[Federal Register Volume 60, Number 200 (Tuesday, October 17, 1995)]
[Proposed Rules]
[Pages 53832-53840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25626]




[[Page 53831]]

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Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 240



Ownership Reports and Trading by Officers, Directors, and Principal 
Security Holders; Proposed Rule

  Federal Register / Vol. 60, No. 200 / Tuesday, October 17, 1995 / 
Proposed Rules   

[[Page 53832]]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 34-36356; 35-26389; IC-21406; 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'') and the 
request for further comment issued on September 16, 1994, Release No. 
34-34681 [59 FR 48579] (the ``Cash-Only Release'') regarding the 
treatment of compensatory cash-only instruments under its rules 
regarding the filing of ownership reports by officers, directors, and 
principal security holders, the Commission today is issuing an 
alternative proposal. This proposal would amend the rule that exempts 
certain employee benefit plan transactions from the short-swing profit 
recovery provisions of Section 16(b) of the Securities Exchange Act of 
1934 (``Exchange Act'') by broadening the exemption and extending it to 
other transactions between issuers and their officers and directors. 
There is also a proposal to amend the rule exempting transactions in 
dividend or interest reinvestment plans to reduce regulatory burdens. 
Comment also is solicited on other issues related to Section 16, 
including the manner in which exempt transactions should be reported 
and possible legislative rescission of Section 16(b). In addition, the 
comment periods for the Proposing Release and Cash-Only Release are 
extended until December 15, 1995.

DATES: Comments should be received on or before December 15, 1995.

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, Office of Chief 
Counsel, at (202) 942-2900, 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 On September 16, 1994, the 
Commission solicited additional comment with respect to the Section 16 
treatment of cash-only instruments. The Commission now proposes an 
alternative scheme to amend Rule 16b-33 (the ``Alternative 
Proposal'') that differs from the amendments to Rule 16b-3 that were 
proposed in the Proposing Release. All rule proposals, including 
proposed amendments to Rule 16b-3, and requests for comment made in 
both the Proposing Release and the Cash-Only Release (the ``1994 
proposals'') remain under consideration, and the Commission may adopt 
any combination of the 1994 proposals and the Alternative Proposal. 
However, it is contemplated that if the Alternative Proposal is adopted 
in its entirety, the exclusion from the definition of ``derivative 
security'' for cash-only instruments provided by the current 
rules4 would be rescinded, and the Section 16 status of such 
instruments would be governed by the Section 16(a) reporting rules and 
Rule 16b-3 as amended by the Alternative Proposal.

    \1\15 U.S.C. 78p (1988).
    \2\15 U.S.C. 78a et seq. (1988).
    \3\Rule 16b-3 [17 CFR 240.16b-3].
    \4\Rule 16a-1(c)(3) [17 CFR 240.16a-1(c)(3)].
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I. Summary

    The strict liability and short-swing profit recovery provisions of 
Section 16(b)5 and the exemptive rules thereunder have been 
criticized as unnecessarily complex, unduly burdensome with respect to 
innocent transactions, and inappropriately intrusive in the area of 
corporate governance. Rule 16b-3 has generated the most significant 
controversy with respect to these issues. In the Proposing Release, the 
Commission published numerous proposed amendments to the Section 16 
rules in an attempt to simplify and clarify this subject. In 
particular, amendments were proposed to Rule 16b-3 that responded to 
objections that the conditions of that rule applicable to broad-based 
plans are difficult to administer and unduly restrictive, given the 
lack of opportunity for speculative abuse in connection with most plan 
transactions. Although public comment on the 1994 proposals generally 
was favorable, the Commission has continued to consider whether issues 
arising from the treatment of employee benefit plan transactions, as 
well as other officer and director transactions, could be better 
resolved through a simpler and more flexible approach that fully serves 
the policy underpinnings of the Section 16 regulatory scheme.

    \5\15 U.S.C. 78p(b) (1988).
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    To this end, the Commission has focused on the distinction between 
market transactions by officers and directors (``insiders''),6 
which present opportunities for profit based on non-public information 
that Section 16(b) is intended to discourage, and transactions between 
an issuer and its officers and directors, which typically constitute a 
legitimate and increasingly popular mechanism for an issuer to 
compensate persons in its service. The Commission is of the view that 
the inherent differences in the usual purpose and effects of these two 
classes of transactions may establish a more cogent rationale upon 
which to base an exemption from the strict liability, short-swing 
profit recovery provisions of Section 16(b).7

    \6\Like current Rule 16b-3, the Alternative Proposal would not 
exempt transactions with persons who beneficially own greater than 
ten percent of a class of an issuer's equity securities.
    \7\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 compensatory 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.
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    Congress adopted Section 16(b) in 1934 ``to deter insiders from 
using inside information to aid them in their trading 
activities.''8 According to the relevant legislative history, the 
drafters intended specifically to target ``directors and officers of 
corporations who used their positions of trust and the confidential 
information which came to them in such positions, to aid them in their 
market activities.''9 To ameliorate the potential harshness of 
applying strict liability to classes of transactions that are not 
susceptible to insider misuse of non-public corporate information, the 
Commission was 

[[Page 53833]]
granted express exemptive authority under Section 16(b).10

    \8\P. Romeo and A. Dye, Section 16 Treatise and Reporting Guide 
Sec. 1.03[b][i], at 1-23 (1994) (hereinafter ``Romeo and Dye'') 
(discussing the legislative history of Section 16(b)).
    \9\S. Rep. No. 1455, 73d Cong., 2d Sess. 55 (1934). Congress 
also was concerned about ``the unscrupulous employment of inside 
information by large stockholders who, while not directors and 
officers, exercised sufficient control over the destinies of their 
companies to enable them to acquire and profit by information not 
available to others.'' Id.
    \10\See Section 16(b) (``This subsection shall not be construed 
to cover any transaction * * * which the Commission by rules and 
regulations may exempt as not comprehended within the purpose of 
this subsection[;]'' i.e., ``[f]or the purpose of preventing the 
unfair use of information which may have been obtained by such 
beneficial owner, director, or officer by reason of his relationship 
with the issuer. * * *''); see also Romeo and Dye, supra n. 8, 
Sec. 1.03[b][i], at 1-24.
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    Generally, transactions between issuers and their officers or 
directors do not appear to present the same opportunities for insider 
profit on the basis of non-public information. Typically, where the 
company, rather than the trading markets, is on the other side of an 
insider transaction in that company's securities, any profit obtained 
is not at the expense of uninformed shareholders and other market 
participants of the type contemplated by the statute.11 This may 
be the case even if the insider is in possession of confidential 
company information that otherwise might permit him or her to reap 
unfair gains from a market transaction.

    \11\An insider's breach of fiduciary duty to profit from self-
dealing transactions with the company is a concern of state 
corporate law; most states have created potent deterrents to insider 
self-dealing and other breaches of fiduciary duty. See generally 3 
Fletcher Cyc. Corp. Sec. 837.60 (Perm. ed. 1994); D. Block, S. Radin 
and N. Barton, The Business Judgment Rule: Fiduciary Duties of 
Corporate Directors 124-137 (4th ed. 1993). There are also potential 
considerations under Rule 10b-5 [17 CFR 240.10b-5].
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    Nevertheless, the Commission believes that imposition of 
traditional state-law procedural protections can be useful in further 
ensuring compliance with the underlying purposes of Section 16 by 
creating effective prophylactics against possible insider trading 
abuses. Consequently, as is the case with respect to the existing rules 
and the 1994 Proposals, this Alternative Proposal retains the concepts, 
where applicable, of approval by shareholder vote or non-employee 
directors.12

    \12\Cf. Del. Gen. Corp. Law Secs. 144 (a)(1) and (a)(2); N.Y. 
Bus. Corp. Law Sec. 713; Model Business Corp. Act Secs. 8.60(1), 
8.62 and 8.63. See also Oberly v. Kirby, 592 A.2d 445, 466-67 (Del. 
1991) (dictum).
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    Through the Alternative Proposal, the Commission has sought to 
craft a rule that, consistent with the statutory purpose of Section 
16(b), erects meaningful safeguards against the abuse of inside 
information by officers and directors without impeding their 
participation in legitimate compensatory transactions that do not 
present the possibility of such abuse, and facilitates compliance. In 
so doing, the Commission has recognized that most, if not all, 
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. Shareholders, economists, 
compensation experts and others increasingly have been urging public 
companies to compensate their officers and directors in stock rather 
than cash, in order to align more closely the interests of management 
and shareholders.13 Many companies have begun to use stock and 
stock-based instruments in lieu of traditional cash incentives to 
encourage managers to adopt a longer-term perspective by sharing the 
risks and rewards of equity ownership.

    \13\See, e.g., Report of the NACD Blue Ribbon Commission on 
Director Compensation (1995); M. Klein, Top Executives Pay for 
Performance (Conference Board 1995); Loucks, ``An Equity Cure for 
Managers,'' Wall St. J., Tues., Sept. 26, 1995.
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    At the same time, the Commission's exemptive rules under Sections 
16(a) and 16(b), including the regulatory exclusion of SARs payable 
solely in cash and other cash-only derivative securities from both 
statutory provisions, have been criticized for creating an undue 
regulatory bias in favor of cash compensation. The restrictions, 
complexity and uncertainties attendant to compliance with Rule 16b-3 
tend to discourage the use of equity and thus further bias compensation 
arrangements toward cash. Additionally, some believe that the current 
exclusion from treatment as ``derivative securities'' of cash-only 
instruments promotes issuer use of such instruments, rather than the 
identical instruments payable in stock, to compensate their insiders.
    In proposing to bring within the definition of derivative security 
cash-only instruments that are the economic equivalents of derivative 
securities payable in stock,14 the Commission has sought, in part, 
to reduce this bias. Today's proposal reflects an approach that 
recognizes that companies could just as easily compensate their 
insiders through cash or other non-equity instruments to avoid 
compliance with the perceived burdens of the Section 16(b) exemptive 
rules.

    \14\See the Cash-Only Release.
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    In brief, the Alternative Proposal would exempt, subject to certain 
conditions, most transactions--both acquisitions and dispositions--
between an officer or director and the issuer. First, the Alternative 
Proposal would exempt without condition almost all transactions 
pursuant to plans that satisfy specified provisions of the Internal 
Revenue Code, such as thrift and stock purchase plans, and certain 
related plans. Since volitional intra-plan transfers involving issuer 
equity securities funds and cash distributions funded by volitional 
dispositions of issuer equity securities are the equivalent of 
discretionary purchase and sale transactions, these transactions would 
be exempt only if effected pursuant to an election by the insider made 
at least six months after an election pursuant to which the last such 
transaction was effected.15 Except for the foregoing transactions, 
the anti-discrimination provisions of the tax laws applicable to broad-
based plans should suffice to minimize the potential for insider profit 
through unfair use of confidential corporate information. An 
acquisition pursuant to a plan or transaction that satisfies the 
conditions applicable to performance-based compensation imposed by 
Section 162(m) of the Internal Revenue Code16 also would be exempt 
without further condition on the basis that the tax conditions 
applicable to such transactions (some of which such conditions closely 
mirror the first two conditions specified in the next paragraph 
describing part of the Alternative Proposal) provide an adequate 
safeguard for Section 16(b) purposes.

    \15\Volitional intra-plan transfers and cash distributions 
funded by issuer equity securities that are in connection with a 
participant's death, disability, retirement or termination of 
employment, or are required to be made available to participants 
pursuant to a provision of the Internal Revenue Code would not be 
subject to this proviso, but instead would be exempt without 
condition.
    \16\26 U.S.C. 162(m) (1993).
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    Second, with respect to grants and awards of issuer equity 
securities, whether made pursuant to an employee benefit plan or 
directly by an issuer, the Alternative Proposal would provide three 
alternative conditions to exemption: (1) Prior approval of the 
transaction by the issuer's board of directors or a committee comprised 
solely of two or more non-employee directors; (2) shareholder approval 
(or subsequent ratification) of the transaction; or (3) satisfaction of 
a six-month holding period.
    Third, the Alternative Proposal would provide a general exemption 
for insider dispositions to the issuer, provided the terms of the 
disposition are approved in advance by the board of directors, a non-
employee director committee, or shareholders.
    As noted above, cash-only instruments whose value is derived from 
the market value of an issuer equity security no longer would be 
excluded from the coverage of Section 16 in a manner different from 

[[Page 53834]]
instruments that can be settled in such securities. Thus, cash-only 
instruments would be subject to Section 16(a) reporting, but usually 
would be exempt from Section 16(b) in accordance with Rule 16b-3, as 
amended by the Alternative Proposal.
    The Alternative Proposal would eliminate:
       General written plan conditions,\17\ including 
specification of the basis on which insiders may participate, 
specification of the price or amount of the securities to be offered, 
and the restriction prohibiting transferability of derivative 
securities;

    \17\Such conditions are set forth in current Rule 16b-3(a). 
Instead, the Alternative Proposal focuses on the inherently 
compensatory nature of transactions between the issuer and its 
officers and directors, and does not require that such transactions 
occur pursuant to an employee benefit plan as a condition for 
exemption.
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       Shareholder approval as a general condition for plan 
exemption;\18\

    \18\This condition is set forth in current Rule 16b-3(b). 
However, shareholder approval would be retained as an alternative 
basis for exempting grants or awards.
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       The six-month holding period as a general condition for 
the exemption of grant and award transactions;\19\

    \19\This condition is set forth in current Rule 16b-3(c)(1). 
However, a six-month holding period would be proposed as an 
alternative basis for exempting a grant or award.
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       The disinterested administration requirement with 
respect to grant transactions;\20\

    \20\This condition is set forth in current Rule 16b-3(c)(2)(i). 
However, approval by the full board or a committee comprised solely 
of two or more non-employee directors would be retained as an 
alternative basis for exempting grants or awards.
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       The formula plan requirement with respect to grant 
transactions, both as a substitute for disinterested administration and 
as a means by which administrators may receive securities awards while 
remaining disinterested;\21\

    \21\These standards are set forth in current Rules 16b-
3(c)(2)(ii) and 16b-3(c)(2)(i)(A), respectively.
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       Any conditions with respect to any transaction in a 
broad-based plan other than a volitional intra-plan transfer or a cash 
distribution funded by a volitional disposition of an issuer equity 
security;\22\ and

    \22\These conditions are set forth in current Rules 16b-
3(d)(2)(i) (B), (C) and (D) and 16b-3(d)(2)(ii).
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       The current public information, disinterested 
administration, window period and six-month holding period conditions 
with respect to the exercise of stock appreciation rights for cash.\23\

    \23\These conditions are set forth in current Rules 16b-3(e) 
(1), (2), (3) and (4), respectively. It should be noted that these 
conditions do not currently apply at all to cash-only instruments 
that satisfy the conditions of Rule 16a-1(c)(3) and are thus 
excluded from the definition of ``derivative security.''
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    As a corollary to adoption of the Alternative Proposal, the 
Commission contemplates modifying the Section 16(a) reporting system so 
that most transactions exempt pursuant to Rule 16b-3 would be required 
to be reported on a current basis on Form 4,\24\ rather than annually 
on Form 5, as now permitted for transactions exempt under current Rule 
16b-3, and certain other exempt transactions. However, reporting no 
longer would be required for routine transactions pursuant to broad-
based plans, dividend or interest reinvestment plan transactions, 
gifts, and transactions pursuant to qualified domestic relations 
orders.

    \24\For example, grants and awards under Section 162(m)-eligible 
plans that would be exempted by Alternative Proposed Rule 16b-3 
would be required to be reported on current Forms 4.
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    In addition, the Commission proposes to make the exemption for 
reinvestment transactions pursuant to dividend and interest 
reinvestment plans\25\ more readily available by amending the rule so 
that it no longer requires the plan to be available to all holders of 
the class of securities. Finally, public comment is solicited as to the 
merit of legislative rescission of Section 16(b).

    \25\Rule 16b-2 [17 CFR 240.16b-2].
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II. Transactions Between an Issuer and its Officers or Directors

A. Tax-Conditioned and Related Plans

    As discussed in the Proposing Release,\26\ one of the principal 
objections raised to current Rule 16b-3 has been that the treatment of 
thrift, stock purchase and other broad-based, tax-qualified plans is 
unduly cumbersome, presents significant record-keeping problems, and 
discourages insiders from participation in plan funds holding issuer 
equity securities. The proposals set forth in the Proposing Release 
would streamline the treatment of such plans, and the Alternative 
Proposal goes still further.

    \26\See Proposing Release at Section II.A.
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    Specifically, under the Alternative Proposal, any acquisition or 
disposition of issuer equity securities, other than a volitional intra-
plan transfer involving an issuer equity securities fund or a cash 
distribution funded by a volitional disposition of an issuer equity 
security, would be exempt without condition if made pursuant to a plan 
that satisfies the definition of a ``Qualified Plan,'' an ``Excess 
Benefit Plan,'' or a ``Stock Purchase Plan.''\27\ The broad-based, non-
discriminatory character of these plans, together with their relatively 
inflexible administrative requirements, indicate that transactions 
pursuant to such plans are strictly for compensatory purposes and are 
not amenable to the type of abuse that Section 16(b) was intended to 
proscribe.

    \27\Alternative Proposed Rule 16b-3(b)(1). Definitions of these 
terms would be provided in Alternative Proposed Rule 16b-3(b)(4). 
Note that the plan itself would not be required to be tax-qualified, 
but would need to satisfy specified conditions applicable to tax-
qualified plans.
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    A volitional intra-plan transfer involving an issuer equity 
securities fund or a cash distribution involving a volitional 
disposition of an issuer equity security\28\ would be exempt only if 
effected pursuant to an election made at least six months following the 
date of the election that effected the most recent prior transaction 
subject to the same condition.\29\ Assuming satisfaction of this 
condition, an insider participant would be able to dispose of his or 
her entire interest in a plan's issuer equity securities fund for cash.

    \28\A loan funded by the disposition of issuer equity securities 
would be considered a cash distribution involving a volitional 
disposition of an issuer equity security unless the insider 
continued 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 would be exempt 
without condition because such transactions do not occur at the 
insider's volition.
    \29\Alternative Proposed Rule 16b-3(b)(2). Because it is 
anticipated that the actual date on which such a plan transaction 
occurs will be outside the control of an insider participant, the 
proposed rule is premised on a six-month interval between the date 
of subsequent elections. The proposed rule does not require that 
such an election be made six months in advance of the related 
transaction.
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    However, only transactions that arise solely from an insider's 
volitional investment decision would be subject to this condition. In 
contrast, 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,\30\ as well as 
transactions that effect a diversification or distribution which the 
Internal Revenue Code requires an employee plan to make available to a 
participant,\31\ would be exempt without regard to this condition. 
Although such transactions may be volitional to the insider, the 
insider's opportunity to speculate in the context of a death, 
disability, retirement or termination would seem well circumscribed, as 
is also the case with regard to the specified diversification and 
distribution elections.

    \30\Such transactions are exempted by current Rule 16b-
3(d)(1)(ii).
    \31\Such transactions would 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).
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    Just as with the tax code provisions relating to Qualified Plans 
and Stock Purchase Plans, as discussed above, Section 162(m) of the 
Internal Revenue 

[[Page 53835]]
Code and the regulations thereunder\32\ impose conditions that may 
serve as an effective safeguard for Section 16(b) purposes. 
Accordingly, it appears appropriate to exempt, without further 
condition, an acquisition pursuant to a plan or transaction that 
satisfies these conditions.\33\ The Section 162(m) provisions require 
that compensation be paid solely on the attainment of one or more 
performance goals, such goals be established by a compensation 
committee consisting solely of two or more outside directors,\34\ the 
terms of the plan be disclosed to and approved by shareholders, and the 
compensation committee certify that the performance goals were 
satisfied prior to making payment. With respect to options and stock 
appreciation rights, these provisions require that the grant be made by 
the compensation committee, the plan state the maximum number of shares 
for which options or rights may be granted during a specified period to 
any employee, and the terms of the option or right provide that the 
amount of compensation to be received be based solely on an increase in 
the value of the stock after the date of grant.\35\ Because a 
substantial number of plans must satisfy Section 162(m) in order to 
obtain a tax deduction, this would appear to provide a simple method 
for exempting grants and awards from Section 16(b) without the need to 
satisfy additional Commission-imposed requirements.\36\

    \32\Proposed Regulation Sec. 1.162-27(e). It is contemplated 
that this prong of Alternative Proposed Rule 16b-3 will function in 
tandem with final tax regulations that contain provisions 
substantially similar to Proposed Regulation Sec. 1.162-27(e). If a 
substantially different tax regulation is adopted, the Commission 
may revisit this prong of the Alternative Proposal.
    \33\Alternative Proposed Rule 16b-3(b)(3).
    \34\As defined in Proposed Regulation Sec. 1.162-27(e)(3), a 
director is an outside director if the director (i) is not a current 
employee of the company; (ii) is not a former employee of the 
company who receives compensation for prior services; (iii) has not 
been an officer of the company; and (iv) does not receive 
remuneration from the company, either directly or indirectly, in any 
capacity other than as a director. This definition is somewhat 
different from the proposed definition of Non-Employee Director set 
forth in the Alternative Proposal.
    \35\Proposed Regulation Sec. 1.162-27(e)(2)(vi). Alternatively, 
if the compensation to be received is not based solely on an 
increase in the value of the stock after the date of grant, the 
grant nevertheless may be considered performance-based compensation 
if it is made on account of attainment of a performance goal that 
otherwise satisfies the requirements of Proposed Regulation 
Sec. 1.162-27(e)(2), or the vesting or exercisability of the grant 
is contingent on attainment of such a performance goal.
    \36\The scope of this proposed condition would not be limited to 
persons who are ``covered employees'' for purposes of the $1,000,000 
deduction limit of Section 162(m), i.e., the issuer's chief 
executive officer and four other most highly compensated officers 
under Item 402 of Regulation S-K [17 CFR 229.402], but would be 
available to exempt grants to any officer or director, provided that 
all Section 162(m) regulatory conditions applicable to performance-
based compensation are met with respect to the individual grant. Of 
course, grants that do not satisfy this condition would be eligible 
for exemption pursuant to the proposed specific conditions 
applicable to grants and awards discussed in Section II.B, below.
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    Commenters are asked to address the proposed unconditional general 
exemption for transactions pursuant to Qualified Plans, Excess Benefit 
Plans and Stock Purchase Plans. Do the proposed references to the 
objective standards of the Internal Revenue Code adequately define 
classes of plans that, by virtue of their broad-based character and/or 
specific administrative requirements, do not present opportunities for 
the abuse of inside information that Section 16(b) was crafted to 
prevent?\37\ Should the exemption for Excess Benefit Plans be revised 
to require that transactions in such plans must be in tandem with 
transactions pursuant to a related Qualified Plan?

    \37\Although Excess Benefit Plans by their terms are not broad-
based, they have not been viewed under current staff interpretations 
or the 1994 proposals as susceptible to abuse because they are 
operated in a manner that replicates tax-qualified plans.
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    Is the proposed exemptive condition that volitional intra-plan 
transfers and cash distributions resulting from a volitional 
disposition of an issuer equity security be effected pursuant to 
elections at least six months apart an appropriate requirement? Should 
an insider be permitted to cash-out his or her entire interest in an 
issuer equity securities fund in reliance on satisfaction of this 
condition? Should the proposed condition also apply to such a 
transaction that is expressly authorized by the Internal Revenue Code 
or that otherwise implements a retirement planning decision? Would the 
proposed condition be easier to administer than the current window-
period requirement? Should the proposed condition only apply if the 
transaction would be opposite way (e.g., purchase vs. sale) to the 
prior transaction? Should a quarterly window period requirement be 
included in the rule as an alternative basis for exemption, with or 
without an additional requirement that elections take place in window 
periods that are at least six months apart?
    Comment also is solicited on whether the conditions of Section 
162(m) provide an appropriate basis for an exemption from Section 
16(b), and whether there are other types of compensation and/or 
transactions involving issuer equity grants to insiders that should be 
exempt from Section 16(b) because of protections afforded by provisions 
of the Internal Revenue Code. To what extent are plans operated in a 
manner that satisfies the conditions of Internal Revenue Code Section 
162(m) with respect to grants to persons other than the issuer's chief 
executive officer and four other most highly compensated officers?

B. Grants and Awards

    The Alternative Proposal would provide three alternative bases for 
exempting the grant or award of issuer equity securities (including 
derivative securities). The first two prongs would exempt an award if 
the specific award is either: (i) approved in advance by the board of 
directors or a committee of the board comprised solely of two or more 
``Non-Employee Directors;'' or (ii) or approved in advance or 
subsequently ratified\38\ by the affirmative vote or written consent of 
the holders of the majority of the issuer's securities entitled to 
vote, solicited in compliance with Section 14 of the Securities 
Exchange Act.\39\ The purpose of these prongs is to ensure that 
appropriate company gate-keeping procedures are in place to monitor any 
grants or awards and to ensure acknowledgement and accountability on 
the part of the company when it makes such grants or awards. Finally, a 
grant or award that did not satisfy any of these exemptive conditions 
would become exempt if the securities awarded were held by the insider 
for six months following the grant, or in the case of a derivative 
security, at least six months had elapsed between the grant of the 
derivative security and the disposition of the underlying security.\40\

    \38\Such ratification would be required to be obtained not later 
than the date of the next annual meeting of shareholders.
    \39\15 U.S.C. 78n. Alternative Proposed Rules 16b-3(c)(1)(i) and 
16b-3(c)(1)(ii).
    \40\Alternative Proposed Rule 16b-3(c)(1)(iii).
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     With respect to the first basis for exemption, a ``Non-
Employee Director'' would be defined simply 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.\41\ This definition differs 
from the requirements of the current ``disinterested director'' 
standard in that any employment or consulting relationship with the 
issuer expressly 

[[Page 53836]]
would be precluded.\42\ Further, as an alternative to approval by Non-
Employee Directors, approval by the full board would constitute a basis 
for exemption.\43\

    \41\Alternative Proposed Rule 16b-3(c)(2). For purposes of this 
proposed rule, ``consultant'' would include attorneys, accountants 
or others who indirectly receive compensation from the issuer 
through firms that provide services to the issuer.
    \42\Additionally, the proposed definition would not include the 
current requirement that, during the one year prior to service as a 
``disinterested director,'' the director not be granted issuer 
equity securities other than pursuant to a formula plan, 
participation in a broad-based securities acquisition plan, or an 
election to receive an annual retainer in an equivalent amount of 
securities.
    \43\Current Rule 16b-3(c)(2)(i) provides for administration by 
the full board of directors if all members are disinterested.
---------------------------------------------------------------------------

     It should be noted that the first two bases for exemption 
would require approval of specific transactions, not merely approval of 
a plan in its entirety, as is sufficient for the current shareholder 
approval requirement. This is because approval of a specific grant 
appears to provide a more effective procedure, which may be appropriate 
when approval is a stand-alone basis for exemption rather than a 
condition imposed in combination with other conditions. However, it is 
contemplated that approval of a plan pursuant to which the terms and 
conditions of each grant are fixed in advance, such as a formula plan, 
would satisfy this basis for exemption, and the exemption also would be 
available for a plan with an attachment providing for specific grants 
to specific individuals. Of course, the transaction approval only 
relates to Section 16 insiders. Transactional approval of grants to 
other persons would not be required for the purpose of obtaining the 
exemption under Alternative Proposed Rule 16b-3. Comment is solicited 
as to whether there are any other circumstances under which whole-plan 
approval, standing alone, would be a sufficient safeguard.
     Finally, the six-month holding period exemption would be 
available to exempt grants that, for reasons of timing or otherwise, 
fail to satisfy any of the other alternative conditions.
    Commenters are asked to address whether approval by shareholders 
should be required in advance of a grant or award, or would subsequent 
ratification be sufficient, provided that such ratification is obtained 
not later than the date of the next annual meeting of shareholders? 
Comment is solicited on whether full board approval, as an alternative 
to Non-Employee Director approval, would be useful to issuers and 
whether it would provide an adequate standard. Should a director who is 
hired as a consultant to the issuer be considered an employee of the 
issuer, and hence be ineligible to serve as a Non-Employee Director?
    Should equity grants received by Non-Employee Directors be required 
to be made pursuant to a formula plan, as is currently required, or is 
satisfaction of any of the other alternatives an adequate standard to 
assure impartiality?44 Why would equity grants be treated 
differently for this purpose than any other arrangement pursuant to 
which a Non-Employee Director is compensated? If formula plan grants 
are required as such a condition, should there be a separate exemption 
for formula plans, or should such plans be subjected to shareholder 
approval as a condition to exemption? As a general matter, is either 
(i) administration by the board of directors or Non-Employee Directors 
or (ii) shareholder approval, standing alone, effective to prevent 
abuse of the type addressed by Section 16(b) when only transactions 
with the issuer are included, or must either of such procedures be 
coupled with a six-month holding period to be effective with respect to 
such transactions? Is satisfaction of a six-month holding period, 
absent any other condition, an adequate procedure on which to premise 
an exemption for grants?

    \44\Although the Alternative Proposed Rule would not expressly 
forbid Non-Employee Directors from awarding themselves grants of 
issuer equity securities, such grants would need to be reviewed in 
the context of state laws governing corporate self-dealing.
---------------------------------------------------------------------------

    Should a grant or award that satisfies any of the proposed 
alternative conditions be exempt only if the officer or director to 
whom the award is made had not disposed of issuer equity securities on 
a non-exempt basis during the previous six months at a price higher 
than the price at which such grant or award is made? Would such a 
timing condition, which is not present in either current Rule 16b-3 or 
the 1994 proposals, be necessary in order to preclude the use of the 
proposed broader exemptive rule, which would eliminate significant 
conditions attached to the current exemption for grants and awards, as 
a vehicle for abuse?

C. Dispositions to the Issuer

    Consistent with its focus on the compensatory nature of 
transactions between an issuer and its officers and directors, the 
Commission is of the view that transactions pursuant to which an 
insider is deemed to have made a disposition of issuer equity 
securities to the issuer under appropriate conditions may merit 
exemption from the short-swing profit recovery provisions of Section 
16(b). Accordingly, the Alternative Proposal would exempt any 
transaction involving a disposition 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.45 This 
provision would provide for the flexibility to redeem issuer equity 
securities from insiders in connection with non-exempt replacement 
grants, and in such discrete compensatory situations as individual buy-
backs in connection with estate planning. As drafted, this provision 
also would exempt the exercise of out-of-the-money options, provided 
that the requisite approval is obtained.46 The shareholder 
approval prong could provide exemptive relief in such scenarios as 
mergers that had received majority shareholder approval that 
specifically addressed such disposition.

    \45\Alternative Proposed Rule 16b-3(d). Unlike the exemption for 
grants and awards, subsequent ratification by shareholders would not 
be included as an alternative condition to the exemption for 
dispositions. Because such transactions are more likely to be at the 
volition of the insider and thus more susceptible to abuse with 
respect to timing, prior approval is considered necessary. 
Commenters should address whether subsequent shareholder 
ratification of a disposition would provide an effective procedure.
    \46\Reliance on this proposed exemption would not be necessary 
with respect to the exercise or conversion of a derivative security 
that is at- or in-the-money because such transactions would continue 
to be exempt pursuant to Rule 16b-6(b) [17 CFR 240.16b-6(b)].
---------------------------------------------------------------------------

    Should a disposition that satisfies either condition be exempt only 
if the officer or director making the disposition has not acquired 
issuer equity securities on a non-exempt basis during the previous six 
months at a price lower than the price at which such disposition is 
made? Would such a timing condition be necessary to preclude the use of 
this proposed exemption as a vehicle for abuse?
    It should be noted that the Alternative Proposal does not 
separately address dispositions 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. As proposed, all of these 
transactions would automatically satisfy the exemptive condition of 
prior approval by the board of directors, a committee of Non-Employee 
Directors or shareholders if the grant that contained these 

[[Page 53837]]
provisions had been so approved. Commenters are asked to address 
whether additional and/or different conditions would be more 
appropriate to exempt these transactions.

III. Dividend or Interest Reinvestment Plans

    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. Companies have raised concerns that the 
requirement that the plan be made available to all holders of the class 
can impose significant burdens on companies that wish to allow for 
officer and director participation. For example, companies have 
indicated that because of this requirement, they may have to spend 
potentially significant sums to comply with foreign laws relating to 
the offering of securities to shareholders in foreign jurisdictions if 
they want to have Rule 16b-2 available to their officers and directors.
    The requirement to include all shareholders does not appear 
necessary to address Section 16(b) concerns--that is, to assure that 
these plans do not provide an opportunity for speculative abuse by 
officers and directors. Consequently, the Commission is proposing to 
tailor the dividend reinvestment plan exemptive rule to address 
concerns about possible opportunities for abuse, while removing 
unnecessary burdens. As proposed to be amended, Rule 16b-2 would be 
available 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.47 Third, the plan must operate on substantially the same 
terms for all plan participants. These proposed standards should assure 
that officers and directors do not use the plan in a manner 
inconsistent with the purposes of Section 16(b).

    \47\This 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. Consistent 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 would not be exempt pursuant to this rule, but could 
be exempt under Alternative Proposed Rule 16b-3, assuming other 
conditions are met. See Release 34-28869, n. 89.
---------------------------------------------------------------------------

    If Rule 16b-2 is amended as proposed, companies would have more 
flexibility to structure their dividend reinvestment plans. Commenters 
are asked to address whether the proposed standards are appropriate and 
serve the intended goals of reducing burdens while retaining 
protections against possible speculative abuse, or whether the current 
standard should be retained. Would it be consistent with the purposes 
of Section 16(b) to provide an exemption for officers and directors 
participating in plans that exclude certain holders, as would be 
permissible under the proposed amendments? Would such exclusions permit 
opportunities for speculative abuse in a manner inconsistent with 
Section 16(b)? Should there be a limitation on the ability to exclude 
certain shareholders, as permitted under this proposal, such as those 
with small holdings or those residing in foreign jurisdictions or 
certain states? Are there other standards that are consistent with 
Section 16(b) that should be considered, such as exempting transactions 
in plans that permit certain holders to be excluded only if their 
inclusion would impose unreasonable burdens and expense?

IV. Reporting

    In the interest of establishing the least burdensome reporting 
system that effectively will achieve the disclosure purposes of Section 
16(a),48 the Proposing Release, without endorsing a specific 
proposal, solicited comment on various alternative schemes to modify 
the reporting of exempt transactions. In addition to the alternatives 
discussed there, which remain under consideration, the Commission 
contemplates a different reporting treatment with respect to 
transactions that would be exempted pursuant to the Alternative 
Proposal.

    \48\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 announced its intention to expand the capacity of the EDGAR 
system to accommodate the electronic filing of ownership and 
transaction reports pursuant to both Section 16(a) of the Exchange 
Act and Rule 144 [17 CFR 230.144] under the Securities Act [15 
U.S.C. 77a et seq.]. See Release No. 33-7231 (October 5, 1995). The 
necessary programming already has been initiated, and filers should 
be able to file these documents electronically on a voluntary basis 
by late 1995 or early 1996. A further announcement will be made when 
the effective date is determined.
---------------------------------------------------------------------------

    In order to simplify the reporting scheme while assuring that 
adequate and timely public information is provided with respect to 
these transactions, it is anticipated that essentially all reporting be 
done on a current basis; that is, on a Form 4 no later than ten days 
following the close of the month in which a transaction occurs. Since 
the Alternative Proposal would exempt a greater variety of transactions 
than either current Rule 16b-3 or the 1994 proposals, it would be 
appropriate to provide the public with information about these 
transactions on a more timely basis than if annual reporting on Form 5 
were permitted. Such transparency would help the markets monitor 
Section 16(b) compliance on a real-time basis. At the same time, 
officers and directors subject to reporting, many of whom now 
voluntarily file reports on a current basis, would benefit from the 
simplicity of the proposed revised reporting system, as well as from 
the broader exemptive provisions of the Alternative Proposal.
    Generally, it is contemplated that exempt grants and awards, as 
well as dispositions, would be reportable on Form 4 no later than ten 
days following the close of the month in which the grant or award is 
made to the insider. Exercises of options49 that are exempt 
pursuant to Rule 16b-6(b) either would remain reportable on the earlier 
of the next otherwise due Form 4 or Form 5, or simply would be required 
to be reported on Form 4.50

    \49\To the extent withholding or surrender rights are exercised 
in conjunction with the exercise or conversion of a derivative 
security, they would be reported at the same time as such exercise 
or conversion. The exercise of a tax-withholding right in connection 
with vesting of a security would be reported on Form 4. Similarly, 
the exercise of a stock appreciation right to receive cash, the 
exercise of an out-of-the-money option, and any other disposition 
transaction that would be exempted under the Alternative Proposal 
also would be reported on Form 4.
    \50\Comment previously was solicited concerning this potential 
revision to the reporting system. See Proposing Release at Section 
III.B.
---------------------------------------------------------------------------

    In recognition of the practical difficulties presented by requiring 
Form 4 reporting of transactions in Qualified Plans, Excess Benefit 
Plans and Stock Purchase Plans, as well as the relatively lesser public 
need for this information to be reported, most of these transactions no 
longer would be required to be reported. However, intra-plan transfers 
and cash distributions would be reportable on Form 4 no later than ten 
days following the close of the month in which such transaction 
occurs.51 Assuming that the Alternative Proposal is adopted in its 
entirety, gifts, transactions pursuant to dividend or 

[[Page 53838]]
interest reinvestment plans and transactions pursuant to qualified 
domestic relations orders (``QDROs''), all of which would remain exempt 
from the short-swing profit recovery provisions of Section 16(b) 
pursuant to other rules,52 also would be exempted from reporting.

    \51\Form 4 reporting thus would be required for all transactions 
exempt under Alternative Proposed Rule 16b-3 except for those 
exempted pursuant to Alternative Proposed Rule 16b-3(b)(1).
    \52\Dividend or interest reinvestment plan transactions would 
continue to be exempt pursuant to Rule 16b-2. Gifts (currently 
exempt pursuant to Rule 16b-5 [17 CFR 240.16b-5]) and QDRO 
transactions (currently exempt pursuant to current Rule 16b-3(f)(3) 
[17 CFR 240.16b-3(f)(3)]) would remain exempt pursuant to Rule 16b-5 
as proposed to be amended. See Proposing Release at Section IV.A.
---------------------------------------------------------------------------

    Commenters are asked to address whether these modifications to the 
reporting scheme would be appropriate. With respect to transactions 
that would be exempted from reporting, to what extent, and for what 
purposes, is there a public need for such information? In lieu of 
eliminating any reporting requirement for these transactions, should 
they be reported on an annual basis on Form 5, as currently required? 
Alternatively, should Form 5 be rescinded, with annual reporting, where 
permitted, accomplished on Form 4? Assuming Form 5 is rescinded, how 
would the current requirement to report on Form 5 all holdings and 
transactions that should have been, but were not, previously 
reported53 be revised? Should such holdings and transactions be 
reported on the last Form 4 filed with respect to the calendar year?

    \53\Rule 16a-3(f)(1)(i) and (ii) [17 CFR 240.16a-3(f)(1)(i) and 
(ii)].
---------------------------------------------------------------------------

    Would accelerated reporting for other transactions that would be 
exempted by the Alternative Proposal, but currently may be reported on 
an annual basis, impose significant burdens on insiders and/or issuers, 
or provide significant benefits to users of the reported information? 
Would such accelerated reporting simplify the overall reporting system 
by eliminating the need to keep track of exempt transactions during the 
year in anticipation of filing the Form 5? Commenters are requested to 
address these questions from the viewpoint of users of the information 
that would be reported, as well as from the viewpoint of filing 
parties.

V. Request For Comment

    Any interested person wishing to submit written comments on the 
Alternative Proposal, the Proposing Release, the Cash-Only Release, and 
any other matters that might have an impact on such proposals, is 
requested to do so. Comment is requested specifically from persons 
subject to Section 16; issuers whose officers, directors and ten 
percent shareholders are subject to Section 16; and persons using the 
information afforded by the Section 16(a) reports.
    Commenters should address whether the Alternative Proposal, as 
drafted, is easy to understand and practicable to implement. Commenters 
also should address whether the Alternative Proposal would be 
preferable to the proposed amendments to Rule 16b-3 set forth in the 
Proposing Release. The Commission also requests comment on whether the 
Alternative Proposal, if adopted, would have an adverse impact on 
competition or would impose a burden on competition that is neither 
necessary nor appropriate in furthering the purposes of the Exchange 
Act.
    Finally, commenters are asked to consider the on-going merit of the 
strict liability short-swing profit recovery provisions of Section 
16(b), and whether the Commission should recommend that Congress 
rescind this section of the statute. Some have suggested that the 
prohibitions of Exchange Act Rule 10b-5, as interpreted by case law, 
adequately address the abuse of inside information and obviate the need 
for a strict liability statute. Others point out that the scienter and 
other standards of the Rule 10b-5 remedy suggest the contrary. Assuming 
Congress, which has the sole authority to do so, were to rescind 
Section 16(b), would insider trading and market manipulation adequately 
be deterred by Rule 10b-5, or does Section 16(b) continue to serve a 
useful purpose? In the absence of Section 16(b), would state laws 
establishing a fiduciary duty on the part of officers and directors 
adequately protect the interests of public company shareholders?
    Comments responsive to these inquiries will be considered by the 
Commission in complying with its responsibilities under Section 
23(a)54 of the Exchange Act. In order to give commenters 
sufficient time to consider this Alternative Proposal and request for 
further comment, the comment periods on the Proposing Release and the 
Cash-Only Release are extended to December 15, 1995.

    \54\15 U.S.C. 78w(a).
---------------------------------------------------------------------------

VI. Transition To New Rules

    Upon adoption of the Alternative Proposal, the 1994 proposals, or 
any combination thereof, provisions for a transition from the current 
rules will be necessary. Although the Commission's current intent 
regarding transition to the proposed revised rules remains as expressed 
in the Proposing Release,55 this schedule is subject to 
modification. Most recently, the Commission has extended the phase-in 
period for current Rule 16b-3 until September 1, 1996, or such 
different date as set in further rulemaking.56 Current and former 
Rule 16b-3 would remain available until September 1, 1996,57 
unless a different date is set by the Commission in the adopting 
release. Comment is solicited on how long a transition period issuers 
and insiders would need, assuming adoption of the Alternative Proposal. 
Of course, issuers continue to be permitted to convert their plans to 
current Rule 16b-3 at any time, or to convert back to the former 
exemptions, provided that all plans of the issuer are so converted. 
After the phase-in date, issuers and insiders no longer will be able to 
rely on the former exemptions, but instead will be required to comply 
with Rule 16b-3 as amended.

    \55\See Proposing Release at Section VI.
    \56\See Release 34-36063 [60 FR 40994].
    \57\The exemptions afforded by former Rules 16a-8(b) [17 CFR 
240.16a-8(b)] and 16a-8(g)(3) [17 CFR 240.16a-8(g)(3)] also would 
remain available.
---------------------------------------------------------------------------

VII. Cost-Benefit Analysis

    The Alternative Proposal is intended to simplify the conditions 
under which insider's transactions in issuer equity securities are 
deemed to be exempt from the short-swing profit recovery provisions of 
Section 16(b), while ensuring that the statutory purposes continue to 
be served. The Commission views this as a way of correcting unintended 
consequences of the present regulatory scheme in terms of creating a 
bias against equity-based compensation and insider participation in 
broad-based plans, and significantly reducing the compliance burden 
imposed on persons subject to Section 16 without undercutting the 
statutory objectives of disclosing information concerning insider 
trading and discouraging speculative short-term insider trading. 
Although some reporting would be accelerated under the Alternative 
Proposal, other reporting requirements would be eliminated. Even where 
accelerated reporting might increase compliance costs, these costs may 
be outweighed by the benefit of having the information available to the 
public on a more timely basis, as well as the ease of compliance with a 
simpler reporting scheme.
    In order to assist the Commission in assessing the costs and 
benefits of the Alternative Proposal, commenters are requested to 
provide their views and data on the following issues. In addressing 
these issues, commenters should be as specific and detailed with their 
views and data as possible, and quantify the costs and benefits to the 
extent practicable. 

[[Page 53839]]

    (1) To what extent would the newly proposed exemptive conditions 
increase or decrease the compliance burden imposed on persons subject 
to Section 16?
    (2) Could any of the exemptive provisions be crafted in a manner 
that would further reduce compliance burdens, consistent with the 
statutory objectives of Section 16? If so, how could that be done?
    (3) What would be the costs and benefits of the proposed 
accelerated reporting of transactions on Form 4, together with the 
elimination of reporting of certain other transactions? In particular, 
to what extent do insiders currently choose voluntarily to report 
exempt transactions on Form 4 rather than annually on Form 5?
    (4) Could the reporting requirements be crafted in a manner that 
would further reduce compliance burdens, consistent with the statutory 
objectives of Section 16? If so, how could that be done?

VIII. Summary of Initial Regulatory Flexibility Analysis

    An Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603 concerning the Alternative Proposal. The 
analysis notes that the Alternative Proposal is intended to simplify 
the Section 16 regulatory scheme with respect to employee benefit 
plans.
    As discussed more fully in the analysis, most of the reporting 
persons the Alternative Proposal would affect are small entities, as 
defined by the Commission's rules. The Alternative Proposal would 
decrease the compliance requirements imposed upon corporate insiders 
subject to Section 16.
    The analysis discusses several possible alternatives to the 
Alternative Proposal. As discussed more fully in the analysis, 
implementation of any of these alternatives either would be duplicative 
of the Alternative Proposal or the Prior Proposals, or would be 
inconsistent with the Exchange Act.
    Comments are encouraged on any aspect of the analysis. A copy of 
the analysis may be obtained by contacting Elizabeth Murphy, Office of 
Disclosure Policy, Division of Corporation Finance, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

IX. Statutory Basis

    The amendments to the Section 16 rules are being proposed by the 
Commission pursuant to Exchange Act Sections 3(a)(11),58 
3(a)(12),59 3(b),60 9(b),61 10(a),62 12(h),63 
13(a),64 14, 16, and 23(a). As the Section 16 rules relate to the 
Investment Company Act and the Public Utility Holding Company Act, they 
also are proposed pursuant to Investment Company Act Sections 3065 
and 38,66 and Public Utility Holding Company Act Sections 
1767 and 20,68 respectively.

    \58\15 U.S.C. 78c(a)(11).
    \59\15 U.S.C. 78c(a)(12).
    \60\15 U.S.C. 78c(b).
    \61\15 U.S.C. 78i(b).
    \62\15 U.S.C. 78j(a).
    \63\15 U.S.C. 78l(h).
    \64\15 U.S.C. 78m(a).
    \65\15 U.S.C. 80a-29.
    \66\15 U.S.C. 80a-37.
    \67\15 U.S.C. 79q.
    \68\15 U.S.C. 79t.
---------------------------------------------------------------------------

List of Subjects in 17 CFR 240

    Reporting, Recordkeeping requirements, and Securities.

Text of Proposals

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. 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.
* * * * *
    2. By revising Sec. 240.16b-2 to read as follows:


Sec. 240.16b-2  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(b) of the Act if made pursuant to a plan providing for 
the regular reinvestment of dividends or interest, if 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.
    3. By revising Sec. 240.16b-3 to read as follows:


Sec. 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.

    Note to Paragraph (a): The exercise or conversion of a 
derivative security that has a fixed exercise price and is not out-
of-the-money is eligible for exemption from Section 16(b) of the Act 
to the extent that the conditions of Rule 16b-6(b) are satisfied.

    (b) Tax-conditioned and related plans.
    (1) Any transaction pursuant to a Qualified Plan, an Excess Benefit 
Plan, or a Stock Purchase Plan shall be exempt without condition, 
except as provided in paragraph (b)(2) of this section.
    (2) A transaction pursuant to a Qualified Plan, an Excess Benefit 
Plan, or a Stock Purchase Plan that is at the volition of a plan 
participant; is not made in connection with the participant's death, 
disability, retirement or termination of employment; is not required to 
be made available to a plan participant pursuant to a provision of the 
Internal Revenue Code; and 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, shall 
be exempt only if effected pursuant to an election made at least six 
months following the date of the most recent election that effected a 
transaction subject to this paragraph (b)(2).
    (3) An acquisition pursuant to a plan or transaction that satisfies 
the conditions applicable to performance-based compensation imposed by 
Section 162(m) of the Internal Revenue Code and the regulations 
thereunder shall be exempt without condition.
    (4) Definitions.
    (i) 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.
    (ii) 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 the limitations of Sections 401(a)(17), 415 and 
any other applicable contribution limitation set forth in the Internal 
Revenue Code, or any successor provisions thereof.
    (iii) A Stock Purchase Plan shall mean an employee benefit plan 
that satisfies the coverage and participation standards of Sections 
410, 423(b)(3) and 

[[Page 53840]]
423(b)(5) of the Internal Revenue Code of 1986, or any successor 
provisions thereof.
    (c) Grant and Award Transactions.
    (1) General. A grant or award transaction shall be exempt if:
    (i) The transaction is approved by the board of directors of the 
issuer, or a committee of the board of directors that is comprised 
solely of two or more Non-Employee Directors;
    (ii) The transaction is approved or ratified by the affirmative 
vote or written consent of the holders of the majority of the 
securities of the issuer entitled to vote, in compliance with Section 
14 of the Act, provided that such ratification occurs no later than the 
date of the next annual meeting of shareholders; or
    (iii) The issuer equity securities so awarded are held by the 
officer or director for a period of six months following the date of 
such grant or award, 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.
    (2) Definition. A Non-Employee Director shall mean a director who 
is not currently an officer (as defined in Sec. 240.16a-1(f)) of the 
issuer or a parent or subsidiary of the issuer, or otherwise currently 
employed by or a consultant to the issuer or a parent or subsidiary of 
the issuer.
    (d) Dispositions to the issuer. Any transaction involving the 
disposition to the issuer of issuer equity securities shall be exempt 
from Section 16(b) of the Act, provided that the terms of such 
disposition are approved in advance in the manner prescribed by either 
paragraph (c)(1)(i) or paragraph (c)(1)(ii) of this section.

    Dated: October 11, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-25626 Filed 10-16-95; 8:45 am]
BILLING CODE 8010-01-P