Exchange Act Section 16 and Related Rules and Forms

Question: A company reincorporated from Canada to Delaware, thus losing its “foreign private issuer” status (see Exchange Act Rule 3b-4). Before the reincorporation, an officer of the company purchased shares of company common stock, which he sold after the reincorporation but within six months of his purchase. Would the officer's purchase be subject to Section 16?

Answer: Yes. The officer's purchase would be subject to Section 16, and the officer would be required to file a Form 3 within 10 days of the reincorporation and a Form 4 reporting both the purchase and sale of the common shares following the sale of those shares. While the staff is of the view, generally, that transactions effected by officers and directors of a foreign company before the loss of “foreign private issuer” status are not subject to Section 16 (see Question 110.03), this position has not been applicable if the event that culminated in the loss of “foreign private issuer” status also involved the company's initial registration of equity securities under Exchange Act Section 12 (cf. Question 110.04). In such event, Rule 16a-2(a) would be applicable, which subjects to Section 16 transactions effected by a director or officer in the six months before the initial Section 12 registration. In the staff's view, for purposes of Section 16, a reincorporation by a foreign company that causes it to lose its “foreign private issuer” status is analogous to a company's initial registration of equity securities under Section 12 because, in each event, the change in the company's “foreign private issuer” status was within the control of the company and insiders should have been aware of the change sufficiently in advance to take potential Section 16 responsibilities into account when buying and selling the company's equity securities. [Aug. 11, 2010]

Question 101.02

Question: Exchange Act Rule 3b-4(c) provides that a foreign issuer determines whether it is a foreign private issuer as of the last business day of its most recently completed second fiscal quarter (the “determination date"). Under Rule 3b-4(e), if a foreign issuer with securities registered under Exchange Act Section 12 does not qualify as a foreign private issuer as of the determination date, it must begin using the forms prescribed for domestic companies and complying with Section 16, starting on the first day of the fiscal year following the determination date. In this situation, when must a Form 3 be filed?

Answer: A Form 3 must be filed on or before the first day of the fiscal year following the determination date. [Aug. 11, 2010]

Question: If an insider purchases units consisting of common stock and debentures of the insider's company, must the insider file a Section 16(a) report covering the acquisition of the stock?

Answer: Yes. An insider who purchases units consisting of common stock and debentures of the insider's company must file a Section 16(a) report covering the acquisition of the stock. The debentures need not be reported unless they are also deemed to be equity securities, as would occur, for example, if they were convertible into common stock. [May 23, 2007]

Question: Section 16(a)(3)(B) of the Exchange Act, as amended by the Sarbanes-Oxley Act of 2002, states, in part, that Forms 4 and 5 “shall indicate ownership by the filing person at the date of filing.” Does this mean that an insider must report ownership of all classes of equity securities of the issuer each time the insider files a Form 4 or 5?

Answer: When an insider files a Form 4 or 5, the insider need only report ownership after the transaction or at the end of the fiscal year, respectively, of the class(es) of equity securities of the issuer as to which the insider reports a transaction. Because Section 16 contained the same language before the statutory amendment, the amendment did not expand an insider's obligation to report post-transaction ownership. [May 23, 2007]

Question: Can an issuer satisfy its Web site posting obligation if it posts forms directly in PDF only?

Answer: Assuming an issuer otherwise satisfies the Web site posting requirements, it is permissible to post forms directly in PDF only if the Web site explains clearly the need to use Adobe Acrobat to access the forms and provides clear directions on how to download it easily and without cost using a readily accessible link provided on the issuer's Web site. [May 23, 2007]

Question: Will the Division staff express a view as to whether a particular transaction involves a “purchase” or “sale” for purposes of Section 16(b)?

Answer: No. Since the enforcement of Section 16(b) is left to private parties and the courts, the Division staff ordinarily will not express a view as to whether a particular transaction involves a “purchase” or “sale” for purposes of this section. [May 23, 2007]

Question: Section 16(e) exempts foreign and domestic arbitrage transactions from the other provisions of Section 16. Rule 16e-1 provides that the Section 16(e) exemption does not apply to such arbitrage transactions by officers and directors. Will the Division staff express a view as to whether any particular transaction qualifies for the Section 16(e) exemption?

Answer: No. In Release No. 34-26333 (Dec. 2, 1988), the Commission noted that Section 16(e) “gives the Commission rulemaking authority to define 'bona fide arbitrage,' but the Commission has not exercised this authority, opting instead to leave such interpretation to the courts.” In Release No. 34-26333, the Commission solicited comment on “whether further guidance in this area is needed” without proposing any additional Section 16(e) rules. Because the Commission did not subsequently adopt any rules defining “bona fide arbitrage” or otherwise address the subject, the Release No. 34-26333 statement about leaving such interpretation to the courts remains the Commission's statement regarding its intentions. Accordingly, the staff will not express a view as to whether any particular transaction qualifies for the Section 16(e) exemption, but instead will direct counsel to relevant case law, e.g., Falco v. Donner, 208 F.2d 600 (2d Cir. 1953). [May 23, 2007]

Question: Would an Assistant Secretary ordinarily be considered an officer of a company under Section 16(a)?

Answer: No. An Assistant Secretary would not ordinarily be considered an officer of a company under Section 16(a), unless such person performs any of the functions that would make such person an officer as defined in Rule 16a-1(f). [May 23, 2007]

Question 109.02

Question: An exchange-traded fund (“ETF”) does not disclose on each trading day the identities and quantities of its portfolio securities. To maintain confidentiality of this information, authorized participants (“APs”) effect creation and redemption transactions through a confidential brokerage account (“Confidential Account”) with an agent (“AP Representative”), for the benefit of the AP. Although the AP will not know the identities and quantities of the ETF’s portfolio securities, the AP will have some control over the timing of when the ETF’s portfolio securities will be purchased and sold on its behalf by the AP Representative by virtue of its ability to place creation and redemption orders with the ETF. For the purposes of Rule 16a-1(a)(1), can the AP rely on informational barriers to determine whether the AP is a greater than 10% beneficial owner of the ETF’s portfolio securities that are acquired on its behalf in a Confidential Account on a disaggregated basis from other accounts of the AP?

Answer: Yes, as long as the arrangement is consistent with the Commission’s guidance regarding the calculation and reporting of beneficial ownership status set forth in Release No. 34-39538 (Jan. 12, 1998), including the following conditions:

• the agreements governing the Confidential Account contain confidentiality provisions that operate as an effective informational barrier between the AP and the AP Representative and other persons with knowledge of the composition of the ETF’s portfolio;
• the AP, AP Representative, and the ETF’s custodian are unaffiliated entities that do not share officers, directors, or employees with investment discretion over the Confidential Account and their respective directors, officers, and employees do not participate in common compensation pools; and
• the AP obtains an annual, independent assessment of the operation of the policies and procedures established to prevent the flow of information related to the Confidential Account. [Oct. 7, 2022]

Question: Where Rule 16a-2(a) makes Section 16 applicable to a transaction that occurs before the issuer's Section 12 registration, are the exemptions provided by the other rules under Section 16 available to the same extent as for any other transaction subject to Section 16?

Answer: Yes. The exemptions provided by the other rules under Section 16 should be available to the same extent as for any other transaction subject to Section 16. [May 23, 2007]

Question: Rule 16a-2(c) provides that “a ten percent beneficial owner not otherwise subject to Section 16 of the Act must report only those transactions conducted while the beneficial owner of more than ten percent of a class of equity securities of the issuer registered pursuant to Section 12 of the Act.” A person is subject to Section 16 solely by being a member of a group, as described in Section 13(d)(3) and Rule 13d-5(b) thereunder, that beneficially owns more than 10 percent of such a class of equity security. The person no longer agrees to act together with the other group members for the purpose of acquiring, holding, voting or disposing of equity securities of the issuer. Does Rule 16a-2(c) require the person to report his or her transactions in issuer equity securities that occur after the person ceases to act as a member of the group?

Answer: No. Group membership is construed the same way for purposes of Section 16(a) and Rule 16a-2(c) as for purposes of Section 13(d). Group membership terminates when the person no longer agrees to act together with the other group members for the purpose of acquiring, holding, voting or disposing of equity securities of the issuer. If after ceasing to act as a member of the group, the person’s beneficial ownership does not exceed 10 percent of a class of issuer equity securities registered under Section 12, and the person is not otherwise subject to Section 16 with respect to the issuer, Rule 16a-2(c) does not require the person to report his or her transactions in issuer equity securities that occur after the person ceases to act as a member of the group. [Apr. 24, 2009]

Question: If a foreign issuer with securities registered under Exchange Act Section 12 loses foreign private issuer status as described in Question 101.02, would Rule 16a-2(a) apply to make transactions effected by its officers and directors before a Form 3 is due subject to Section 16 and reportable on Form 4?

Answer: No. [Aug. 11, 2010]

Question 110.04

Question: A foreign issuer that is not a foreign private issuer files its initial registration statement to register equity securities under Exchange Act Section 12. Would Rule 16a-2(a) apply to make transactions by its officers and directors within six months before the effectiveness of the registration statement subject to Section 16 and reportable on Form 4?

Answer: Yes. [Aug. 11, 2010]

Question: If a company otherwise maintains a dividend reinvestment plan that satisfies the exemptive conditions of Rule 16a-11, are automatic dividend reinvestments under a non-qualified deferred compensation plan also eligible for the Rule 16a-11 exemption, so that those reinvestment transactions would not be required to be reported, thus reducing the number of Forms 4 due?

Answer: Non-qualified deferred compensation plans are not Excess Benefit Plans, as defined by Rule 16b-3(b)(2) under the Exchange Act, in which transactions are exempted by Rule 16b-3(c). See interpretive letter to American Bar Association (Feb. 10, 1999, Q. 2(c)). Under Rule 16a-3(g)(1), as amended in Release No. 34-46421 (Aug. 27, 2002), each transaction in a non-qualified deferred compensation plan must be reported on a Form 4 not later than the end of the second business day following the day on which the transaction was executed. However, if a company maintains a dividend reinvestment plan that satisfies the exemptive conditions of Rule 16a-11, automatic dividend reinvestments under a non-qualified deferred compensation plan are also eligible for the Rule 16a-11 exemption. See interpretive letter to American Home Products (Dec. 15, 1992). [May 23, 2007]

Question: For purposes of satisfying the affirmative defense conditions of Rule 10b5-1(c), an insider adopts a written plan for the purchase or sale of issuer equity securities. In the plan, which was drafted by a broker-dealer, the broker-dealer specified the dates on which plan transactions will be executed. Can the insider rely on Rule 16a-3(g)(2) to compute the Form 4 due date for plan transactions based on a deemed execution date?

Answer: No. By adopting a written plan that specifies the dates on which plan transactions will be executed, the insider will have selected the date of execution for plan transactions. Consequently, the insider will not be able to rely on Rule 16a-3(g)(2) to compute the Form 4 due date for plan transactions based on a deemed execution date. [May 23, 2007]

Question: Where a new beneficial owner joins an existing set of beneficial owners who file as a group, does the new beneficial owner have to file a new Form 3, even if the new owner is not adding any new securities to the group holdings?

Answer: Yes. Under Rule 16a-3(j), the new beneficial owner must file a new Form 3 even if the new owner is not adding any new securities to the group holdings. [May 23, 2007]

Question: In order to reduce the number of Forms 4 due annually, an insider makes the following choices: In connection with the annual year-end election to defer some of the following year's salary into a non-qualified deferred compensation plan, the insider elects to have payroll deductions invested in the plan's interest-only account. The insider also elects for the deferred salary so invested to be “swept” on a quarterly basis into the plan's stock fund account. How should these "sweep” transactions be reported?

Answer: Each "sweep” transaction would be reportable separately on Form 4. If the "sweep” election satisfies the Rule 16b-3(f ) exemptive conditions for Discretionary Transactions (as defined in Rule 16b-3(b)(1)), the "sweep” transactions would be reported using Code I. Further, if the reporting person does not select the date of execution for a "sweep” that is a Discretionary Transaction, Rules 16a-3(g)(3) and (4) would apply to determine the deemed execution date. [May 23, 2007]

Question: Does Rule 16a-9(a) exempt a stock dividend payable where there is only one shareholder of the class on which the dividend is paid?

Answer: No. This position reflects the staff's concern that such a transaction would represent a manipulative use of the rule for the purpose of benefiting one shareholder. For purposes of this interpretation, a single group required to file a Schedule 13D is treated the same way as a single shareholder. [May 23, 2007]

Question: Does Rule 16a-9(b) exempt from Section 16 the pro rata acquisition of rights by a shareholder who is a stand-by purchaser?

Answer: Rule 16a-9(b) exempts from Section 16 the acquisition of rights, such as shareholder or preemptive rights, pursuant to a pro rata grant to all holders of the same class of equity securities registered under Section 12. Where the distribution of rights is pro rata, the acquisition of rights so distributed is exempt, including a pro rata acquisition by a shareholder who is a stand-by purchaser. However, such stand-by purchaser's acquisition of underlying shares pursuant to the exercise of rights not exercised by other shareholders is not exempted by Rule 16a-9(b) because such acquisition is the result of an independently negotiated contract with the issuer that is not available to all shareholders on a pro rata basis. [May 23, 2007]

Question: A company will effect a 1-for-4 reverse stock split for all of its outstanding common stock. Rather than issue fractional shares, the company will pay cash for the value of the fractional shares. Is this transaction exempt from Section 16?

Answer: Yes. Rule 16a-9(a) exempts from Section 16 "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.” This rule is available to exempt the disposition of fractional shares incidental to the reverse stock split where the cash-out of fractional shares, like the reverse split itself, applies equally to all securities of the class, and there is no choice to receive fractional shares instead of cash. [Aug. 14, 2009]

Question: Rule 16a-11 exempts from Sections 16(a) and 16(b) of the Exchange Act the acquisition of securities by insiders through the reinvestment of dividends pursuant to dividend reinvestment plans that satisfy the conditions of the rule. Is the disposition of such securities also exempted by Rule 16a-11?

Answer: No. Dispositions of securities acquired by insiders through the reinvestment of dividends pursuant to dividend reinvestment plans that satisfy the conditions of the rule is not exempted by Rule 16a-11. Further, Rule 16a-11 does not exempt from the liability provisions of Section 16(b) the acquisition of additional securities through voluntary additional investments permitted by such plans. [May 23, 2007]

Question: When a dividend reinvestment plan meeting the requirements of Rule 16a-11 is terminated and the stock held by the plan is distributed to participants, does the distribution of the shares of stock to persons covered by Section 16 need to be reported?

Answer: No. In this situation there is no effective change in beneficial ownership, and therefore, pursuant to Rule 16a-13, the distribution of shares to persons covered by Section 16 need not be reported as an acquisition of securities, assuming that those shares previously had been reported as indirectly beneficially owned. [May 23, 2007]

Question: Does Rule 16b-3 exempt issuer equity securities transactions between the issuer and persons who are subject to Section 16 solely because they are more than 10 percent beneficial owners?

Answer: No. Rule 16b-3 exempts issuer equity securities transactions between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer. The rule, however, does not exempt similar transactions by persons who are subject to Section 16 solely because they are more than 10 percent beneficial owners. Rule 16b-3 is available to a more than 10 percent beneficial owner who is also subject to Section 16 by virtue of being an officer or director of the issuer (see Release No 34-37260 (May 31, 1996) at n. 42 (Part 1 and Part 2)), including a "deputized” director (see Brief of the Securities and Exchange Commission, Amicus Curiae in Roth v. Perseus, L.L.C.) [May 23, 2007]

Question: Does Rule 16b-3 exempt a transaction between the issuer and (1) an officer's charitable remainder trust, or (2) an investment advisor of which a director is a principal?

Answer: No. Rule 16b-3 exempts issuer equity securities transactions between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer. Rule 16b-3 will not exempt a transaction between the issuer and (1) an officer's charitable remainder trust, or (2) an investment advisor of which a director is a principal. However, in its interpretive letter to American Bar Association (Feb. 10, 1999), Q. 4, the Division staff has stated that Rule 16b-3 is available to exempt an officer's or director's indirect pecuniary interest in certain specific transactions. [May 23, 2007]

Question: For purposes of determining whether a plan is a "Stock Purchase Plan,” as defined by Rule 16b-3(b)(5), how are satisfaction of the coverage and participation requirements of Internal Revenue Code Section 410 measured?

Answer: Satisfaction of the coverage and participation requirements of Internal Revenue Code Section 410 are measured by reference to employees eligible to participate, rather than employees actually participating. [May 23, 2007]

Question: Does the definition of a "Stock Purchase Plan” in Rule 16b-3(b)(5), which includes employee benefit plans that satisfy the coverage and participation requirements of Sections 423(b)(3) and (b)(5) of the Internal Revenue Code, contemplate that such plans are broad-based?

Answer: Yes. While Rule 16b-3(b)(5) does not specifically indicate that such plans must also meet the broad-based plan requirements in Section 423(b)(4) of the Internal Revenue Code (because these requirements may be more restrictive than was intended for purposes of Rule 16b-3(b)(5)), Rule 16b-3(b)(5) contemplates that Stock Purchase Plans are broad-based. See footnote 50 to Release No. 34-37260 (May 31, 1996) (Part 1 and Part 2). Accordingly, a director-only or senior-executive only plan would not be a Stock Purchase Plan within the meaning of Rule 16b-3(b)(5) or Rule 16b-3(c). [May 23, 2007]

Question: A Stock Purchase Plan, as defined in Rule 16b-3(b)(5), includes a dividend reinvestment feature. Would dividend acquisitions pursuant to this plan be exempted by Rule 16b-3(c)?

Answer: Yes. Dividend acquisitions pursuant to the Stock Purchase Plan are exempted by Rule 16b-3(c), because any acquisition pursuant to a Stock Purchase Plan is exempted by Rule 16b-3(c). [May 23, 2007]

Question: Would a stand-alone top hat plan that qualifies for an exemption under Section 201(2) of ERISA be an Excess Benefit Plan eligible for exemption under Rule 16b-3(c)?

Answer: No. A stand-alone top hat plan that qualifies for an exemption under Section 201(2) of ERISA would not be an Excess Benefit Plan eligible for exemption under Rule 16b-3(c), because such plan would not be operated in conjunction with a Qualified Plan, as defined in Rule 16b-3(b)(4). [May 23, 2007]

Question: Are the Non-Employee Director standards of Rule 16b-3(b)(3) independent of the "outside director” standards of Internal Revenue Code Section 162(m)?

Answer: Yes. Accordingly, satisfaction of the Non-Employee Director standards cannot be presumed based on satisfaction of the Section 162(m) "outside director” standards. [May 23, 2007]

Question: What is the relevant date for determining Non-Employee Director status under Rule 16b-3?

Answer: The relevant date for determining Non-Employee Director status is the date such director proposes to act as a Non-Employee Director. This would be the date on which approval is obtained, even where an award is not deemed to occur until a later date, for example, upon the satisfaction of conditions (other than the passage of time and continued employment) that are not tied to the market price of an equity security of the issuer. Cf. Bioject Medical Technologies Inc. (Nov. 24, 1993). [May 23, 2007]

Question: Rule 16b-3(b)(3)(i)(A) disqualifies for service as a Non-Employee Director any director who currently is an officer of or otherwise currently employed by the issuer, its parent or subsidiary. How is the term "subsidiary” defined for the purposes of this rule?

Answer: For the purposes of Rule 16b-3(b)(3)(i)(A), "subsidiary” would be defined pursuant to the broad standards of Rule 12b-2, i.e., as an affiliate controlled directly or indirectly through one or more intermediaries. [May 23, 2007]

Question: Will a sale into the open market from a Stock Purchase Plan or other Tax-Conditioned Plan be exempt pursuant to Rule 16b-3(c)? Will such a sale be a Discretionary Transaction (as defined in Rule 16b-3(b)(1)) eligible for exemption pursuant to Rule 16b-3(f)?

Answer: No to both questions. Such transactions will not be eligible for exemption from Section 16(b) pursuant to Rule 16b-3. [May 23, 2007]

Question: Would stock acquisitions through an open market purchase plan that is not a Rule 16b-3(b) Stock Purchase Plan (and hence ineligible for Rule 16b-3(c) exemption) but is "sponsored by the issuer” as interpreted in the interpretive letter to American Bar Association (Oct. 15, 1999) be considered "acquisitions from the issuer” eligible for the Rule 16b-3(d) exemption?

Answer: No. [May 23, 2007]

Question: Is a diversification transaction permitted by Section 401(a)(35) of the Internal Revenue Code a "Discretionary Transaction,” as defined in Rule 16b-3(b)(1), subject to the exemptive conditions of Rule 16b-3(f)?

Answer: Yes. Section 401(a)(35) of the Internal Revenue Code provides diversification rights to qualifying participants in defined contribution plans that hold publicly-traded employer securities. Specifically, Section 401(a)(35) makes intra-plan transfers out of and back into the plan's issuer securities fund available no less frequently than quarterly. As explained in Release No. 34-37260 (May 31, 1996) (Part 1 and Part 2), periodic fund-switching transactions involving an issuer equity securities fund 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 actual counterparty to the transaction is not the issuer, but instead is a market participant.

Rule 16b-3(b)(1)(iii) excludes from the definition of "Discretionary Transaction” a transaction "required to be made available to a plan participant pursuant to a provision of the Internal Revenue Code.” This provision was adopted in 1996 to exclude:

• the diversification elections and distributions that Section 401(a)(28) of the Internal Revenue Code makes available to 10-year plan participants who have reached age 55, and
• the distributions that Section 401(a)(9) of the Internal Revenue Code requires at the later of the employee's retirement or reaching age 70½.

The basis for the Rule 16b-3(b)(1)(iii) exclusion was that the insider's opportunity to speculate in the context of the specified events was well circumscribed. In contrast, Section 401(a)(35) of the Internal Revenue Code, which was added by Section 901 of the Pension Protection Act of 2006, makes available the periodic fund-switching transactions for which the exemptive conditions of Rule 16b-3(f) were designed to apply. Because the Commission did not consider the later-enacted Section 401(a)(35) of the Internal Revenue Code when it adopted Rule 16b-3(b)(1)(iii), this rule should not be construed to exclude Section 401(a)(35) transactions from the exemptive conditions of Rule 16b-3(f). [May 23, 2007]

Question: May a plan be bifurcated so that it is eligible in part for exemption under Rule 16b-3(c)?

Answer: A plan may be bifurcated so that it is eligible in part for exemption under Rule 16b-3(c) only if it works entirely as a Tax-Conditioned Plan with respect to a segregable class of participants and entirely as a non-Tax-Conditioned Plan as to a different class of participants. [May 23, 2007]

Question: Would an amendment to a material term of a security acquired pursuant to the full board, Non-Employee Director or shareholder approval conditions of Rule 16b-3(d) require further approval pursuant to any one of those approval conditions?

Answer: Yes, an amendment to a material term of a security acquired pursuant to the full board, Non-Employee Director or shareholder approval conditions of Rule 16b-3(d) would require further approval pursuant to any one of those approval conditions in order for the specific approval conditions of Note 3 to the rule to be satisfied. This is required because allowing a material term to be changed without subsequent approval would vitiate the specific approval requirement of the rule. Such further approval is required whether or not the amendment would result in the cancellation and regrant of the security. For example, an amendment to accelerate vesting (which, pursuant to the interpretive letter to Foster Pepper & Shefelman (Dec. 20, 1991), does not effect a cancellation and regrant) would require further approval. [May 23, 2007]

Question: Will initial approval of a plan satisfy the specificity requirement where the specific terms and conditions of each acquisition are fixed in advance, such as a formula plan?

Answer: Yes. [May 23, 2007]

Question: Would approval of a grant that by its terms provides for automatic reloads satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants?

Answer: Yes. Approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis. The same result applies under Rule 16b-3(e) where the automatic feature is a tax- or exercise-withholding right. [May 23, 2007]

Question: Could the six-month holding period of Rule 16b-3(d)(3) be used to exempt an officer's or director's purchase of the issuer's stock in an underwritten public offering?

Answer: No. Rule 16b-3 would not exempt this transaction, because the rule was not intended to cover a situation where someone other than the issuer controls to whom the sales are made and on what terms. For the same reasons, Rule 16b-3 would not exempt an officer's or director's purchase of the issuer's stock in a public offering pursuant to a "friends and family” allocation. [May 23, 2007]

Question: Are the dispositions of issuer securities that take place in cashless exercises through a broker eligible for exemption pursuant to Rule 16b-3(e)?

Answer: No. The dispositions that take place pursuant to these transactions are not eligible for exemption pursuant to Rule 16b-3(e) because cashless exercises through a broker do not involve a transaction with the issuer or the issuer's employee benefit plan. [May 23, 2007]

Question: Is the disclosure regarding loans by a bank, savings and loan association, or broker-dealer contemplated by Instruction 4.c to Item 404(a) (loan made in ordinary course of business, on substantially same terms as for unrelated persons, no more than normal risk of collectibility, etc.) Item 404(a) disclosure that would disqualify a director from being a Non-Employee Director, as defined in Rule 16b-3(b)(3)?

Answer: No. Statements disclosed pursuant to Instruction 4.c to Item 404(a) will not be considered Item 404(a) disclosure that would disqualify a director from being a Non-Employee Director. Release No. 33-8732A, in the Item 404 discussion at Section V.A.3, characterizes this instruction as addressing a situation that "do[es] not raise the potential issues underlying our principle for disclosure."

Question: Would Rule 16b-6(b) be available to exempt the cash settlement of phantom stock?

Answer: No. Rule 16b-6(b) would not be available to exempt the cash settlement of phantom stock, because the deemed sale of the underlying stock following exercise of the phantom stock is outside the exemptive scope of Rule 16b-6(b). In contrast, Rule 16b-6(b) would be available to exempt the stock settlement of phantom stock because such transaction involves only the exercise of a derivative security. [May 23, 2007]

Question: What information does an insider report for the issuer's ticker or trading symbol (Item 3 of Form 3, and Item 2 of Forms 4 and 5) if there is none?

Answer: The insider should enter "NONE.” [May 23, 2007]

Question: Does an insider need to file a power of attorney with the filing?

Answer: If the Form is signed on behalf of an individual by another person, the power of attorney establishing the authority of such person to sign the Form must be filed in an exhibit to the Form or as soon as practicable in an amendment to the Form, unless a previously filed paper or electronic power of attorney is still in effect. The power of attorney need only indicate that the reporting person authorizes and designates the named person or persons to sign and file the Form on the reporting person's behalf and state its duration. [May 23, 2007]

Question: How should an insider sign the document when it uses a power of attorney?

Answer: The staff recommends that the document signature be the typed signature of the person holding the power of attorney. The remainder of the signature line would then indicate that the person is signing on behalf of the named officer, director or more than 10 percent shareholder under a power of attorney. For example, "John Jones, by power of attorney,” where John Jones holds power of attorney for insider Susan Smith. [May 23, 2007]

Question: How can a filer indicate the title of the person filing the Form?

Answer: The title of the person may be included on the same line as the signature. [May 23, 2007]

Question: Do all officers and directors need filing codes?

Answer: Yes. Each officer, director and more than 10 percent shareholder will need his/her own CIK, CCC and Password codes. The codes are needed whether the insider is filing as an individual or as part of a group. It is very important to use the insider's CIK rather than, for example, the issuer's CIK, so that users can readily identify the insider filing the form (if the wrong CIK has been used, file a new form with the correct CIK). Only one set of codes is permitted even if the filer is an officer, director, or more than 10 percent shareholder of more than one company. We strongly recommend that companies applying for codes on behalf of their insiders verify that the persons do not already have codes assigned to them. [May 23, 2007]

Question: When reporting derivative securities on Table II of Form 4 or Form 5, are options that have different economic characteristics (such as exercise price and expiration date) considered different classes of securities?

Answer: Yes. General Instruction 4(a)(i) to Form 4 requires an insider to "report total beneficial ownership following the reported transaction(s) for each class of securities in which a transaction was reported.” In reporting derivative securities on Table II, options that have different economic characteristics (such as exercise price and expiration date) are considered different classes of options. For example, in reporting the grant of options with an exercise price of $10 per share and an expiration date of March 1, 2014, the holdings column should show the total number of options with the same terms, and should not include the insider's holdings of options with an exercise price of $8 per share and an expiration date of November 1, 2012. On a voluntary basis, the insider may report on a separate line(s) holdings of options that are of a different class(es) than the options transaction reported. General Instruction 4(a)(iii) to Form 5, which requires an insider to "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,” is construed the same way. [May 23, 2007]

Question: Column 8 of Table II in Form 4 and Form 5 requires disclosure of the "Price of Derivative Security.” Does this column require the exercise price of the derivative security, the fair market value of the underlying security on the date of the reported transaction, or some other price?

Answer: The “Price of Derivative Security” required in Column 8 of Table II is the price, if any, that the insider paid to acquire the derivative security (where an acquisition is reported) or received when disposing of the derivative security (where a disposition is reported). It is not the exercise price of the derivative security (which is reportable in Column 2) or the fair market value of the underlying security on the date of the reported transaction. [May 23, 2007]

[Reserved]

Question: Must an estate that holds more than 10 percent of a class of an issuer's equity securities file a Form 3 to report its holdings?

Answer: Yes. An estate that holds more than 10 percent of a class of an issuer's equity securities must file a Form 3 to report its holdings. Rule 16a-2(d), which permits an executor not to report transactions in securities held by an estate for the first 12 months following appointment as an executor, does not apply to the reporting of holdings on a Form 3. However, if the executor is already an insider (e.g., by virtue of being an officer of the issuer), in accordance with Rule 16a-3(b)(2) the executor need not file an additional Form 3 in the capacity of executor. Rather, when the executor next files a Form 4 (e.g., in the executor's individual capacity or for the estate after the 12 month period has elapsed), the executor would indicate the additional capacity in Box 5. [May 23, 2007]

Question: May an officer of a company whose securities are registered under Section 12(g) of the Exchange Act file a Form 4 report solely to indicate the officer's resignation?

Answer: Yes. An officer of a company whose securities are registered under Section 12(g) of the Exchange Act may, but is not legally required to, file a Form 4 report, checking the exit box, solely to indicate the officer's resignation. [May 23, 2007]

Question: On Form 4, what date should be entered for Item 3 (Date of Earliest Transaction Required to be Reported)?

Answer: The date in Item 3 should be the transaction date of the earliest transaction reported that you are required to report on Form 4. This is the same date you enter in Column 2 of Table I (or Column 3 of Table II), not the Deemed Execution Date you would enter in Column 2A of Table I (or Column 3A of Table II). Where the transactions reported on the Form 4 include a transaction that the insider previously failed to report timely on Form 4, the transaction date for that transaction should be entered in Item 3. [May 23, 2007]

Question: What date should be entered for Item 3 on a Form 4 filed solely to report voluntarily a transaction that is eligible for deferred reporting on Form 5, such as a Rule 16b-5 gift or a Rule 16a-6(a) small acquisition?

Answer: Enter the transaction date reported in Column 2 of Table I (or Column 3 of Table II). In reporting the transaction, make sure that "V” is designated in Column 3 of Table I (or Column 4 of Table II). [May 23, 2007]

Question: Does the Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1?

Answer: No. The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c). See Release No. 33-11138 (Dec. 14, 2022). [August 25, 2023]

Question: Are Discretionary Transactions required to be reported on Form 5 individually, rather than on an aggregate basis, even when they are "same way” rather than "opposite way” transactions?

Answer: Yes. Discretionary Transactions are required to be reported individually, rather than on an aggregate basis, even when they are "same way” rather than "opposite way” transactions. [May 23, 2007]

209.02 Following a company's buy-back of its stock, a person who previously owned less than 10 percent of the company's stock may own more than 10 percent of the stock without having purchased additional shares. If, before the buy-back, the person is aware that the buy-back will occur and will have this result on his or her holdings, the person should file a Form 3 within 10 days after the buy-back. If the person does not have advance awareness of the buy-back and/or its consequences, he or she would need to determine whether he or she is a more than 10 percent beneficial owner and satisfy any obligation to file a Form 3 within ten days after information in the company's most recent quarterly, annual or current report indicates the amount of securities outstanding following the buy-back. [May 23, 2007]

209.03 In connection with termination of employment, an officer was awarded options that would become exercisable (in installments) when the issuer's stock reached and maintained specified price levels for a period of 30 days, conditioned on the terminated officer's continued provision of services as a consultant. These options would be derivative securities under Rule 16a-1(c) and thereby subject to Section 16 upon grant because their exercisability would not be subject to conditions (other than the passage of time and continued employment) that are not tied to the market price of an equity security of the issuer. Cf. Certilman Balin Adler & Hyman (April 20, 1992). [May 23, 2007]

209.04 Rule 16a-1(c)(3) excludes from "derivative security” 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 tax withholding consequences of receipt, exercise or vesting. The federal state, local and foreign taxes that may be paid through the withholding, tendering back or delivery of previously owned shares may exceed minimum withholding requirements as along as the amount withheld does not exceed the participant's estimated federal state, local and foreign tax obligations attributable to the underlying transaction. Such amount may include capital gains tax on the shares that were surrendered or withheld in settlement of the tax-withholding right or exercising the derivative security. [May 23, 2007]

209.05 A caller contemplated writing a short put option, whereby the counterparty would have the right to put the security to the writer at any point after execution of the contract. Provided that the counterparty who is "long” the put option retains its discretion as to whether and when to exercise the put option, then the writer of the put option is not deemed to beneficially own the securities underlying the put option because the right to receive the underlying securities is dependent upon factors that are not within the control of the writer of the put option. Thus, in calculating its beneficial ownership for purposes of Section 16, the party that is short the put option should not count the underlying securities. [May 23, 2007]

209.06 An exchange-traded fund (“ETF”) has authorized participants (“APs”) whose directors or officers, or the directors or officers of the AP’s parent holding company, serve as a director of an issuer of securities purchased or sold as part of the ETF’s in-kind creation or redemption baskets. The AP or its parent holding company may be deemed to be a director of that issuer for the purposes of Section 16 based on expressly or impliedly “deputizing” that individual to serve as its representative on the issuer’s board of directors. See Blau v. Lehmann, 368 U.S. at 403, 408-10 (1962); see also Feder v. Martin Marietta Corp., 406 F.2d 260, 263-64 (2d Cir. 1969). An AP and its parent holding company would avoid being deemed to have a pecuniary interest in a security in the creation or redemption basket, for the purposes of Rule 16a-1(a)(2), if the ETF substitutes cash for that basket security, so that neither the AP, nor anyone transacting on the AP’s behalf, would purchase, receive, or sell the security. [Oct. 7, 2022]

211.02 Any issuer that maintains a corporate Web site must post on that Web site by the end of the business day after filing any Form 3, 4 or 5 under Section 16(a) as to the equity securities of that issuer, and must keep each such form accessible on that website for at least a 12-month period in accordance with Section 16(a)(4)(C) and Rule 16a-3(k). In a bank holding company, the bank subsidiary maintains a corporate Web site, but the bank holding company does not. The staff advised that the subsidiary Web site should be considered a corporate Web site for purposes of these posting requirements. [May 23, 2007]

211.03 One public company will acquire another public company. After the merger, the acquiring company will shut down the Web site of the acquired company. Under Rule 16a-3(k), any issuer that maintains a Web site is required to post Section 16 forms on its Web site. Because the acquired company will no longer exist, and its Web site will be shut down, the staff would not object if the acquiring company stopped posting the pre-acquisition Section 16 reports of the acquired company. [May 23, 2007]

217.02 A limited partnership will make a pro rata distribution to its limited partners of portfolio securities that it holds. The limited partnership is subject to Section 16 with respect to the securities that will be distributed. The Division staff was asked whether Rule 16a-9(a) would exempt this distribution for the limited partnership as the distributing party. The Division staff expressed the view that Rule 16a-9(a), which exempts from Sections 16(a) and (b) "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,” would not provide the limited partnership an exemption. Instead, the scope of Rule 16a-9(a) is limited to persons subject to Section 16 who experience an increase or decrease in the number of securities held as a result of a stock distribution or reverse stock split effected by the distributing party, and is not available to the distributing party. [May 23, 2007]

221.02 For estate planning purposes, a director of an issuer transfers shares of that issuer to a newly created foreign domiciled mutual fund in exchange for shares of the mutual fund. The mutual fund's equity investments would be limited to the issuer's shares. While significant restrictions would likely make the mutual fund an unattractive investment to the general public, the fund would have one shareholder other than the director and would be open to investment by the general public. Rule 16a-13 would not be available for the director's transfer of the issuer's shares to the mutual fund. [May 23, 2007]

221.03 An insider is a partner in a partnership that owns securities of the issuer. The insider's Section 16 reports reported all of the issuer shares owned by the partnership, which exceeded the insider's individual pecuniary interest, and did not disclaim an interest in the excess. The insider planned to "recapitalize” the partnership by contributing cash and withdrawing more issuer shares than his individual pecuniary interest. The insider cannot rely on Rule 16a-13 with respect to the amount that he withdraws in excess of his individual pecuniary interest. [May 23, 2007]

223.02 A rollover of funds into the issuer equity securities fund from a plan maintained by the insider's former employer will not be a Discretionary Transaction subject to Rule 16b-3(f) because it does not involve a reallocation of funds already invested in a plan of the issuer. An automatic rollover of a phantom stock account upon the issuer's abolition of the plan in which it is maintained into a restricted stock account in another plan of the issuer would not be a Discretionary Transaction. However, other rollovers or transfers between different plans sponsored by the same issuer may be Discretionary Transactions, and need to be analyzed on a case-by-case basis as to the character of the funds involved and whether the transaction is volitional to the insider. [May 23, 2007]

223.03Where there are two issuer equity securities funds (one containing 100 percent issuer equity securities and the other 50 percent issuer equity securities), a transfer from the 100 percent fund to the 50 percent fund would be a transfer out of an issuer equity securities fund for purposes of measuring the six-month period before the next Discretionary Transaction. Conversely, a transfer from the 50 percent fund to the 100 percent fund would be a transfer into an issuer equity securities fund for the same purpose. But a transfer out of either fund into a non-issuer equity securities fund would be a transfer out, and a transfer into either fund from a non-issuer equity securities fund would be a transfer into an issuer equity securities fund.

223.04 Under Rule 16b-3(b)(3)(i)(B), a director will not be disqualified for service as a Non-Employee Director by virtue of receiving compensation from the issuer for services rendered "in any capacity other than as a director” where the director receives a higher director's fee in consideration for service as chairman of the board or on a committee of the board. [May 23, 2007]

223.05 Rule 16b-3(b)(3)(i)(B) provides that a Non-Employee Director may not receive compensation from the issuer, its parent or subsidiary, for services in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure is required under Item 404(a) of Regulation S-K. The "services” in question refer to current services or services recently provided. Accordingly, a director's receipt from the issuer of a pension that is paid as a result of the director's prior service as an employee of the issuer would not trigger disqualification under paragraph (B), without regard to amount. In contrast, a director's receipt of a severance payment, in excess of the referenced amount, would trigger disqualification to the extent it relates to recent service. [May 23, 2007]

223.06 An Internal Revenue Code Section 423 plan permits a lump sum purchase at the end of the purchase period as an alternative to payroll deductions. However, a participant must enroll at the beginning of a purchase period and elect at that time whether to use payroll deductions or the lump sum payment. Such a plan would be a Stock Purchase Plan, as defined by Rule 16b-3(b)(5) and purchases under either form of payment would be exempt under Rule 16b-3(c). [May 23, 2007]

223.07 A routine disposition of shares to fund an administrative fee assessment under a Tax-Conditioned Plan would be exempt without further condition. However, the staff is of the view that dispositions that are not similarly incidental to plan administration are outside the purview of the plan and thus not exempted by Rule 16b-3(c). See the staff interpretive letter to American Bar Association (Oct. 15, 1999). [May 23, 2007]

223.08 Under a plan that is otherwise a formula plan, following a change in control (as objectively defined in the plan) participants will receive benefits in the form of cash or stock. The decision as to whether payment is made in cash or stock is made by the issuer's compensation committee. Although issuer discretion is limited to the form of payment (rather than the amount) this issuer discretion must be exercised by the full board, the committee of Non-Employee Directors, or shareholders. Alternatively, any securities received by insiders must be held for six months for the Rule 16b-3(d)(3) exemption to apply. [May 23, 2007]

223.09 The six-month holding period Rule 16b-3(d)(3) will remain satisfied if, during the six months, the insider transfers the securities to a family trust, provided that the insider retains a pecuniary interest in the securities so transferred. In contrast, an outright transfer to a family member during the six months (either by gift or for consideration) will result in failure to satisfy the six-month holding period. [May 23, 2007]

223.10 A company grants options in reliance on the six-month holding period of Rule 16b-3(d)(3). Shortly thereafter, the company authorizes tax-withholding rights with respect to the same options pursuant to Non-Employee Director approval under Rule 16b-3(e). This bifurcated procedure should not alter the availability of Rule 16b-3(d)(3), provided that the withholding rights are not exercised before the conclusion of the six-month holding period for the related option grant. [May 23, 2007]

223.11 Board approval of a buy-back plan providing for the issuer to buy back option shares at any time at fair market value would not satisfy the approval requirement of Rule 16b-3(e), because the resultant open-ended buy-back transactions would not have been approved with sufficient specificity. [May 23, 2007]

223.12 Consistent with the staff interpretive letter to American Bar Association (Dec. 20, 1996), an insider elects to defer salary into a phantom stock account in a single fund plan, and at the same time makes an election to receive the ultimate cash payout at a fixed date more than six months following the election. The payout election will not be subject to the conditions applicable to Discretionary Transactions under Rule 16b-3(f). [May 23, 2007]

223.13 A deferred compensation plan allows deferrals to either a phantom stock account or a cash account. Transfers between the phantom stock account and cash account are permitted. At the time a participant elects to defer compensation, the participant determines that the balance of both accounts will be paid in cash at a fixed date more than six months following the election. Because of the transfer feature, the plan is treated as a multi-fund deferral plan under Q. 4(c) of the staff interpretive letter to American Bar Association (Dec. 20, 1996), rather than a single-fund deferral plan under Q. 4(b) of that interpretive letter. A cash-out from the phantom stock account pursuant to the election described above would be a Discretionary Transaction, eligible for exemption under Rule 16b-3(f). Because the transfer feature permits assets to be transferred between the accounts, the balance of assets that will be in the phantom stock account at the fixed date payout cannot be determined until the fixed date occurs. Therefore, for purposes of Rule 16b-3(f) the fixed date payout election will be deemed to occur on the fixed date. The fixed date payout is not eligible for exemption under Rule 16b-3(e). [May 23, 2007]

223.14 A deferred compensation plan allows deferrals to either a phantom stock account or a cash account (which is credited with interest at the market rate). No transfers between the phantom stock account and the cash account are permitted, except that if a participant elects a payout in installments, the participant may make a one-time election (effective simultaneously with commencement of payouts) to transfer all or part of the phantom stock account balance to the cash account. Because of this transfer feature, pursuant to the staff interpretive letter to American Bar Association (Dec. 20, 1996) Q. 4(c), the plan is treated as a multi-fund deferral plan, rather than as a single-fund deferral plan. Generally, a transfer pursuant to this feature would be a Discretionary Transaction, eligible for exemption under Rule 16b-3(f). However, where such a transaction is not a Discretionary Transaction (for example, where it is in connection with the participant's death, disability or retirement, as provided by Rule 16b-3(b)(1)), it is eligible for exemption under Rule 16b-3(e). In that case, if the participant irrevocably elects to make such a transfer at the time he or she elects to defer funds, the approval requirement of Rule 16b-3(e) and Note 3 may be satisfied by approval of the plan. Cf. staff interpretive letter to American Bar Association (Dec. 20, 1996) Q. 4(b). However, if the election is made at a later point, approval of the individual transaction is necessary. [May 23, 2007]

223.15 If an election to effect a Discretionary Transaction is revocable until a specified date, such specified date should be used as the date of the election for purposes of measuring the six-month period before election of the next "opposite way” Discretionary Transaction eligible for exemption under Rule 16b-3(f). [May 23, 2007]

233.02 An insider may rely in good faith on the last plan statement in reporting holdings pursuant to 401(k) plans and other plans eligible for the Rule 16b-3(c) exemption on Forms 4 and 5, unless the insider is aware of subsequent plan transactions. [May 23, 2007]

233.03 When reporting a transaction on Form 4 or Form 5, care should be taken that the characterization of securities as “Acquired (A)” or “Disposed (D)” in Table I Column 4 or Table II Column 5 is consistent with the transaction code reported in Table I Column 3 or Table II Column 4. For example, a transaction coded “P” should not report “D” in Table I Column 4 or Table II Column 5, because a purchase is not a disposition. [May 23, 2007]