEC’s pre-revision rationale for

the rule. It is true that before 1996, the rule applied only to

compensatory transactions. But the current incarnation of

Rule 16b-3(d) explicitly covers non-compensatory insiderissuer transactions. 17 C.F.R. § 240.16b-3(d) (exempting eligible insider-issuer transactions “whether or not intended for

a compensatory or other particular purpose”). The SEC

adopted the 1996 revision with the express purpose of immunizing non-compensatory transactions. See 61 Fed. Reg. at

30,377-78 (indicating that the 1996 revision to Rule 16b-3(d)

was intended to exempt compensatory stock grants to directors or officers as well as “[o]ther acquisitions by an officer

or director from the issuer, including grants, awards and

participant-directed transactions,” if approved by the board of

directors or a majority of shareholders). To make matters doubly clear, the SEC squarely takes the position in its amicus

brief that Rule 16b-3(d) encompasses directors by deputization: “[W]hen Rule 16b-3(d) was adopted the Commission

contemplated its application to all acquisitions from an issuer

that met the objective gatekeeping requirements set forth in

the rule (such as board or shareholder approval), regardless of

whether the acquisitions have a compensatory purpose or

not.” We thus reject Dreiling’s argument because it conflicts

9582 DREILING v. AMERICAN EXPRESS CO.
with the plain text of the 1996 version of Rule 16b-3(d) as

well as the SEC’s controlling interpretation of it.11 Thus,

directors by deputization are entitled to seek the protection of

Rule 16b-3(d) to the same extent, and on the same terms, as

an individual director or officer. 

B. SPECIFIC APPLICATION OF RULE 16b-3(d) TO TRS

[12] The remaining issue to be decided is whether Rule

16b-3(d) exempts TRS under the facts alleged by Dreiling.

According to Dreiling’s allegations, the InfoSpace board did

not approve of the issuance of shares to TRS with the understanding that TRS was an insider as a director by deputization

through David House. Dreiling cites a letter InfoSpace’s

counsel sent to Dreiling that said that House “did not in any

way represent [TRS]” and, thus, was not a director by deputization. For purposes of TRS’s motion to dismiss for failure

to state a claim, we accept as true the allegation that the InfoSpace board did not approve the transaction in question

knowing that TRS was a director by deputization. See Zimmerman v. Oakland, 255 F.3d 734, 737 (9th Cir. 2001) (“We

review dismissals under Rule 12(b)(6) de novo, accepting as

true all well-pleaded allegations of fact in the complaint and

construing them in the light most favorable to the plaintiffs.”).

We agree with Dreiling and the SEC that, on the facts alleged,

TRS has not met the requirements of Rule 16b-3(d), and that

Dreiling’s complaint should not have been dismissed. 

11The SEC’s interpretation of its own regulation is controlling unless

plainly erroneous or inconsistent with the regulation. See Auer v. Robbins,

519 U.S. 452, 461 (1997). This principle applies even if the SEC’s interpretation is presented in the form of an amicus brief. Id. at 462

(“Petitioners complain that the Secretary’s interpretation comes to us in

the form of a legal brief; but that does not, in the circumstances of this

case, make it unworthy of deference. The Secretary’s position is in no

sense a ‘post hoc rationalizatio[n]’ advanced by an agency seeking to

defend past agency action against attack. There is simply no reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question.”) (internal citation omitted). 

DREILING v. AMERICAN EXPRESS CO. 9583
[13] As we indicated already, Rule 16b-3(d) applies to

directors by deputization on the same terms as it would apply

to any other § 16(b) insider. Thus a director by deputization

must fulfill the same requirements of Rule 16b-3(d) to receive

its protection. Rule 16b-3(d) requires an issuer board to

approve the specific insider-issuer transaction for which the

exemption is sought. See 17 C.F.R. § 240.16b-3 interpretive

note 3 (“The approval condition[ ] of [Rule 16b-3(d)(1)]

require[s] the approval of each specific transaction, and [is]

not satisfied by approval of a plan in its entirety . . . .”); 61

Fed. Reg. at 30,381 (“When the rule requires ‘Non-Employee

Director,’ full board or shareholder approval, the Commission

intends that the approval relate to specific transactions rather

than the plan in its entirety.”). As the SEC observes in its

amicus brief, “[i]t is . . . imperative, for the purposes of Rule

16b-3(d), that the members of any corporate board know

when another person serving on the same board is deputized

by another person or entity to carry out its interests.”

12 If a

board does not know that one of its directors is a deputy for

another corporation, and thus a potential conduit for inside

information, the board “would have no reason for special vigilance . . . and . . . would not effectively serve its gatekeeping

function and ensure accountability.”

13

[14] It follows that Rule 16b-3(d) does not exempt TRS if

it is an undisclosed or secret director by deputization. Logically speaking, a board cannot approve of a specific insider12TRS argues that the position the SEC takes in its amicus brief clashes

with its previous understanding of the rule, something the SEC can only

modify through formal rulemaking. Despite this attack, TRS offers up

nothing to show that the SEC articulated a previous position on this point.

13TRS attempts to side step the knowledge requirement, arguing that

even if the board did not know that TRS was a director by deputization,

the exemption still applies because other laws exists to remedy the inside

transaction, including the reporting requirements under § 13(d) and

§ 13(g) of the Williams Act, or Rule 10b-5 liability. Again, the mere fact

that another remedy exists to cure the same ill suggests nothing about the

scope of § 16(b) or Rule 16b-3. See Foremost-McKesson, 423 U.S. at 255.

9584 DREILING v. AMERICAN EXPRESS CO.
issuer transaction without knowing that an insider was

involved in the transaction.14 As alleged by Dreiling, the InfoSpace board did not approve of the grant of its shares to TRS

knowing that TRS was a director by deputization for purposes

of the insider-issuer exemption. To be sure, the board

approved of the merger with Prio and the concomitant issuance of InfoSpace stock to Prio shareholders, of which TRS

was just one. But an open question, to be resolved on remand,

is whether the board approved the transaction with the understanding that TRS was an insider. 

Still, TRS argues that it must be exempt under Rule 16b3(d) because to hold otherwise would require us to create a

judicial exception to the rule and illegitimately “usurp” the

SEC’s regulatory function. United States v. Willfong, 274

F.3d 1297, 1302 (9th Cir. 2001). We are neither modifying

the rule nor “usurping” the SEC’s authority. All we are doing

at this stage of litigation is applying the requirements of Rule

16b-3(d), as written, to the facts alleged by Dreiling. 

[15] In sum, we uphold the SEC’s authority to adopt Rule

16b-3(d). We give “controlling weight” to the SEC’s interpretation that the rule covers directors by deputization and that

specific board approval of an insider-issuer transactions must

be done with knowledge of the director’s status. We reverse

the district court’s grant of TRS’s motion to dismiss because

Rule 16b-3(d) does not, on the facts alleged, shield TRS from

liability under § 16(b). Whether TRS was a director by deputization, and, if so, whether InfoSpace, in approving the general Prio-InfoSpace transaction, intended to approve a specific

insider-issuer transaction with respect to TRS, are among the

issues to be resolved on remand. 

14TRS argues that even if it were a director by deputization, the InfoSpace board was aware of this, knowing that House was a TRS officer.

This approach still begs the question of whether the InfoSpace board specifically approved of the grant of InfoSpace stock to TRS as an insider for

purposes of Rule 16b-3(d). 

DREILING v. AMERICAN EXPRESS CO. 9585
REVERSED and REMANDED.

Each party shall bear its own costs on appeal. 

9586 DREILING v. AMERICAN EXPRESS CO.