30376 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

1 17 CFR 240.16a–1, 16a–2, 16a–3, 16a–4, 16a–6,

16a–8, 16a–9, 16b–3, and 16b–6. Throughout this

release, the term ‘‘current Rule or Form’’ refers to

the regulation as in effect before today’s

amendments, while ‘‘new Rule or Form’’ refers to

the regulations as amended or adopted in this

release.

2 15 U.S.C. 78p.

3 15 U.S.C. 78a et seq.

4 17 CFR 240.16b–2.

5 17 CFR 240.16a–11.

6 17 CFR 240.16a–12 and 16a–13.

7 17 CFR 229.405.

8 17 CFR 228.405.

9 17 CFR 249.103, 104 and 105.

10The term ‘‘insider,’’ as used in this release,

refers to officers and directors of issuers with a class

of equity securities registered pursuant to section 12

of the Exchange Act, and holders of more than ten

percent of a class of equity securities so registered.

When referring to an issuer with securities

registered under section 12, this release includes

securities of closed-end investment companies

subject to section 30(f) of the Investment Company

Act (15 U.S.C. 80a–29(f) (1988)) and public utility

holding companies subject to Section 17 of the

Public Utility Holding Company Act of 1935 (15

U.S.C. 79q (1988)). The insiders of a closed-end

investment company also include the adviser and

any affiliated person of the adviser. Section 2(a)(3)

of the Investment Company Act (15 U.S.C. 80a–

2(a)(3) (1988)).

11Release No. 34–28869 (February 8, 1991) [56 FR

7242] (‘‘Adopting Release’’). The rules generally

became effective on May 1, 1991, except for the

phase-in period for compliance with the substantive

conditions of new Rule 16b–3. The phase-in period

previously was extended until September 1, 1996

or such different date as may be set in further

rulemaking (Release 34–36063 (August 7, 1995) (60

FR 40994) (‘‘1995 Phase-in Release’’)). It is being

further extended to November 1, 1996 to

accommodate the transition to the new rules.

Issuers may use new Rule 16b–3 for transactions on

or after the August 15, 1996 effective date, but are

not required to use the new rule until the end of

the phase-in period. See Section VII, below.

Following the Adopting Release, the Commission

issued two other releases relating to the revised

rules; one set forth the Commission’s views

regarding shareholder approval for amendments to

employee benefit plans under Rule 16b–3, as well

as certain technical amendments (Release No. 34–

29131 (April 26, 1991) (56 FR 19925)), while the

other adopted a technical amendment to Form 4

(Release No. 34–28869B (April 10, 1991) (56 FR

14467)).

12 15 U.S.C. 78p(b).

13Release No. 34–34514 (August 10, 1994) (59 FR

42449) (‘‘1994 Release’’).

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 228, 229, 240 and 249

[Release Nos. 34–37260; 35–26524; IC–

21997; File No. S7–21–94]

RIN 3235–AF66

Ownership Reports and Trading by

Officers, Directors and Principal

Security Holders

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

adopting amendments to its rules and

forms regarding the filing of ownership

reports by officers, directors, and

principal security holders, and the

exemption of certain transactions by

those persons from the short-swing

profit recovery provisions of section 16

of the Securities Exchange Act of 1934

(‘‘Exchange Act’’) and related provisions

of the Investment Company Act of 1940

(‘‘Investment Company Act’’) and the

Public Utility Holding Company Act of

1935. The revised rules are intended to

streamline the Section 16 regulatory

scheme, particularly with respect to

transactions between an issuer and its

officers and directors; simplify the

reporting system; broaden exemptions

from short-swing profit recovery where

consistent with the statutory purposes;

and codify several staff interpretive

positions.

DATES: Effective date: August 15, 1996.

The phase-in period for Rule 16b–3 is

extended until November 1, 1996

pursuant to Release No. 34–37261. For

a discussion of transition provisions, see

Section VII.

FOR FURTHER INFORMATION CONTACT:

Anne M. Krauskopf, Special Counsel,

Office of Chief Counsel, or Elizabeth M.

Murphy, Special Counsel, Office of

Disclosure Policy, at (202) 942–2900,

Division of Corporation Finance,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC.

20549.

SUPPLEMENTARY INFORMATION: The

Commission is adopting amendments to

Rules 16a–1, 16a–2, 16a–3, 16a–4, 16a–

6, 16a–8, 16a–9, 16b–3, and 16b–6 1

promulgated under section 16 2 of the

Exchange Act.3 The Commission also is

amending Rule 16b–2 4 and

redesignating it as Rule 16a–11,5 and

adopting new Rules 16a–12 and 16a–

13.6 Finally, the Commission is

adopting revisions to Item 405 of

Regulation S–K 7 and Regulation S–B,8

as well as to Forms 3, 4, and 5.9

Table of Contents

I. Executive Summary and Background

II. Transactions Between an Issuer and its

Directors or Officers

A. General Approach

B. Tax-Conditioned Plans

C. Discretionary Transactions

D. Grants, Awards and Other Acquisitions

from the Issuer

1. General; Participant-Directed

Acquisitions

2. Alternative Conditions

3. Scope of Approval Required

4. Non-Employee Director Definition

E. Dispositions to the Issuer

III. Derivative Securities

A. Compensatory Cash-Only Instruments

B. Over-Allotment Options

C. Surrender and Withholding Rights in

Connection with Exercise or Tax

Withholding

D. Value Derived from Market Price of an

Equity Security

IV. Revisions to Reporting System

A. Overall Approach

B. Transactions No Longer Reported at All

C. Transactions to be Reported on Form 5

D. Transactions to be Reported on Form 4

E. Joint and Group Reporting

F. Trust Transactions

G. Compliance with the Reporting

Requirements

H. Equity Swaps

I. Changes in Forms and Reporting Codes

V. Additional Exemptions and Revisions

A. Dividend or Interest Reinvestment Plans

B. New Exemption for Domestic Relations

Orders

C. Exemption for Stock Dividend

Transactions

VI. 1995 Solicitation of Comment Regarding

the on-Going Merit of the Short-Swing

Profit Recovery Provisions of Section 16

VII. Transition to New Rules

A. General Application

B. New Rule 16b–3

VIII. Cost-Benefit Analysis

IX. Summary of Final Regulatory Flexibility

Analysis

X. Statutory Basis and Text of the

Amendments

I. Executive Summary and Background

In February 1991, in response to

developments in the trading of

derivative securities, the growth of

complex and diverse employee benefit

plans, and substantial filing

delinquencies, the Commission adopted

comprehensive changes to the beneficial

ownership and short-swing profit

recovery rules and forms applicable to

insiders 10 pursuant to section 16.11

While many aspects of the new section

16 rules were favorably received,

unanticipated practical difficulties arose

in implementing the new rules,

particularly with respect to thrift and

similar employee benefit plans. In

particular, issuers and insiders stated

that the application of current Rule 16b–

3 to these plans is cumbersome,

presents significant record-keeping

problems and discourages insiders from

participation in plan funds holding

employer securities.

In order to address these concerns, in

1994 the Commission proposed further

rule changes designed to streamline the

Section 16 regulatory scheme adopted

in 1991. The proposals were designed to

facilitate the operation of employee

benefit plans; broaden exemptions from

Section 16(b) 12 short-swing profit

recovery where consistent with

statutory purposes; and codify several

staff interpretive positions.13 Comment

also was solicited on various suggested
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30377

14 15 U.S.C. 78p(a).

15Release No. 34–34681 (September 16, 1994) (59

FR 48579) (‘‘Cash-only Release’’).

16Release No. 34–36356 (October 11, 1995) (60 FR

53832), as corrected in Release No. 34–36356A

(October 29, 1995) (60 FR 54823), (together, the

‘‘1995 Release’’).

17An insider’s breach of fiduciary duty to profit

from self-dealing transactions with the company is

a concern of state corporate law. Generally, states

have created potent deterrents to insider selfdealing and other breaches of fiduciary duty. See

3 Fletcher Cyc. Corp. § 837.60 (Perm. ed. 1994); D.

Block, S. Radin and N. Barton, The Business

Judgment Rule: Fiduciary Duties of Corporate

Directors 124–37 (4th ed. 1993). There are also

potential liability considerations under Rule 10b–5

[17 CFR 240.10b–5].

18 26 U.S.C. et seq. (1986) (‘‘Internal Revenue

Code’’).

19 29 U.S.C. 1001 et seq. (1986).

20See Section II, below.

21See Section IV, below.

22These comment letters, together with two

Summaries of Comments prepared by Commission

staff, are available for inspection and copying in the

Commission’s Public Reference Room, 450 Fifth

Street, NW., Washington DC 20549. Persons seeking

these materials should make reference to File No.

S7–21–94.

23Pursuant to Release 33–7300 issued today, the

Commission also is rescinding Rules 16b–1(c) and

16b–4 and amending Rule 16a–3(i) to permit typed

signatures, consistent with the recommendations of

the Task Force on Disclosure Simplification.

modifications to the section 16(a) 14

reporting requirements.

A follow-up release 15 solicited further

comment on the treatment of

compensatory cash-only instruments

based on the value of the issuer’s equity

securities. Such instruments currently

are not subject to Section 16 if they meet

specified conditions. The Commission

requested comment as to whether the

current exclusion is appropriate in light

of the fact that equity-based securities

provide identical opportunities for

profit predicated on the underlying

stock price movement, whether settled

exclusively in cash or stock, and

whether, from the perspective of

shareholders and analysts, cash-only

instruments have the same section 16(a)

informational value as instruments that

may be settled in stock.

Finally, additional rule proposals

were published in 1995 16 to provide a

broader exemption from short-swing

profit recovery for transactions between

an issuer and its directors or officers,

whether or not in the context of

employee benefit plans; broaden the

exemption for transactions in dividend

and interest reinvestment plans; and

revise the section 16(a) reporting

scheme.

The 1995 proposals presented a

simplified, flexible approach based on

the premise that 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.

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. Typically, where the issuer,

rather than the 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.17

Based on its experience with the Section

16 rules, the Commission is persuaded

that transactions between the issuer and

its officers and directors that are

pursuant to plans meeting the

administrative requirements and

nondiscrimination standards of the

Internal Revenue Code 18 and the

Employee Retirement Income Security

Act of 1974 (‘‘ERISA’’),19 or that satisfy

other objective gate-keeping conditions,

are not vehicles for the speculative

abuse that section 16(b) was designed to

prevent. Accordingly, these transactions

are exempted by new Rule 16b–3 as

adopted.20

As a corollary to this approach, it was

proposed that cash-only instruments

would be subject to section 16 to the

same extent as other instruments that

embody the opportunity for profit based

on price movement in the issuer’s stock.

These instruments would be eligible for

exemption from section 16(b), but

reportable under section 16(a), to the

same extent as other issuer equity

securities in transactions between an

issuer and its officers and directors. The

Commission has determined to adopt

this proposal as an integral part of its

revised approach to transactions

between an issuer and its officers and

directors.

As a further corollary to the 1995

proposal, the Commission indicated that

it contemplated simplifying the

reporting system. Certain routine

transactions were proposed to be

exempted from reporting, while other

transactions exempt pursuant to Rule

16b–3 would be reported on Form 4

within ten days after the end of the

month in which the transaction

occurred. The Commission has

determined to revise the reporting

system so that most transactions exempt

pursuant to new Rule 16b–3 will be

reported on an annual basis on Form 5,

and to eliminate the class of

transactions currently reportable on the

earlier of the next required Form 4 or

Form 5 by requiring that option

exercises be reported on Form 4 and

small acquisitions on Form 5. A number

of exempt transactions of a routine

nature, such as acquisitions pursuant to

tax-conditioned plans and dividend and

interest reinvestment plans, will not be

required to be reported at all.21

Eighty-nine letters of comment were

received in response to the 1994 Release

and the Cash-only Release, and 38

letters were received in response to the

1995 Release.22 In general, the

commenters expressed strong support

for the tenor of the proposals, with most

preferring the 1995 version of Rule 16b–

3 to the 1994 version. These

commenters thought that the revisions

would alleviate many of the practical

issues and uncertainties that have arisen

since adoption of the comprehensive

section 16 amendments in 1991. Many

commenters suggested modifications to

the proposals, some of which are

addressed in this Release, as discussed

throughout.

The rules adopted today essentially

implement the 1995 proposals, as well

as the elements of the 1994 proposals

not addressed in 1995.23 Changes from

the proposals are discussed in the

release below. Highlights of changes

from the current rules are as follows:

A. Transactions Between an Issuer and

its Directors or Officers

• Generally, transactions between an

issuer (including an employee benefit

plan sponsored by an issuer) and its

directors or officers will be exempt from

section 16(b) if they satisfy the

applicable conditions of new Rule 16b–

3, as set forth below:

• Routine transactions pursuant to

specified tax-conditioned plans (such as

thrift plans, stock purchase plans and

excess benefit plans) will be exempt

from section 16(b) without further

condition.

• Fund-switching transactions or

volitional cash withdrawals from an

issuer equity securities fund will be

exempt if the election to engage in the

transaction is at least six months after

the last election to engage in such a

transaction that was opposite-way (i.e.,

a previous acquisition if the transaction

to be exempted is a disposition, and

vice versa).

• Other acquisitions by an officer or

director from the issuer, including

grants, awards and participant-directed

transactions, will be exempt upon

satisfaction of any one of three

alternative conditions:

• Approval of the transaction by the

board of directors of the issuer or a

committee of two or more NonEmployee Directors;
30378 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

24Current Rule 16a–1(c)(3).

25New Rule 16a–1(c)(7), which will codify the

interpretive positions set forth in Video Technology

(Overseas) Limited/Davis Polk & Wardwell (June 17,

1992) and Davis Polk & Wardwell (July 16, 1992).

26New Rule 16a–1(c)(3) (proposed as Rule 16a–

1(c)(8)).

27New Rule 16a–11 (current Rule 16b–2).

28New Rule 16a–12.

29New Rule 16a–13.

30New Rule 16a–2(b).

31New Rule 16a–4(d).

32These transactions, which do not exceed

$10,000 in the aggregate, are eligible for deferred

reporting pursuant to current and new Rule 16a–6.

33New Rule 16a–3(j).

34Current Rule 16a–8(a)(1)(ii), which makes a

trust subject to Section 16 if the trustee otherwise

is subject to section 16 and exercises or shares

investment control of issuer securities held by the

trust and the trustee or a member of the trustee’s

immediate family has a pecuniary interest in such

issuer securities, is rescinded. Other obligations

applicable to trusts, trustees, beneficiaries and

settlors pursuant to current Rule 16a–8 are not

affected by this change.

35 17 CFR 229.405 and 228.405.

36New Rule 16a–11 (current Rule 16b–2).

37New Rule 16a–12.

38Current and new Rule 16a–9.

39New Rule 16a–2(b).

40See Section I, above.

41As indicated in Note (1) to new Rule 16b–3, the

exercise or conversion of a derivative security that

does not satisfy the conditions of this rule will

continue to be eligible for exemption from section

16(b) pursuant to Rule 16b–6(b) [17 CFR 240.16b–

6(b)]. Similarly, a note is added to new Rule 16b–

6(b) as a reminder that exercises or conversions also

may be exempted by new Rule 16b–3.

42Like current Rule 16b–3, new Rule 16b–3 does

not provide an exemption for persons who are

subject to section 16 solely because they

beneficially own greater than ten percent of a class

of an issuer’s equity securities. Officers and

directors owe certain fiduciary duties to a

corporation. See n. 17, above. Such duties, which

act as an independent constraint on self-dealing,

may not extend to ten percent holders. The lack of

other constraints argues against making new Rule

16b–3 available to ten percent holders. However,

new Rule 16b–3 is available to such a person who

is also subject to section 16 by virtue of being an

officer or director with respect to transactions with

the issuer.

43New Rule 16b–3(a). 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 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, that

• Approval or ratification of the

transaction by the holders of the

majority of the issuer’s securities; or

• Satisfaction of a six-month holding

period following the date of acquisition.

• Other dispositions by an officer or

director to the issuer will be exempt if

approved by the board of directors of

the issuer, a committee of two or more

‘‘Non-Employee Directors,’’ as defined,

or the holders of the majority of the

issuer’s securities.

B. Derivative Securities

• The current section 16 exclusion

from the definition of ‘‘derivative

securities’’ for instruments based on the

value of the issuer’s equity securities

but settled exclusively in cash 24 is

rescinded. However, these instruments

are eligible for exemption pursuant to

new Rule 16b–3.

• Options granted to an underwriter

in a registered public offering to satisfy

over-allotments are expressly excluded

from the definition of ‘‘derivative

security.’’ 25

• Rights to withhold or surrender a

security in satisfaction of the exercise

price of a derivative security, or in

satisfaction of the tax-withholding

consequences applicable to the receipt,

exercise or vesting of an issuer equity

security (including a derivative security)

are excluded from the definition of

‘‘derivative security.’’ 26

C. Reporting

• A number of transactions exempt

from Section 16(b) that currently must

be reported on Form 5 no longer will be

required to be reported at all, among

them:

• Exempt transactions pursuant to

tax-conditioned plans (other than fundswitching transactions and volitional

cash withdrawals from an issuer equity

securities fund);

• Transactions pursuant to dividend

or interest reinvestment plans 27 and

domestic relations orders; 28

• Transactions that change only the

form of beneficial ownership; 29

• Certain transactions by a person

who has ceased to be an insider; 30 and

• Expirations or cancellations of

certain derivative securities. 31

• Exercises and conversions of

derivative securities, including

employee stock options, whether or not

exempt from Section 16(b), will be

reported on Form 4.

• All other exempt transactions and

small acquisitions 32 will be reported

annually on Form 5, with earlier

reporting on Form 4 permitted.

• Reporting will be permitted on a

joint basis when more than one person

subject to Section 16 is deemed to be a

beneficial owner of the same issuer

equity securities.33

• A trust will be subject to Section 16

only if the trust is the beneficial owner

of more than ten percent of a class of

issuer equity securities registered

pursuant to Section 12 of the Act.34

• Item 405 of Regulations S–K and S–

B35 is revised to clarify the nature of the

issuer’s obligation to review insiders’

filings in order to determine whether

there are any delinquent reports that

require disclosure. Item 405 disclosure

will be required to be placed under a

separate caption.

• Insiders’ obligation to report equity

swap transactions is reiterated and

clarified, and a new reporting code is

added for equity swaps.

D. Other Issues

• The exemption for the reinvestment

of dividends and interest pursuant to

dividend and interest reinvestment

plans 36 is revised to eliminate the

requirement that the plan be made

available on the same terms to all

holders of the class of securities.

• A new exemption is provided for

transactions pursuant to domestic

relations orders.37

• The exemption for stock splits,

stock dividends and pro rata rights 38 is

expanded to exempt stock dividends

paid in the securities of a different

issuer, such as spinoff distributions.

• A transaction that occurs after a

person ceases to be an officer or director

will be subject to section 16 only if it

is not otherwise exempt from section

16(b) and is executed within six months

of an opposite-way transaction subject

to section 16(b) that occurred while the

person was an officer or director.39

II. Transactions Between an Issuer and

Its Directors or Officers

A. General Approach

The amendments to Rule 16b–3

adopted today implement the approach

set forth in the 1995 proposal to align

better the regulatory requirements under

the rule with the statutory goals

underlying section 16.40 Moreover, since

benefit plans and compensation

payments and programs vary widely in

design and purpose, the Commission is

convinced that a ‘‘one size fits all’’

regulatory scheme is impractical. The

proliferation of unique plan features

over the last decade has led to legal

uncertainty regarding the application of

Rule 16b–3 to these innovations. Rather

than react to present plan

developments, the Commission intends

to provide greater regulatory flexibility

to accommodate future developments.

New Rule 16b–3 exempts from shortswing profit recovery any acquisitions

and dispositions of issuer equity

securities (including those that occur

upon the exercise or conversion of a

derivative security, whether in- or outof-the-money) 41 between an officer or

director and the issuer, subject to

simplified conditions.42 A transaction

with an employee benefit plan

sponsored by the issuer will be treated

the same as a transaction with the

issuer.43 However, unlike the current
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30379

otherwise would be satisfied through direct

compensation from the issuer.

44 In addition to the conditions for exemption, as

discussed below, Note (2) has been added to new

Rule 16b–3 to reference the reporting rules

applicable to transactions exempted by the new

rule. See Section IV, below.

45Because a plan no longer will be required to set

forth in writing either the price at which securities

may be offered and the amount of securities to be

awarded, or the method by which such price and

amount are to be determined, the manner in which

shares are counted no longer will present

interpretive issues. As noted at n. 69 to the 1994

Release, interpretive letters regarding this subject

for purposes of the requirements of current Rule

16b–3(a)(1) no longer are required to be followed.

46New Rule 16b–3(c).

47The rule does not require the plan to be taxqualified, but instead either to satisfy specified

conditions applicable to tax-qualified plans, or, in

certain circumstances, to be operated in connection

with a plan that satisfies those conditions.

48New Rule 16b–3(b)(4). The definition of

‘‘Qualified Plan’’ is adopted as proposed, i.e., 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.

49New Rule 16b–3(b)(2). The definition of

‘‘Excess Benefit Plan’’ has been revised to eliminate

references to specific I.R.C. Sections so as to ensure

that plans qualifying for an exemption under

section 201(2) of ERISA would be covered by the

exemption. The revised definition requires that

such a plan be operated in conjunction with a

Qualified Plan, and provide only the benefits and

contributions that would be provided under the

Qualified Plan but for any benefit or contribution

limitations set forth in the Internal Revenue Code.

As was proposed, the amended rule does not

require transactions pursuant to an Excess Benefit

Plan to be in tandem with transactions in the

related Qualified Plan to be eligible for exemption.

50New Rule 16b–3(b)(5). The definition of ‘‘Stock

Purchase Plan’’ has been revised to indicate that

satisfaction of the coverage and participation

standards of Section 410 of the Internal Revenue

Code is an alternative to satisfaction of Internal

Revenue Code Sections 423(b)(3) and 423(b)(5),

rather than an additional requirement. The purpose

of including this alternative standard is to make the

exemption available to stock purchase plans that do

not satisfy the standards of Internal Revenue Code

Section 423, but nevertheless are operated in a

broad-based manner.

51See Section II.C, below.

52 Internal Revenue Code Section 162(m) and

Regulation § 1.162–27(e), which set forth the

conditions pursuant to which an issuer may deduct

compensation in excess of $1 million paid to its

chief executive officer and four other most highly

compensated officers for whom disclosure is

required to be reported in Exchange Act filings.

53See Section II.D, below.

54No exemption has been provided in new Rule

16b–3 for a withdrawal in kind of issuer equity

securities because such a transaction would be a

change in form of beneficial ownership from

indirect to direct, which will be exempt from

Section 16 pursuant to new Rule 16a–13. See

Section IV.B, below.

55New Rule 16b-3(f).

56New Rule 16b-3(b)(1).

57Because it is anticipated that the actual date on

which such a plan transaction occurs may be

outside the control of an insider participant, the

rule is premised on a six-month interval between

the date of subsequent ‘‘opposite way’’ elections.

The rule does not require that such an election be

made six months in advance of the related

transaction.

rule, a transaction need not be pursuant

to an employee benefit plan or any

compensatory program to be exempt,

nor need it specifically have a

compensatory element.

A transaction will be exempt if it

satisfies the appropriate conditions set

forth among four alternative categories:

Tax-Conditioned and Related Plans;

Discretionary Transactions; Grants,

Awards and Other Acquisitions from

the Issuer; and Dispositions to the

Issuer.44 New Rule 16b–3 eliminates

many of the conditions of current Rule

16b–3, such as general written plan

conditions,45 the prohibition against

transfer of derivative securities,

shareholder approval as a general

condition for plan exemption, the sixmonth holding period as a general

condition for the exemption of grant and

award transactions, the disinterested

administration or formula plan

requirements regarding grant

transactions, and the window period

requirement for fund-switching

transactions and stock appreciation

right exercises.

B. Tax-Conditioned Plans

The exemption for transactions

pursuant to tax-conditioned plans 46 is

adopted substantially as proposed in

1995. This exemption is premised on

the view that an adequate safeguard

against speculative abuse is provided

when a plan satisfies certain conditions

imposed by the Internal Revenue Code

and ERISA.47 Accordingly, any

acquisition or disposition of issuer

equity securities, except as discussed

below, will be exempt without further

condition if made pursuant to a plan

that satisfies the definition of a

‘‘Qualified Plan,’’ 48 an ‘‘Excess Benefit

Plan,’’ 49 or a ‘‘Stock Purchase Plan.’’ 50

Thus, for example, routine acquisitions

pursuant to thrift and stock purchase

plans generally will be exempt under

this provision. The tax code coverage

and participation requirements provide

readily accessible, objective standards

for designing an exempt plan.

While most transactions pursuant to

tax-conditioned plans may rely on this

exemption, fund-switching and cash

withdrawal transactions arising solely

from an insider’s volitional investment

decision, defined as ‘‘Discretionary

Transactions,’’ instead must satisfy a

timing requirement.51

As proposed, the exemption for taxconditioned plans would have

exempted without further condition any

acquisition pursuant to a plan or

transaction that satisfied the conditions

applicable to performance-based

compensation imposed by section

162(m) of the Internal Revenue Code

and the regulations thereunder.52

Commenters expressed divergent views

on whether this basis for exemption

would be useful. The Commission is not

adopting the section 162(m) provision,

since it appears unnecessary in view of

the expanded availability of the

exemption for grants, awards and other

acquisitions.53

C. Discretionary Transactions

Many contributory employee benefit

plans permit a participant to choose one

of several funds in which to invest (e.g.,

an issuer stock fund, a bond fund, or a

money market fund). Plan participants

typically are given the opportunity to

engage in ‘‘fund-switching’’

transactions, permitting the transfer of

assets from one fund to another, at

periodic intervals. Plan participants also

commonly have the right to withdraw

their investments in cash from a fund

containing equity securities of the

issuer. Fund-switching transactions

involving an issuer equity securities

fund and cash distributions from these

funds 54 may present opportunities for

abuse because the investment decision

is similar to that involved in a market

transaction. Moreover, the plan may buy

and sell issuer equity securities in the

market in order to effect these

transactions, so that the real party on

the other side of the transaction is not

the issuer but instead a market

participant.

In order to foreclose opportunities for

abuse, the 1995 proposal contemplated

that such transactions in a taxconditioned plan would be exempt only

if effected pursuant to an election made

at least six months following the date of

the most recent prior such election. As

adopted, this provision has been made

applicable to these transactions

pursuant to any plan, whether or not

tax-conditioned,55 given that it is the

nature of the transaction, without regard

to the type of plan, that presents an

opportunity for abuse. Accordingly,

these transactions are defined separately

as ‘‘Discretionary Transactions,’’ 56 and

the exemption is placed in a separate

paragraph rather than included with the

exemption for tax-conditioned plans.

As favored by many commenters, the

six month condition will apply only to

‘‘opposite way’’ transactions; i.e.,

elections that effect acquisitions and

dispositions must be six months apart,

but prior ‘‘same-way’’ elections within

the preceding six months do not render

the exemption unavailable. 57 The six

month condition will apply if a prior

election by the officer or director

effecting an ‘‘opposite way’’
30380 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

58The items enumerated are the same as those in

the rule as proposed, although they were not set

forth in a separate definition.

59Such transactions are exempted by current Rule

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

60Such transactions 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).

61A loan funded by the disposition of issuer

equity securities will be considered a cash

distribution involving a volitional disposition of an

issuer equity security unless the insider continues

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 will be

exempt without condition because such

transactions do not occur at the insider’s volition.

62New Rule 16b–3(d).

63Many such transactions are now exempt

pursuant to the six month advance election

provided by current Rule 16b–3(d)(1)(i).

64Participant-directed dispositions are eligible for

the ‘‘Dispositions to the Issuer’’ exemption,

discussed in Section II.E, below.

65See Section II.C, above.

66New Rule 16b–3(d)(1).

67New Rule 16b–3(d)(2). Like current Rule 16b–

3(b), this standard would require the affirmative

vote of the holders of the majority of the issuer’s

securities present or represented and entitled to

vote at a meeting duly held in accordance with the

applicable laws of the state or other jurisdiction in

which the issuer is incorporated, or the written

consent of the majority of the issuer’s securities

entitled to vote, solicited in compliance with

Section 14 of the Securities Exchange Act (15 U.S.C.

78n).

68New Rule 16b–3(d)(3). The 1995 Release

solicited comment as to whether a grant or award

that satisfies any of the three alternative conditions

should be exempt only if the officer or director to

whom the grant is made had not disposed of issuer

equity securities on a non-exempt basis during the

previous six months at a price higher than that at

which the grant is made. New Rule 16b–3(d), as

adopted, does not require satisfaction of this

condition with respect to any acquisition.

69This position is consistent with the amendment

to current Rule 16b–3(c)(1) proposed in 1994,

which would have reversed current interpretation

providing that the six-month holding period is

deemed to commence on the date the dividend or

DER is granted or allocated to the participant. See

Hewitt Associates (Apr. 30, 1991) Q. 2(b); and Davis

Polk & Wardwell (Aug. 23, 1991). Under new Rule

16b–3, DERs and shares purchased pursuant to the

receipt of dividends will need to satisfy a six-month

holding period only if the securities on which the

dividends or DERs are paid rely on a six-month

holding period as the basis for exemption.

Moreover, pro rata dividends paid in stock with

respect to all securities of a class will continue to

be exempt pursuant to Rule 16a–9.

Discretionary Transaction was made

pursuant to any plan of the issuer in

which the officer or director

participates. Some commenters favored

an exemption premised on transactions

taking place during a window period.

The Commission, however, prefers a

more simple approach that is more

consistent with the statutory purpose.

The definition of ‘‘Discretionary

Transaction’’ excludes a number of

transactions that are primarily for

retirement planning.58 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,59 as well as transactions

that effect a diversification or

distribution which the Internal Revenue

Code requires an employee benefit plan

to make available to a participant,60

need not comply with the six-month

condition.61 Thus, these transactions are

eligible for exemption pursuant to other

applicable provisions of the amended

rule (most likely the exemption for taxconditioned plans). Although such

transactions have an element of volition,

the insider’s opportunity to speculate in

the context of a death, disability,

retirement or termination of

employment would seem well

circumscribed, as is also the case with

regard to the specified diversification

and distribution elections.

D. Grants, Awards and Other

Acquisitions From the Issuer

1. General; Participant-Directed

Acquisitions

Plans that authorize ‘‘grant and

award’’ transactions provide issuer

equity securities to participants on a

basis that does not require either the

contribution of assets or the exercise of

investment discretion by the

participants. For example, awards of

bonus stock pursuant to a salary-based

formula and grants of options or

restricted stock are grant and award

transactions. In contrast, a ‘‘participantdirected transaction’’ requires the

participant to exercise investment

discretion as to either the timing of the

transaction or the assets into which the

investment is made. For example, the

exercise of an option and a participant’s

election pursuant to a thrift plan to

invest either the employee or the

employer contribution in issuer equity

securities are participant-directed

transactions.

Both the current and the new rules

provide a specific exemption for the

grant or award of issuer equity

securities. The new rule makes the

exemption more readily available, since

only one of three alternative conditions

need be satisfied.62 Commenters

responded favorably to this proposal.

They expressed concern, however, that

some participant-directed transactions

(such as deferrals of bonuses into

phantom stock and other deferred

compensation programs) that are

exempt under the current rule 63 would

lack an exemption under the new rule.

The 1995 proposal was intended to

permit such transactions, which

ordinarily do not present opportunities

for abuse, an opportunity for exemption.

Accordingly, as adopted, the

proposed grant and award exemption

has been retitled ‘‘Grants, Awards and

Other Acquisitions from the Issuer’’ to

make it clear that participant-directed

acquisitions that are not pursuant to taxconditioned plans may rely on this

exemption.64 However, if a participantdirected transaction is a ‘‘Discretionary

Transaction,’’ as defined in the new

rule, it must instead satisfy the

conditions designed specifically for

Discretionary Transactions in order to

be exempt.65

2. Alternative Conditions

The new rule provides three

alternative bases for exempting the

acquisition of issuer equity securities

(including derivative securities). The

first two conditions exempt an

acquisition that is either: (i) Approved

in advance by the board of directors or

a committee of the board composed

solely of two or more ‘‘Non-Employee

Directors;’’ 66 or (ii) approved in

advance, or subsequently ratified not

later than the date of the next annual

meeting of shareholders, by

shareholders.67 If a transaction has

satisfied more than one of the

alternative approval conditions

specified in the new rule (for example,

if board approval is followed by

shareholder approval) the issuer may

rely on any condition that provides the

basis for the exemption.

Alternatively, an acquisition that does

not satisfy any of the approval

conditions will be exempt if the

securities acquired are held by the

insider for six months following the

date of acquisition, or in the case of a

derivative security, at least six months

elapse between the date of acquisition of

the derivative security and the date of

disposition of the underlying security.68

The six-month holding period for

dividend equivalent rights (‘‘DERs’’) and

shares purchased pursuant to the

automatic reinvestment of dividends

will be deemed to commence on the

date of acquisition of the shares on

which the DERs or dividends are paid.69

Commenters who addressed this

segment of the 1995 proposal favorably

noted both its simplicity and flexibility.

The Commission is persuaded that

satisfaction of any of the three

conditions is a sufficient basis to

exempt an acquisition of issuer equity

securities from the issuer.
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30381

70This term is defined in new Rule 16b–3(b)(3).

See Section II.D.4, below.

71A plan that constitutes a ‘‘formula plan’’ under

staff interpretations of current Rule 16b–3(c)(2)(ii)

will be considered a formula plan for this purpose.

72The disposition of the derivative security that

occurs upon exercise similarly will be exempt

pursuant to new Rule 16b–3(e). See Section II.E,

below.

A derivative security that did not satisfy the NonEmployee Director committee, board of directors or

shareholder approval conditions (such as a

derivative security issued in reliance on the sixmonth holding period of new Rule 16b–3(d)(3) or

a derivative security acquired other than directly

from the issuer) could be exercised or converted

and the underlying issuer equity securities acquired

on an exempt basis pursuant to Rule 16b–6(b), if the

conditions of that rule are met (fixed exercise price

and exercise not out-of-the-money unless necessary

to comport with the sequential exercise provisions

of Internal Revenue Code Section 422A).

73Current Rule 16b–3(c)(2)(i).

74New Rule 16b–3(b)(3)(i).

75 17 CFR 229.404(a). This item generally requires

disclosure of related party transactions where the

amount involved exceeds $60,000. For purposes of

the definition of ‘‘Non-Employee Director,’’ each

test that refers to S–K Item 404 will be measured

by reference to the Regulation S–K disclosure Item,

whether the disclosure requirements applicable to

the issuer are governed by Regulation S–K or S–B.

76 17 CFR 229.404(b). This item generally requires

disclosure of business relationships with the

registrant where the amount involved exceeds

greater than five percent of the consolidated gross

revenue of either the registrant or the other entity.

77New Rule 16b–3(b)(3)(ii).

78 15 U.S.C. 80a–2(a)(19).

79See n. 17, above.

80New Rule 16b-3(e).

81See Section II.C, above.

82Like most other exempt transactions, these

transactions will be reportable on Form 5. See

Section IV.C, below. However, where the surrender

or withholding transaction is in connection with

the exercise or conversion of a derivative security,

it should be reported on the same Form 4 as the

exercise or conversion. See Section IV.D, below.

3. Scope of Approval Required

When the rule requires ‘‘NonEmployee Director,’’ 70 full board or

shareholder approval, the Commission

intends that the approval relate to

specific transactions rather than the

plan in its entirety. However, approval

of a plan pursuant to which the specific

terms and conditions of each acquisition

are fixed in advance, such as a formula

plan,71 will satisfy this condition, and

the exemption also will be available for

a plan with an appendix providing for

specific grants to specific individuals.

Note (3) has been added to the new rule,

making the specific nature of the

approval required clear.

The note also provides that where the

terms of a subsequent transaction are

provided for at the time a transaction is

initially approved, the subsequent

transaction will not require further

specific approval. If the terms of an

award as approved provide for a

subsequent participant-directed

election, that election will be exempt

without further condition if effected

pursuant to those terms. For example, if

an award of restricted stock as approved

permits an insider awardee to defer

receipt pursuant to a related deferred

compensation plan, the insider’s

election to defer will be exempt without

further condition. In the same manner,

the acquisition of underlying issuer

equity securities that occurs upon the

exercise or conversion of a derivative

security will be exempt, provided that

the exercise is pursuant to terms

provided in the derivative security

originally approved in its acquisition.72

Similarly, if an award as originally

approved specifically provided for the

automatic grant of reload options, each

resultant grant of reload options

pursuant to those terms will not require

subsequent approval.

4. Non-Employee Director Definition

With respect to committee approval as

a basis for exemption, ‘‘Non-Employee

Director’’ as proposed in 1995 was

defined 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. The

1995 Release further elaborated that, for

this purpose, ‘‘consultant’’ would

include attorneys, accountants or others

who indirectly receive compensation

from the issuer through firms that

provide services to the issuer.

However, commenters criticized the

‘‘Non-Employee Director’’ definition to

the extent that it would prohibit any

consulting arrangement with the issuer.

These commenters cited definitional

uncertainty, the special expertise

provided by retired senior executives

and other consultants, and the absence

of problems stemming from such

persons’ service as disinterested

directors under the current rules 73 as

reasons for not imposing an absolute

ban on consulting arrangements.

The Commission is persuaded that the

reasoning supporting these comments

justifies permitting directors with

limited consulting relationships with

the issuer to serve as Non-Employee

Directors. Under the rule as adopted,74

a ‘‘Non-Employee Director’’ will be a

director who is not currently an officer

or otherwise employed by the issuer, or

a parent or subsidiary of the issuer; does

not receive compensation directly or

indirectly from the issuer, its parent or

subsidiary for services rendered as a

consultant or in any capacity other than

as a director, except for an amount for

which disclosure would not be required

pursuant to Item 404(a) of Regulation S–

K;75 does not possess an interest in any

other transaction for which disclosure

would be required pursuant to Item

404(a) of Regulation S–K; and is not

engaged in a business relationship for

which disclosure would be required

pursuant to Item 404(b) of Regulation S–

K. 76 With respect to a closed-end

investment company, a ‘‘Non-Employee

Director’’ 77 will be a director who is not

an ‘‘interested person’’ of the issuer, as

that term is defined in section 2(a)(19)

of the Investment Company Act.78

Although the new rule would not

prohibit Non-Employee Directors or the

full board from awarding themselves

grants of issuer equity securities, such

grants would be subject to state laws

governing corporate self-dealing. 79 The

Commission believes that traditional

state law fiduciary duties facilitate

compliance with the underlying

purposes of section 16 by creating

effective prophylactics against possible

insider trading abuses.

E. Dispositions to the Issuer

Both as proposed in 1995 and as

adopted, the new rule exempts any

transaction involving a disposition of

issuer equity securities 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.80

However, if a disposition is a

Discretionary Transaction, as defined in

the new rule, it must instead satisfy the

conditions specifically applicable to

Discretionary Transactions to be

exempt.81

The 1994 Release proposed

amendments to current Rule 16b-3(f) to

exempt exercise withholding rights and

the surrender or withholding of issuer

equity securities in satisfaction of a taxwithholding obligation. These proposed

amendments are not adopted because

the same transactions will be exempted

pursuant to the broad scope of the new

rule.82 For example, the new rule will

exempt dispositions of issuer equity

securities to the issuer 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. Additionally,

the new rule will give the issuer the
30382 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

83The 1995 Release solicited comment as to

whether a disposition that satisfies either condition

should be exempt only if the officer or director

making the disposition had not acquired issuer

equity securities on a non-exempt basis during the

previous six months at a price lower than that at

which the disposition was made. New Rule 16b3(e), as adopted, does not require satisfaction of this

condition with respect to any disposition.

84Note (3) to new Rule 16b–3. See Section II.D.3,

above.

85 If such securities were acquired in reliance on

new Rule 16b-3(d)(3), the six-month holding period

will need to be satisfied prior to such disposition

in order for the acquisition to be exempt.

86Any such proxy statement should describe the

security holdings of each officer and director as to

which approval of an exempt disposition is

solicited. See Item 5 of Schedule 14A (17 CFR

240.14a-101), which requires, in a solicitation made

on behalf of the registrant, a brief description by

security holdings of any direct or indirect

substantial interest in any matter to be acted upon

of each person who has been a director or executive

officer of the registrant at any time since the

beginning of the last fiscal year, unless such interest

gives rise to a benefit that is shared on a pro rata

basis by all other holders of the same class. See also

Item 3 of Schedule 14C (17 CFR 240.14c-101).

87An instrument whose value is not derived from

the value of an issuer equity security is not

currently and, under the rules as adopted, will not

be subject to section 16.

88Current Rule 16a-1(c)(3)(i), which references

the provisions of Rules 16b-3(a)(1) (written plan

requirements), 16b-3(a)(2) (transferability

restriction) and 16b-3(c)(2) (disinterested

administration or formula plan).

89Current Rule 16b-3(c)(3)(ii).

90See Section I, above.

91See the discussion of reporting at Section VII.A,

below, concerning the transition to the new rules.

92Most of these instruments are acquired from the

issuer and meet the other conditions of the new

Rule. Of course, the acquisition of a cash-only

instrument from a party other than the issuer would

not be within the scope of the Rule.

flexibility to redeem its equity securities

from insiders in connection with nonexempt replacement grants, and in

discrete compensatory situations such

as individual buy-backs in connection

with estate planning.

The exemption, which was favorably

received by commenters, is adopted

substantially as proposed.83 A note has

been added to the new rule to clarify

that if the terms of a subsequent

transaction are provided for in the

transaction as initially approved, the

subsequent transaction does not require

further specific approval.84 For example,

the exemption will apply to the

disposition to the issuer of a derivative

security upon its exercise or conversion,

if such exercise is pursuant to the terms

provided in the derivative security as

initially approved in its acquisition.

In the context of a merger, the new

rule will exempt the disposition of

issuer equity securities (including

derivative securities) solely to the

issuer, provided the conditions of the

rule are satisfied.85 Dispositions of such

securities to parties other than the

issuer, such as an acquiror, are not

covered by the rule and consequently

would not be eligible for exemption

under the rule. The specific terms of the

disposition, including price, will

require prior approval of either the full

board, the committee of Non-Employee

Directors or shareholders. If shareholder

approval is solicited and is to be the

condition relied upon for exemption,

the proxy card and proxy statement both

should provide that a vote to approve

the merger also shall constitute a vote to

approve insiders’ exempt dispositions of

issuer equity securities to the issuer.86

III. Derivative Securities

A. Compensatory Cash-Only

Instruments

The proposal to apply Section 16 and

the rules thereunder to compensatory

instruments that can be redeemed or

exercised solely for cash (‘‘cash-only

instruments’’) elicited divergent views.

Cash-only instruments provide

performance-based cash compensation

to employees, using stock price as a

measure of company performance.

Although such instruments do not

provide employees with an equity

interest in the employer that may be

traded in securities markets, they do

provide the equivalent opportunity to

profit based on an increase in market

price.

Currently, a cash-only instrument

whose value is derived from the market

value of an issuer equity security 87 is

excluded from the definition of

derivative security if it: (i) Is awarded

pursuant to an employee benefit plan

that satisfies specified provisions of

Rule 16b-3,88 or (ii) may be redeemed or

exercised only upon a fixed date or

dates at least six months after award, or

upon death, retirement, disability or

termination of employment.89 The 1994

Release included a proposed

modification of the derivative security

definition that would have excluded all

cash-only instruments issued in the

context of an employer-employee

compensation arrangement, including

compensation arrangements between a

company and its non-employee

directors. As discussed above,90 the

subsequent Cash-Only Release solicited

comment as to whether the existing

exclusion for cash-only instruments is

overly broad in light of the purposes of

Section 16.

Most commenters responding to the

Cash-Only Release favored an

unconditional exemption for cash-only

instruments, stressing that such

instruments are not transferable and

hence do not give rise to market

transactions. However, the 1995 Release

indicated that, as a corollary to

broadening the Rule 16b-3 exemption,

the Commission contemplated

rescinding the exclusion for cash-only

instruments. Such instruments thus

would be on a par with stock options

and other instruments settled in stock,

and would be both reportable and

eligible for exemption under Rule 16b3 to the same extent. This approach is

consistent with the purpose of the 1995

proposals to eliminate bias toward

compensation paid in cash by

exempting from the short-swing profit

recovery provisions of section 16(b)

virtually all compensatory transactions

between an issuer and its officers and

directors. Commenters addressing this

aspect of the 1995 proposals divided in

their views; some indicated that the

exclusion should be eliminated because

the insider retains the same opportunity

to profit as presented by an equitysettled instrument, while most favored

retention of the exclusion because

transactions in these instruments do not

affect securities markets.

As an integral aspect of the 1995

approach, the Commission has

determined to rescind Rule 16a-1(c)(3)

as contemplated. The Commission

believes that because the opportunity

for profit based on price movement in

the underlying stock embodied in a

cash-only instrument is the same as for

an instrument settled in stock, cash-only

instruments should be subject to Section

16 to the same extent as other issuer

equity securities. However, the

Commission also recognizes that cashonly instruments generally are not

traded in market transactions by

insiders. Accordingly, transactions in

these instruments are made eligible for

exemption on the same basis as other

transactions in issuer equity securities

between an issuer and its officers and

directors.

This change renders uniform the

application of a simplified set of rules

applying to all compensatory

instruments that provide an opportunity

to profit based on issuer equity

performance. It is anticipated that, by

eliminating the more burdensome

aspects of Rule 16b-3 and bringing cashonly instruments within its scope, the

rules adopted today will reduce the

regulatory complexity and uncertainty

that has discouraged the use of equity as

compensation. Accordingly, although

transactions in cash-only instruments

will be reportable following

effectiveness of the amended rules,91

such instruments will be eligible, and

should usually qualify, for exemption

from section 16(b) pursuant to new Rule

16b-3.92 Commenters’ concerns
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30383

93See Section II.D.1, above.

94See Video Technology (Overseas) Limited/Davis

Polk & Wardwell (June 17, 1992), and Davis Polk

& Wardwell (July 16, 1992). Absent this relief, an

over-allotment option written by an insider could

be characterized as the establishment of a put

equivalent position and deemed sale of the

underlying stock. Subsequent expiration of the

unexercised option arguably could constitute a

purchase of the underlying security, matchable with

the over-allotment option grant or other sales by the

insider within a six-month period.

95Paragraph (c)(6)(B)(ix) of Article III, Section 44

of the NASD Rules of Fair Practice (the Corporate

Financing Rule).

96New Rule 16a-1(c)(7).

97See Section II.E, above.

98As an alternative to separate reporting, a tax

withholding right currently may be noted as a

feature of the equity or derivative security to which

it relates. See The Clorox Company (Mar. 27, 1992).

An insider’s failure to report such right does not

give rise to a disclosure obligation under Item 405

of Regulation S–B or Regulation S–K. See Skadden,

Arps, Slate, Meagher & Flom (June 8, 1992).

99Cf. Xerox Corporation (Jul. 7, 1992) (the staff

reached this conclusion with respect to a

mandatory tax withholding feature).

100New Rule 16a-1(c)(3) (proposed as Rule 16a1(c)(8)).

101Proposed Rule 16a-1(c)(9).

102This is an interpretation of current Rule 16a1(c), which requires a derivative security to have

‘‘an exercise or conversion privilege at a price

related to an equity security, or * * * a value

derived from the value of an equity security.’’ See

General Mills, Inc. (Jan. 31, 1992); and Certilman

Balin Adler & Hyman (Apr. 20, 1992). See also

Boston Edison Company (Mar. 19, 1992); Merrill

Lynch & Co. (Aug. 28, 1992) Q. 4. (Registrant

discretion to adjust the applicable performance

measure, as to either duration or level of

performance, excludes a performance unit from

being a derivative security.)

regarding the lack of an exemption for

participant-directed transactions in

cash-only instruments, such as the

deferral of salary or fees into phantom

stock, have been addressed by

expanding the proposed exemption for

grants and awards to cover participantdirected acquisitions of issuer equity

securities.93

B. Over-Allotment Options

Over-allotment options (sometimes

referred to as ‘‘Green Shoe options’’)

facilitate public offerings and do not

lend themselves to the speculative

abuse Section 16 was designed to

prevent. Accordingly, in 1994 the

Commission proposed codification of

staff interpretive relief 94 that would

specifically exclude from the definition

of ‘‘derivative security’’ options granted

to an underwriter in a registered public

offering for the purpose of satisfying

over-allotments.

In response, some commenters

suggested that the exclusion should not

be limited to over-allotment options

granted in registered public offerings, as

proposed. Other commenters differed in

their responses to the request for

comment as to whether the exclusion

should be limited specifically to those

over-allotment options that comply with

the National Association of Securities

Dealers (‘‘NASD’’) regulation stating that

it is ‘‘unfair and unreasonable’’ for an

over-allotment option in connection

with a firm commitment undertaking to

exceed 15 percent of the amount of

securities offered, exclusive of the overallotment option.95 However, given that

the primary need for the exclusion

relates to over-allotment options granted

in registered public offerings, which as

a practical matter generally are subject

to the NASD regulation, the rule is

adopted in the form proposed,96 without

a specific requirement for compliance

with the NASD regulation.

C. Surrender and Withholding Rights in

Connection With Exercise or Tax

Withholding

As discussed above,97 the exercise of

a right to surrender or withhold

securities in connection with the

exercise of a derivative security or

satisfaction of a tax obligation will be an

exempt disposition of issuer equity

securities to the issuer. Whether such a

right, when granted, constitutes a

derivative security is a separate issue.

Currently, the right to withhold

securities in satisfaction of a tax

obligation is treated as a derivative

security separate from the equity or

derivative security to which it relates.98

However, this right, as well as the right

to have securities withheld in

satisfaction of an exercise price,

properly may be viewed as an integral

feature of the related security.99

Accordingly, the 1994 Release proposed

a new rule that would exclude from the

definition of ‘‘derivative security’’ these

withholding rights, as well as rights to

surrender previously owned securities

in satisfaction of either an exercise price

or a tax obligation incurred upon the

exercise of derivative securities or the

vesting of restricted shares.

Commenters suggested that the

proposed rule’s reference to ‘‘restricted

shares’’ circumscribed too narrowly the

class of securities, other than derivative

securities, to which withholding and

surrender rights apply. Commenters

indicated that the receipt of a security

also could be a taxable event. In

response to these comments, the rule as

adopted 100 has been broadened to

exempt also withholding and surrender

rights that apply to ‘‘equity securities’’

rather than only ‘‘restricted shares,’’ and

that arise with respect to the receipt as

well as the exercise or vesting of a

derivative or equity security. With

respect to a tax-withholding right, the

exclusion from the definition of

‘‘derivative security’’ is not limited to

the insider’s marginal tax rate with

respect to the underlying transaction.

However, the amount withheld must be

applied to the tax obligation generated

by the underlying transaction.

D. Value Derived from Market Price of

an Equity Security

In the 1994 Release the Commission

proposed an amendment to the

definition of ‘‘derivative security’’ 101 to

codify the staff interpretive position that

an instrument is not within the scope of

Section 16 if it includes a material nonmarket price based condition (such as

return on equity) to exercise or

settlement.102 Although the Commission

endorses the application of this analysis

to date, the Commission also recognizes

the advantage in retaining the

interpretive role of the staff to modify or

develop further this analysis as may be

appropriate with respect to new

instruments that may be developed in

the future. Accordingly, the proposed

amendment is not adopted, and

questions regarding this analysis should

continue to be addressed to the staff. For

purposes of this interpretive analysis, a

condition will be considered ‘‘material’’

only if it possesses substance

independent of the passage of time or

continued employment.

Most importantly, the Commission

believes that under the new rule much

of the incentive to characterize these

instruments one way or the other will

evaporate. In almost all cases, they will

be exempt from Section 16(b) because

they will be able to satisfy easily one of

the simplified approval conditions.

Consequently, the only effect of a

particular characterization is on the

need for and timing of any reporting

under section 16(a). The Commission

does not believe that relief generally

will be needed for this purpose.

IV. Revisions to Reporting System

A. Overall Approach

In the 1994 Release, the Commission

stated that it was reconsidering its

approach to the reporting of transactions

pursuant to the Section 16 regulatory

scheme. The release, without endorsing

a specific proposal, solicited comment

on five alternative proposals seeking to

simplify reporting through the following

three different basic approaches: (1)

Deleting or substantially reducing the

reporting of exempt transactions; (2)
30384 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

103 Instruction 4(a)(i) to Form 4.

104There may not be sufficient information

available concerning certain types of transactions

that are not required to be reported under the

revised rules, e.g., periodic purchases in taxconditioned employee benefit plans, to establish a

best estimate regarding changes in holdings. In

those cases, the holdings column will not be

updated until the information becomes available.

105When accurate information concerning

holdings that were estimated by an insider becomes

available, it should be reflected on the next

otherwise required Form 4 or 5 that references the

same class of securities. Modifications in holdings

information to reflect variances in actual holdings

from estimated holdings will not trigger the

disclosure requirements of Item 405 of Regulations

S–K and S–B.

106See Release Nos. 33–7231 (October 5, 1995)

(FR) and 33–7241 (November 13, 1995) (60 FR

57682). At the same time, the EDGAR system was

expanded to accommodate the electronic filing of

reports pursuant to Rule 144 [17 CFR 230.144]

under the Securities Act (15 U.S.C. 77a et seq.).

107 Instruction 3 to Form 3 and Instruction 2 to

Forms 4 and 5 have been amended to add a

reference to electronic filing.

108New Rule 16a-9(a). The current exemption for

stock splits and dividends has been expanded to

include specifically a stock dividend in which

equity securities of a different issuer are distributed.

See Section V.C, below.

109New Rule 16a-11. See Section V.A, below.

110New Rules 16a–3(f)(1)(i)(B) and 16b–3(c).

Current Instruction 4(a)(ii) to Form 5 sets forth

information regarding the reporting of transactions

and holdings in ongoing securities acquisition

plans. Among other things, it states that

transactions and holdings may be reported as of the

most recent date for which information is available,

and that acquisitions may be reported on an

aggregate basis. The 1994 Release proposed

amendments to Instructions 4(a) (ii) and (iv) to

Form 5 and the Note to Instruction 4(a)(ii) to Form

4 to codify interpretations regarding aggregated

reporting. Because these acquisitions no longer are

required to be reported under the revised rules, the

proposed amendments are not adopted. Further,

current Instruction 4(a)(ii) to Form 5 is rescinded

since the transactions addressed will not be

reported under the revised rules.

111 Defined as ‘‘Discretionary Transactions’’

pursuant to new Rule 16b–3(b)(1). See Section II.C,

above. These transactions will continue to be

reported on Form 5, as discussed in Section IV.C

below.

reducing the flexibility currently

provided insiders with respect to use of

Form 4 or 5 to report a number of

exempt transactions; and (3) requiring

issuer annual reporting of insider

holdings and information as to

transactions during the fiscal year.

These varied approaches highlighted

several questions as to what extent, if at

all, investors need information with

respect to exempt transactions and

whether investors need a reconciliation

of insiders’ equity holdings from year to

year. The 1994 Release also requested

comment on whether exercises and

conversions of derivative securities

exempt from section 16(b), as well as

small acquisitions, should continue to

be reported on an insider’s next

required Form 4 or 5, whichever is

earlier.

As a corollary to the amendments to

Rule 16b-3 proposed in 1995, the 1995

Release requested comment on an

additional reporting approach. Pursuant

to the scheme contemplated by the 1995

Release, several types of transactions,

such as routine acquisitions in broadbased employer plans, would not need

to be reported at all. The remaining

transactions, including grants and

awards exempt under Rule 16b–3,

generally would be reported on a Form

4 no later than ten days following the

end of the month in which the

transaction occurred. Exempt option

exercises either would have remained

reportable on an insider’s next required

Form 4 or 5, or would have been

reported on Form 4.

The approach selected by the

Commission is based on the 1995

approach, but includes elements from

the 1994 Release. As outlined in

Sections IV.B through D below, the

revisions simplify the reporting

framework by providing that several

types of transactions exempt from

section 16(b) no longer will be required

to be reported at all. Transactions

exempt from short-swing profit recovery

that still must be reported will be

reported on Form 5, and non-exempt

transactions will be reported on Form 4,

except that exercises and conversions of

derivative securities (whether or not

exempt) will be reported on Form 4, and

small acquisitions will be reported on

Form 5. There no longer will be a

category of transactions reported on a

‘‘next required Form 4 or Form 5,

whichever is earlier’’ basis, which

commenters have criticized as being

confusing and possibly leading to

inadvertent late filings. The

Commission believes that this new

approach simplifies insiders’ reporting

obligations without adversely affecting

the timing and amount of information

that is significant to investors.

The 1994 Release solicited comment

on whether the Commission should

eliminate the ‘‘total holdings’’ column

in Forms 4 and 5 or simplify the data

provided by insiders to reconcile their

total holdings. Alternatively,

commenters were asked to consider

whether a new column should be added

to Forms 4 and 5 requiring insiders to

reconcile their current holdings with

those reported in a previous filing,

particularly if exempt transactions no

longer were to be reported.

Although several commenters

supported elimination of the total

holdings columns, they are being

retained. Form 4 disclosure of total

holdings assists users of Section 16

information in evaluating the

significance of a transaction to a

particular insider, and Form 5 total

holdings provide a useful reconciliation

of changes in holdings resulting from

exempt and other types of transactions

permitted to be reported on a deferred

basis.

The Commission also has decided not

to impose any new reconciliation

requirements on insiders. Instead, as

currently, the requirement to report total

holdings on Forms 4 and 5 will remain

limited to the class of securities to

which a transaction is reported, and

changes in holdings associated with

transactions eligible for deferred

reporting on Form 5 will not have to be

reflected in the month-end total

holdings reported on Form 4, unless the

transaction voluntarily has been

reported earlier on Form 4.103

Also in keeping with current practice,

insiders will reflect changes in holdings

resulting from transactions that are

exempt from section 16 reporting in the

holdings column of the next otherwise

required Form 4 or 5 filed to report a

transaction involving the same class of

securities. Insiders may choose, but are

not required, to include footnote

disclosure indicating the date and

nature of transactions not required to be

reported. To the extent that information

about a transaction not required to be

reported under the revised rules is not

readily available, the insider should

provide a ‘‘best estimate’’ of the change

in holdings resulting from the

transaction.104 The purpose of the best

estimate is not indirectly to require

insiders to report transactions exempt

from Section 16(a), but rather, to

provide users of section 16 information

with holdings information that is as

accurate as reasonably possible.105

In a separate effort 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

expanded the capacity of the EDGAR

system to accommodate the electronic

filing of those reports.106 Insiders have

been able to electronically file their

section 16 reports on a voluntary basis

since December 18, 1995.107

B. Transactions No Longer Reported at

All

• ‘‘Spinoff’’ or other dividend

transactions in which equity securities

of a different issuer are distributed to

insiders of an issuer 108

• Acquisitions pursuant to a dividend

or interest reinvestment plan 109

• Transactions in a tax-conditioned

plan,110 except for discretionary intraplan transfers and cash distributions 111
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30385

112New Rule 16a–2(b).

113New Rule 16a–12. See Section V.B below for

further discussion of this new rule, which expands

the existing exemption relating to Qualified

Domestic Relations Orders.

114New Rule 16a–13.

115New Rule 16a–4(d).

116Under the current and revised requirements,

stock splits, stock dividends with respect to the

same issuer and the acquisition of certain pro rata

rights do not have to be reported pursuant to Rule

16a–9. Further, transactions by odd-lot dealers in

odd-lots are exempt from current and revised

reporting requirements pursuant to Rule 16a–5.

Cash-only instruments also are not now reported

since they are excluded from the definition of

‘‘derivative securities’’ under current Rule 16a–

1(c)(3) if they meet certain conditions, but they will

be reported under the new rules.

117New Rule 16a–13. For example, distributions

of equity securities from an employee benefit plan

to an insider participant would be a mere change

in the form of beneficial ownership from indirect

to direct where the securities previously had been

attributed to the insider.

118Accordingly, the proposed transaction code is

not adopted. The new rule makes it clear that

exercises and conversions of derivative securities

and the deposit or withdrawal of shares into or from

a voting trust are not to be regarded as mere changes

in the form of beneficial ownership, and will

continue to be reported. If a deposit or withdrawal

of shares into or from a voting trust satisfies the

conditions of Rule 16b–8 (17 CFR 240.16b–8), the

transaction is exempt from section 16(b).

119New Rule 16a–3(f)(1)(i).

120New Rule 16a–6.

121See Section III.A, above.

122New Rule 16a–6, like the current rule,

provides only a deferral, not an exemption, from

reporting. All small acquisitions, unless otherwise

exempt, must be reported on Form 5. As is

currently the case, if an acquisition no longer

qualifies for the reporting deferral in paragraph (a)

of Rule 16a–6, all such acquisitions that have not

yet been reported will continue to be reported on

Form 4 within ten days after the close of the

calendar month in which the conditions of that

Continued

• Post-termination transactions by a

former officer or director that are

exempt from section 16(b) or that do not

occur within six months of an opposite

non-exempt transaction 112

• Acquisitions or dispositions of

securities pursuant to a domestic

relations order meeting certain

conditions of the Internal Revenue

Code 113

• Transactions reflecting a mere

change in form of beneficial

ownership 114

• Exempt cancellations or expirations

of a long derivative security where no

value is received 115

The above are transactions that must

be reported under current rules, but will

not be reported under the revised

rules.116 In addition to providing a

means for enforcing section 16(b) shortswing profit liability, section 16(a)

reporting serves the separate purpose of

informing the market of transactions

that reflect insiders’ views of their

companies’ prospects. Because the

transactions listed above generally do

not provide investors meaningful

information consistent with this

purpose, the Commission deems it

appropriate to relieve insiders from

unnecessary burdens by exempting

these transactions from reporting. There

was nearly unanimous support among

the commenters for these revisions,

which are adopted substantially as

proposed.

The revised rules provide a specific

exemption from section 16 for changes

in the form of beneficial ownership (but

not in the extent of an insider’s

pecuniary interest in the subject

securities).117 Although commenters

generally supported the proposal to add

a new transaction code to Form 5 to

facilitate the reporting of these

transactions, several commenters

suggested eliminating any reporting

requirement regarding changes in the

form of beneficial stock ownership.

Since these transactions do not reflect

any change in an insider’s pecuniary

interest in an issuer’s equity securities,

reporting seems to serve little purpose,

and the Commission has determined

that they should be exempt from

reporting.118

C. Transactions To Be Reported on

Form 5

• Transactions exempt from section

16(b), except for: (1) Transactions listed

in Section IV.B above that are not

required to be reported at all pursuant

to the changes being adopted; and (2)

exempt exercises and conversions of

derivative securities 119

• Small acquisitions 120

A substantial number of commenters

supported an alternative reporting

approach described in the 1994 Release

involving elimination of the

requirement to report transactions

exempt from section 16(b) liability, and

many also supported the elimination of

Form 5. In contrast, however, a number

of commenters thought that the

requirement to report exempt

transactions should be retained, and

indicated that Form 5 is a useful

document.

As discussed above, the Commission

is eliminating the reporting of several

classes of exempt transactions,

including non-volitional transactions in

tax-conditioned plans. The Commission

expects that elimination of reporting of

these routine plan transactions will

greatly alleviate insiders’ burden of

reporting exempt transactions without

resulting in any significant loss of

information that users of Section 16

information find valuable.

The Commission believes, however,

that the reporting of other types of

exempt transactions, such as option

grants and other acquisitions and

dispositions of securities in plans that

are not tax-conditioned, may provide

the marketplace with useful

information. These transactions

typically are less automatic and may

reflect insiders’ views of their

companies’ prospects. The Commission

also believes that continued annual

reporting of these transactions on Form

5 is appropriate.

In view of the change discussed above

concerning the treatment of cash-only

instruments that derive value from the

market value of equity securities of the

issuer,121 transactions involving such

instruments will be reported on Form 4

or 5, depending on whether they are

exempt. It is anticipated that most of

these will be exempt pursuant to new

Rule 16b–3 and thus reportable on Form

5.

Pursuant to the reporting scheme

contemplated by the 1995 Release,

exempt grants, awards and dispositions

of securities in plans that are not taxconditioned, as well as intra-plan

transfers and cash distributions in taxconditioned plans, would have been

reported on Form 4 no later than ten

days after the close of the month in

which the transaction occurred. The

Commission has determined to require

reporting of these transactions on Form

5 rather than Form 4, in view of the

remarks of many commenters who felt

that the accelerated reporting of exempt

transactions on Form 4 would prove

unworkable as the result of the

necessary plan information not being

available in sufficient time to meet Form

4 filing deadlines. Further, while some

commenters expressed a preference for

reporting transactions on Form 4 rather

than waiting until year-end to file a

Form 5 and possibly overlooking a

transaction, others expressed a need for

flexibility and indicated that annual

reporting is preferable. Those who

prefer voluntarily to report exempt

transactions on Form 4, of course, may

continue to do so, as is currently

permitted.

The 1995 Release also proposed

elimination of the requirement that gifts

be reported. Since some commenters

find gift activity to be a useful

indication of an insider’s view of the

company’s prospects (for example,

where a large charitable gift effects a

significant disposition) the requirement

to report gifts on Form 5 is retained.

Small acquisitions, which currently

are reported on a next required Form 4

or Form 5 basis, will be reported on

Form 5.122 The 1994 Release solicited
30386 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

paragraph no longer are met. See Rule 16a–6(b) (17

CFR 240.16a–6(b)).

123As discussed below, exempt exercises and

conversions of derivative securities will be reported

on Form 4 under the revised rules.

124New Rule 16a–3(g)(1).

125 Id.

126 If a derivative security is exercised or

converted before its exempt grant otherwise must be

reported, the grant should be reported at the same

time as the exercise or conversion.

127New Rules 16a–3(j) and 16a–1(a)(3) reflect this

change. Forms 3, 4 and 5 and the Instructions

thereto also are modified to permit joint and group

filings. In response to a commenter’s request for

clarification, the revised instructions to the forms

indicate that, for their convenience, joint filers may

reflect transactions in separately owned securities

either in an individually filed or jointly filed report.

128 Joint and group filings can be used, for

example, by parents and subsidiaries, trusts and

trust beneficiaries, partnerships, or Schedule 13D

groups (17 CFR 240.13d–101). The group itself is

not a reporting person for section 16 purposes, but

under the revised rules, group members may choose

to file collective reports to satisfy their individual

filing obligations. A group member is not required

to report transactions by another group member,

however, unless he or she has or shares a pecuniary

interest in the securities held by such other

member.

129Currently, General Instruction 7 to Forms 3, 4

and 5 permits a form filed for an individual to be

signed on behalf of the individual by an authorized

person. This instruction remains the same. General

Instruction 5 to Form 3 and General Instruction 4

to Forms 4 and 5 are amended to specify the means

of reporting pecuniary interest of multiple

beneficial owners. A corresponding amendment

also has been made to General Instruction 6 to each

Form.

130Cf. In the Matter of Bettina Bancroft, Release

No. 34–32033, AP 3–7999 (Mar. 23, 1993).

131New Rule 16a–8(a)(1). See Proskauer Rose

Goetz & Mendelsohn (Apr. 29, 1991) (a trust that

holds more than ten percent of a class of equity

securities registered under section 12 is the

beneficial owner of those securities for purposes of

section 16).

132Current Rule 16a–8(a)(1)(ii) (17 CFR 240.16a–

8(a)(1)(ii)). A conforming amendment to Rule 16a–

2(d)(2) (17 CFR 16a–2(d)(2)) reflects the rescission

of Rule 16a–8(a)(1)(ii).

comment as to whether reporting could

be made more convenient for insiders,

consistent with the informational needs

of the investing public, by permitting

small acquisitions to be reported solely

on Form 5, and the majority of

commenters favored this approach.123

Additionally, as proposed in the 1994

Release, the small acquisitions reporting

rule is revised to exclude from the

$10,000 threshold acquisitions

occurring within the prior six months of

the current acquisition that were

exempted by rule from Section 16(b), or

previously reported on Form 4 or 5. The

revised rule also clarifies, as proposed,

that the current acquisition cannot be

disregarded in calculating the $10,000

threshold. All the commenters

remarking on these clarifications

supported them.

D. Transactions to be Reported on Form

4

• Transactions not exempt from

Section 16(b), except for small

acquisitions 124

• Exercises or conversions of a

derivative security, whether or not

exempt from Section 16(b) 125

Transactions not exempt from shortswing profit recovery that currently are

reported on Form 4 generally will

continue to be reported on Form 4,

including non-exempt exercises and

conversions of derivative securities. In

addition, as a change from the current

system, exercises and conversions of

derivative securities exempt from shortswing profit recovery under either new

Rule 16b–3 or Rule 16b–6(b) always will

be reported on Form 4,126 since the

Commission is eliminating the current

method of reporting these transactions

on a next Form 4 or Form 5 basis.

Reporting of these transactions has been

shifted to Form 4 rather than Form 5

due to concerns expressed by

commenters that the timing of option

exercises represents an important

indication of insiders’ views of their

companies’ prospects.

E. Joint and Group Reporting

Currently, when more than one

person subject to Section 16 is deemed

to be a beneficial owner of the same

equity securities, all such persons must

report as beneficial owners and file

separate reports. To reduce this

duplicative reporting, the Commission

is adopting rules that permit such

persons to file their reports either

separately or jointly, as proposed in the

1994 Release.127

Under the new reporting scheme,

where persons in a group have reporting

obligations, the filing of collective

reports on behalf of all group members

is permitted.128 Such joint and group

filings, and any amendments, may be

submitted by any designated constituent

beneficial owner. Required information

must be given for each beneficial owner,

and such filings must be signed by, or

on behalf of, each beneficial owner by

an authorized person, with statements

confirming the delegation of signature

authority attached to the filing.

Beneficial owners making a joint or

group filing may authorize one of the

beneficial owners or a third party to sign

on their behalf, provided that

confirming statements are attached to

the filing, or are provided by

amendment as soon as practicable, with

respect to each owner delegating

signature authority, unless such a

confirmation still in effect is on file with

the Commission.129 Of course, to the

extent a sufficiently broad power of

attorney previously was filed, such as

with a Schedule 13D, that power of

attorney may be incorporated by

reference in a Section 16(a) filing. Each

beneficial owner will retain individual

liability for compliance with the filing

requirements, including the obligation

to assure that the filing is timely and

accurately made.130

Comment was solicited in the 1994

Release as to whether, in the alternative,

authority to make a group Section 16

filing could be presumed based on the

filing of a group Schedule 13D, such

that all group members thereby would

be deemed to have granted authority to

any group member to file a Section 16

form. The commenters rejected the

creation of such a presumption under

any circumstances other than a

sufficiently broad power of attorney,

i.e., one that specifically authorizes the

beneficial owner to file Section 16

reports on his or her behalf. One of the

commenters noted that a Schedule 13D

group member could file Section 16

reports on behalf of another group

member who may not even be aware

that he or she has become subject to

Section 16, or who may file duplicative

reports. Therefore, authority to make a

group Section 16 filing will not be

presumed based upon the filing of a

group Schedule 13D.

F. Trust Transactions

Under the revised rules, and as

proposed in the 1994 Release, a trust is

subject to section 16 only if it

beneficially owns more than ten percent

of a class of registered equity securities

of an issuer.131 The Commission has

rescinded the provision imposing

section 16 reporting obligations on a

trust that does not own more than ten

percent of an issuer’s securities if it has

an insider trustee with investment

control over the issuer’s securities held

by the trust, and the trustee or a member

of the trustee’s immediate family has a

pecuniary interest in the securities.132

Since the primary effect of the current

dual reporting standard is to create

duplicative reporting obligations,

particularly with respect to family

trusts, the imposition of independent

Section 16 obligations on the trusts does

not appear necessary.

There will continue to be some

instances where a trust and a trust

beneficiary that both are subject to

Section 16 must report separately with

respect to the same transaction because

they share investment control. The 1994

Release proposed adding a new note to

the reporting rules to provide that

transactions attributed to a trust

beneficiary may be reported by the

trustee on behalf of the beneficiary. A
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30387

133Note to new Rule 16a–8(b)(3).

134New Item 405(a)(1) of Regulations S–K and S–

B. Additionally, a technical amendment has been

made to Item 405 of Regulation S–B to correct the

reference to Rule 16a–3(d) (17 CFR 240.16a–(d)) by

replacing it with a reference to Rule 16a–3(e) (17

CFR 240.16a–3(e)).

135New Item 405(a)(2) of Regulations S–K and S–

B. This obligation was set forth in the 1991

Adopting Release, n. 231 and surrounding text.

136A ‘‘safe harbor’’ from disclosure is available for

an issuer who receives a written representation and

keeps it for two years. See Item 405(b)(2).

137On February 14, 1996, the Commission

included in the SEC News Digest and posted on the

Commission’s Internet Web Site an announcement

encouraging the electronic filing of Forms 3, 4 and

5 (as well as Form 144) and providing guidance on

how companies that choose to do so may assist

filers in the electronic filing process.

138Of course, insiders giving powers of attorney

would still retain individual liability for

compliance. See n. 130, above.

139See Section III.G of the 1994 Release for the

Commission’s detailed analysis.

140For purposes of this analysis, ‘‘return’’ may

include dividends paid on the equity instrument, as

well as the change in market value.

141This analysis addresses solely the application

of Section 16 to equity swaps to the extent that they

are engaged in by insiders. The discussion does not

analyze the status of these transactions or the

parties thereto under any other provision of the

federal securities laws.

However, as stated in the 1994 Release, no

Section 16 consequences would flow from an equity

swap to the extent that the equity swap relates

solely to interests in securities comprising part of

a broad-based, publicly traded market basket or

index of stocks, approved for trading by the

appropriate federal governmental authority, that are

deemed not to confer beneficial ownership for

purposes of section 16 pursuant to Rule 16a–

1(a)(5)(iii) (17 CFR 240.16a–1(a)(5)(iii)) and/or are

excluded from the definition of ‘‘derivative

securities’’ pursuant to current Rule 16a–1(c)(4).

142See 1994 Release n. 106, which stated that to

the extent settlement of the parties’ obligations

occurs on an interim basis during the term of the

swap the insider’s section 16 obligations would

arise with respect to each settlement, commenters

expressed concern over the need to report interim

events. As noted above and consistent with the

section 16 reporting scheme in general, such events

need be reported only to the extent that they cause

a change in an insider’s call or put equivalent

position.

commenter objected to the proposed

note on grounds that a trustee should

not report on behalf of a trust

beneficiary unless formally authorized

to do so. Therefore, the note has been

modified to indicate that, as currently,

a trustee may file a separate report on

behalf of a beneficiary if a statement

confirming the delegation of signature

authority is filed with the

Commission.133 The trustee also may

file a consolidated report on behalf of

the trust and one or more trust

beneficiaries if authorized to do so by

the beneficiaries. Regardless of whether

the trustee reports on behalf of a

beneficiary or the beneficiary personally

files reports, the beneficiary subject to a

reporting requirement retains individual

liability for compliance with that

requirement.

G. Compliance With the Reporting

Requirements

Under the revised rules, as proposed,

registrants will be required to set off any

disclosure required by Item 405 of

Regulation S–K or S–B of insider noncompliance with Section 16(a) reporting

obligations under an appropriate and

discrete caption.134 In response to

commenters’ remarks, this new caption

will read ‘‘Section 16(a) Beneficial

Ownership Reporting Compliance’’

rather than ‘‘Section 16(a) Reporting

Delinquencies,’’ as proposed in the 1994

Release. The new caption should enable

interested parties readily to locate this

disclosure, which often consists of only

a sentence or two, and prevent the

information from being buried among

unrelated disclosure.

In addition, Item 405 is revised to

clarify the nature of the issuer’s

obligation to review insiders’ filings in

order to determine whether there are

any delinquent reports that must be

disclosed. The issuer is entitled to rely

on the Forms 3, 4 and 5 furnished to it,

as well as written representations by the

insider that no Form 5 is required.

New language has been added, as

proposed, to make it clear that the issuer

is obligated to consider the absence of

certain forms.135 The absence of a Form

3 is an indication that disclosure is

required. Similarly, the absence of a

Form 5 is an indication that disclosure

is required, unless the issuer has

received a written representation that no

Form 5 is required, or otherwise knows

that no such filing is required.136 While

some commenters objected to this

clarification on grounds that it would

place an inappropriate burden of

investigation on issuers to determine

that a form is not required, the

Commission views it merely as a

codification of previous Commission

guidance concerning issuers’

obligations.

The 1994 Release solicited comment

on whether Item 405 should require

issuers to include in their filings an

affirmative statement that no section

16(a) delinquencies were required to be

reported, if such was the case. It had

been suggested that an affirmative

statement requirement would prevent

issuers from overlooking the Item 405

disclosure requirement. Since most of

the commenters addressing the issue

opposed an affirmative statement

requirement, and there is little evidence

that issuers are overlooking Item 405

disclosure, the Commission is not

adopting such a requirement.

Finally, as noted in the 1994 Release,

the Commission is aware of and

encourages the practice of many issuers

to assist their officers and directors in

complying with their section 16(a)

reporting obligations. 137 Since the use

of powers of attorney is permitted, it is

also possible for an issuer to coordinate

the filing of its officers’ and directors’

reports by having the corporate

secretary or other agent obtain powers of

attorney from these reporting persons,

collect information every month about

their transactions subject to Section 16,

and file required reports by the due

date.138

H. Equity Swaps

The 1994 Release contained a section

analyzing Section 16 issues relating to

equity swaps, and soliciting comments

upon the analysis and related issues.139

Equity swaps are individually

negotiated contracts in which the

specific terms may vary from agreement

to agreement. For instance, an equity

swap may take the form of an agreement

in which one party holding shares of

equity securities agrees to pay, or

‘‘swap,’’ the return 140 on those

securities in exchange for the return on

an equity index, basket of equities, or an

interest rate-based cash flow. Generally,

commenters agreed that the

Commission’s analysis of equity swaps

as involving the economic equivalent of

tandem stock appreciation and

depreciation rights reflects economic

reality. Some, however, suggested

simplified approaches to analysis and

reporting.

The Commission reiterates that

Section 16 consequences arise from an

equity swap transaction where either

party to the transaction is a Section 16

insider with respect to a security to

which the swap agreement relates.141

The Commission agrees with

commenters, however, that any manner

of reporting an equity swap, or an

instrument with similar characteristics,

that provides an adequate description is

appropriate. The specific method of

reporting described in the 1994 Release

is not the only acceptable method.

However, there are certain items of

information that must be set forth for an

adequate presentation. To provide an

adequate description, an insider must

report the entry into and termination of

the equity swap, as well as any interim

events to the extent such events change

the insider’s call or put equivalent

position.142 To be adequate, each report

must provide the following information:

(1) The date of the transaction; (2) the

term; (3) the number of underlying

shares; (4) the exercise price (i.e., the

dollar value locked in); (5) the non-
30388 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

143New Code K is added to Forms 4 and 5 for

reporting equity swaps and instruments with

similar characteristics. See Section IV.I, below.

144See Release No. 33–7187 (June 27, 1995) (60

FR 35645).

145See Release No. 33–7190 (June 27, 1995) (60

FR 35663).

146See the Commission’s Report of the Task Force

on Disclosure Simplification, Part III.A.3.b.

147Transaction code ‘‘F.’’ The sale of shares to

pay the exercise price of an option under a cashless

exercise program is exempt from Section 16(b) if the

issuer is the purchaser, but not if the shares are sold

on the open market by a broker or other third party.

Code ‘‘F’’ may be used to reflect only exempt

transactions. The amendments clarify that code ‘‘F’’

also should be used to report the withholding of

securities incident to satisfaction of tax liability

incurred upon the receipt, exercise or vesting of a

security.

148Transaction code ‘‘S.’’

149New transaction code ‘‘K’’ and General

Instruction 8 to Forms 4 and 5.

150For example, an equity swap transaction

reported as a disposition will be reported as S/K,

using the codes for ‘‘sale’’ and ‘‘equity swap.’’

151 General Instruction 3(a) to Form 3, and

General Instruction 2(a) to Forms 4 and 5.

152 General Instruction 6 to Forms 3, 4 and 5.

Specified information must be included at the top

of the page so that the filing can be identified if the

page is detached.

153Transaction codes ‘‘A,’’ ‘‘F,’’ ‘‘H,’’ ‘‘I,’’ and

‘‘M’’ have been modified and codes ‘‘B,’’ ‘‘N,’’ ‘‘Q,’’

‘‘R’’ and ‘‘T’’ have been deleted.

154 Item 1 of the forms has been revised to explain

how the names and addresses of more than one

reporting person should be indicated, and a new

Item 7 has been added to the forms to indicate

whether the form is being filed by one or more

reporting persons.

155This 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.

156Consistent 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 will not be exempt pursuant to this rule,

but may be exempt under new Rule 16b–3,

assuming other conditions are met. See Release No.

34–28869, n. 89. The amended rule also continues

to exempt the acquisition of issuer equity securities

pursuant to a dividend reinvestment feature of an

employee benefit plan so long as the company

maintains a separate dividend reinvestment plan

that satisfies the conditions of the rule. See

Simpson Thacher & Bartlett (Jun. 19, 1991) and

Release No. 34–18114, Q. 76. Finally, consistent

with current interpretations, the amended rule will

continue to be available to exempt the reinvestment

of dividends in the securities of a publicly traded

parent or subsidiary, and will exempt the

reinvestment of all pro rata distributions to security

holders, not just dividends and interest. See Middle

South Utilities, Inc. (Aug. 21, 1982) and Investment

Company Institute (Sept. 18, 1992).

exempt disposition (acquisition) of

shares at the outset of the term; (6) the

non-exempt acquisition (disposition) of

shares at the end of the term (and at

such earlier dates, if any, where events

under the equity swap cause a change

in a call or put equivalent position); (7)

the total number of shares held after the

transaction; and (8) any other material

terms.143

Some commenters suggested that

equity swaps in general or certain

aspects of them should be regarded as

excluded or exempt from Section 16.

The Commission is not persuaded,

however, that any exclusion or

exemption currently is available or that

equity swaps should be so excluded or

exempted.

Numerous issues are raised under the

federal securities laws by equity swaps

and other instruments that shift some or

all of the economic interests and risks

of an equity security. Since record and

beneficial ownership does not

necessarily reflect who holds the voting,

investment or income interests of a

security, it may be appropriate in areas

other than Section 16 to assure that the

regulatory structure reflects the

economic realities of these transactions.

The Commission is continuing to

consider the legal and disclosure issues

raised by these arrangements under the

federal securities laws, including

Schedule 13D reporting, Rule 144,144

Rule 144A, Regulation S,145 and

disclosure of security holdings and

executive compensation.146

I. Changes in Forms and Reporting

Codes

As proposed in the 1994 Release,

when an insider exercises an option

acquired pursuant to a Rule 16b-3 plan

and immediately sells a portion of the

shares to pay the exercise price under a

cashless exercise program, the insider

will be able to reflect the sale of the

portion of shares necessary to satisfy the

exercise price by using the transaction

code for payment of an option exercise

price by delivery or withholding of

securities,147 rather than the general sale

of security code,148 provided that the

sale is to the issuer. Commenters agreed

that it was appropriate to use the same

code for these transactions since they all

constitute cashless exercises.

A new transaction code also has been

included in Forms 4 and 5 to be used

for transactions in equity swaps and

instruments with similar

characteristics.149 This will be in

addition to whatever other codes are

used to describe the transaction.150 The

new code will assist the Commission

and users of Section 16 information in

identifying these transactions.

Additionally, the Instructions to

Forms 3, 4 and 5 are revised to state that

the forms may be submitted to the

Commission in electronic format at the

option of the reporting person.151 The

Instructions also are modified to

indicate that insiders may attach a page

of 81⁄2 by 11 inch white paper to reflect

additional comments to the forms, if the

space provided on the forms is

insufficient.152 The current rules require

insiders to reflect supplemental

information on additional copies of the

forms.

Several transaction codes have been

modified or deleted from the

Instructions to Forms 4 and 5 in

accordance with the revisions.153

Finally, Forms 3, 4 and 5 have been

revised to accommodate joint and group

filing.154

V. Additional Exemptions and

Revisions

A. Dividend or Interest Reinvestment

Plans

Current 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.

Concerns have been expressed that the

requirement that the plan be made

available to all holders of the class (the

‘‘all-holders requirement’’) can impose

significant burdens, such as the outlay

of significant sums to comply with laws

governing securities offerings in foreign

jurisdictions, on companies that wish to

allow for insider participation.

Accordingly, in 1995 the Commission

proposed to modify this requirement,

noting that such a stringent

participation requirement did not

appear necessary to preclude the

opportunity for speculative abuse by

insiders. The rule was proposed to be

amended 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.155 Third, the

plan must operate on substantially the

same terms for all plan participants.156

Commenters agreed that the proposed

modification is appropriate and serves

the goal of reducing administrative

burdens while protecting against

possible speculative abuse by officers

and directors. Commenters noted

particularly that the ‘‘all-holders’’

provision is not essential to eliminate

abuse, and that modification of this

provision would substantially reduce

the costs imposed by the requirement

that such plans be made available to
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30389

157New Rule 16a-11. The rule has been

renumbered as a Section 16(a) rule, since reporting

of these transactions no longer will be required, as

discussed above.

158Current Rule 16b–3(f)(3).

159 I.R.C. Sections 414(p)(1)(A) and (B). Among

other things, the order must create or recognize an

alternate payee’s right to receive all or a portion of

the benefits payable to a participant under a plan;

relate to the provisions of child support, alimony

payments, or marital property rights to a spouse,

former spouse, child, or other dependent of the

participant; and be made pursuant to a state

domestic relations law (including a community

property law).

160The order need not satisfy, among other things,

conditions applicable to payments made after the

participant’s earliest retirement age, and

requirements to treat the former spouse as surviving

spouse for purposes of determining survivor

benefits. See Premark International, Inc. (Mar. 6,

1992), which further provides that the plan may

permit such transfers consistent with the

transferability restriction of current Rule 16b–

3(a)(2).

161New Rule 16a–12, which replaces current Rule

16b–3(f)(3). This amendment was proposed in the

1994 Release as proposed Rule 16b–5(b), but

instead is adopted as a section 16(a) rule since

reporting of these transactions no longer will be

required, as discussed above.

162See Emergent Group, Inc. (Apr. 6, 1992).

163New Rule 16a–9(a).

164E.g., new Rule 16a–1(c)(7) and Item 405(a)(2)

of Regulations S–K and S–B.

165Post-Effective Date transactions in cash-only

securities that were originally issued prior to May

1, 1991 will continue not to be subject to section

16 to the extent provided in Cravath, Swaine &

Moore (Oct. 22, 1991).

odd-lot holders and shareholders

domiciled abroad. The amendment is

adopted as proposed, with minor

clarifying changes.157

B. New Exemption for Domestic

Relations Orders

The current rules limit the exemption

for the disposition of securities pursuant

to a qualified domestic relations order

(‘‘QDRO’’), as defined in the Internal

Revenue Code or Title I of ERISA, and

the rules thereunder, to employee plan

securities.158 Since such dispositions are

unlikely to be influenced by access to

inside information, this limitation

appears unnecessary. Accordingly, the

1994 proposal included a general

exemption for such dispositions.

By interpretation, the current

exemption has been construed to permit

the transfer of securities, issued under a

plan that is not subject to Section 401(a)

of the Internal Revenue Code, pursuant

to a ‘‘domestic relations order’’ that

satisfies certain conditions of the

Internal Revenue Code,159 but does not

satisfy QDRO standards.160 Comment

was requested as to whether the

proposed exemption should require

satisfaction of the QDRO standards in

all circumstances, or whether

satisfaction of the Internal Revenue

Code ‘‘domestic relations order’’

standards would suffice.

Commenters who addressed this

proposal supported it overwhelmingly,

noting that these dispositions are

unlikely to give rise to the types of

abuse of inside information that the

section 16 rules are designed to prevent

and that satisfaction of the ‘‘domestic

relations order’’ standards should

suffice. Commenters also suggested that

the rule should exempt acquisitions as

well as dispositions. The Commission is

persuaded that the likelihood of abuse

is equally remote whether the

transaction is an acquisition or

disposition, so long as the ‘‘domestic

relations order’’ standards are satisfied.

The rule as adopted reflects these

modifications.161

C. Exemption for Stock Dividend

Transactions

The Commission proposed in 1994 to

expand the exemption for stock splits

and stock dividends to include

specifically a stock dividend in which

equity securities of a different issuer are

distributed. The primary application of

this exemption would be to ‘‘spinoff’’

transactions, in which assets previously

owned by the issuer are distributed pro

rata to shareholders in the form of

equity securities of another issuer.

The Division has interpreted the

current rule to apply to stock splits or

stock dividends involving the issuance,

on a pro rata basis, of a different class

of equity securities of the same issuer.162

Commenters addressing this proposal

expressed support, noting that this type

of dividend involves the distribution of

an ownership interest already held

indirectly through the distributing

entity, and thus involves a change in the

form of ownership from indirect

through the distributing entity to direct

by the recipient. Commenters also noted

that since there is no purchase or sale,

there is no significant opportunity for

abuse. The proposal is adopted

substantially as proposed, with minor

technical revisions.163

VI. 1995 Solicitation of Comment

Regarding the On-Going Merit of the

Short-Swing Profit Recovery Provisions

of Section 16

The 1995 Release solicited comment

as to whether the Commission should

recommend that Congress rescind the

short-swing profit recovery provisions

of section 16(b). Commenters were

asked to address whether insider trading

and market manipulation would be

deterred adequately by Rule 10b–5, as

interpreted by case law, and whether

state laws establishing a fiduciary duty

on the part of officers and directors

would protect adequately the interests

of public company shareholders.

Although the majority of commenters

addressing this issue favored the

legislative rescission of section 16(b),

the Commission is of the view that the

short-swing profit recovery provisions

continue to fulfill a useful and effective

role in maintaining investor confidence

in the integrity of United States

securities markets and accordingly

should be retained. Instead, the

Commission has attempted to craft the

amended rules in a manner that retains

the market protections provided by

section 16(b) while curtailing

compliance costs, thereby striking an

appropriate balance between benefits

and costs.

VII. Transition to New Rules

A. General Application

All of the rules adopted today, except

for new Rule 16b–3, become effective

August 15, 1996 (the ‘‘Effective Date’’).

Accordingly, the section 16 treatment of

all transactions effected on or after the

Effective Date will be governed by the

new rules. As discussed below, a phasein period until November 1, 1996 is

provided for new Rule 16b–3. Of course,

to the extent that the new rules codify

current interpretive positions,164 those

positions continue to be valid before the

Effective Date. Trusts currently subject

to section 16 that will be relieved of

section 16 obligations under the new

rules will not be subject to any posttermination reporting obligations or

required to file a final Form 4 or Form

5. The amendments to Item 405 of

Regulations S–K and S–B will apply to

documents containing Item 405

disclosure that are filed after the

Effective Date. The new Forms should

be used for filings made on and after the

Effective Date.

Cash-only instruments excludable

from the definition of ‘‘derivative

security’’ under current Rule 16a–1(c)(3)

originally issued before the Effective

Date will remain exempt from the

reporting requirements of section 16(a)

after the Effective Date. With respect to

such cash-only securities, a transaction

on or after the Effective Date that is

consistent with the conditions of the

exclusion pursuant to which the

security was issued also will not to be

subject to Section 16.165

Transactions not exempt from section

16(b) under the current rules that are

conducted prior to the Effective Date

will continue to be matchable with nonexempt transactions conducted after the

Effective Date for short-swing profit

recovery purposes.
30390 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

166See the 1995 Phase-in Release.

167See Release No. 34–37261, issued today.

168Former Rules 16a–8(b) and 16a–8(g)(3) also

remain available for purposes of providing an

exemption from Section 16(b). See the 1991

Adopting Release at Section VII.C.

169Following conversion of an existing plan to

new Rule 16b–3, the amendment of outstanding

derivative securities to permit their transfer will not

be deemed a cancellation of such securities and a

grant of new securities for Section 16 purposes.

Compare Time Warner (Dec. 18, 1992) Q.3 and Jesse

M. Brill (Mar. 25, 1994) Q.4, where following

amendment outstanding options no longer were

exempt pursuant to current and former Rule 16b–

3, respectively.

170The new reporting exemption for taxconditioned plans will not be available until new

Rule 16b–3 is used because that reporting

exemption applies only to transactions exempted by

new Rule 16b–3(c).

B. New Rule 16b–3

In extending the phase-in date for

current Rule 16b–3, the Commission

stated that this period would continue

until September 1, 1996.166 However,

given the timing of the adoption of new

Rule 16b–3, the Commission is

extending the phase-in date until

November 1, 1996.167 While new Rule

16b–3 will become available for issuers

that wish to use it on August 15, 1996,

current and former Rule 16b–3 168 will

remain available for transactions

effected prior to November 1, 1996.

When an issuer adopts a plan that

complies with new Rule 16b–3 or

converts one of its existing plans to the

new rule, all plans must be

converted,169 provided that any

transaction between an issuer and its

officers or directors that occurs outside

the scope of a formal plan or pursuant

to a plan that permits only the issuance

of cash-only instruments may rely on

new Rule 16b–3 without triggering this

conversion requirement. Current and

former Rule 16b–3 may not continue to

be relied on by issuers and insiders after

November 1, 1996. Transactions exempt

under current and former Rule 16b–3

should be reported as provided by the

new rules during the phase-in period.170

As stated above, the new Forms

should be used for filings made on and

after the Effective Date. Since the new

transaction codes are keyed to

transactions exempted by new Rule

16b–3, insiders reporting transactions

under the former or current rule may

either use the new code most analogous

to the transaction or code ‘‘J’’ (for

‘‘other’’ transactions) with an

explanatory footnote.

VIII. Cost-Benefit Analysis

The amendments adopted herein are

expected to decrease significantly the

compliance burden imposed on persons

subject to Section 16 and attendant costs

without undercutting the statutory

objectives of disclosing information

concerning insider trading and

discouraging speculative short-term

insider trading.

The simplified treatment of

transactions between an issuer and its

officers and directors, whether or not

pursuant to a formal employee benefit

plan, will constitute the most important

reduction in compliance burden. With

respect to these transactions, the

conditions that must be met for an

exemption to be available have been

substantially simplified. The amended

rules also will simplify issuers’

administration of dividend and interest

reinvestment plans, and expand the

exemption for stock splits and stock

dividends to include stock dividends in

which securities of a different issuer are

distributed.

The rules also will reduce compliance

costs by: providing that many

transactions no longer need be reported

at all; permitting joint and group

reporting where more than one person

is deemed to be a beneficial owner of

the same securities; providing that

section 16 applies to a trust only if the

trust beneficially owns more than ten

percent of a class of registered equity

securities; and limiting officers’ and

directors’ post-termination reporting

obligations. Where the amendments

may increase compliance costs, such as

by requiring reporting with respect to

transactions in cash-only securities and

by accelerating the reporting of option

exercises, such costs should be

outweighed by the benefit of having

additional information available to the

public on an accelerated basis, as well

as the ease of compliance with a

simplified reporting scheme. The

amendments also will eliminate

regulatory complexity and uncertainty

that discourages the use of equity as

compensation.

IX. Summary of Final Regulatory

Flexibility Analysis

The Commission has prepared a final

regulatory flexibility analysis in

accordance with 5 U.S.C. 604 regarding

the adoption of new Rules 16a–11, 16a–

12 and 16a–13, and the changes to Rules

16a–1, 16a–2, 16a–3, 16a–4, 16a–6, 16a–

8, 16a–9, 16b–3 and 16b–6, Forms 3, 4

and 5, and Item 405 of Regulations S–

B and S–K. A summary of the

corresponding Initial Regulatory

Flexibility Analysis was included in the

1994 Release and the 1995 Release. A

copy of the final regulatory flexibility

analysis may be obtained by contacting

Anne M. Krauskopf, Division of

Corporation Finance, U.S. Securities

and Exchange Commission, 450 Fifth

Street NW., Washington, DC 20549 at

(202) 942–2900.

As more fully discussed in the

analysis, since 1994 the Commission

has been engaged in rulemaking to

modify the Rules under Section 16,

particularly to alleviate unanticipated

practical difficulties that arose since

adoption of the 1991 amendments,

simplify section 16 requirements

applicable to employee benefit plans,

and codify several staff interpretive

positions. The amendments to Rule

16b–3 adopted today will significantly

expand the exemption as it applies to

broad-based non-discriminatory plans,

will impose different conditions

applicable to grants, awards and other

acquisitions from the issuer, and will

provide new exemptions for the

disposition of issuer equity securities to

the issuer.

Other rule amendments will modify

the section 16(a) reporting system to

provide that most exempt transactions

and small acquisitions will be reported

annually on Form 5, with earlier

reporting on Form 4 permitted.

Exercises and conversions of derivative

securities, whether or not exempt from

section 16(b), will be reported on Form

4. However, routine transactions

pursuant to tax-conditioned plans,

dividend or interest reinvestment plan

transactions, transactions pursuant to

domestic relations orders and

transactions that change only the form

of beneficial ownership will be exempt

from reporting. The exemption for

reinvestment transactions pursuant to

dividend and interest reinvestment

plans is amended to replace the

requirement that such a plan must be

available to all holders of the class of

securities with a condition that the plan

require both wide participation and

equal treatment of all participants.

No significant issues were raised by

public comment in response to the

initial regulatory flexibility analysis.

The amendments adopted today

primarily will affect individuals who

are corporate insiders, the majority of

whom may fall within the definition of

‘‘small business’’ under the Exchange

Act. To the extent that these persons are

affected, it is expected that the

proposals will reduce their compliance

burdens associated with section 16.

It is expected that the amendments

adopted today will result in a material

decrease in reporting and compliance

requirements since they will streamline

the requirements applicable to

employee benefit plans. Although

exercises and conversions of derivative

securities will be reported earlier than

previously required, and certain types of

cash-only instruments will become
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30391

171 15 U.S.C. 78c(a)(11).

172 15 U.S.C. 78c(a)(12).

173 15 U.S.C. 78c(b).

174 15 U.S.C. 78i(b).

175 15 U.S.C. 78j(a).

176 15 U.S.C. 78l(h).

177 15 U.S.C. 78m(a).

178 15 U.S.C. 78n.

179 15 U.S.C. 80a–29.

180 15 U.S.C. 80a–37.

181 15 U.S.C. 79q.

182 15 U.S.C. 79t.

reportable, many other transactions no

longer will be reported at all, and the

overall reporting scheme will be

simplified as a result.

The amendments adopted today will

benefit corporate insiders by simplifying

the section 16 rules and eliminating

unnecessary requirements. Separate

requirements for small issuers are

inappropriate because most of the

corporate insiders subject to the section

16 rules are individuals who meet the

small business definition. The use of

performance rather than design

standards for small issuers is

inconsistent with the Commission’s

mandate of investor protection. Other

proposals to further reduce the

compliance requirements were

considered but rejected on grounds that

they would be inconsistent with the

section 16 statutory objectives.

X. Statutory Basis

The amendments to Regulation S–B,

Regulation S–K, and the section 16 rules

and forms are adopted by the

Commission pursuant to Exchange Act

sections 3(a)(11),171 3(a)(12),172 3(b),173

9(b),174 10(a),175 12(h),176 13(a),177 14,178

16, and 23(a). As the Section 16 rules

and forms relate to the Investment

Company Act and the Public Utility

Holding Company Act, they also are

adopted pursuant to Investment

Company Act sections 30 179 and 38,180

and Public Utility Holding Company

Act Sections 17 181 and 20,182

respectively.

List of Subjects in 17 CFR 228, 229, 240,

and 249

Reporting, Recordkeeping

requirements, and Securities.

Text of the Amendments

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is amended as

follows:

PART 228—INTEGRATED

DISCLOSURE SYSTEM FOR SMALL

BUSINESS ISSUERS

1. The authority citation for part 228

continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,

77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee,

77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m,

78n, 78o, 78w, 78ll, 80a–8, 80a–29, 80a–30,

80a–37, 80b–11, unless otherwise noted.

2. By amending § 228.405 by revising

the reference to ‘‘Rule 16a–3(d)’’ in

paragraph (a) to read ‘‘Rule 16a–3(e)’’

and by revising paragraphs (a)(1) and

(a)(2) before the Note to read as follows:

§ 228.405 (Item 405) Compliance with

section 16(a) of the Exchange Act.

* * * * *

(a) * * *

(1) Under the caption ‘‘Section 16(a)

Beneficial Ownership Reporting

Compliance,’’ identify each person who,

at any time during the fiscal year, was

a director, officer, beneficial owner of

more than ten percent of any class of

equity securities of the registrant

registered pursuant to section 12

(‘‘reporting person’’) that failed to file

on a timely basis, as disclosed in the

above Forms, reports required by

section 16(a) of the Exchange Act during

the most recent fiscal year or prior fiscal

years.

(2) For each such person, set forth the

number of late reports, the number of

transactions that were not reported on a

timely basis, and any known failure to

file a required Form. A known failure to

file would include, but not be limited

to, a failure to file a Form 3, which is

required of all reporting persons, and a

failure to file a Form 5 in the absence

of the written representation referred to

in paragraph (b)(2)(i) of this section,

unless the registrant otherwise knows

that no Form 5 is required.

* * * * *

PART 229—STANDARD

INSTRUCTIONS FOR FILING FORMS

UNDER SECURITIES ACT OF 1933,

SECURITIES EXCHANGE ACT OF 1934

AND ENERGY POLICY AND

CONSERVATION ACT OF 1975—

REGULATION S–K

3. The authority citation for part 229

continues to read in part as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,

77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee,

77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c,

78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e,

79n, 79t, 80a–8, 80a–29, 80a–30, 80a–37,

80b–11, unless otherwise noted.

* * * * *

4. By amending § 229.405 by revising

paragraphs (a)(1) and (a)(2) before the

Note to read as follows:

§ 229.405 (Item 405) Compliance with

section 16(a) of the Exchange Act.

* * * * *

(a) * * *

(1) Under the caption ‘‘Section 16(a)

Beneficial Ownership Reporting

Compliance,’’ identify each person who,

at any time during the fiscal year, was

a director, officer, beneficial owner of

more than ten percent of any class of

equity securities of the registrant

registered pursuant to section 12 of the

Exchange Act, or any other person

subject to section 16 of the Exchange

Act with respect to the registrant

because of the requirements of section

30 of the Investment Company Act or

section 17 of the Public Utility Holding

Company Act (‘‘reporting person’’) that

failed to file on a timely basis, as

disclosed in the above Forms, reports

required by section 16(a) of the

Exchange Act during the most recent

fiscal year or prior fiscal years.

(2) For each such person, set forth the

number of late reports, the number of

transactions that were not reported on a

timely basis, and any known failure to

file a required Form. A known failure to

file would include, but not be limited

to, a failure to file a Form 3, which is

required of all reporting persons, and a

failure to file a Form 5 in the absence

of the written representation referred to

in paragraph (b)(2)(i) of this section,

unless the registrant otherwise knows

that no Form 5 is required.

* * * * *

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

5. The authority citation for part 240

continues to read in part as follows:

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

77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c,

78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 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.

* * * * *

6. By amending § 240.16a–1 by

revising paragraphs (a)(3) and (c)(3),

removing the word ‘‘or’’ at the end of

paragraph (c)(5), replacing the period at

the end of paragraph (c)(6) with a semicolon followed by the word ‘‘or’’, and

adding paragraph (c)(7) to read as

follows:

§ 240.16a–1 Definition of terms.

* * * * *

(a) * * *

(3) Where more than one person

subject to section 16 of the Act is

deemed to be a beneficial owner of the

same equity securities, all such persons

must report as beneficial owners of the

securities, either separately or jointly, as

provided in § 240.16a–3(j). In such

cases, the amount of short-swing profit

recoverable shall not be increased above
30392 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

the amount recoverable if there were

only one beneficial owner.

* * * * *

(c) * * *

(3) Rights or obligations to surrender

a security, or have a security withheld,

upon the receipt or exercise of a

derivative security or the receipt or

vesting of equity securities, in order to

satisfy the exercise price or the tax

withholding consequences of receipt,

exercise or vesting;

* * * * *

(7) Options granted to an underwriter

in a registered public offering for the

purpose of satisfying over-allotments in

such offering.

* * * * *

7. By amending § 240.16a–2 by

revising paragraphs (b) and (d)(2) to

read as follows:

§ 240.16a–2 Persons and transactions

subject to section 16.

* * * * *

(b) A transaction(s) following the

cessation of director or officer status

shall be subject to section 16 of the Act

only if:

(1) Executed within a period of less

than six months of an opposite

transaction subject to section 16(b) of

the Act that occurred while that person

was a director or officer; and

(2) Not otherwise exempted from

section 16(b) of the Act pursuant to the

provisions of this chapter.

Note to Paragraph (b): For purposes of this

paragraph, an acquisition and a disposition

each shall be an opposite transaction with

respect to the other.

* * * * *

(d)(1) * * *

(2) Transactions by such person or

entity acting in a capacity specified in

paragraph (d)(1) of this section after the

period specified in that paragraph shall

be subject to section 16 of the Act only

where the estate, trust or other entity is

a beneficial owner of more than ten

percent of any class of equity security

registered pursuant to section 12 of the

Act.

8. By amending § 240.16a–3 by

revising paragraph (f)(1)(i),

redesignating paragraphs (f)(1)(ii) and

(f)(1)(iii) as (f)(1)(iii) and (f)(1)(iv),

adding paragraph (f)(1)(ii), revising

paragraph (g), and adding paragraph (j)

to read as follows:

§ 240.16a–3 Reporting transactions and

holdings.

* * * * *

(f)(1) * * *

(i) All transactions during the most

recent fiscal year that were exempt from

section 16(b) of the Act, except:

(A) Exercises and conversions of

derivative securities exempt under

either § 240.16b–3 or § 240.16b–6(b)

(these are required to be reported on

Form 4);

(B) Transactions exempt from section

16(b) of the Act pursuant to § 240.16b–

3(c), which shall be exempt from section

16(a) of the Act; and

(C) Transactions exempt from section

16(a) of the Act pursuant to another

rule;

(ii) Transactions that constituted

small acquisitions pursuant to

§ 240.16a–6(a);

* * * * *

(g) (1) A Form 4 shall be filed to

report all transactions not exempt from

section 16(b) of the Act and all exercises

and conversions of derivative securities,

regardless of whether exempt from

section 16(b) of the Act.

(2) At the option of the reporting

person, transactions that are reportable

on Form 5 may be reported on Form 4,

provided that the Form 4 is filed no

later than the due date of the Form 5

with respect to the fiscal year in which

the transaction occurred.

* * * * *

(j) Where more than one person

subject to section 16 of the Act is

deemed to be a beneficial owner of the

same equity securities, all such persons

must report as beneficial owners of the

securities, either separately or jointly.

Where persons in a group are deemed to

be beneficial owners of equity securities

pursuant to § 240.16a–1(a)(1) due to the

aggregation of holdings, a single Form 3,

4 or 5 may be filed on behalf of all

persons in the group. Joint and group

filings must include all required

information for each beneficial owner,

and such filings must be signed by each

beneficial owner, or on behalf of such

owner by an authorized person.

9. By amending § 240.16a–4 by

revising paragraphs (b), (c) and (d) and

the Note to read as follows:

§ 240.16a–4 Derivative securities.

* * * * *

(b) The exercise or conversion of a

call equivalent position shall be

reported on Form 4 and treated for

reporting purposes as:

(1) A purchase of the underlying

security; and

(2) A closing of the derivative security

position.

(c) The exercise or conversion of a put

equivalent position shall be reported on

Form 4 and treated for reporting

purposes as:

(1) A sale of the underlying security;

and

(2) A closing of the derivative security

position.

(d) The disposition or closing of a

long derivative security position, as a

result of cancellation or expiration, shall

be exempt from section 16(a) of the Act

if exempt from section 16(b) of the Act

pursuant to § 240.16b–6(d).

Note to § 240.16a–4: A purchase or sale

resulting from an exercise or conversion of a

derivative security may be exempt from

section 16(b) of the Act pursuant to

§ 240.16b–3 or § 240.16b–6(b).

10. By amending § 240.16a–6 by

revising paragraph (a) and removing

paragraph (c) to read as follows:

§ 240.16a–6 Small acquisitions.

(a) Any acquisition of an equity

security not exceeding $10,000 in

market value, or of the right to acquire

such securities, shall be reported on

Form 5, subject to the following

conditions:

(1) Such acquisition, when aggregated

with other acquisitions of securities of

the same class (including securities

underlying derivative securities, but

excluding acquisitions exempted by rule

from section 16(b) or previously

reported on Form 4 or Form 5) within

the prior six months, does not exceed a

total of $10,000 in market value; and

(2) The person making the acquisition

does not within six months thereafter

make any disposition, other than by a

transaction exempt from section 16(b) of

the Act.

* * * * *

11. By amending § 240.16a–8 by

revising paragraph (a)(1) and adding a

note at the end of paragraph (b)(3) to

read as follows:

§ 240.16a–8 Trusts.

(a) Persons subject to section 16.—(1)

Trusts. A trust shall be subject to section

16 of the Act with respect to securities

of the issuer if the trust is a beneficial

owner, pursuant to § 240.16a–1(a)(1), of

more than ten percent of any class of

equity securities of the issuer registered

pursuant to section 12 of the Act (‘‘ten

percent beneficial owner’’).

* * * * *

(b) Trust holdings and transactions.

* * *

(3) Beneficiaries. * * *

Note to Paragraph (b)(3): Transactions and

holdings attributed to a trust beneficiary may

be reported by the trustee on behalf of the

beneficiary, provided that the report is signed

by the beneficiary or other authorized person.

Where the transactions and holdings are

attributed both to the trustee and trust

beneficiary, a joint report may be filed in

accordance with § 240.16a–3(j).

* * * * *

12. By amending § 240.16a–9 by

revising paragraph (a) to read as follows:
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30393

§ 240.16a–9 Stock splits, stock dividends,

and pro rata rights.

* * * * *

(a) The increase or decrease in the

number of securities held as a result of

a stock split or stock dividend applying

equally to all securities of a class,

including a stock dividend in which

equity securities of a different issuer are

distributed; and

* * * * *

13. By adding § 240.16a–11 to read as

follows:

§ 240.16a–11 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 of the

Act if the acquisition is made pursuant

to a plan providing for the regular

reinvestment of dividends or interest

and 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.

14. By adding § 240.16a–12 to read as

follows:

§ 240.16a–12 Domestic relations orders.

The acquisition or disposition of

equity securities pursuant to a domestic

relations order, as defined in the

Internal Revenue Code or Title I of the

Employee Retirement Income Security

Act, or the rules thereunder, shall be

exempt from section 16 of the Act.

15. By adding § 240.16a–13 to read as

follows:

§ 240.16a–13 Change in form of beneficial

ownership.

A transaction, other than the exercise

or conversion of a derivative security or

deposit into or withdrawal from a voting

trust, that effects only a change in the

form of beneficial ownership without

changing a person’s pecuniary interest

in the subject equity securities shall be

exempt from section 16 of the Act.

§ 240.16b–2 [Removed and reserved]

16. By removing and reserving

§ 240.16b–2.

17. By revising § 240.16b–3 to read as

follows:

§ 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.

(b) Definitions.

(1) A Discretionary Transaction shall

mean a transaction pursuant to an

employee benefit plan that:

(i) Is at the volition of a plan

participant;

(ii) Is not made in connection with the

participant’s death, disability,

retirement or termination of

employment;

(iii) Is not required to be made

available to a plan participant pursuant

to a provision of the Internal Revenue

Code; and

(iv) 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.

(2) 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

any benefit or contribution limitations

set forth in the Internal Revenue Code

of 1986, or any successor provisions

thereof.

(3) (i) A Non-Employee Director shall

mean a director who:

(A) Is not currently an officer (as

defined in § 240.16a-1(f)) of the issuer or

a parent or subsidiary of the issuer, or

otherwise currently employed by the

issuer or a parent or subsidiary of the

issuer;

(B) Does not receive compensation,

either directly or indirectly, from the

issuer or a parent or subsidiary of the

issuer, for services rendered as a

consultant or in any capacity other than

as a director, except for an amount that

does not exceed the dollar amount for

which disclosure would be required

pursuant to § 229.404(a) of this chapter;

(C) Does not possess an interest in any

other transaction for which disclosure

would be required pursuant to

§ 229.404(a) of this chapter; and

(D) Is not engaged in a business

relationship for which disclosure would

be required pursuant to § 229.404(b) of

this chapter.

(ii) Notwithstanding paragraph

(b)(3)(i) of this section, a Non-Employee

Director of a closed-end investment

company shall mean a director who is

not an ‘‘interested person’’ of the issuer,

as that term is defined in Section

2(a)(19) of the Investment Company Act

of 1940.

(4) 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.

(5) A Stock Purchase Plan shall mean

an employee benefit plan that satisfies

the coverage and participation

requirements of sections 423(b)(3) and

423(b)(5), or section 410, of the Internal

Revenue Code of 1986, or any successor

provisions thereof.

(c) Tax-conditioned plans. Any

transaction (other than a Discretionary

Transaction) pursuant to a Qualified

Plan, an Excess Benefit Plan, or a Stock

Purchase Plan shall be exempt without

condition.

(d) Grants, awards and other

acquisitions from the issuer. Any

transaction involving a grant, award or

other acquisition from the issuer (other

than a Discretionary Transaction) 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 NonEmployee Directors;

(2) The transaction is approved or

ratified, in compliance with section 14

of the Act, by either: the affirmative

votes of the holders of a majority of the

securities of the issuer present, or

represented, and entitled to vote at a

meeting duly held in accordance with

the applicable laws of the state or other

jurisdiction in which the issuer is

incorporated; or the written consent of

the holders of a majority of the

securities of the issuer entitled to vote;

provided that such ratification occurs

no later than the date of the next annual

meeting of shareholders; or

(3) The issuer equity securities so

acquired are held by the officer or

director for a period of six months

following the date of such acquisition,

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.

(e) Dispositions to the issuer. Any

transaction involving the disposition to

the issuer of issuer equity securities

(other than a Discretionary Transaction)

shall be exempt, provided that the terms

of such disposition are approved in

advance in the manner prescribed by

either paragraph (d)(1) or paragraph

(d)(2) of this section.

(f) Discretionary Transactions. A

Discretionary Transaction shall be

exempt only if effected pursuant to an

election made at least six months

following the date of the most recent

election, with respect to any plan of the

issuer, that effected a Discretionary

Transaction that was:

(1) An acquisition, if the transaction

to be exempted would be a disposition;

or
30394 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

(2) A disposition, if the transaction to

be exempted would be an acquisition.

Notes to § 240.16b–3

Note (1): The exercise or conversion of a

derivative security that does not satisfy the

conditions of this section is eligible for

exemption from section 16(b) of the Act to

the extent that the conditions of § 240.16b–

6(b) are satisfied.

Note (2): Section 16(a) reporting

requirements applicable to transactions

exempt pursuant to this section are set forth

in § 240.16a–3(f) and (g) and § 240.16a–4.

Note (3): The approval conditions of

paragraphs (d)(1), (d)(2) and (e) of this

section require the approval of each specific

transaction, and are not satisfied by approval

of a plan in its entirety except for the

approval of a plan pursuant to which the

terms and conditions of each transaction are

fixed in advance, such as a formula plan.

Where the terms of a subsequent transaction

(such as the exercise price of an option, or

the provision of an exercise or tax

withholding right) are provided for in a

transaction as initially approved pursuant to

paragraphs (d)(1), (d)(2) or (e), such

subsequent transaction shall not require

further specific approval.

18. By amending § 240.16b–6 by

adding a note following paragraph (b) to

read as follows:

§ 240.16b–6 Derivative securities.

* * * * *

Note to Paragraph (b): The exercise or

conversion of a derivative security that does

not satisfy the conditions of this section is

eligible for exemption from section 16(b) of

the Act to the extent that the conditions of

§ 240.16b–3 are satisfied.

* * * * *

PART 249—FORMS, SECURITIES

EXCHANGE ACT OF 1934

19. The authority citation for part 249

continues to read in part as follows:

Authority: 15 U.S.C. 78a, et seq., unless

otherwise noted;

* * * * *

20. By amending Form 3 (referenced

in § 249.103) and the General

Instructions thereto by adding a

sentence at the end of paragraph (a) to

General Instruction 3 after the note,

adding paragraph (b)(v) to General

Instruction 5, by revising General

Instruction 6, and by revising Item 1 and

adding Item 7 to the information

preceding Table I to read as follows:

Note: The text of Form 3 does not and this

amendment will not appear in the Code of

Federal Regulations.

Form 3 Initial Statement of Beneficial

Ownership of Securities

* * * * *

General Instructions

* * * * *

3. Where Form Must be Filed

(a) * * * Alternatively, this Form is

permitted to be submitted to the Commission

in electronic format at the option of the

reporting person pursuant to § 232.101(b)(4)

of this chapter.

* * * * *

5. Holdings Required to be Reported

* * * * *

(b) Beneficial Ownership Reported

(Pecuniary Interest)

* * * * *

(v) Where more than one person

beneficially owns the same equity securities,

such owners may file Form 3 individually or

jointly. Joint and group filings may be made

by any designated beneficial owner. Holdings

of securities owned separately by any joint or

group filer are permitted to be included in

the joint filing. Indicate only the name and

address of the designated filer in Item 1 of

Form 3 and attach a listing of the names and

IRS or social security numbers (or addresses

in lieu thereof) of each other reporting

person. Joint and group filings must include

all required information for each beneficial

owner, and such filings must be signed by

each beneficial owner, or on behalf of such

owner by an authorized person. If the space

provided for signatures is insufficient, attach

a signature page. Submit any attached listing

of names or signatures on another Form 3,

copy of Form 3 or separate page of 81⁄2 by 11

inch white paper, indicate the number of

pages comprising the report (Form plus

attachments) at the bottom of each report

page (e.g., 1 of 3, 2 of 3, 3 of 3), and include

the name of the designated filer and

information required by Items 2 and 4 of the

Form on the attachment.

* * * * *

6. Additional Information

If the space provided in the line items of

this Form or space provided for additional

comments is insufficient, attach another

Form 3, copy of Form 3 or a separate page

of 81⁄2 by 11 inch white paper to Form 3,

completed as appropriate to include the

additional comments. Each attached page

must include information required in Items

1, 2 and 4 of the Form. The number of pages

comprising the report (Form plus

attachments) shall be indicated at the bottom

of each report page (e.g., 1 of 3, 2 of 3, 3 of

3). If additional information is not provided

in this manner, it will be assumed that no

additional information was provided.

* * * * *

1. Name and Address of Reporting Person*

(Last) (First) (Middle)

(Street)

(City) (State) (Zip)

* If the Form is filed by more than one

Reporting Person, see Instruction 5(b)(v).

* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

llll Form filed by One Reporting Person

llll Form Filed by More than One

Reporting Person

* * * * *

21. By amending Form 4 (referenced

in § 249.104) and the General

Instructions thereto by adding a

sentence at the end of paragraph (a) of

General Instruction 2 after the note; by

revising paragraph (a)(i) of General

Instruction 4; by revising the Note

following General Instruction 4(a)(ii)

and adding paragraph (b)(v) to General

Instruction 4; by revising General

Instruction 6; in General Instruction 8

by adding a sentence at the end of the

paragraph appearing under the

‘‘Transaction Codes’’ caption and

revising the Transaction Codes; and by

revising Item 1 and adding Item 7 to the

information preceding Table I to read as

follows:

Note: The text of Form 4 does not and this

amendment will not appear in the Code of

Federal Regulations.

Form 4 Statement of Changes in Beneficial

Ownership of Securities

* * * * *

General Instructions

* * * * *

2. Where Form Must be Filed

(a) * * * Alternatively, this Form is

permitted to be submitted to the Commission

in electronic format at the option of the

reporting person pursuant to § 232.101(b)(4)

of this chapter.

* * * * *

4. Transactions and Holdings Required to be

Reported

* * * * *

(a) General Requirements

(i) Report, in accordance with Rule 16a–

3(g), all transactions not exempt from section

16(b) of the Act and all exercises and

conversions of derivative securities,

regardless of whether exempt from section

16(b) of the Act, resulting in a change of

beneficial ownership in the issuer’s

securities. Every transaction shall be reported

even though acquisitions and dispositions

during the month are equal. Report total

beneficial ownership as of the end of the

month for each class of securities in which

a transaction was reported.

Note: * * *

(ii) * * *

Note: Transactions reportable on Form 5

may, at the option of the reporting person, be

reported on a Form 4 filed before the due

date of the Form 5. (See Instruction 8 for the

code for voluntarily reported transactions.)

(b) Beneficial Ownership Reported

(Pecuniary Interest)

* * * * *

(v) Where more than one beneficial owner

of the same equity securities must report

transactions on Form 4, such owners may file

Form 4 individually or jointly. Joint and

group filings may be made by any designated

beneficial owner. Transactions with respect

to securities owned separately by any joint or

group filer are permitted to be included in

the joint filing. Indicate only the name and

address of the designated filer in Item 1 of
Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations 30395

Form 4 and attach a listing of the names and

IRS or social security numbers (or addresses

in lieu thereof) of each other reporting

person. Joint and group filings must include

all required information for each beneficial

owner, and such filings must be signed by

each beneficial owner, or on behalf of such

owner by an authorized person. If the space

provided for signatures is insufficient, attach

a signature page. Submit any attached listing

of names or signatures on another Form 4,

copy of Form 4 or separate page of 81⁄2 by 11

inch white paper, indicate the number of

pages comprising the report (Form plus

attachments) at the bottom of each report

page (e.g., 1 of 3, 2 of 3, 3 of 3), and include

the name of the designated filer and

information required by Items 2 and 4 of the

Form on the attachment.

* * * * *

6. Additional Information

If the space provided in the line items of

this Form or space provided for additional

comments is insufficient, attach another

Form 4, copy of Form 4 or a separate page

of 81⁄2 by 11 inch white paper to Form 4,

completed as appropriate to include the

additional comments. Each attached page

must include information required in Items

1, 2 and 4 of the Form. The number of pages

comprising the report (Form plus

attachments) shall be indicated at the bottom

of each report page (e.g., 1 of 3, 2 of 3, 3 of

3). If additional information is not provided

in this manner, it will be assumed that no

additional information was provided.

* * * * *

8. Transaction Codes

* * * If a transaction involves an equity

swap or instrument with similar

characteristics, use transaction Code ‘‘K’’ in

addition to the code(s) that most

appropriately describes the transaction, e.g.,

‘‘S/K’’ or ‘‘P/K.’’

General Transaction Codes

P—Open market or private purchase of nonderivative or derivative security

S—Open market or private sale of nonderivative or derivative security

V—Transaction voluntarily reported earlier

than required

Rule 16b–3 Transaction Codes

A—Grant, award or other acquisition

pursuant to Rule 16b–3(d)

D—Disposition to the issuer of issuer equity

securities pursuant to Rule 16b–3(e)

F—Payment of exercise price or tax liability

by delivering or withholding securities

incident to the receipt, exercise, or

vesting of a security issued in

accordance with Rule 16b–3

I—Discretionary transaction in accordance

with Rule 16b–3(f) resulting in

acquisition or disposition of issuer

securities

M—Exercise or conversion of derivative

security exempted pursuant to Rule 16b–

3

Derivative Securities Codes (Except for

transactions exempted pursuant to Rule 16b–

3)

C—Conversion of derivative security

E—Expiration of short derivative position

H—Expiration (or cancellation) of long

derivative position with value received

O—Exercise of out-of-the-money derivative

security

X—Exercise of in-the-money or at-the-money

derivative security

Other Section 16(b) Exempt Transaction and

Small Acquisition Codes (except for Rule

16b–3 codes above)

G—Bona fide gift

L—Small acquisition under Rule 16a–6

W—Acquisition or disposition by will or the

laws of descent and distribution

Z—Deposit into or withdrawal from voting

trust

Other Transaction Codes

J—Other acquisition or disposition (describe

transaction)

K—Transaction in equity swap or instrument

with similar characteristics

U—Disposition pursuant to a tender of shares

in a change of control transaction

* * * * *

1. Name and Address of Reporting Person*

(Last) (First) (Middle)

(Street)

(City) (State) (Zip)

*If the Form is filed by more than one

Reporting Person, see Instruction 4(b)(v).

* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

llllForm filed by One Reporting Person

llllForm Filed by More than One

Reporting Person

* * * * *

22. By amending Form 5 (referenced

in § 249.105) and the General

Instructions thereto by adding a

sentence at the end of paragraph (a) of

General Instruction 2 after the note; by

revising General Instruction 4(a)(i)(A);

by removing General Instruction 4(a)(ii);

by redesignating paragraphs (a)(iii) and

(a)(iv) of General Instruction 4 as

paragraphs (a)(ii) and (a)(iii); by revising

newly designated paragraph 4(a)(iii) and

adding paragraph (b)(v) to General

Instruction 4; by revising General

Instruction 6; in General Instruction 8

by adding a sentence at the end of the

paragraph appearing under the

‘‘Transaction Codes’’ caption and

revising the Transaction Codes; by

revising the last paragraph in the

General Instructions, following the

Transaction Codes, and caption thereto;

and by revising Item 1 and adding Item

7 to the information preceding Table I

to read as follows:

Note: The text of Form 5 does not and this

amendment will not appear in the Code of

Federal Regulations.

Form 5 Annual Statement of Beneficial

Ownership of Securities

* * * * *

General Instructions

* * * * *

2. Where Form Must be Filed

(a) * * * Alternatively, this Form is

permitted to be submitted to the Commission

in electronic format at the option of the

reporting person pursuant to § 232.101(b)(4)

of this chapter.

* * * * *

4. Transactions and Holdings Required to be

Reported

(a) General Requirements

* * * * *

(i) * * *

(A) any transaction during the issuer’s

most recent fiscal year that was exempt from

section 16(b) of the Act, except: (1) any

exercise or conversion of derivative securities

exempt under either § 240.16b–3 or

§ 240.16b–6(b) (these are required to be

reported on Form 4); (2) any transaction

exempt from section 16(b) of the Act

pursuant to Rule 16b–3(c) of this section,

which is exempt from section 16(a) of the

Act; and (3) any transaction exempt from

section 16 of the Act pursuant to another

section 16(a) rule;

* * * * *

(iii) Every transaction shall be reported

even though acquisitions and dispositions

with respect to a class of securities are equal.

Report total beneficial ownership as of the

end of the issuer’s fiscal year for all classes

of securities in which a transaction was

reported.

(b) Beneficial Ownership Reported

(Pecuniary Interest)

* * * * *

(v) Where more than one beneficial owner

of the same equity securities must report on

Form 5, such owners may file Form 5

individually or jointly. Joint and group

filings may be made by any designated

beneficial owner. Transactions and holdings

with respect to securities owned separately

by any joint or group filer are permitted to

be included in the joint filing. Indicate only

the name and address of the designated filer

in Item 1 of Form 5 and attach a listing of

the names and IRS or social security numbers

(or addresses in lieu thereof) of each other

reporting person. Joint and group filings must

include all required information for each

beneficial owner, and such filings must be

signed by each beneficial owner, or on behalf

of such owner by an authorized person. If the

space provided for signatures is insufficient,

attach a signature page. Submit any attached

listing of names or signatures on another

Form 5, copy of Form 5 or separate page of

81⁄2 by 11 inch white paper, indicate the

number of pages comprising the report (Form

plus attachments) at the bottom of each

report page (e.g., 1 of 3, 2 of 3, 3 of 3), and

include the name of the designated filer and

information required by Items 2 and 4 of the

Form on the attachment.

* * * * *
30396 Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules and Regulations

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

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

3Exchange Act Release No. 28869 (February 8,

1991) (56 FR 7242) (‘‘Adopting Release’’). See

Section VII of the Adopting Release for transition

provisions generally and Section VII.C for transition

provisions relating to employee benefit plans.

4 15 U.S.C. 78p(b).

5 17 CFR 240.16a–8(b).

6 17 CFR 240.16a–8(g)(3).

7 17 CFR 240.16b–3 (1990).

8 17 CFR 240.16b–3 (1991).

9The phase-in period applies only to the

exemption from section 16(b), not to the revised

reporting requirements under section 16(a) that

became effective on May 1, 1991 and the further

revisions adopted today.

10Exchange Act Release No. 36063 (August 7,

1995) (60 FR 40994).

11Exchange Act Release No. 34–37260, Section

VII.

12When an issuer adopts a plan that complies

with new Rule 16b–3 or converts one of its existing

plans to the new rule, all plans must be converted,

provided that any transaction between an issuer

and its officers or directors that occurs outside the

scope of a formal plan or pursuant to a plan that

permits only the issuance of cash-only instruments

6. Additional Information

If the space provided in the line items of

this Form or space provided for additional

comments is insufficient, attach another

Form 5, copy of Form 5 or a separate page

of 81⁄2 by 11 inch white paper to Form 5,

completed as appropriate to include the

additional comments. Each attached page

must include information required in Items

1, 2 and 4 of the Form. The number of pages

comprising the report (Form plus

attachments) shall be indicated at the bottom

of each report page (e.g., 1 of 3, 2 of 3, 3 of

3). If additional information is not provided

in this manner, it will be assumed that no

additional information was provided.

* * * * *

8. Transaction Codes

* * * If a transaction involves an equity

swap or instrument with similar

characteristics, use transaction Code ‘‘K’’ in

addition to the code(s) that most

appropriately describes the transaction, e.g.,

‘‘S/K’’ or ‘‘P/K.’’

General Transaction Codes

P—Open market or private purchase of nonderivative or derivative security

S—Open market or private sale of nonderivative or derivative security

Rule 16b-3 Transaction Codes

A—Grant, award or other acquisition

pursuant to Rule 16b-3(d)

D—Disposition to the issuer of issuer equity

securities pursuant to Rule 16b-3(e)

F—Payment of exercise price or tax liability

by delivering or withholding securities

incident to the receipt, exercise or

vesting of a security issued in

accordance with Rule 16b-3

I—Discretionary transaction in accordance

with Rule 16b-3(f) resulting in

acquisition or disposition of issuer

securities

M—Exercise or conversion of derivative

security exempted pursuant to Rule 16b3

Derivative Securities Codes (Except for

transactions exempted pursuant to Rule 16b3)

C—Conversion of derivative security

E—Expiration of short derivative position

H—Expiration (or cancellation) of long

derivative position with value received

O—Exercise of out-of-the-money derivative

security

X—Exercise of in-the-money or at-the-money

derivative security

Other Section 16(b) Exempt Transaction and

Small Acquisition Codes (except for Rule

16b-3 codes above)

G—Bona fide gift

L—Small acquisition under Rule 16a–6

W—Acquisition or disposition by will or the

laws of descent and distribution

Z—Deposit into or withdrawal from voting

trust

Other Transaction Codes

J—Other acquisition or disposition (describe

transaction)

K—Transaction in equity swap or instrument

with similar characteristics

U—Disposition pursuant to a tender of shares

in a change of control transaction

To indicate that a holding should have

been reported previously on Form 3, place a

‘‘3’’ in Table I, column 3 or Table II, column

4, as appropriate. Indicate in the space

provided for explanation of responses the

event triggering the Form 3 filing obligation.

To indicate that a transaction should have

been reported previously on Form 4, place a

‘‘4’’ next to the transaction code reported in

Table I, column 3 or Table II, column 4 (e.g,

an open market purchase of a non-derivative

security that should have been reported

previously on Form 4 should be designated

as ‘‘P4’’). To indicate that a transaction

should have been reported on a previous

Form 5, place a ‘‘5’’ in Table I, column 3 or

Table II, column 4, as appropriate. In

addition, the appropriate box on the front

page of the Form should be checked.

* * * * *

1. Name and Address of Reporting Person*

(Last) (First) (Middle)

(Street)

(City) (State) (Zip)

* If the Form is filed by more than one

Reporting Person, see Instruction 4(b)(v).

* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

llllForm Filed by One Reporting Person

llllForm Filed by More than One

Reporting Person

* * * * *

Dated: May 31, 1996.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 96–14184 Filed 6–13–96; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 240

[Release Nos. 34–37261; 35–26525; IC–

21998]

RIN 3235–AB14

Employee Benefit Plan Exemptive

Rules Under Section 16 of the

Securities Exchange Act of 1934

AGENCY: Securities and Exchange

Commission.

ACTION: Extension of phase-in period for

rule 16b–3.

SUMMARY: The Commission today is

extending the phase-in period for

compliance with the substantive

conditions of new Rule 16b–3 regarding

employee benefit plan transactions

under the Securities Exchange Act of

1934.

DATES: Effective June 14, 1996. The

phase-in period for compliance with

new § 240.16b–3, which previously has

been extended to September 1, 1996, is

extended until November 1, 1996.

FOR FURTHER INFORMATION CONTACT:

Anne M. Krauskopf, Office of the Chief

Counsel, Division of Corporation

Finance, at (202) 942–2900.

SUPPLEMENTARY INFORMATION: On

February 8, 1991, the Commission

adopted comprehensive revisions to the

rules under section 16 1 of the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’).2 The new regulatory scheme

generally became effective on May 1,

1991, but a 16 month phase-in period

was provided with respect to specified

rules affecting employee benefit plans,

in order to give registrants ample time

to review the rule changes and amend

their plans accordingly.3 The Adopting

Release provided that registrants could

continue to rely on the exemptions from

section 16(b) of the Exchange Act 4

afforded by former Rules 16a–8(b),5

16a–8(g)(3),6 and 16b–3 7 after May 1,

1991, but would be required to adopt

the substantive conditions of new Rule

16b–3 8 by September 1, 1992.9

The Rule 16b–3 phase-in period was

extended until September 1, 1996, or

such different date as set by the

Commission, pending completion of

further rulemaking under section 16

with regard to employee benefit plans.10

The amendments to the rules under

section 16 adopted today, which

become effective August 15, 1996,

complete this rulemaking effort.11 While

new Rule 16b–3 becomes available for

issuers that wish to use it on August 15,

1996, the phase-in period for Rule 16b–

3 is extended until November 1, 1996.12