[Federal Register Volume 59, Number 183 (Thursday, September 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23480]


[[Page Unknown]]

[Federal Register: September 22, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 34-34681; 35-26127; IC-20557; 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: Proposed Rule; Extension of Comment Period and Further Request 
for Comment.

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SUMMARY: In connection with proposals issued on August 10, 1994, 
Release No. 34-34514 [59 FR 42449] (the ``Proposing Release''), the 
Commission today is requesting further comment on the treatment of 
compensatory cash-only instruments under its rules 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''). The comment period 
for the Proposing Release also is extended until November 1, 1994.

DATES: Comments should be received on or before November 1, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Comment letters should refer to File No. 
S7-21-94. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, N.W., Washington, D.C., 20549.

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf or Mark W. Green, 
Office of Chief Counsel, at (202) 942-2900, or Elizabeth M. Murphy, 
Office of Disclosure Policy, at (202) 942-2910, Division of Corporation 
Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: On August 10, 1994, the Commission released 
for public comment proposals to amend certain of its rules under 
Section 161 of the Exchange Act.2 The Commission now seeks to 
clarify and amplify certain comment requests made in the Proposing 
Release. Specifically, the Commission is soliciting additional comment 
with respect to Rule 16a-1(c)(3),3 which excludes cash-only 
instruments from the definition of ``derivative securities'' if they 
meet certain conditions.
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    \1\15 U.S.C. 78p (1988).
    \2\15 U.S.C. 78a et seq. (1988).
    \3\17 CFR 240.16a-1(c)(3).
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    The current Rule 16a-1(c)(3) definitional exclusion covers any 
compensatory instrument issued in an employment context that can be 
redeemed or exercised solely for cash, provided that the instrument 
either: (1) Is awarded under an employee benefit plan that satisfies 
certain conditions prescribed by Rule 16b-3;4 or (2) can be 
redeemed or exercised only upon a fixed date or dates at least six 
months from the date of the award, or incident to death, retirement, 
disability or termination of employment.5 Both prongs of this 
exclusion are based on the principle that removal of the insider-
recipient's discretion with respect to the timing of grant and/or 
realization of a cash-only instrument would minimize the opportunity 
for speculative abuse that Section 16 was designed to prevent.
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    \4\Rule 16a-1(c)(3)(i) [17 CFR 240.16a-1(c)(3)(i)].
    \5\Rule 16a-1(c)(3)(ii) [17 CFR 240.16a-1(c)(3)(ii)].
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    As proposed to be amended in the Proposing Release, the Rule 16a-
1(c)(3) exclusion would extend to all compensatory cash-only 
instruments issued pursuant to an employer-employee relationship, even 
if the insider-recipient could control or influence the timing of such 
an instrument's grant or payout. In soliciting public comment, the 
Commission urged commenters to address whether

    There [is] any basis for according disparate treatment, for 
reporting and/or short-swing profit purposes, to equity-based 
securities depending on whether they are settled exclusively in cash 
or stock (or in either stock or cash), where both types of 
derivative securities provide identical opportunities for profit 
predicated on the underlying stock price movement [].6
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    \6\Proposing Release, Section II.C.

    As reflected in the above-quoted request for comment, the 
Commission is interested in comments on whether the current 
definitional exclusion for compensatory cash-only instruments codified 
in Rule 16a-1(c)(3) is appropriate. The Commission is interested in 
determining whether, for example, stock appreciation rights (``SARs'') 
that have a multi-year term and may be exercised at the volition of the 
insider-recipient may provide opportunities for speculative profit that 
are identical, regardless of whether the SARs are payable exclusively 
in cash, stock, or some combination of the two and, from the 
perspective of shareholders and analysts, have the same Section 
16(a)7 informational value.
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    \7\15 U.S.C. 78p(a).
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    Accordingly, in addition to considering the proposals and 
alternatives addressed in the Proposing Release, the Commission invites 
commenters to express their views on whether the current exclusions for 
cash-only instruments set forth in Rules 16a-1(c)(3)(i) and (ii), 
respectively, are overly broad in light of the purposes of Section 16, 
and thus should be limited to a smaller class of such instruments. In 
responding to this question, commenters should discuss whether any 
continued exclusion for cash-only compensatory instruments should be 
limited to those for which the timing of settlement is not subject to 
the insider's volition. For example, should Rule 16a-1(c)(3)(i) be 
rescinded, so the exemption would be available only if the instrument 
met the fixed-date conditions of Rule 16a-1(c)(3)(ii)? If an exemption 
for cash-only instruments is appropriate, should it be made available 
only under the short-swing profit recovery provision of Section 
16(b),8 rather than also providing an exemption from the reporting 
requirements of Section 16(a)? If a separate Section 16(a) exclusion is 
retained for certain compensatory cash-only instruments, comment is 
sought on whether it should be recast as an exemptive rule, rather than 
the current rule, which excludes these instruments from the definition 
of ``derivative securities'' and therefore from the class of ``equity 
securities'' covered by Section 16.
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    \8\15 U.S.C. 78p(b).
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    Were the Commission to eliminate the definitional exclusion for 
volitional compensatory cash-only instruments, transactions involving 
these instruments would be reportable under Section 16(a) but still 
could qualify for Section 16(b) exemptive treatment. Specifically, Rule 
16b-3 coverage would be available for these instruments if all 
applicable conditions were satisfied, including non-transferability (if 
retained as a condition9), six-month holding period, shareholder 
approval, disinterested administration (or formula), and window-period 
settlement. Comment is requested as to whether fewer or additional 
conditions should be imposed as a prerequisite to Rule 16b-3 
qualification of cash-only instruments. Or should a separate exemption 
from Section 16(b) be created for the grant and/or settlement of these 
instruments? If so, what exemptive conditions would be necessary and 
appropriate in furtherance of the purpose of Section 16(b)?
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    \9\See Proposing Release, Section II.J.
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    In order to give commenters sufficient time to consider this 
request for further comment, the comment period on the Proposing 
Release is extended to November 1, 1994.

    Dated: September 16, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23480 Filed 9-21-94; 8:45 am]
BILLING CODE 8010-01-P