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Insider Trades During Pension Fund Blackout Periods

February 22, 2003

MEMORANDUM

To:   Our Clients and Friends
From:   Olshan Grundman Frome Rosenzweig & Wolosky LLP
Date:   February 22, 2003
Re:   Insider Trades During Pension Fund Blackout Periods

On January 22, 2003, the SEC adopted Regulation BTR which provides guidance regarding the trading prohibitions under Section 306(a) of the Sarbanes-Oxley Act.  Section 306(a) prohibits directors and executive officers of public companies from directly or indirectly purchasing, selling or otherwise acquiring or transferring any equity security of such company during any pension plan blackout period, [1] if a director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer.

Companies Subject to Trading Prohibition

Under Regulation BTR, the trading prohibition under Section 306(a) of the Act applies to an issuer (i) the securities of which are registered under Section 12 of the Securities Exchange Act of 1934 ("Exchange Act"), (ii) that is required to file reports under Section 15(d) of the Exchange Act, or (iii) that files, or had filed, a registration statement that has not yet become effective under the Securities Act of 1933 and that has not been withdrawn.  Thus, an issuer includes all domestic issuers, foreign private issuers, publicly-held banks and savings associations, small business issuers, and, in some circumstances, registered investment companies.

Individuals Subject to Trading Prohibition

The trading prohibition under Section 306(a) applies only to directors and executive officers [2] of an issuer and only to "equity securities that a director or executive officer acquires in connection with his or her service or employment as a director or executive officer."  Regulation BTR sets forth rules for identifying which securities are treated as having been acquired in connection with an individual's service or employment as a director or executive officer. [3]

Exemptions

Regulation BTR exempts various transactions from its trading restrictions.  These exemptions include:

  • acquisitions of equity securities under dividend or interest reinvestment plans;
  • purchases or sales of equity securities pursuant to a "Rule 10b5-1 plan" that satisfies the affirmative defense conditions of Exchange Act Rule 10b5-1(c), subject to certain conditions; purchases or sales of equity securities (other than certain discretionary transactions) pursuant to certain qualified, excess benefit or stock purchase plans;
  • compensatory grants and awards pursuant to plans that provide for grants or awards to occur automatically; certain exercises, conversions or terminations of derivative securities;
  • acquisitions or dispositions of equity securities involving a bona fide gift or transfer by will;
  • acquisitions or dispositions of equity securities pursuant to a qualified domestic relations order;
  • sales or other dispositions of equity securities compelled by laws of an applicable jurisdiction;
  • acquisitions or dispositions of equity securities in connection with a merger, acquisition or similar transaction occurring by operation of law;
  • increases or decreases in the number of equity securities held as a result of a stock split or stock dividend applying equally to all equity securities of that class.

Consequences of Violation

There are two possible consequences of a violation of Section 306(a).  First, violations of the trading prohibition are subject to enforcement by the SEC.   Additionally, Section 306(a)(2) provides for a private right of action, similar to the short swing profit recovery provisions under Section 16(b) of the Exchange Act, by which the issuer, or other security holder on behalf of the issuer, may bring an action to recover profits realized by a director or executive officer from a prohibited transaction during a blackout period.

Notice Requirements

The issuer must provide notice of the blackout period to directors and executive officers, as well as to the SEC on Form 8-K. [4] The notice must be provided no later than five (5) business days after the issuer receives notice from the pension plan administrator of the blackout period [5] (in accordance with Labor Department rules) or, if no such notice is received, at least 15 calendar days prior to the date the blackout period is scheduled to begin.  The notice to the SEC on Form 8-K must be filed on the same day as that notice is transmitted to directors and executive officers.

Effective Date

The new rules became effective on January 26, 2003.  Consequently, the notice requirements apply for blackout periods beginning on or after such date.  However, the requirement that an issuer provide notice to the SEC using Form 8-K does not become effective until March 31, 2003.  In the interim, an issuer may provide the required notice to the SEC by disclosing the appropriate information under Item 5 of Form 10-Q or 10-QSB in the first quarterly report filed by the issuer after commencement of the blackout period.

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These are only brief descriptions of the SEC's new rules.  This memorandum provides general information only and does not constitute legal advice that may be applied to any particular situation.  Please contact the Partners in our Corporate Department for further advice and assistance.

Annex A

New Rule 100(a) of Regulation BTRdefines the term "acquired such equity security in connection with service or employment as a director or executive officer" to include equity securities acquired by a director or executive officer:

  • at a time when he or she was a director or executive officer under a compensatory plan, contract, authorization or arrangement, including, but not limited to, plans relating to options, warrants or rights, pension, retirement or deferred compensation or bonus, incentive or profit-sharing (whether or not set forth in any formal plan document), including a compensatory plan, contract, authorization or arrangement with a parent, subsidiary or affiliate;
  • at a time when he or she was a director or executive officer as a result of any transaction or business relationship described in paragraph (a) or (b) of Item 404 of Regulation S-K or, in the case of a foreign private issuer, Item 7.B of Form 20-F (but without application of the disclosure thresholds of such provisions), to the extent that he or she has a pecuniary interest in the equity securities;
  • at a time when he or she was a director or executive officer, as "director's qualifying shares" or other securities that he or she must hold to satisfy minimum ownership requirements or guidelines for directors or executive officers;
  • prior to becoming, or while, a director or executive officer where the equity security was acquired as a direct or indirect inducement to service or employment as a director or executive officer; or
  • prior to becoming, or while, a director or executive officer where the equity security was received as a result of a business combination in respect of an equity security of an entity involved in the business combination that he or she had acquired in connection with service or employment as a director or executive officer of that entity.

[1] Under Regulation BTR, a "blackout period" means a period of more than three (3) consecutive business days during which the ability to purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer held in an individual account plan is temporarily suspended by the issuer, or by a fiduciary of the plan, with respect to at least 50% of the participants or beneficiaries located in the United States under all individual account plans maintained by the issuer that permit participants or beneficiaries to acquire or hold equity securities of the issuer.

[2] Regulation BTR provides that the term "director" has the meaning set forth in Section 3(a)(7) of the Exchange Act and  "executive officer" has the same meaning as the term "officer" in Exchange Act Rule 16a-1(f).  As related to foreign private issuers, "director" means a director who is a management employee of the issuer and "executive officer" means the principal executive officer or officers, the principal financial officer or officers and the principal accounting officer or officers of the issuer.

[3] See Annex A for a list of the rules used for identifying such securities.

[4] A foreign private issuer subject to Section 306(a) must file as an exhibit to its annual report a copy of each notice provided to directors and executive officers pursuant to Section 306(a)(6) and new Exchange Act Rule 104 during the most recently completed fiscal year, unless the notice was provided previously to the SEC in a report on Form 6-K.  A foreign private issuer may make the required disclosure sooner in a report on Form 6-K, a practice which is encouraged by the SEC.

[5] The notice must include: (i) the reason or reasons for the blackout period; (ii) a description of the plan transactions to be suspended during, or otherwise affected by, the blackout period; (iii) a description of the class of equity securities subject to the blackout period; and (iv) the length of the blackout period.

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