Publications

The Commission announced the adoption of significant changes to its rules regarding Section 16 of the Securities Exchange Act of 1934. The revised rules, which are effective August 15, 1996, are designed to reflect a new, simplified approach to transactions between an issuer and its directors and officers. The new rules implement the Commission’s position that transactions between an issuer and its officers and directors are compensatory in nature and generally do not provide an opportunity for insiders to take advantage of the marketplace through the illicit use of inside information.

New Rule 16b-3
Under new Rule 16b-3, a transaction in issuer equity securities between an issuer and a director or officer will be exempt from Section 16 liability if it satisfies the applicable rules and falls into one of three categories: (1) Grants, Awards and Other Acquisitions from the Issuer; (2) Tax Conditioned Plans; and (3) Dispositions to the Issuer.

1. Grants, Awards and Other Acquisitions from the Issuer.
   Grants of options and bonus awards in stock will be exempt from Section 16 if they satisfy any one of three conditions:
   • Approval in advance by the Board of Directors or a committee of two or more non-employee directors
   • Approval of the grant by the stockholders not later than the next annual meeting following the transaction
   • The director or officer holds the acquired securities for six months (or in the case of an option or other derivative security six months pass between the acquisition date of the derivative security and disposition date of the underlying security).

   New Rule 16b-3 also eliminates the following requirements currently contained in Rule 16b-3:

   • stockholder approval of option and similar plans
   • administration of plans by disinterested directors
   • “formula” option grants for disinterested directors
   • prohibition against transfer of options except under certain limited circumstances
   • requirement for six month holding period for grant and award transactions requirement that plans be in writing
2. Tax Conditioned Plans.
   Non-discretionary purchases or sales made pursuant to a qualified plan (i.e. employee thrift, stock purchase or similar plan) are exempt from “short-swing” liability under Section 16. Although discretionary transactions made pursuant to a qualified plan are not automatically exempt, they may, however, be exempt if the election by the director or officer to effect the discretionary transaction is made at least six months after an “opposite way” (i.e. buy or sell) election was made pursuant to any plan. This change provides welcome clarity to what was one of the most difficult to administer areas of the old Section 16 scheme.

3. Dispositions to the Issuer.
   Non-discretionary dispositions to the issuer will be exempt if the disposition receives advance approval from the Board of Directors, a committee of two or more non-employee directors or the stockholders. If the transaction is a discretionary transaction, it must meet the requirements for discretionary transactions set forth in the previous section.

   Other Changes
   In addition to Rule 16b-3, the Commission revised certain other rules relating to Section 16, including exempting any reinvestment of dividends or interest in securities of the issuer, as long as the acquisition is made pursuant to a broad-based, non-discriminatory plan providing for regular investment of dividends or interest. In addition, a trust will be subject to Section 16 reporting only if it holds more than ten percent of a class of issuer equity securities.

Practice Pointer
Companies may want to review their current plans to determine if the newly-allowed provisions would be beneficial.