[Federal Register Volume 61, Number 116 (Friday, June 14, 1996)]
[Rules and Regulations]
[Pages 30376-30396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14184]




[[Page 30375]]


_______________________________________________________________________

Part III





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 228, et al.



Ownership Reports and Trading by Officers, Directors and Principal 
Security Holders; Extension of Phase-In Period for 16b-3; Disclosure 
Simplification: Phase One and Phase Two Recommendations of Task Force; 
Final and Proposed Rules

  Federal Register / Vol. 61, No. 116 / Friday, June 14, 1996 / Rules 
and Regulations  

[[Page 30376]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 240 and 249

[Release Nos. 34-37260; 35-26524; IC-21997; 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: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to its rules and forms 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'') and related 
provisions of the Investment Company Act of 1940 (``Investment Company 
Act'') and the Public Utility Holding Company Act of 1935. The revised 
rules are intended to streamline the Section 16 regulatory scheme, 
particularly with respect to transactions between an issuer and its 
officers and directors; simplify the reporting system; broaden 
exemptions from short-swing profit recovery where consistent with the 
statutory purposes; and codify several staff interpretive positions.

DATES: Effective date: August 15, 1996. The phase-in period for Rule 
16b-3 is extended until November 1, 1996 pursuant to Release No. 34-
37261. For a discussion of transition provisions, see Section VII.

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special Counsel, 
Office of Chief Counsel, or Elizabeth M. Murphy, Special Counsel, 
Office of Disclosure Policy, at (202) 942-2900, Division of Corporation 
Finance, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC. 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
Rules 16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3, and 16b-6 
\1\ promulgated under section 16 \2\ of the Exchange Act.\3\ The 
Commission also is amending Rule 16b-2 \4\ and redesignating it as Rule 
16a-11,\5\ and adopting new Rules 16a-12 and 16a-13.\6\ Finally, the 
Commission is adopting revisions to Item 405 of Regulation S-K \7\ and 
Regulation S-B,\8\ as well as to Forms 3, 4, and 5.\9\
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    \1\ 17 CFR 240.16a-1, 16a-2, 16a-3, 16a-4, 16a-6, 16a-8, 16a-9, 
16b-3, and 16b-6. Throughout this release, the term ``current Rule 
or Form'' refers to the regulation as in effect before today's 
amendments, while ``new Rule or Form'' refers to the regulations as 
amended or adopted in this release.
    \2\ 15 U.S.C. 78p.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 17 CFR 240.16b-2.
    \5\ 17 CFR 240.16a-11.
    \6\ 17 CFR 240.16a-12 and 16a-13.
    \7\ 17 CFR 229.405.
    \8\ 17 CFR 228.405.
    \9\ 17 CFR 249.103, 104 and 105.
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Table of Contents

I. Executive Summary and Background
II. Transactions Between an Issuer and its Directors or Officers
    A. General Approach
    B. Tax-Conditioned Plans
    C. Discretionary Transactions
    D. Grants, Awards and Other Acquisitions from the Issuer
    1. General; Participant-Directed Acquisitions
    2. Alternative Conditions
    3. Scope of Approval Required
    4. Non-Employee Director Definition
    E. Dispositions to the Issuer
III. Derivative Securities
    A. Compensatory Cash-Only Instruments
    B. Over-Allotment Options
    C. Surrender and Withholding Rights in Connection with Exercise 
or Tax Withholding
    D. Value Derived from Market Price of an Equity Security
IV. Revisions to Reporting System
    A. Overall Approach
    B. Transactions No Longer Reported at All
    C. Transactions to be Reported on Form 5
    D. Transactions to be Reported on Form 4
    E. Joint and Group Reporting
    F. Trust Transactions
    G. Compliance with the Reporting Requirements
    H. Equity Swaps
    I. Changes in Forms and Reporting Codes
V. Additional Exemptions and Revisions
    A. Dividend or Interest Reinvestment Plans
    B. New Exemption for Domestic Relations Orders
    C. Exemption for Stock Dividend Transactions
VI. 1995 Solicitation of Comment Regarding the on-Going Merit of the 
Short-Swing Profit Recovery Provisions of Section 16
VII. Transition to New Rules
    A. General Application
    B. New Rule 16b-3
VIII. Cost-Benefit Analysis
IX. Summary of Final Regulatory Flexibility Analysis
X. Statutory Basis and Text of the Amendments

I. Executive Summary and Background

    In February 1991, in response to developments in the trading of 
derivative securities, the growth of complex and diverse employee 
benefit plans, and substantial filing delinquencies, the Commission 
adopted comprehensive changes to the beneficial ownership and short-
swing profit recovery rules and forms applicable to insiders 10 
pursuant to section 16.11 While many aspects of the new section 16 
rules were favorably received, unanticipated practical difficulties 
arose in implementing the new rules, particularly with respect to 
thrift and similar employee benefit plans. In particular, issuers and 
insiders stated that the application of current Rule 16b-3 to these 
plans is cumbersome, presents significant record-keeping problems and 
discourages insiders from participation in plan funds holding employer 
securities.
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    \10\ The term ``insider,'' as used in this release, refers to 
officers and directors of issuers with a class of equity securities 
registered pursuant to section 12 of the Exchange Act, and holders 
of more than ten percent of a class of equity securities so 
registered. When referring to an issuer with securities registered 
under section 12, this release includes securities of closed-end 
investment companies subject to section 30(f) of the Investment 
Company Act (15 U.S.C. 80a-29(f) (1988)) and public utility holding 
companies subject to Section 17 of the Public Utility Holding 
Company Act of 1935 (15 U.S.C. 79q (1988)). The insiders of a 
closed-end investment company also include the adviser and any 
affiliated person of the adviser. Section 2(a)(3) of the Investment 
Company Act (15 U.S.C. 80a-2(a)(3) (1988)).
    \11\ Release No. 34-28869 (February 8, 1991) [56 FR 7242] 
(``Adopting Release''). The rules generally became effective on May 
1, 1991, except for the phase-in period for compliance with the 
substantive conditions of new Rule 16b-3. The phase-in period 
previously was extended until September 1, 1996 or such different 
date as may be set in further rulemaking (Release 34-36063 (August 
7, 1995) (60 FR 40994) (``1995 Phase-in Release'')). It is being 
further extended to November 1, 1996 to accommodate the transition 
to the new rules. Issuers may use new Rule 16b-3 for transactions on 
or after the August 15, 1996 effective date, but are not required to 
use the new rule until the end of the phase-in period. See Section 
VII, below.
    Following the Adopting Release, the Commission issued two other 
releases relating to the revised rules; one set forth the 
Commission's views regarding shareholder approval for amendments to 
employee benefit plans under Rule 16b-3, as well as certain 
technical amendments (Release No. 34-29131 (April 26, 1991) (56 FR 
19925)), while the other adopted a technical amendment to Form 4 
(Release No. 34-28869B (April 10, 1991) (56 FR 14467)).
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    In order to address these concerns, in 1994 the Commission proposed 
further rule changes designed to streamline the Section 16 regulatory 
scheme adopted in 1991. The proposals were designed to facilitate the 
operation of employee benefit plans; broaden exemptions from Section 
16(b) 12 short-swing profit recovery where consistent with 
statutory purposes; and codify several staff interpretive 
positions.13 Comment also was solicited on various suggested

[[Page 30377]]

modifications to the section 16(a) 14 reporting requirements.
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    \12\ 15 U.S.C. 78p(b).
    \13\ Release No. 34-34514 (August 10, 1994) (59 FR 42449) 
(``1994 Release'').
    \14\ 15 U.S.C. 78p(a).
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    A follow-up release 15 solicited further comment on the 
treatment of compensatory cash-only instruments based on the value of 
the issuer's equity securities. Such instruments currently are not 
subject to Section 16 if they meet specified conditions. The Commission 
requested comment as to whether the current exclusion is appropriate in 
light of the fact that equity-based securities provide identical 
opportunities for profit predicated on the underlying stock price 
movement, whether settled exclusively in cash or stock, and whether, 
from the perspective of shareholders and analysts, cash-only 
instruments have the same section 16(a) informational value as 
instruments that may be settled in stock.
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    \15\ Release No. 34-34681 (September 16, 1994) (59 FR 48579) 
(``Cash-only Release'').
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    Finally, additional rule proposals were published in 1995 16 
to provide a broader exemption from short-swing profit recovery for 
transactions between an issuer and its directors or officers, whether 
or not in the context of employee benefit plans; broaden the exemption 
for transactions in dividend and interest reinvestment plans; and 
revise the section 16(a) reporting scheme.
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    \16\ Release No. 34-36356 (October 11, 1995) (60 FR 53832), as 
corrected in Release No. 34-36356A (October 29, 1995) (60 FR 54823), 
(together, the ``1995 Release'').
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    The 1995 proposals presented a simplified, flexible approach based 
on the premise that 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. 
Generally, these transactions do not appear to present the same 
opportunities for insider profit on the basis of non-public information 
as do market transactions by officers and directors. Typically, where 
the issuer, rather than the trading markets, is on the other side of an 
officer or director's transaction in the issuer's equity securities, 
any profit obtained is not at the expense of uninformed shareholders 
and other market participants of the type contemplated by the 
statute.17 Based on its experience with the Section 16 rules, the 
Commission is persuaded that transactions between the issuer and its 
officers and directors that are pursuant to plans meeting the 
administrative requirements and nondiscrimination standards of the 
Internal Revenue Code 18 and the Employee Retirement Income 
Security Act of 1974 (``ERISA''),19 or that satisfy other 
objective gate-keeping conditions, are not vehicles for the speculative 
abuse that section 16(b) was designed to prevent. Accordingly, these 
transactions are exempted by new Rule 16b-3 as adopted.20
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    \17\ An insider's breach of fiduciary duty to profit from self-
dealing transactions with the company is a concern of state 
corporate law. Generally, states have created potent deterrents to 
insider self-dealing and other breaches of fiduciary duty. See 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 124-37 (4th ed. 1993). There are also potential 
liability considerations under Rule 10b-5 [17 CFR 240.10b-5].
    \18\ 26 U.S.C. et seq. (1986) (``Internal Revenue Code'').
    \19\ 29 U.S.C. 1001 et seq. (1986).
    \20\ See Section II, below.
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    As a corollary to this approach, it was proposed that cash-only 
instruments would be subject to section 16 to the same extent as other 
instruments that embody the opportunity for profit based on price 
movement in the issuer's stock. These instruments would be eligible for 
exemption from section 16(b), but reportable under section 16(a), to 
the same extent as other issuer equity securities in transactions 
between an issuer and its officers and directors. The Commission has 
determined to adopt this proposal as an integral part of its revised 
approach to transactions between an issuer and its officers and 
directors.
    As a further corollary to the 1995 proposal, the Commission 
indicated that it contemplated simplifying the reporting system. 
Certain routine transactions were proposed to be exempted from 
reporting, while other transactions exempt pursuant to Rule 16b-3 would 
be reported on Form 4 within ten days after the end of the month in 
which the transaction occurred. The Commission has determined to revise 
the reporting system so that most transactions exempt pursuant to new 
Rule 16b-3 will be reported on an annual basis on Form 5, and to 
eliminate the class of transactions currently reportable on the earlier 
of the next required Form 4 or Form 5 by requiring that option 
exercises be reported on Form 4 and small acquisitions on Form 5. A 
number of exempt transactions of a routine nature, such as acquisitions 
pursuant to tax-conditioned plans and dividend and interest 
reinvestment plans, will not be required to be reported at all.21
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    \21\ See Section IV, below.
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    Eighty-nine letters of comment were received in response to the 
1994 Release and the Cash-only Release, and 38 letters were received in 
response to the 1995 Release.22 In general, the commenters 
expressed strong support for the tenor of the proposals, with most 
preferring the 1995 version of Rule 16b-3 to the 1994 version. These 
commenters thought that the revisions would alleviate many of the 
practical issues and uncertainties that have arisen since adoption of 
the comprehensive section 16 amendments in 1991. Many commenters 
suggested modifications to the proposals, some of which are addressed 
in this Release, as discussed throughout.
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    \22\ These comment letters, together with two Summaries of 
Comments prepared by Commission staff, are available for inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, NW., Washington DC 20549. Persons seeking these materials 
should make reference to File No. S7-21-94.
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    The rules adopted today essentially implement the 1995 proposals, 
as well as the elements of the 1994 proposals not addressed in 
1995.23 Changes from the proposals are discussed in the release 
below. Highlights of changes from the current rules are as follows:
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    \23\ Pursuant to Release 33-7300 issued today, the Commission 
also is rescinding Rules 16b-1(c) and 16b-4 and amending Rule 16a-
3(i) to permit typed signatures, consistent with the recommendations 
of the Task Force on Disclosure Simplification.
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A. Transactions Between an Issuer and its Directors or Officers

     Generally, transactions between an issuer (including an 
employee benefit plan sponsored by an issuer) and its directors or 
officers will be exempt from section 16(b) if they satisfy the 
applicable conditions of new Rule 16b-3, as set forth below:
     Routine transactions pursuant to specified tax-conditioned 
plans (such as thrift plans, stock purchase plans and excess benefit 
plans) will be exempt from section 16(b) without further condition.
     Fund-switching transactions or volitional cash withdrawals 
from an issuer equity securities fund will be exempt if the election to 
engage in the transaction is at least six months after the last 
election to engage in such a transaction that was opposite-way (i.e., a 
previous acquisition if the transaction to be exempted is a 
disposition, and vice versa).
     Other acquisitions by an officer or director from the 
issuer, including grants, awards and participant-directed transactions, 
will be exempt upon satisfaction of any one of three alternative 
conditions:
     Approval of the transaction by the board of directors of 
the issuer or a committee of two or more Non-Employee Directors;

[[Page 30378]]

     Approval or ratification of the transaction by the holders 
of the majority of the issuer's securities; or
     Satisfaction of a six-month holding period following the 
date of acquisition.
     Other dispositions by an officer or director to the issuer 
will be exempt if approved by the board of directors of the issuer, a 
committee of two or more ``Non-Employee Directors,'' as defined, or the 
holders of the majority of the issuer's securities.

B. Derivative Securities

     The current section 16 exclusion from the definition of 
``derivative securities'' for instruments based on the value of the 
issuer's equity securities but settled exclusively in cash 24 is 
rescinded. However, these instruments are eligible for exemption 
pursuant to new Rule 16b-3.
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    \24\ Current Rule 16a-1(c)(3).
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     Options granted to an underwriter in a registered public 
offering to satisfy over-allotments are expressly excluded from the 
definition of ``derivative security.'' 25
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    \25\ New Rule 16a-1(c)(7), which will codify the interpretive 
positions set forth in Video Technology (Overseas) Limited/Davis 
Polk & Wardwell (June 17, 1992) and Davis Polk & Wardwell (July 16, 
1992).
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     Rights to withhold or surrender a security in satisfaction 
of the exercise price of a derivative security, or in satisfaction of 
the tax-withholding consequences applicable to the receipt, exercise or 
vesting of an issuer equity security (including a derivative security) 
are excluded from the definition of ``derivative security.'' 26
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    \26\ New Rule 16a-1(c)(3) (proposed as Rule 16a-1(c)(8)).
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C. Reporting

     A number of transactions exempt from Section 16(b) that 
currently must be reported on Form 5 no longer will be required to be 
reported at all, among them:
     Exempt transactions pursuant to tax-conditioned plans 
(other than fund-switching transactions and volitional cash withdrawals 
from an issuer equity securities fund);
     Transactions pursuant to dividend or interest reinvestment 
plans 27 and domestic relations orders;28
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    \27\ New Rule 16a-11 (current Rule 16b-2).
    \28\ New Rule 16a-12.
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     Transactions that change only the form of beneficial 
ownership;29
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    \29\ New Rule 16a-13.
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     Certain transactions by a person who has ceased to be an 
insider;30 and
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    \30\ New Rule 16a-2(b).
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     Expirations or cancellations of certain derivative 
securities. 31
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    \31\ New Rule 16a-4(d).
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     Exercises and conversions of derivative securities, 
including employee stock options, whether or not exempt from Section 
16(b), will be reported on Form 4.
     All other exempt transactions and small acquisitions 
32 will be reported annually on Form 5, with earlier reporting on 
Form 4 permitted.
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    \32\ These transactions, which do not exceed $10,000 in the 
aggregate, are eligible for deferred reporting pursuant to current 
and new Rule 16a-6.
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     Reporting will be permitted on a joint basis when more 
than one person subject to Section 16 is deemed to be a beneficial 
owner of the same issuer equity securities.33
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    \33\ New Rule 16a-3(j).
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     A trust will be subject to Section 16 only if the trust is 
the beneficial owner of more than ten percent of a class of issuer 
equity securities registered pursuant to Section 12 of the Act.34
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    \34\ Current Rule 16a-8(a)(1)(ii), which makes a trust subject 
to Section 16 if the trustee otherwise is subject to section 16 and 
exercises or shares investment control of issuer securities held by 
the trust and the trustee or a member of the trustee's immediate 
family has a pecuniary interest in such issuer securities, is 
rescinded. Other obligations applicable to trusts, trustees, 
beneficiaries and settlors pursuant to current Rule 16a-8 are not 
affected by this change.
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     Item 405 of Regulations S-K and S-B 35 is revised to 
clarify the nature of the issuer's obligation to review insiders' 
filings in order to determine whether there are any delinquent reports 
that require disclosure. Item 405 disclosure will be required to be 
placed under a separate caption.
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    \35\ 17 CFR 229.405 and 228.405.
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     Insiders' obligation to report equity swap transactions is 
reiterated and clarified, and a new reporting code is added for equity 
swaps.

D. Other Issues

     The exemption for the reinvestment of dividends and 
interest pursuant to dividend and interest reinvestment plans 36 
is revised to eliminate the requirement that the plan be made available 
on the same terms to all holders of the class of securities.
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    \36\ New Rule 16a-11 (current Rule 16b-2).
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     A new exemption is provided for transactions pursuant to 
domestic relations orders.37
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    \37\ New Rule 16a-12.
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     The exemption for stock splits, stock dividends and pro 
rata rights 38 is expanded to exempt stock dividends paid in the 
securities of a different issuer, such as spinoff distributions.
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    \38\ Current and new Rule 16a-9.
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     A transaction that occurs after a person ceases to be an 
officer or director will be subject to section 16 only if it is not 
otherwise exempt from section 16(b) and is executed within six months 
of an opposite-way transaction subject to section 16(b) that occurred 
while the person was an officer or director.39
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    \39\ New Rule 16a-2(b).
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II. Transactions Between an Issuer and Its Directors or Officers

A. General Approach

    The amendments to Rule 16b-3 adopted today implement the approach 
set forth in the 1995 proposal to align better the regulatory 
requirements under the rule with the statutory goals underlying section 
16.40 Moreover, since benefit plans and compensation payments and 
programs vary widely in design and purpose, the Commission is convinced 
that a ``one size fits all'' regulatory scheme is impractical. The 
proliferation of unique plan features over the last decade has led to 
legal uncertainty regarding the application of Rule 16b-3 to these 
innovations. Rather than react to present plan developments, the 
Commission intends to provide greater regulatory flexibility to 
accommodate future developments.
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    \40\ See Section I, above.
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    New Rule 16b-3 exempts from short-swing profit recovery any 
acquisitions and dispositions of issuer equity securities (including 
those that occur upon the exercise or conversion of a derivative 
security, whether in- or out-of-the-money) 41 between an officer 
or director and the issuer, subject to simplified conditions.42 A 
transaction with an employee benefit plan sponsored by the issuer will 
be treated the same as a transaction with the issuer.43 However, 
unlike the current

[[Page 30379]]

rule, a transaction need not be pursuant to an employee benefit plan or 
any compensatory program to be exempt, nor need it specifically have a 
compensatory element.
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    \41\ As indicated in Note (1) to new Rule 16b-3, the exercise or 
conversion of a derivative security that does not satisfy the 
conditions of this rule will continue to be eligible for exemption 
from section 16(b) pursuant to Rule 16b-6(b) [17 CFR 240.16b-6(b)]. 
Similarly, a note is added to new Rule 16b-6(b) as a reminder that 
exercises or conversions also may be exempted by new Rule 16b-3.
    \42\ Like current Rule 16b-3, new Rule 16b-3 does not provide an 
exemption for persons who are subject to section 16 solely because 
they beneficially own greater than ten percent of a class of an 
issuer's equity securities. Officers and directors owe certain 
fiduciary duties to a corporation. See n. 17, above. Such duties, 
which act as an independent constraint on self-dealing, may not 
extend to ten percent holders. The lack of other constraints argues 
against making new Rule 16b-3 available to ten percent holders. 
However, new Rule 16b-3 is available to such a person who is also 
subject to section 16 by virtue of being an officer or director with 
respect to transactions with the issuer.
    \43\ New Rule 16b-3(a). 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 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, that 
otherwise would be satisfied through direct compensation from the 
issuer.
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    A transaction will be exempt if it satisfies the appropriate 
conditions set forth among four alternative categories: Tax-Conditioned 
and Related Plans; Discretionary Transactions; Grants, Awards and Other 
Acquisitions from the Issuer; and Dispositions to the Issuer.44 
New Rule 16b-3 eliminates many of the conditions of current Rule 16b-3, 
such as general written plan conditions,45 the prohibition against 
transfer of derivative securities, shareholder approval as a general 
condition for plan exemption, the six-month holding period as a general 
condition for the exemption of grant and award transactions, the 
disinterested administration or formula plan requirements regarding 
grant transactions, and the window period requirement for fund-
switching transactions and stock appreciation right exercises.
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    \44\ In addition to the conditions for exemption, as discussed 
below, Note (2) has been added to new Rule 16b-3 to reference the 
reporting rules applicable to transactions exempted by the new rule. 
See Section IV, below.
    \45\ Because a plan no longer will be required to set forth in 
writing either the price at which securities may be offered and the 
amount of securities to be awarded, or the method by which such 
price and amount are to be determined, the manner in which shares 
are counted no longer will present interpretive issues. As noted at 
n. 69 to the 1994 Release, interpretive letters regarding this 
subject for purposes of the requirements of current Rule 16b-3(a)(1) 
no longer are required to be followed.
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B. Tax-Conditioned Plans

    The exemption for transactions pursuant to tax-conditioned plans 
46 is adopted substantially as proposed in 1995. This exemption is 
premised on the view that an adequate safeguard against speculative 
abuse is provided when a plan satisfies certain conditions imposed by 
the Internal Revenue Code and ERISA.47 Accordingly, any 
acquisition or disposition of issuer equity securities, except as 
discussed below, will be exempt without further condition if made 
pursuant to a plan that satisfies the definition of a ``Qualified 
Plan,'' 48 an ``Excess Benefit Plan,'' 49 or a ``Stock 
Purchase Plan.'' 50 Thus, for example, routine acquisitions 
pursuant to thrift and stock purchase plans generally will be exempt 
under this provision. The tax code coverage and participation 
requirements provide readily accessible, objective standards for 
designing an exempt plan.
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    \46\ New Rule 16b-3(c).
    \47\ The rule does not require the plan to be tax-qualified, but 
instead either to satisfy specified conditions applicable to tax-
qualified plans, or, in certain circumstances, to be operated in 
connection with a plan that satisfies those conditions.
    \48\ New Rule 16b-3(b)(4). The definition of ``Qualified Plan'' 
is adopted as proposed, i.e., 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.
    \49\ New Rule 16b-3(b)(2). The definition of ``Excess Benefit 
Plan'' has been revised to eliminate references to specific I.R.C. 
Sections so as to ensure that plans qualifying for an exemption 
under section 201(2) of ERISA would be covered by the exemption. The 
revised definition requires that such a plan be operated in 
conjunction with a Qualified Plan, and provide only the benefits and 
contributions that would be provided under the Qualified Plan but 
for any benefit or contribution limitations set forth in the 
Internal Revenue Code. As was proposed, the amended rule does not 
require transactions pursuant to an Excess Benefit Plan to be in 
tandem with transactions in the related Qualified Plan to be 
eligible for exemption.
    \50\ New Rule 16b-3(b)(5). The definition of ``Stock Purchase 
Plan'' has been revised to indicate that satisfaction of the 
coverage and participation standards of Section 410 of the Internal 
Revenue Code is an alternative to satisfaction of Internal Revenue 
Code Sections 423(b)(3) and 423(b)(5), rather than an additional 
requirement. The purpose of including this alternative standard is 
to make the exemption available to stock purchase plans that do not 
satisfy the standards of Internal Revenue Code Section 423, but 
nevertheless are operated in a broad-based manner.
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    While most transactions pursuant to tax-conditioned plans may rely 
on this exemption, fund-switching and cash withdrawal transactions 
arising solely from an insider's volitional investment decision, 
defined as ``Discretionary Transactions,'' instead must satisfy a 
timing requirement.51
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    \51\ See Section II.C, below.
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    As proposed, the exemption for tax-conditioned plans would have 
exempted without further condition any acquisition pursuant to a plan 
or transaction that satisfied the conditions applicable to performance-
based compensation imposed by section 162(m) of the Internal Revenue 
Code and the regulations thereunder.52 Commenters expressed 
divergent views on whether this basis for exemption would be useful. 
The Commission is not adopting the section 162(m) provision, since it 
appears unnecessary in view of the expanded availability of the 
exemption for grants, awards and other acquisitions.53
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    \52\ Internal Revenue Code Section 162(m) and Regulation 
Sec. 1.162-27(e), which set forth the conditions pursuant to which 
an issuer may deduct compensation in excess of $1 million paid to 
its chief executive officer and four other most highly compensated 
officers for whom disclosure is required to be reported in Exchange 
Act filings.
    \53\ See Section II.D, below.
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C. Discretionary Transactions

    Many contributory employee benefit plans permit a participant to 
choose one of several funds in which to invest (e.g., an issuer stock 
fund, a bond fund, or a money market fund). Plan participants typically 
are given the opportunity to engage in ``fund-switching'' transactions, 
permitting the transfer of assets from one fund to another, at periodic 
intervals. Plan participants also commonly have the right to withdraw 
their investments in cash from a fund containing equity securities of 
the issuer. Fund-switching transactions involving an issuer equity 
securities fund and cash distributions from these funds 54 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 real party on the other side of 
the transaction is not the issuer but instead a market participant.
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    \54\ No exemption has been provided in new Rule 16b-3 for a 
withdrawal in kind of issuer equity securities because such a 
transaction would be a change in form of beneficial ownership from 
indirect to direct, which will be exempt from Section 16 pursuant to 
new Rule 16a-13. See Section IV.B, below.
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    In order to foreclose opportunities for abuse, the 1995 proposal 
contemplated that such transactions in a tax-conditioned plan would be 
exempt only if effected pursuant to an election made at least six 
months following the date of the most recent prior such election. As 
adopted, this provision has been made applicable to these transactions 
pursuant to any plan, whether or not tax-conditioned,55 given that 
it is the nature of the transaction, without regard to the type of 
plan, that presents an opportunity for abuse. Accordingly, these 
transactions are defined separately as ``Discretionary Transactions,'' 
56 and the exemption is placed in a separate paragraph rather than 
included with the exemption for tax-conditioned plans.
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    \55\ New Rule 16b-3(f).
    \56\ New Rule 16b-3(b)(1).
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    As favored by many commenters, the six month condition will apply 
only to ``opposite way'' transactions; i.e., elections that effect 
acquisitions and dispositions must be six months apart, but prior 
``same-way'' elections within the preceding six months do not render 
the exemption unavailable. 57 The six month condition will apply 
if a prior election by the officer or director effecting an ``opposite 
way''

[[Page 30380]]

Discretionary Transaction was made pursuant to any plan of the issuer 
in which the officer or director participates. Some commenters favored 
an exemption premised on transactions taking place during a window 
period. The Commission, however, prefers a more simple approach that is 
more consistent with the statutory purpose.
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    \57\ Because it is anticipated that the actual date on which 
such a plan transaction occurs may be outside the control of an 
insider participant, the rule is premised on a six-month interval 
between the date of subsequent ``opposite way'' elections. The rule 
does not require that such an election be made six months in advance 
of the related transaction.
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    The definition of ``Discretionary Transaction'' excludes a number 
of transactions that are primarily for retirement planning.58 
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,59 as well as 
transactions that effect a diversification or distribution which the 
Internal Revenue Code requires an employee benefit plan to make 
available to a participant,60 need not comply with the six-month 
condition.61 Thus, these transactions are eligible for exemption 
pursuant to other applicable provisions of the amended rule (most 
likely the exemption for tax-conditioned plans). Although such 
transactions have an element of volition, the insider's opportunity to 
speculate in the context of a death, disability, retirement or 
termination of employment would seem well circumscribed, as is also the 
case with regard to the specified diversification and distribution 
elections.
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    \58\ The items enumerated are the same as those in the rule as 
proposed, although they were not set forth in a separate definition.
    \59\ Such transactions are exempted by current Rule 16b-
3(d)(1)(ii).
    \60\ Such transactions 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).
    \61\ A loan funded by the disposition of issuer equity 
securities will be considered a cash distribution involving a 
volitional disposition of an issuer equity security unless the 
insider continues 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 will be exempt 
without condition because such transactions do not occur at the 
insider's volition.
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D. Grants, Awards and Other Acquisitions From the Issuer

1. General; Participant-Directed Acquisitions
    Plans that authorize ``grant and award'' transactions provide 
issuer equity securities to participants on a basis that does not 
require either the contribution of assets or the exercise of investment 
discretion by the participants. For example, awards of bonus stock 
pursuant to a salary-based formula and grants of options or restricted 
stock are grant and award transactions. In contrast, a ``participant-
directed transaction'' requires the participant to exercise investment 
discretion as to either the timing of the transaction or the assets 
into which the investment is made. For example, the exercise of an 
option and a participant's election pursuant to a thrift plan to invest 
either the employee or the employer contribution in issuer equity 
securities are participant-directed transactions.
    Both the current and the new rules provide a specific exemption for 
the grant or award of issuer equity securities. The new rule makes the 
exemption more readily available, since only one of three alternative 
conditions need be satisfied.62 Commenters responded favorably to 
this proposal. They expressed concern, however, that some participant-
directed transactions (such as deferrals of bonuses into phantom stock 
and other deferred compensation programs) that are exempt under the 
current rule 63 would lack an exemption under the new rule.
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    \62\ New Rule 16b-3(d).
    \63\ Many such transactions are now exempt pursuant to the six 
month advance election provided by current Rule 16b-3(d)(1)(i).
---------------------------------------------------------------------------

    The 1995 proposal was intended to permit such transactions, which 
ordinarily do not present opportunities for abuse, an opportunity for 
exemption.
    Accordingly, as adopted, the proposed grant and award exemption has 
been retitled ``Grants, Awards and Other Acquisitions from the Issuer'' 
to make it clear that participant-directed acquisitions that are not 
pursuant to tax-conditioned plans may rely on this exemption.64 
However, if a participant-directed transaction is a ``Discretionary 
Transaction,'' as defined in the new rule, it must instead satisfy the 
conditions designed specifically for Discretionary Transactions in 
order to be exempt.65
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    \64\ Participant-directed dispositions are eligible for the 
``Dispositions to the Issuer'' exemption, discussed in Section II.E, 
below.
    \65\ See Section II.C, above.
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2. Alternative Conditions
    The new rule provides three alternative bases for exempting the 
acquisition of issuer equity securities (including derivative 
securities). The first two conditions exempt an acquisition that is 
either: (i) Approved in advance by the board of directors or a 
committee of the board composed solely of two or more ``Non-Employee 
Directors;'' 66 or (ii) approved in advance, or subsequently 
ratified not later than the date of the next annual meeting of 
shareholders, by shareholders.67 If a transaction has satisfied 
more than one of the alternative approval conditions specified in the 
new rule (for example, if board approval is followed by shareholder 
approval) the issuer may rely on any condition that provides the basis 
for the exemption.
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    \66\ New Rule 16b-3(d)(1).
    \67\ New Rule 16b-3(d)(2). Like current Rule 16b-3(b), this 
standard would require the affirmative vote of the holders of the 
majority of the issuer's securities present or represented and 
entitled to vote at a meeting duly held in accordance with the 
applicable laws of the state or other jurisdiction in which the 
issuer is incorporated, or the written consent of the majority of 
the issuer's securities entitled to vote, solicited in compliance 
with Section 14 of the Securities Exchange Act (15 U.S.C. 78n).
---------------------------------------------------------------------------

    Alternatively, an acquisition that does not satisfy any of the 
approval conditions will be exempt if the securities acquired are held 
by the insider for six months following the date of acquisition, or in 
the case of a derivative security, at least six months elapse between 
the date of acquisition of the derivative security and the date of 
disposition of the underlying security.68 The six-month holding 
period for dividend equivalent rights (``DERs'') and shares purchased 
pursuant to the automatic reinvestment of dividends will be deemed to 
commence on the date of acquisition of the shares on which the DERs or 
dividends are paid.69
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    \68\ New Rule 16b-3(d)(3). The 1995 Release solicited comment as 
to whether a grant or award that satisfies any of the three 
alternative conditions should be exempt only if the officer or 
director to whom the grant is made had not disposed of issuer equity 
securities on a non-exempt basis during the previous six months at a 
price higher than that at which the grant is made. New Rule 16b-
3(d), as adopted, does not require satisfaction of this condition 
with respect to any acquisition.
    \69\ This position is consistent with the amendment to current 
Rule 16b-3(c)(1) proposed in 1994, which would have reversed current 
interpretation providing that the six-month holding period is deemed 
to commence on the date the dividend or DER is granted or allocated 
to the participant. See Hewitt Associates (Apr. 30, 1991) Q. 2(b); 
and Davis Polk & Wardwell (Aug. 23, 1991). Under new Rule 16b-3, 
DERs and shares purchased pursuant to the receipt of dividends will 
need to satisfy a six-month holding period only if the securities on 
which the dividends or DERs are paid rely on a six-month holding 
period as the basis for exemption. Moreover, pro rata dividends paid 
in stock with respect to all securities of a class will continue to 
be exempt pursuant to Rule 16a-9.
---------------------------------------------------------------------------

    Commenters who addressed this segment of the 1995 proposal 
favorably noted both its simplicity and flexibility. The Commission is 
persuaded that satisfaction of any of the three conditions is a 
sufficient basis to exempt an acquisition of issuer equity securities 
from the issuer.

[[Page 30381]]

3. Scope of Approval Required
    When the rule requires ``Non-Employee Director,'' 70 full 
board or shareholder approval, the Commission intends that the approval 
relate to specific transactions rather than the plan in its entirety. 
However, approval of a plan pursuant to which the specific terms and 
conditions of each acquisition are fixed in advance, such as a formula 
plan,71 will satisfy this condition, and the exemption also will 
be available for a plan with an appendix providing for specific grants 
to specific individuals. Note (3) has been added to the new rule, 
making the specific nature of the approval required clear.
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    \70\ This term is defined in new Rule 16b-3(b)(3). See Section 
II.D.4, below.
    \71\ A plan that constitutes a ``formula plan'' under staff 
interpretations of current Rule 16b-3(c)(2)(ii) will be considered a 
formula plan for this purpose.
---------------------------------------------------------------------------

    The note also provides that where the terms of a subsequent 
transaction are provided for at the time a transaction is initially 
approved, the subsequent transaction will not require further specific 
approval. If the terms of an award as approved provide for a subsequent 
participant-directed election, that election will be exempt without 
further condition if effected pursuant to those terms. For example, if 
an award of restricted stock as approved permits an insider awardee to 
defer receipt pursuant to a related deferred compensation plan, the 
insider's election to defer will be exempt without further condition. 
In the same manner, the acquisition of underlying issuer equity 
securities that occurs upon the exercise or conversion of a derivative 
security will be exempt, provided that the exercise is pursuant to 
terms provided in the derivative security originally approved in its 
acquisition.72 Similarly, if an award as originally approved 
specifically provided for the automatic grant of reload options, each 
resultant grant of reload options pursuant to those terms will not 
require subsequent approval.
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    \72\ The disposition of the derivative security that occurs upon 
exercise similarly will be exempt pursuant to new Rule 16b-3(e). See 
Section II.E, below.
    A derivative security that did not satisfy the Non-Employee 
Director committee, board of directors or shareholder approval 
conditions (such as a derivative security issued in reliance on the 
six-month holding period of new Rule 16b-3(d)(3) or a derivative 
security acquired other than directly from the issuer) could be 
exercised or converted and the underlying issuer equity securities 
acquired on an exempt basis pursuant to Rule 16b-6(b), if the 
conditions of that rule are met (fixed exercise price and exercise 
not out-of-the-money unless necessary to comport with the sequential 
exercise provisions of Internal Revenue Code Section 422A).
---------------------------------------------------------------------------

4. Non-Employee Director Definition
    With respect to committee approval as a basis for exemption, ``Non-
Employee Director'' as proposed in 1995 was defined 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. The 1995 
Release further elaborated that, for this purpose, ``consultant'' would 
include attorneys, accountants or others who indirectly receive 
compensation from the issuer through firms that provide services to the 
issuer.
    However, commenters criticized the ``Non-Employee Director'' 
definition to the extent that it would prohibit any consulting 
arrangement with the issuer. These commenters cited definitional 
uncertainty, the special expertise provided by retired senior 
executives and other consultants, and the absence of problems stemming 
from such persons' service as disinterested directors under the current 
rules 73 as reasons for not imposing an absolute ban on consulting 
arrangements.
---------------------------------------------------------------------------

    \73\ Current Rule 16b-3(c)(2)(i).
---------------------------------------------------------------------------

    The Commission is persuaded that the reasoning supporting these 
comments justifies permitting directors with limited consulting 
relationships with the issuer to serve as Non-Employee Directors. Under 
the rule as adopted,74 a ``Non-Employee Director'' will be a 
director who is not currently an officer or otherwise employed by the 
issuer, or a parent or subsidiary of the issuer; does not receive 
compensation directly or indirectly from the issuer, its parent or 
subsidiary for services rendered as a consultant or in any capacity 
other than as a director, except for an amount for which disclosure 
would not be required pursuant to Item 404(a) of Regulation S-K;75 
does not possess an interest in any other transaction for which 
disclosure would be required pursuant to Item 404(a) of Regulation S-K; 
and is not engaged in a business relationship for which disclosure 
would be required pursuant to Item 404(b) of Regulation S-K. 76 
With respect to a closed-end investment company, a ``Non-Employee 
Director'' 77 will be a director who is not an ``interested 
person'' of the issuer, as that term is defined in section 2(a)(19) of 
the Investment Company Act.78
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    \74\ New Rule 16b-3(b)(3)(i).
    \75\ 17 CFR 229.404(a). This item generally requires disclosure 
of related party transactions where the amount involved exceeds 
$60,000. For purposes of the definition of ``Non-Employee 
Director,'' each test that refers to S-K Item 404 will be measured 
by reference to the Regulation S-K disclosure Item, whether the 
disclosure requirements applicable to the issuer are governed by 
Regulation S-K or S-B.
    \76\ 17 CFR 229.404(b). This item generally requires disclosure 
of business relationships with the registrant where the amount 
involved exceeds greater than five percent of the consolidated gross 
revenue of either the registrant or the other entity.
    \77\ New Rule 16b-3(b)(3)(ii).
    \78\ 15 U.S.C. 80a-2(a)(19).
---------------------------------------------------------------------------

    Although the new rule would not prohibit Non-Employee Directors or 
the full board from awarding themselves grants of issuer equity 
securities, such grants would be subject to state laws governing 
corporate self-dealing. 79 The Commission believes that 
traditional state law fiduciary duties facilitate compliance with the 
underlying purposes of section 16 by creating effective prophylactics 
against possible insider trading abuses.
---------------------------------------------------------------------------

    \79\ See n. 17, above.
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E. Dispositions to the Issuer

    Both as proposed in 1995 and as adopted, the new rule exempts any 
transaction involving a disposition of issuer equity securities 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.80 However, if a disposition is a Discretionary 
Transaction, as defined in the new rule, it must instead satisfy the 
conditions specifically applicable to Discretionary Transactions to be 
exempt.81
---------------------------------------------------------------------------

    \80\ New Rule 16b-3(e).
    \81\ See Section II.C, above.
---------------------------------------------------------------------------

    The 1994 Release proposed amendments to current Rule 16b-3(f) to 
exempt exercise withholding rights and the surrender or withholding of 
issuer equity securities in satisfaction of a tax-withholding 
obligation. These proposed amendments are not adopted because the same 
transactions will be exempted pursuant to the broad scope of the new 
rule.82 For example, the new rule will exempt dispositions of 
issuer equity securities to the issuer 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. Additionally, the new rule 
will give the issuer the

[[Page 30382]]

flexibility to redeem its equity securities from insiders in connection 
with non-exempt replacement grants, and in discrete compensatory 
situations such as individual buy-backs in connection with estate 
planning.
---------------------------------------------------------------------------

    \82\ Like most other exempt transactions, these transactions 
will be reportable on Form 5. See Section IV.C, below. However, 
where the surrender or withholding transaction is in connection with 
the exercise or conversion of a derivative security, it should be 
reported on the same Form 4 as the exercise or conversion. See 
Section IV.D, below.
---------------------------------------------------------------------------

    The exemption, which was favorably received by commenters, is 
adopted substantially as proposed.83 A note has been added to the 
new rule to clarify that if the terms of a subsequent transaction are 
provided for in the transaction as initially approved, the subsequent 
transaction does not require further specific approval.84 For 
example, the exemption will apply to the disposition to the issuer of a 
derivative security upon its exercise or conversion, if such exercise 
is pursuant to the terms provided in the derivative security as 
initially approved in its acquisition.
---------------------------------------------------------------------------

    \83\ The 1995 Release solicited comment as to whether a 
disposition that satisfies either condition should be exempt only if 
the officer or director making the disposition had not acquired 
issuer equity securities on a non-exempt basis during the previous 
six months at a price lower than that at which the disposition was 
made. New Rule 16b-3(e), as adopted, does not require satisfaction 
of this condition with respect to any disposition.
    \84\ Note (3) to new Rule 16b-3. See Section II.D.3, above.
---------------------------------------------------------------------------

    In the context of a merger, the new rule will exempt the 
disposition of issuer equity securities (including derivative 
securities) solely to the issuer, provided the conditions of the rule 
are satisfied.85 Dispositions of such securities to parties other 
than the issuer, such as an acquiror, are not covered by the rule and 
consequently would not be eligible for exemption under the rule. The 
specific terms of the disposition, including price, will require prior 
approval of either the full board, the committee of Non-Employee 
Directors or shareholders. If shareholder approval is solicited and is 
to be the condition relied upon for exemption, the proxy card and proxy 
statement both should provide that a vote to approve the merger also 
shall constitute a vote to approve insiders' exempt dispositions of 
issuer equity securities to the issuer.86
---------------------------------------------------------------------------

    \85\ If such securities were acquired in reliance on new Rule 
16b-3(d)(3), the six-month holding period will need to be satisfied 
prior to such disposition in order for the acquisition to be exempt.
    \86\ Any such proxy statement should describe the security 
holdings of each officer and director as to which approval of an 
exempt disposition is solicited. See Item 5 of Schedule 14A (17 CFR 
240.14a-101), which requires, in a solicitation made on behalf of 
the registrant, a brief description by security holdings of any 
direct or indirect substantial interest in any matter to be acted 
upon of each person who has been a director or executive officer of 
the registrant at any time since the beginning of the last fiscal 
year, unless such interest gives rise to a benefit that is shared on 
a pro rata basis by all other holders of the same class. See also 
Item 3 of Schedule 14C (17 CFR 240.14c-101).
---------------------------------------------------------------------------

III. Derivative Securities

A. Compensatory Cash-Only Instruments

    The proposal to apply Section 16 and the rules thereunder to 
compensatory instruments that can be redeemed or exercised solely for 
cash (``cash-only instruments'') elicited divergent views. Cash-only 
instruments provide performance-based cash compensation to employees, 
using stock price as a measure of company performance. Although such 
instruments do not provide employees with an equity interest in the 
employer that may be traded in securities markets, they do provide the 
equivalent opportunity to profit based on an increase in market price.
    Currently, a cash-only instrument whose value is derived from the 
market value of an issuer equity security 87 is excluded from the 
definition of derivative security if it: (i) Is awarded pursuant to an 
employee benefit plan that satisfies specified provisions of Rule 16b-
3,88 or (ii) may be redeemed or exercised only upon a fixed date 
or dates at least six months after award, or upon death, retirement, 
disability or termination of employment.89 The 1994 Release 
included a proposed modification of the derivative security definition 
that would have excluded all cash-only instruments issued in the 
context of an employer-employee compensation arrangement, including 
compensation arrangements between a company and its non-employee 
directors. As discussed above,90 the subsequent Cash-Only Release 
solicited comment as to whether the existing exclusion for cash-only 
instruments is overly broad in light of the purposes of Section 16.
---------------------------------------------------------------------------

    \87\ An instrument whose value is not derived from the value of 
an issuer equity security is not currently and, under the rules as 
adopted, will not be subject to section 16.
    \88\ Current Rule 16a-1(c)(3)(i), which references the 
provisions of Rules 16b-3(a)(1) (written plan requirements), 16b-
3(a)(2) (transferability restriction) and 16b-3(c)(2) (disinterested 
administration or formula plan).
    \89\ Current Rule 16b-3(c)(3)(ii).
    \90\ See Section I, above.
---------------------------------------------------------------------------

    Most commenters responding to the Cash-Only Release favored an 
unconditional exemption for cash-only instruments, stressing that such 
instruments are not transferable and hence do not give rise to market 
transactions. However, the 1995 Release indicated that, as a corollary 
to broadening the Rule 16b-3 exemption, the Commission contemplated 
rescinding the exclusion for cash-only instruments. Such instruments 
thus would be on a par with stock options and other instruments settled 
in stock, and would be both reportable and eligible for exemption under 
Rule 16b-3 to the same extent. This approach is consistent with the 
purpose of the 1995 proposals to eliminate bias toward compensation 
paid in cash by exempting from the short-swing profit recovery 
provisions of section 16(b) virtually all compensatory transactions 
between an issuer and its officers and directors. Commenters addressing 
this aspect of the 1995 proposals divided in their views; some 
indicated that the exclusion should be eliminated because the insider 
retains the same opportunity to profit as presented by an equity-
settled instrument, while most favored retention of the exclusion 
because transactions in these instruments do not affect securities 
markets.
    As an integral aspect of the 1995 approach, the Commission has 
determined to rescind Rule 16a-1(c)(3) as contemplated. The Commission 
believes that because the opportunity for profit based on price 
movement in the underlying stock embodied in a cash-only instrument is 
the same as for an instrument settled in stock, cash-only instruments 
should be subject to Section 16 to the same extent as other issuer 
equity securities. However, the Commission also recognizes that cash-
only instruments generally are not traded in market transactions by 
insiders. Accordingly, transactions in these instruments are made 
eligible for exemption on the same basis as other transactions in 
issuer equity securities between an issuer and its officers and 
directors.
    This change renders uniform the application of a simplified set of 
rules applying to all compensatory instruments that provide an 
opportunity to profit based on issuer equity performance. It is 
anticipated that, by eliminating the more burdensome aspects of Rule 
16b-3 and bringing cash-only instruments within its scope, the rules 
adopted today will reduce the regulatory complexity and uncertainty 
that has discouraged the use of equity as compensation. Accordingly, 
although transactions in cash-only instruments will be reportable 
following effectiveness of the amended rules,91 such instruments 
will be eligible, and should usually qualify, for exemption from 
section 16(b) pursuant to new Rule 16b-3.92 Commenters' concerns

[[Page 30383]]

regarding the lack of an exemption for participant-directed 
transactions in cash-only instruments, such as the deferral of salary 
or fees into phantom stock, have been addressed by expanding the 
proposed exemption for grants and awards to cover participant-directed 
acquisitions of issuer equity securities.93
---------------------------------------------------------------------------

    \91\ See the discussion of reporting at Section VII.A, below, 
concerning the transition to the new rules.
    \92\ Most of these instruments are acquired from the issuer and 
meet the other conditions of the new Rule. Of course, the 
acquisition of a cash-only instrument from a party other than the 
issuer would not be within the scope of the Rule.
    \93\ See Section II.D.1, above.
---------------------------------------------------------------------------

B. Over-Allotment Options

    Over-allotment options (sometimes referred to as ``Green Shoe 
options'') facilitate public offerings and do not lend themselves to 
the speculative abuse Section 16 was designed to prevent. Accordingly, 
in 1994 the Commission proposed codification of staff interpretive 
relief 94 that would specifically exclude from the definition of 
``derivative security'' options granted to an underwriter in a 
registered public offering for the purpose of satisfying over-
allotments.
---------------------------------------------------------------------------

    \94\ See Video Technology (Overseas) Limited/Davis Polk & 
Wardwell (June 17, 1992), and Davis Polk & Wardwell (July 16, 1992). 
Absent this relief, an over-allotment option written by an insider 
could be characterized as the establishment of a put equivalent 
position and deemed sale of the underlying stock. Subsequent 
expiration of the unexercised option arguably could constitute a 
purchase of the underlying security, matchable with the over-
allotment option grant or other sales by the insider within a six-
month period.
---------------------------------------------------------------------------

    In response, some commenters suggested that the exclusion should 
not be limited to over-allotment options granted in registered public 
offerings, as proposed. Other commenters differed in their responses to 
the request for comment as to whether the exclusion should be limited 
specifically to those over-allotment options that comply with the 
National Association of Securities Dealers (``NASD'') regulation 
stating that it is ``unfair and unreasonable'' for an over-allotment 
option in connection with a firm commitment undertaking to exceed 15 
percent of the amount of securities offered, exclusive of the over-
allotment option.95 However, given that the primary need for the 
exclusion relates to over-allotment options granted in registered 
public offerings, which as a practical matter generally are subject to 
the NASD regulation, the rule is adopted in the form proposed,96 
without a specific requirement for compliance with the NASD regulation.
---------------------------------------------------------------------------

    \95\ Paragraph (c)(6)(B)(ix) of Article III, Section 44 of the 
NASD Rules of Fair Practice (the Corporate Financing Rule).
    \96\ New Rule 16a-1(c)(7).
---------------------------------------------------------------------------

C. Surrender and Withholding Rights in Connection With Exercise or Tax 
Withholding

    As discussed above,97 the exercise of a right to surrender or 
withhold securities in connection with the exercise of a derivative 
security or satisfaction of a tax obligation will be an exempt 
disposition of issuer equity securities to the issuer. Whether such a 
right, when granted, constitutes a derivative security is a separate 
issue.
---------------------------------------------------------------------------

    \97\ See Section II.E, above.
---------------------------------------------------------------------------

    Currently, the right to withhold securities in satisfaction of a 
tax obligation is treated as a derivative security separate from the 
equity or derivative security to which it relates.98 However, this 
right, as well as the right to have securities withheld in satisfaction 
of an exercise price, properly may be viewed as an integral feature of 
the related security.99 Accordingly, the 1994 Release proposed a 
new rule that would exclude from the definition of ``derivative 
security'' these withholding rights, as well as rights to surrender 
previously owned securities in satisfaction of either an exercise price 
or a tax obligation incurred upon the exercise of derivative securities 
or the vesting of restricted shares.
---------------------------------------------------------------------------

    \98\ As an alternative to separate reporting, a tax withholding 
right currently may be noted as a feature of the equity or 
derivative security to which it relates. See The Clorox Company 
(Mar. 27, 1992). An insider's failure to report such right does not 
give rise to a disclosure obligation under Item 405 of Regulation S-
B or Regulation S-K. See Skadden, Arps, Slate, Meagher & Flom (June 
8, 1992).
    \99\ Cf. Xerox Corporation (Jul. 7, 1992) (the staff reached 
this conclusion with respect to a mandatory tax withholding 
feature).
---------------------------------------------------------------------------

    Commenters suggested that the proposed rule's reference to 
``restricted shares'' circumscribed too narrowly the class of 
securities, other than derivative securities, to which withholding and 
surrender rights apply. Commenters indicated that the receipt of a 
security also could be a taxable event. In response to these comments, 
the rule as adopted 100 has been broadened to exempt also 
withholding and surrender rights that apply to ``equity securities'' 
rather than only ``restricted shares,'' and that arise with respect to 
the receipt as well as the exercise or vesting of a derivative or 
equity security. With respect to a tax-withholding right, the exclusion 
from the definition of ``derivative security'' is not limited to the 
insider's marginal tax rate with respect to the underlying transaction. 
However, the amount withheld must be applied to the tax obligation 
generated by the underlying transaction.
---------------------------------------------------------------------------

    \100\ New Rule 16a-1(c)(3) (proposed as Rule 16a-1(c)(8)).
---------------------------------------------------------------------------

D. Value Derived from Market Price of an Equity Security

    In the 1994 Release the Commission proposed an amendment to the 
definition of ``derivative security'' 101 to codify the staff 
interpretive position that an instrument is not within the scope of 
Section 16 if it includes a material non-market price based condition 
(such as return on equity) to exercise or settlement.102 Although 
the Commission endorses the application of this analysis to date, the 
Commission also recognizes the advantage in retaining the interpretive 
role of the staff to modify or develop further this analysis as may be 
appropriate with respect to new instruments that may be developed in 
the future. Accordingly, the proposed amendment is not adopted, and 
questions regarding this analysis should continue to be addressed to 
the staff. For purposes of this interpretive analysis, a condition will 
be considered ``material'' only if it possesses substance independent 
of the passage of time or continued employment.
---------------------------------------------------------------------------

    \101\ Proposed Rule 16a-1(c)(9).
    \102\ This is an interpretation of current Rule 16a-1(c), which 
requires a derivative security to have ``an exercise or conversion 
privilege at a price related to an equity security, or *  *  * a 
value derived from the value of an equity security.'' See General 
Mills, Inc. (Jan. 31, 1992); and Certilman Balin Adler & Hyman (Apr. 
20, 1992). See also Boston Edison Company (Mar. 19, 1992); Merrill 
Lynch & Co. (Aug. 28, 1992) Q. 4. (Registrant discretion to adjust 
the applicable performance measure, as to either duration or level 
of performance, excludes a performance unit from being a derivative 
security.)
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    Most importantly, the Commission believes that under the new rule 
much of the incentive to characterize these instruments one way or the 
other will evaporate. In almost all cases, they will be exempt from 
Section 16(b) because they will be able to satisfy easily one of the 
simplified approval conditions. Consequently, the only effect of a 
particular characterization is on the need for and timing of any 
reporting under section 16(a). The Commission does not believe that 
relief generally will be needed for this purpose.

IV. Revisions to Reporting System

A. Overall Approach

    In the 1994 Release, the Commission stated that it was 
reconsidering its approach to the reporting of transactions pursuant to 
the Section 16 regulatory scheme. The release, without endorsing a 
specific proposal, solicited comment on five alternative proposals 
seeking to simplify reporting through the following three different 
basic approaches: (1) Deleting or substantially reducing the reporting 
of exempt transactions; (2)

[[Page 30384]]

reducing the flexibility currently provided insiders with respect to 
use of Form 4 or 5 to report a number of exempt transactions; and (3) 
requiring issuer annual reporting of insider holdings and information 
as to transactions during the fiscal year.
    These varied approaches highlighted several questions as to what 
extent, if at all, investors need information with respect to exempt 
transactions and whether investors need a reconciliation of insiders' 
equity holdings from year to year. The 1994 Release also requested 
comment on whether exercises and conversions of derivative securities 
exempt from section 16(b), as well as small acquisitions, should 
continue to be reported on an insider's next required Form 4 or 5, 
whichever is earlier.
    As a corollary to the amendments to Rule 16b-3 proposed in 1995, 
the 1995 Release requested comment on an additional reporting approach. 
Pursuant to the scheme contemplated by the 1995 Release, several types 
of transactions, such as routine acquisitions in broad-based employer 
plans, would not need to be reported at all. The remaining 
transactions, including grants and awards exempt under Rule 16b-3, 
generally would be reported on a Form 4 no later than ten days 
following the end of the month in which the transaction occurred. 
Exempt option exercises either would have remained reportable on an 
insider's next required Form 4 or 5, or would have been reported on 
Form 4.
    The approach selected by the Commission is based on the 1995 
approach, but includes elements from the 1994 Release. As outlined in 
Sections IV.B through D below, the revisions simplify the reporting 
framework by providing that several types of transactions exempt from 
section 16(b) no longer will be required to be reported at all. 
Transactions exempt from short-swing profit recovery that still must be 
reported will be reported on Form 5, and non-exempt transactions will 
be reported on Form 4, except that exercises and conversions of 
derivative securities (whether or not exempt) will be reported on Form 
4, and small acquisitions will be reported on Form 5. There no longer 
will be a category of transactions reported on a ``next required Form 4 
or Form 5, whichever is earlier'' basis, which commenters have 
criticized as being confusing and possibly leading to inadvertent late 
filings. The Commission believes that this new approach simplifies 
insiders' reporting obligations without adversely affecting the timing 
and amount of information that is significant to investors.
    The 1994 Release solicited comment on whether the Commission should 
eliminate the ``total holdings'' column in Forms 4 and 5 or simplify 
the data provided by insiders to reconcile their total holdings. 
Alternatively, commenters were asked to consider whether a new column 
should be added to Forms 4 and 5 requiring insiders to reconcile their 
current holdings with those reported in a previous filing, particularly 
if exempt transactions no longer were to be reported.
    Although several commenters supported elimination of the total 
holdings columns, they are being retained. Form 4 disclosure of total 
holdings assists users of Section 16 information in evaluating the 
significance of a transaction to a particular insider, and Form 5 total 
holdings provide a useful reconciliation of changes in holdings 
resulting from exempt and other types of transactions permitted to be 
reported on a deferred basis.
    The Commission also has decided not to impose any new 
reconciliation requirements on insiders. Instead, as currently, the 
requirement to report total holdings on Forms 4 and 5 will remain 
limited to the class of securities to which a transaction is reported, 
and changes in holdings associated with transactions eligible for 
deferred reporting on Form 5 will not have to be reflected in the 
month-end total holdings reported on Form 4, unless the transaction 
voluntarily has been reported earlier on Form 4.103
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    \103\ Instruction 4(a)(i) to Form 4.
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    Also in keeping with current practice, insiders will reflect 
changes in holdings resulting from transactions that are exempt from 
section 16 reporting in the holdings column of the next otherwise 
required Form 4 or 5 filed to report a transaction involving the same 
class of securities. Insiders may choose, but are not required, to 
include footnote disclosure indicating the date and nature of 
transactions not required to be reported. To the extent that 
information about a transaction not required to be reported under the 
revised rules is not readily available, the insider should provide a 
``best estimate'' of the change in holdings resulting from the 
transaction.104 The purpose of the best estimate is not indirectly 
to require insiders to report transactions exempt from Section 16(a), 
but rather, to provide users of section 16 information with holdings 
information that is as accurate as reasonably possible.105
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    \104\ There may not be sufficient information available 
concerning certain types of transactions that are not required to be 
reported under the revised rules, e.g., periodic purchases in tax-
conditioned employee benefit plans, to establish a best estimate 
regarding changes in holdings. In those cases, the holdings column 
will not be updated until the information becomes available.
    \105\ When accurate information concerning holdings that were 
estimated by an insider becomes available, it should be reflected on 
the next otherwise required Form 4 or 5 that references the same 
class of securities. Modifications in holdings information to 
reflect variances in actual holdings from estimated holdings will 
not trigger the disclosure requirements of Item 405 of Regulations 
S-K and S-B.
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    In a separate effort 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 expanded the capacity of the EDGAR system to accommodate 
the electronic filing of those reports.106 Insiders have been able 
to electronically file their section 16 reports on a voluntary basis 
since December 18, 1995.107
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    \106\ See Release Nos. 33-7231 (October 5, 1995) (FR) and 33-
7241 (November 13, 1995) (60 FR 57682). At the same time, the EDGAR 
system was expanded to accommodate the electronic filing of reports 
pursuant to Rule 144 [17 CFR 230.144] under the Securities Act (15 
U.S.C. 77a et seq.).
    \107\ Instruction 3 to Form 3 and Instruction 2 to Forms 4 and 5 
have been amended to add a reference to electronic filing.
---------------------------------------------------------------------------

B. Transactions No Longer Reported at All

     ``Spinoff'' or other dividend transactions in which equity 
securities of a different issuer are distributed to insiders of an 
issuer 108
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    \108\ New Rule 16a-9(a). The current exemption for stock splits 
and dividends has been expanded to include specifically a stock 
dividend in which equity securities of a different issuer are 
distributed. See Section V.C, below.
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     Acquisitions pursuant to a dividend or interest 
reinvestment plan 109
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    \109\ New Rule 16a-11. See Section V.A, below.
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     Transactions in a tax-conditioned plan,110 except for 
discretionary intra-plan transfers and cash distributions 111
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    \110\ New Rules 16a-3(f)(1)(i)(B) and 16b-3(c). Current 
Instruction 4(a)(ii) to Form 5 sets forth information regarding the 
reporting of transactions and holdings in ongoing securities 
acquisition plans. Among other things, it states that transactions 
and holdings may be reported as of the most recent date for which 
information is available, and that acquisitions may be reported on 
an aggregate basis. The 1994 Release proposed amendments to 
Instructions 4(a) (ii) and (iv) to Form 5 and the Note to 
Instruction 4(a)(ii) to Form 4 to codify interpretations regarding 
aggregated reporting. Because these acquisitions no longer are 
required to be reported under the revised rules, the proposed 
amendments are not adopted. Further, current Instruction 4(a)(ii) to 
Form 5 is rescinded since the transactions addressed will not be 
reported under the revised rules.
    \111\ Defined as ``Discretionary Transactions'' pursuant to new 
Rule 16b-3(b)(1). See Section II.C, above. These transactions will 
continue to be reported on Form 5, as discussed in Section IV.C 
below.

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[[Page 30385]]

     Post-termination transactions by a former officer or 
director that are exempt from section 16(b) or that do not occur within 
six months of an opposite non-exempt transaction 112
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    \112\ New Rule 16a-2(b).
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     Acquisitions or dispositions of securities pursuant to a 
domestic relations order meeting certain conditions of the Internal 
Revenue Code 113
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    \113\ New Rule 16a-12. See Section V.B below for further 
discussion of this new rule, which expands the existing exemption 
relating to Qualified Domestic Relations Orders.
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     Transactions reflecting a mere change in form of 
beneficial ownership 114
---------------------------------------------------------------------------

    \114\ New Rule 16a-13.
---------------------------------------------------------------------------

     Exempt cancellations or expirations of a long derivative 
security where no value is received 115
---------------------------------------------------------------------------

    \115\ New Rule 16a-4(d).
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    The above are transactions that must be reported under current 
rules, but will not be reported under the revised rules.116 In 
addition to providing a means for enforcing section 16(b) short-swing 
profit liability, section 16(a) reporting serves the separate purpose 
of informing the market of transactions that reflect insiders' views of 
their companies' prospects. Because the transactions listed above 
generally do not provide investors meaningful information consistent 
with this purpose, the Commission deems it appropriate to relieve 
insiders from unnecessary burdens by exempting these transactions from 
reporting. There was nearly unanimous support among the commenters for 
these revisions, which are adopted substantially as proposed.
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    \116\ Under the current and revised requirements, stock splits, 
stock dividends with respect to the same issuer and the acquisition 
of certain pro rata rights do not have to be reported pursuant to 
Rule 16a-9. Further, transactions by odd-lot dealers in odd-lots are 
exempt from current and revised reporting requirements pursuant to 
Rule 16a-5. Cash-only instruments also are not now reported since 
they are excluded from the definition of ``derivative securities'' 
under current Rule 16a-1(c)(3) if they meet certain conditions, but 
they will be reported under the new rules.
---------------------------------------------------------------------------

    The revised rules provide a specific exemption from section 16 for 
changes in the form of beneficial ownership (but not in the extent of 
an insider's pecuniary interest in the subject securities).117 
Although commenters generally supported the proposal to add a new 
transaction code to Form 5 to facilitate the reporting of these 
transactions, several commenters suggested eliminating any reporting 
requirement regarding changes in the form of beneficial stock 
ownership. Since these transactions do not reflect any change in an 
insider's pecuniary interest in an issuer's equity securities, 
reporting seems to serve little purpose, and the Commission has 
determined that they should be exempt from reporting.118
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    \117\ New Rule 16a-13. For example, distributions of equity 
securities from an employee benefit plan to an insider participant 
would be a mere change in the form of beneficial ownership from 
indirect to direct where the securities previously had been 
attributed to the insider.
    \118\ Accordingly, the proposed transaction code is not adopted. 
The new rule makes it clear that exercises and conversions of 
derivative securities and the deposit or withdrawal of shares into 
or from a voting trust are not to be regarded as mere changes in the 
form of beneficial ownership, and will continue to be reported. If a 
deposit or withdrawal of shares into or from a voting trust 
satisfies the conditions of Rule 16b-8 (17 CFR 240.16b-8), the 
transaction is exempt from section 16(b).
---------------------------------------------------------------------------

C.  Transactions  To  Be  Reported  on Form 5

     Transactions exempt from section 16(b), except for: (1) 
Transactions listed in Section IV.B above that are not required to be 
reported at all pursuant to the changes being adopted; and (2) exempt 
exercises and conversions of derivative securities 119
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    \119\ New Rule 16a-3(f)(1)(i).
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     Small acquisitions 120
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    \120\ New Rule 16a-6.
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    A substantial number of commenters supported an alternative 
reporting approach described in the 1994 Release involving elimination 
of the requirement to report transactions exempt from section 16(b) 
liability, and many also supported the elimination of Form 5. In 
contrast, however, a number of commenters thought that the requirement 
to report exempt transactions should be retained, and indicated that 
Form 5 is a useful document.
    As discussed above, the Commission is eliminating the reporting of 
several classes of exempt transactions, including non-volitional 
transactions in tax-conditioned plans. The Commission expects that 
elimination of reporting of these routine plan transactions will 
greatly alleviate insiders' burden of reporting exempt transactions 
without resulting in any significant loss of information that users of 
Section 16 information find valuable.
    The Commission believes, however, that the reporting of other types 
of exempt transactions, such as option grants and other acquisitions 
and dispositions of securities in plans that are not tax-conditioned, 
may provide the marketplace with useful information. These transactions 
typically are less automatic and may reflect insiders' views of their 
companies' prospects. The Commission also believes that continued 
annual reporting of these transactions on Form 5 is appropriate.
    In view of the change discussed above concerning the treatment of 
cash-only instruments that derive value from the market value of equity 
securities of the issuer,121 transactions involving such 
instruments will be reported on Form 4 or 5, depending on whether they 
are exempt. It is anticipated that most of these will be exempt 
pursuant to new Rule 16b-3 and thus reportable on Form 5.
---------------------------------------------------------------------------

    \121\ See Section III.A, above.
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    Pursuant to the reporting scheme contemplated by the 1995 Release, 
exempt grants, awards and dispositions of securities in plans that are 
not tax-conditioned, as well as intra-plan transfers and cash 
distributions in tax-conditioned plans, would have been reported on 
Form 4 no later than ten days after the close of the month in which the 
transaction occurred. The Commission has determined to require 
reporting of these transactions on Form 5 rather than Form 4, in view 
of the remarks of many commenters who felt that the accelerated 
reporting of exempt transactions on Form 4 would prove unworkable as 
the result of the necessary plan information not being available in 
sufficient time to meet Form 4 filing deadlines. Further, while some 
commenters expressed a preference for reporting transactions on Form 4 
rather than waiting until year-end to file a Form 5 and possibly 
overlooking a transaction, others expressed a need for flexibility and 
indicated that annual reporting is preferable. Those who prefer 
voluntarily to report exempt transactions on Form 4, of course, may 
continue to do so, as is currently permitted.
    The 1995 Release also proposed elimination of the requirement that 
gifts be reported. Since some commenters find gift activity to be a 
useful indication of an insider's view of the company's prospects (for 
example, where a large charitable gift effects a significant 
disposition) the requirement to report gifts on Form 5 is retained.
    Small acquisitions, which currently are reported on a next required 
Form 4 or Form 5 basis, will be reported on Form 5.122 The 1994 
Release solicited

[[Page 30386]]

comment as to whether reporting could be made more convenient for 
insiders, consistent with the informational needs of the investing 
public, by permitting small acquisitions to be reported solely on Form 
5, and the majority of commenters favored this approach.123
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    \122\ New Rule 16a-6, like the current rule, provides only a 
deferral, not an exemption, from reporting. All small acquisitions, 
unless otherwise exempt, must be reported on Form 5. As is currently 
the case, if an acquisition no longer qualifies for the reporting 
deferral in paragraph (a) of Rule 16a-6, all such acquisitions that 
have not yet been reported will continue to be reported on Form 4 
within ten days after the close of the calendar month in which the 
conditions of that paragraph no longer are met. See Rule 16a-6(b) 
(17 CFR 240.16a-6(b)).
    \123\ As discussed below, exempt exercises and conversions of 
derivative securities will be reported on Form 4 under the revised 
rules.
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    Additionally, as proposed in the 1994 Release, the small 
acquisitions reporting rule is revised to exclude from the $10,000 
threshold acquisitions occurring within the prior six months of the 
current acquisition that were exempted by rule from Section 16(b), or 
previously reported on Form 4 or 5. The revised rule also clarifies, as 
proposed, that the current acquisition cannot be disregarded in 
calculating the $10,000 threshold. All the commenters remarking on 
these clarifications supported them.

D. Transactions to be Reported on Form 4

     Transactions not exempt from Section 16(b), except for 
small acquisitions 124
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    \124\ New Rule 16a-3(g)(1).
---------------------------------------------------------------------------

     Exercises or conversions of a derivative security, whether 
or not exempt from Section 16(b) 125
---------------------------------------------------------------------------

    \125\ Id.
---------------------------------------------------------------------------

    Transactions not exempt from short-swing profit recovery that 
currently are reported on Form 4 generally will continue to be reported 
on Form 4, including non-exempt exercises and conversions of derivative 
securities. In addition, as a change from the current system, exercises 
and conversions of derivative securities exempt from short-swing profit 
recovery under either new Rule 16b-3 or Rule 16b-6(b) always will be 
reported on Form 4,126 since the Commission is eliminating the 
current method of reporting these transactions on a next Form 4 or Form 
5 basis. Reporting of these transactions has been shifted to Form 4 
rather than Form 5 due to concerns expressed by commenters that the 
timing of option exercises represents an important indication of 
insiders' views of their companies' prospects.
---------------------------------------------------------------------------

    \126\ If a derivative security is exercised or converted before 
its exempt grant otherwise must be reported, the grant should be 
reported at the same time as the exercise or conversion.
---------------------------------------------------------------------------

E. Joint and Group Reporting

    Currently, when more than one person subject to Section 16 is 
deemed to be a beneficial owner of the same equity securities, all such 
persons must report as beneficial owners and file separate reports. To 
reduce this duplicative reporting, the Commission is adopting rules 
that permit such persons to file their reports either separately or 
jointly, as proposed in the 1994 Release.127
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    \127\ New Rules 16a-3(j) and 16a-1(a)(3) reflect this change. 
Forms 3, 4 and 5 and the Instructions thereto also are modified to 
permit joint and group filings. In response to a commenter's request 
for clarification, the revised instructions to the forms indicate 
that, for their convenience, joint filers may reflect transactions 
in separately owned securities either in an individually filed or 
jointly filed report.
---------------------------------------------------------------------------

    Under the new reporting scheme, where persons in a group have 
reporting obligations, the filing of collective reports on behalf of 
all group members is permitted.128 Such joint and group filings, 
and any amendments, may be submitted by any designated constituent 
beneficial owner. Required information must be given for each 
beneficial owner, and such filings must be signed by, or on behalf of, 
each beneficial owner by an authorized person, with statements 
confirming the delegation of signature authority attached to the 
filing.
---------------------------------------------------------------------------

    \128\ Joint and group filings can be used, for example, by 
parents and subsidiaries, trusts and trust beneficiaries, 
partnerships, or Schedule 13D groups (17 CFR 240.13d-101). The group 
itself is not a reporting person for section 16 purposes, but under 
the revised rules, group members may choose to file collective 
reports to satisfy their individual filing obligations. A group 
member is not required to report transactions by another group 
member, however, unless he or she has or shares a pecuniary interest 
in the securities held by such other member.
---------------------------------------------------------------------------

    Beneficial owners making a joint or group filing may authorize one 
of the beneficial owners or a third party to sign on their behalf, 
provided that confirming statements are attached to the filing, or are 
provided by amendment as soon as practicable, with respect to each 
owner delegating signature authority, unless such a confirmation still 
in effect is on file with the Commission.129 Of course, to the 
extent a sufficiently broad power of attorney previously was filed, 
such as with a Schedule 13D, that power of attorney may be incorporated 
by reference in a Section 16(a) filing. Each beneficial owner will 
retain individual liability for compliance with the filing 
requirements, including the obligation to assure that the filing is 
timely and accurately made.130
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    \129\ Currently, General Instruction 7 to Forms 3, 4 and 5 
permits a form filed for an individual to be signed on behalf of the 
individual by an authorized person. This instruction remains the 
same. General Instruction 5 to Form 3 and General Instruction 4 to 
Forms 4 and 5 are amended to specify the means of reporting 
pecuniary interest of multiple beneficial owners. A corresponding 
amendment also has been made to General Instruction 6 to each Form.
    \130\ Cf. In the Matter of Bettina Bancroft, Release No. 34-
32033, AP 3-7999 (Mar. 23, 1993).
---------------------------------------------------------------------------

    Comment was solicited in the 1994 Release as to whether, in the 
alternative, authority to make a group Section 16 filing could be 
presumed based on the filing of a group Schedule 13D, such that all 
group members thereby would be deemed to have granted authority to any 
group member to file a Section 16 form. The commenters rejected the 
creation of such a presumption under any circumstances other than a 
sufficiently broad power of attorney, i.e., one that specifically 
authorizes the beneficial owner to file Section 16 reports on his or 
her behalf. One of the commenters noted that a Schedule 13D group 
member could file Section 16 reports on behalf of another group member 
who may not even be aware that he or she has become subject to Section 
16, or who may file duplicative reports. Therefore, authority to make a 
group Section 16 filing will not be presumed based upon the filing of a 
group Schedule 13D.

F. Trust Transactions

    Under the revised rules, and as proposed in the 1994 Release, a 
trust is subject to section 16 only if it beneficially owns more than 
ten percent of a class of registered equity securities of an 
issuer.131 The Commission has rescinded the provision imposing 
section 16 reporting obligations on a trust that does not own more than 
ten percent of an issuer's securities if it has an insider trustee with 
investment control over the issuer's securities held by the trust, and 
the trustee or a member of the trustee's immediate family has a 
pecuniary interest in the securities.132 Since the primary effect 
of the current dual reporting standard is to create duplicative 
reporting obligations, particularly with respect to family trusts, the 
imposition of independent Section 16 obligations on the trusts does not 
appear necessary.
---------------------------------------------------------------------------

    \131\ New Rule 16a-8(a)(1). See Proskauer Rose Goetz & 
Mendelsohn (Apr. 29, 1991) (a trust that holds more than ten percent 
of a class of equity securities registered under section 12 is the 
beneficial owner of those securities for purposes of section 16).
    \132\ Current Rule 16a-8(a)(1)(ii) (17 CFR 240.16a-8(a)(1)(ii)). 
A conforming amendment to Rule 16a-2(d)(2) (17 CFR 16a-2(d)(2)) 
reflects the rescission of Rule 16a-8(a)(1)(ii).
---------------------------------------------------------------------------

    There will continue to be some instances where a trust and a trust 
beneficiary that both are subject to Section 16 must report separately 
with respect to the same transaction because they share investment 
control. The 1994 Release proposed adding a new note to the reporting 
rules to provide that transactions attributed to a trust beneficiary 
may be reported by the trustee on behalf of the beneficiary. A

[[Page 30387]]

commenter objected to the proposed note on grounds that a trustee 
should not report on behalf of a trust beneficiary unless formally 
authorized to do so. Therefore, the note has been modified to indicate 
that, as currently, a trustee may file a separate report on behalf of a 
beneficiary if a statement confirming the delegation of signature 
authority is filed with the Commission.133 The trustee also may 
file a consolidated report on behalf of the trust and one or more trust 
beneficiaries if authorized to do so by the beneficiaries. Regardless 
of whether the trustee reports on behalf of a beneficiary or the 
beneficiary personally files reports, the beneficiary subject to a 
reporting requirement retains individual liability for compliance with 
that requirement.
---------------------------------------------------------------------------

    \133\ Note to new Rule 16a-8(b)(3).
---------------------------------------------------------------------------

G. Compliance With the Reporting Requirements

    Under the revised rules, as proposed, registrants will be required 
to set off any disclosure required by Item 405 of Regulation S-K or S-B 
of insider non-compliance with Section 16(a) reporting obligations 
under an appropriate and discrete caption.134 In response to 
commenters' remarks, this new caption will read ``Section 16(a) 
Beneficial Ownership Reporting Compliance'' rather than ``Section 16(a) 
Reporting Delinquencies,'' as proposed in the 1994 Release. The new 
caption should enable interested parties readily to locate this 
disclosure, which often consists of only a sentence or two, and prevent 
the information from being buried among unrelated disclosure.
---------------------------------------------------------------------------

    \134\ New Item 405(a)(1) of Regulations S-K and S-B. 
Additionally, a technical amendment has been made to Item 405 of 
Regulation S-B to correct the reference to Rule 16a-3(d) (17 CFR 
240.16a-(d)) by replacing it with a reference to Rule 16a-3(e) (17 
CFR 240.16a-3(e)).
---------------------------------------------------------------------------

    In addition, Item 405 is revised to clarify the nature of the 
issuer's obligation to review insiders' filings in order to determine 
whether there are any delinquent reports that must be disclosed. The 
issuer is entitled to rely on the Forms 3, 4 and 5 furnished to it, as 
well as written representations by the insider that no Form 5 is 
required.
    New language has been added, as proposed, to make it clear that the 
issuer is obligated to consider the absence of certain forms.135 
The absence of a Form 3 is an indication that disclosure is required. 
Similarly, the absence of a Form 5 is an indication that disclosure is 
required, unless the issuer has received a written representation that 
no Form 5 is required, or otherwise knows that no such filing is 
required.136 While some commenters objected to this clarification 
on grounds that it would place an inappropriate burden of investigation 
on issuers to determine that a form is not required, the Commission 
views it merely as a codification of previous Commission guidance 
concerning issuers' obligations.
---------------------------------------------------------------------------

    \135\ New Item 405(a)(2) of Regulations S-K and S-B. This 
obligation was set forth in the 1991 Adopting Release, n. 231 and 
surrounding text.
    \136\ A ``safe harbor'' from disclosure is available for an 
issuer who receives a written representation and keeps it for two 
years. See Item 405(b)(2).
---------------------------------------------------------------------------

    The 1994 Release solicited comment on whether Item 405 should 
require issuers to include in their filings an affirmative statement 
that no section 16(a) delinquencies were required to be reported, if 
such was the case. It had been suggested that an affirmative statement 
requirement would prevent issuers from overlooking the Item 405 
disclosure requirement. Since most of the commenters addressing the 
issue opposed an affirmative statement requirement, and there is little 
evidence that issuers are overlooking Item 405 disclosure, the 
Commission is not adopting such a requirement.
    Finally, as noted in the 1994 Release, the Commission is aware of 
and encourages the practice of many issuers to assist their officers 
and directors in complying with their section 16(a) reporting 
obligations. 137 Since the use of powers of attorney is permitted, 
it is also possible for an issuer to coordinate the filing of its 
officers' and directors' reports by having the corporate secretary or 
other agent obtain powers of attorney from these reporting persons, 
collect information every month about their transactions subject to 
Section 16, and file required reports by the due date.138
---------------------------------------------------------------------------

    \137\ On February 14, 1996, the Commission included in the SEC 
News Digest and posted on the Commission's Internet Web Site an 
announcement encouraging the electronic filing of Forms 3, 4 and 5 
(as well as Form 144) and providing guidance on how companies that 
choose to do so may assist filers in the electronic filing process.
    \138\ Of course, insiders giving powers of attorney would still 
retain individual liability for compliance. See n. 130, above.
---------------------------------------------------------------------------

H. Equity Swaps

    The 1994 Release contained a section analyzing Section 16 issues 
relating to equity swaps, and soliciting comments upon the analysis and 
related issues.139 Equity swaps are individually negotiated 
contracts in which the specific terms may vary from agreement to 
agreement. For instance, an equity swap may take the form of an 
agreement in which one party holding shares of equity securities agrees 
to pay, or ``swap,'' the return 140 on those securities in 
exchange for the return on an equity index, basket of equities, or an 
interest rate-based cash flow. Generally, commenters agreed that the 
Commission's analysis of equity swaps as involving the economic 
equivalent of tandem stock appreciation and depreciation rights 
reflects economic reality. Some, however, suggested simplified 
approaches to analysis and reporting.
---------------------------------------------------------------------------

    \139\ See Section III.G of the 1994 Release for the Commission's 
detailed analysis.
    \140\ For purposes of this analysis, ``return'' may include 
dividends paid on the equity instrument, as well as the change in 
market value.
---------------------------------------------------------------------------

    The Commission reiterates that Section 16 consequences arise from 
an equity swap transaction where either party to the transaction is a 
Section 16 insider with respect to a security to which the swap 
agreement relates.141 The Commission agrees with commenters, 
however, that any manner of reporting an equity swap, or an instrument 
with similar characteristics, that provides an adequate description is 
appropriate. The specific method of reporting described in the 1994 
Release is not the only acceptable method. However, there are certain 
items of information that must be set forth for an adequate 
presentation. To provide an adequate description, an insider must 
report the entry into and termination of the equity swap, as well as 
any interim events to the extent such events change the insider's call 
or put equivalent position.142 To be adequate, each report must 
provide the following information: (1) The date of the transaction; (2) 
the term; (3) the number of underlying shares; (4) the exercise price 
(i.e., the dollar value locked in); (5) the non-

[[Page 30388]]

exempt disposition (acquisition) of shares at the outset of the term; 
(6) the non-exempt acquisition (disposition) of shares at the end of 
the term (and at such earlier dates, if any, where events under the 
equity swap cause a change in a call or put equivalent position); (7) 
the total number of shares held after the transaction; and (8) any 
other material terms.143
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    \141\ This analysis addresses solely the application of Section 
16 to equity swaps to the extent that they are engaged in by 
insiders. The discussion does not analyze the status of these 
transactions or the parties thereto under any other provision of the 
federal securities laws.
    However, as stated in the 1994 Release, no Section 16 
consequences would flow from an equity swap to the extent that the 
equity swap relates solely to interests in securities comprising 
part of a broad-based, publicly traded market basket or index of 
stocks, approved for trading by the appropriate federal governmental 
authority, that are deemed not to confer beneficial ownership for 
purposes of section 16 pursuant to Rule 16a-1(a)(5)(iii) (17 CFR 
240.16a-1(a)(5)(iii)) and/or are excluded from the definition of 
``derivative securities'' pursuant to current Rule 16a-1(c)(4).
    \142\ See 1994 Release n. 106, which stated that to the extent 
settlement of the parties' obligations occurs on an interim basis 
during the term of the swap the insider's section 16 obligations 
would arise with respect to each settlement, commenters expressed 
concern over the need to report interim events. As noted above and 
consistent with the section 16 reporting scheme in general, such 
events need be reported only to the extent that they cause a change 
in an insider's call or put equivalent position.
    \143\ New Code K is added to Forms 4 and 5 for reporting equity 
swaps and instruments with similar characteristics. See Section 
IV.I, below.
---------------------------------------------------------------------------

    Some commenters suggested that equity swaps in general or certain 
aspects of them should be regarded as excluded or exempt from Section 
16. The Commission is not persuaded, however, that any exclusion or 
exemption currently is available or that equity swaps should be so 
excluded or exempted.
    Numerous issues are raised under the federal securities laws by 
equity swaps and other instruments that shift some or all of the 
economic interests and risks of an equity security. Since record and 
beneficial ownership does not necessarily reflect who holds the voting, 
investment or income interests of a security, it may be appropriate in 
areas other than Section 16 to assure that the regulatory structure 
reflects the economic realities of these transactions. The Commission 
is continuing to consider the legal and disclosure issues raised by 
these arrangements under the federal securities laws, including 
Schedule 13D reporting, Rule 144,144 Rule 144A, Regulation 
S,145 and disclosure of security holdings and executive 
compensation.146
---------------------------------------------------------------------------

    \144\ See Release No. 33-7187 (June 27, 1995) (60 FR 35645).
    \145\ See Release No. 33-7190 (June 27, 1995) (60 FR 35663).
    \146\ See the Commission's Report of the Task Force on 
Disclosure Simplification, Part III.A.3.b.
---------------------------------------------------------------------------

I. Changes in Forms and Reporting Codes

    As proposed in the 1994 Release, when an insider exercises an 
option acquired pursuant to a Rule 16b-3 plan and immediately sells a 
portion of the shares to pay the exercise price under a cashless 
exercise program, the insider will be able to reflect the sale of the 
portion of shares necessary to satisfy the exercise price by using the 
transaction code for payment of an option exercise price by delivery or 
withholding of securities,147 rather than the general sale of 
security code,148 provided that the sale is to the issuer. 
Commenters agreed that it was appropriate to use the same code for 
these transactions since they all constitute cashless exercises.
---------------------------------------------------------------------------

    \147\ Transaction code ``F.'' The sale of shares to pay the 
exercise price of an option under a cashless exercise program is 
exempt from Section 16(b) if the issuer is the purchaser, but not if 
the shares are sold on the open market by a broker or other third 
party. Code ``F'' may be used to reflect only exempt transactions. 
The amendments clarify that code ``F'' also should be used to report 
the withholding of securities incident to satisfaction of tax 
liability incurred upon the receipt, exercise or vesting of a 
security.
    \148\ Transaction code ``S.''
---------------------------------------------------------------------------

    A new transaction code also has been included in Forms 4 and 5 to 
be used for transactions in equity swaps and instruments with similar 
characteristics.149 This will be in addition to whatever other 
codes are used to describe the transaction.150 The new code will 
assist the Commission and users of Section 16 information in 
identifying these transactions.
---------------------------------------------------------------------------

    \149\ New transaction code ``K'' and General Instruction 8 to 
Forms 4 and 5.
    \150\ For example, an equity swap transaction reported as a 
disposition will be reported as S/K, using the codes for ``sale'' 
and ``equity swap.''
---------------------------------------------------------------------------

    Additionally, the Instructions to Forms 3, 4 and 5 are revised to 
state that the forms may be submitted to the Commission in electronic 
format at the option of the reporting person.151 The Instructions 
also are modified to indicate that insiders may attach a page of 8\1/2\ 
by 11 inch white paper to reflect additional comments to the forms, if 
the space provided on the forms is insufficient.152 The current 
rules require insiders to reflect supplemental information on 
additional copies of the forms.
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    \151\ General Instruction 3(a) to Form 3, and General 
Instruction 2(a) to Forms 4 and 5.
    \152\ General Instruction 6 to Forms 3, 4 and 5. Specified 
information must be included at the top of the page so that the 
filing can be identified if the page is detached.
---------------------------------------------------------------------------

    Several transaction codes have been modified or deleted from the 
Instructions to Forms 4 and 5 in accordance with the revisions.153 
Finally, Forms 3, 4 and 5 have been revised to accommodate joint and 
group filing.154
---------------------------------------------------------------------------

    \153\ Transaction codes ``A,'' ``F,'' ``H,'' ``I,'' and ``M'' 
have been modified and codes ``B,'' ``N,'' ``Q,'' ``R'' and ``T'' 
have been deleted.
    \154\ Item 1 of the forms has been revised to explain how the 
names and addresses of more than one reporting person should be 
indicated, and a new Item 7 has been added to the forms to indicate 
whether the form is being filed by one or more reporting persons.
---------------------------------------------------------------------------

V. Additional Exemptions and Revisions

A. Dividend or Interest Reinvestment Plans

    Current 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. Concerns have been expressed 
that the requirement that the plan be made available to all holders of 
the class (the ``all-holders requirement'') can impose significant 
burdens, such as the outlay of significant sums to comply with laws 
governing securities offerings in foreign jurisdictions, on companies 
that wish to allow for insider participation.
    Accordingly, in 1995 the Commission proposed to modify this 
requirement, noting that such a stringent participation requirement did 
not appear necessary to preclude the opportunity for speculative abuse 
by insiders. The rule was proposed to be amended 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.155 Third, the plan must operate 
on substantially the same terms for all plan participants.156
---------------------------------------------------------------------------

    \155\ 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.
    \156\ 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 will not be exempt pursuant to this rule, but may be 
exempt under new Rule 16b-3, assuming other conditions are met. See 
Release No. 34-28869, n. 89. The amended rule also continues to 
exempt the acquisition of issuer equity securities pursuant to a 
dividend reinvestment feature of an employee benefit plan so long as 
the company maintains a separate dividend reinvestment plan that 
satisfies the conditions of the rule. See Simpson Thacher & Bartlett 
(Jun. 19, 1991) and Release No. 34-18114, Q. 76. Finally, consistent 
with current interpretations, the amended rule will continue to be 
available to exempt the reinvestment of dividends in the securities 
of a publicly traded parent or subsidiary, and will exempt the 
reinvestment of all pro rata distributions to security holders, not 
just dividends and interest. See Middle South Utilities, Inc. (Aug. 
21, 1982) and Investment Company Institute (Sept. 18, 1992).
---------------------------------------------------------------------------

    Commenters agreed that the proposed modification is appropriate and 
serves the goal of reducing administrative burdens while protecting 
against possible speculative abuse by officers and directors. 
Commenters noted particularly that the ``all-holders'' provision is not 
essential to eliminate abuse, and that modification of this provision 
would substantially reduce the costs imposed by the requirement that 
such plans be made available to

[[Page 30389]]

odd-lot holders and shareholders domiciled abroad. The amendment is 
adopted as proposed, with minor clarifying changes.157
---------------------------------------------------------------------------

    \157\ New Rule 16a-11. The rule has been renumbered as a Section 
16(a) rule, since reporting of these transactions no longer will be 
required, as discussed above.
---------------------------------------------------------------------------

B. New Exemption for Domestic Relations Orders

    The current rules limit the exemption for the disposition of 
securities pursuant to a qualified domestic relations order (``QDRO''), 
as defined in the Internal Revenue Code or Title I of ERISA, and the 
rules thereunder, to employee plan securities.158 Since such 
dispositions are unlikely to be influenced by access to inside 
information, this limitation appears unnecessary. Accordingly, the 1994 
proposal included a general exemption for such dispositions.
---------------------------------------------------------------------------

    \158\ Current Rule 16b-3(f)(3).
---------------------------------------------------------------------------

    By interpretation, the current exemption has been construed to 
permit the transfer of securities, issued under a plan that is not 
subject to Section 401(a) of the Internal Revenue Code, pursuant to a 
``domestic relations order'' that satisfies certain conditions of the 
Internal Revenue Code,159 but does not satisfy QDRO 
standards.160 Comment was requested as to whether the proposed 
exemption should require satisfaction of the QDRO standards in all 
circumstances, or whether satisfaction of the Internal Revenue Code 
``domestic relations order'' standards would suffice.
---------------------------------------------------------------------------

    \159\ I.R.C. Sections 414(p)(1)(A) and (B). Among other things, 
the order must create or recognize an alternate payee's right to 
receive all or a portion of the benefits payable to a participant 
under a plan; relate to the provisions of child support, alimony 
payments, or marital property rights to a spouse, former spouse, 
child, or other dependent of the participant; and be made pursuant 
to a state domestic relations law (including a community property 
law).
    \160\ The order need not satisfy, among other things, conditions 
applicable to payments made after the participant's earliest 
retirement age, and requirements to treat the former spouse as 
surviving spouse for purposes of determining survivor benefits. See 
Premark International, Inc. (Mar. 6, 1992), which further provides 
that the plan may permit such transfers consistent with the 
transferability restriction of current Rule 16b-3(a)(2).
---------------------------------------------------------------------------

    Commenters who addressed this proposal supported it overwhelmingly, 
noting that these dispositions are unlikely to give rise to the types 
of abuse of inside information that the section 16 rules are designed 
to prevent and that satisfaction of the ``domestic relations order'' 
standards should suffice. Commenters also suggested that the rule 
should exempt acquisitions as well as dispositions. The Commission is 
persuaded that the likelihood of abuse is equally remote whether the 
transaction is an acquisition or disposition, so long as the ``domestic 
relations order'' standards are satisfied. The rule as adopted reflects 
these modifications.161
---------------------------------------------------------------------------

    \161\ New Rule 16a-12, which replaces current Rule 16b-3(f)(3). 
This amendment was proposed in the 1994 Release as proposed Rule 
16b-5(b), but instead is adopted as a section 16(a) rule since 
reporting of these transactions no longer will be required, as 
discussed above.
---------------------------------------------------------------------------

C. Exemption for Stock Dividend Transactions

    The Commission proposed in 1994 to expand the exemption for stock 
splits and stock dividends to include specifically a stock dividend in 
which equity securities of a different issuer are distributed. The 
primary application of this exemption would be to ``spinoff'' 
transactions, in which assets previously owned by the issuer are 
distributed pro rata to shareholders in the form of equity securities 
of another issuer.
    The Division has interpreted the current rule to apply to stock 
splits or stock dividends involving the issuance, on a pro rata basis, 
of a different class of equity securities of the same issuer.162 
Commenters addressing this proposal expressed support, noting that this 
type of dividend involves the distribution of an ownership interest 
already held indirectly through the distributing entity, and thus 
involves a change in the form of ownership from indirect through the 
distributing entity to direct by the recipient. Commenters also noted 
that since there is no purchase or sale, there is no significant 
opportunity for abuse. The proposal is adopted substantially as 
proposed, with minor technical revisions.163
---------------------------------------------------------------------------

    \162\ See Emergent Group, Inc. (Apr. 6, 1992).
    \163\ New Rule 16a-9(a).
---------------------------------------------------------------------------

VI. 1995 Solicitation of Comment Regarding the On-Going Merit of the 
Short-Swing Profit Recovery Provisions of Section 16

    The 1995 Release solicited comment as to whether the Commission 
should recommend that Congress rescind the short-swing profit recovery 
provisions of section 16(b). Commenters were asked to address whether 
insider trading and market manipulation would be deterred adequately by 
Rule 10b-5, as interpreted by case law, and whether state laws 
establishing a fiduciary duty on the part of officers and directors 
would protect adequately the interests of public company shareholders.
    Although the majority of commenters addressing this issue favored 
the legislative rescission of section 16(b), the Commission is of the 
view that the short-swing profit recovery provisions continue to 
fulfill a useful and effective role in maintaining investor confidence 
in the integrity of United States securities markets and accordingly 
should be retained. Instead, the Commission has attempted to craft the 
amended rules in a manner that retains the market protections provided 
by section 16(b) while curtailing compliance costs, thereby striking an 
appropriate balance between benefits and costs.

VII. Transition to New Rules

A. General Application

    All of the rules adopted today, except for new Rule 16b-3, become 
effective August 15, 1996 (the ``Effective Date''). Accordingly, the 
section 16 treatment of all transactions effected on or after the 
Effective Date will be governed by the new rules. As discussed below, a 
phase-in period until November 1, 1996 is provided for new Rule 16b-3. 
Of course, to the extent that the new rules codify current interpretive 
positions,164 those positions continue to be valid before the 
Effective Date. Trusts currently subject to section 16 that will be 
relieved of section 16 obligations under the new rules will not be 
subject to any post-termination reporting obligations or required to 
file a final Form 4 or Form 5. The amendments to Item 405 of 
Regulations S-K and S-B will apply to documents containing Item 405 
disclosure that are filed after the Effective Date. The new Forms 
should be used for filings made on and after the Effective Date.
---------------------------------------------------------------------------

    \164\ E.g., new Rule 16a-1(c)(7) and Item 405(a)(2) of 
Regulations S-K and S-B.
---------------------------------------------------------------------------

    Cash-only instruments excludable from the definition of 
``derivative security'' under current Rule 16a-1(c)(3) originally 
issued before the Effective Date will remain exempt from the reporting 
requirements of section 16(a) after the Effective Date. With respect to 
such cash-only securities, a transaction on or after the Effective Date 
that is consistent with the conditions of the exclusion pursuant to 
which the security was issued also will not to be subject to Section 
16.165
---------------------------------------------------------------------------

    \165\ Post-Effective Date transactions in cash-only securities 
that were originally issued prior to May 1, 1991 will continue not 
to be subject to section 16 to the extent provided in Cravath, 
Swaine & Moore (Oct. 22, 1991).
---------------------------------------------------------------------------

    Transactions not exempt from section 16(b) under the current rules 
that are conducted prior to the Effective Date will continue to be 
matchable with non-exempt transactions conducted after the Effective 
Date for short-swing profit recovery purposes.

[[Page 30390]]

B. New Rule 16b-3

    In extending the phase-in date for current Rule 16b-3, the 
Commission stated that this period would continue until September 1, 
1996.166 However, given the timing of the adoption of new Rule 
16b-3, the Commission is extending the phase-in date until November 1, 
1996.167 While new Rule 16b-3 will become available for issuers 
that wish to use it on August 15, 1996, current and former Rule 16b-3 
168 will remain available for transactions effected prior to 
November 1, 1996. When an issuer adopts a plan that complies with new 
Rule 16b-3 or converts one of its existing plans to the new rule, all 
plans must be converted,169 provided that any transaction between 
an issuer and its officers or directors that occurs outside the scope 
of a formal plan or pursuant to a plan that permits only the issuance 
of cash-only instruments may rely on new Rule 16b-3 without triggering 
this conversion requirement. Current and former Rule 16b-3 may not 
continue to be relied on by issuers and insiders after November 1, 
1996. Transactions exempt under current and former Rule 16b-3 should be 
reported as provided by the new rules during the phase-in 
period.170
---------------------------------------------------------------------------

    \166\ See the 1995 Phase-in Release.
    \167\ See Release No. 34-37261, issued today.
    \168\ Former Rules 16a-8(b) and 16a-8(g)(3) also remain 
available for purposes of providing an exemption from Section 16(b). 
See the 1991 Adopting Release at Section VII.C.
    \169\ Following conversion of an existing plan to new Rule 16b-
3, the amendment of outstanding derivative securities to permit 
their transfer will not be deemed a cancellation of such securities 
and a grant of new securities for Section 16 purposes. Compare Time 
Warner (Dec. 18, 1992) Q.3 and Jesse M. Brill (Mar. 25, 1994) Q.4, 
where following amendment outstanding options no longer were exempt 
pursuant to current and former Rule 16b-3, respectively.
    \170\ The new reporting exemption for tax-conditioned plans will 
not be available until new Rule 16b-3 is used because that reporting 
exemption applies only to transactions exempted by new Rule 16b-
3(c).
---------------------------------------------------------------------------

    As stated above, the new Forms should be used for filings made on 
and after the Effective Date. Since the new transaction codes are keyed 
to transactions exempted by new Rule 16b-3, insiders reporting 
transactions under the former or current rule may either use the new 
code most analogous to the transaction or code ``J'' (for ``other'' 
transactions) with an explanatory footnote.

VIII. Cost-Benefit Analysis

    The amendments adopted herein are expected to decrease 
significantly the compliance burden imposed on persons subject to 
Section 16 and attendant costs without undercutting the statutory 
objectives of disclosing information concerning insider trading and 
discouraging speculative short-term insider trading.
    The simplified treatment of transactions between an issuer and its 
officers and directors, whether or not pursuant to a formal employee 
benefit plan, will constitute the most important reduction in 
compliance burden. With respect to these transactions, the conditions 
that must be met for an exemption to be available have been 
substantially simplified. The amended rules also will simplify issuers' 
administration of dividend and interest reinvestment plans, and expand 
the exemption for stock splits and stock dividends to include stock 
dividends in which securities of a different issuer are distributed.
    The rules also will reduce compliance costs by: providing that many 
transactions no longer need be reported at all; permitting joint and 
group reporting where more than one person is deemed to be a beneficial 
owner of the same securities; providing that section 16 applies to a 
trust only if the trust beneficially owns more than ten percent of a 
class of registered equity securities; and limiting officers' and 
directors' post-termination reporting obligations. Where the amendments 
may increase compliance costs, such as by requiring reporting with 
respect to transactions in cash-only securities and by accelerating the 
reporting of option exercises, such costs should be outweighed by the 
benefit of having additional information available to the public on an 
accelerated basis, as well as the ease of compliance with a simplified 
reporting scheme. The amendments also will eliminate regulatory 
complexity and uncertainty that discourages the use of equity as 
compensation.

IX. Summary of Final Regulatory Flexibility Analysis

    The Commission has prepared a final regulatory flexibility analysis 
in accordance with 5 U.S.C. 604 regarding the adoption of new Rules 
16a-11, 16a-12 and 16a-13, and the changes to Rules 16a-1, 16a-2, 16a-
3, 16a-4, 16a-6, 16a-8, 16a-9, 16b-3 and 16b-6, Forms 3, 4 and 5, and 
Item 405 of Regulations S-B and S-K. A summary of the corresponding 
Initial Regulatory Flexibility Analysis was included in the 1994 
Release and the 1995 Release. A copy of the final regulatory 
flexibility analysis may be obtained by contacting Anne M. Krauskopf, 
Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 450 Fifth Street NW., Washington, DC 20549 at (202) 942-
2900.
    As more fully discussed in the analysis, since 1994 the Commission 
has been engaged in rulemaking to modify the Rules under Section 16, 
particularly to alleviate unanticipated practical difficulties that 
arose since adoption of the 1991 amendments, simplify section 16 
requirements applicable to employee benefit plans, and codify several 
staff interpretive positions. The amendments to Rule 16b-3 adopted 
today will significantly expand the exemption as it applies to broad-
based non-discriminatory plans, will impose different conditions 
applicable to grants, awards and other acquisitions from the issuer, 
and will provide new exemptions for the disposition of issuer equity 
securities to the issuer.
    Other rule amendments will modify the section 16(a) reporting 
system to provide that most exempt transactions and small acquisitions 
will be reported annually on Form 5, with earlier reporting on Form 4 
permitted. Exercises and conversions of derivative securities, whether 
or not exempt from section 16(b), will be reported on Form 4. However, 
routine transactions pursuant to tax-conditioned plans, dividend or 
interest reinvestment plan transactions, transactions pursuant to 
domestic relations orders and transactions that change only the form of 
beneficial ownership will be exempt from reporting. The exemption for 
reinvestment transactions pursuant to dividend and interest 
reinvestment plans is amended to replace the requirement that such a 
plan must be available to all holders of the class of securities with a 
condition that the plan require both wide participation and equal 
treatment of all participants.
    No significant issues were raised by public comment in response to 
the initial regulatory flexibility analysis.
    The amendments adopted today primarily will affect individuals who 
are corporate insiders, the majority of whom may fall within the 
definition of ``small business'' under the Exchange Act. To the extent 
that these persons are affected, it is expected that the proposals will 
reduce their compliance burdens associated with section 16.
    It is expected that the amendments adopted today will result in a 
material decrease in reporting and compliance requirements since they 
will streamline the requirements applicable to employee benefit plans. 
Although exercises and conversions of derivative securities will be 
reported earlier than previously required, and certain types of cash-
only instruments will become

[[Page 30391]]

reportable, many other transactions no longer will be reported at all, 
and the overall reporting scheme will be simplified as a result.
    The amendments adopted today will benefit corporate insiders by 
simplifying the section 16 rules and eliminating unnecessary 
requirements. Separate requirements for small issuers are inappropriate 
because most of the corporate insiders subject to the section 16 rules 
are individuals who meet the small business definition. The use of 
performance rather than design standards for small issuers is 
inconsistent with the Commission's mandate of investor protection. 
Other proposals to further reduce the compliance requirements were 
considered but rejected on grounds that they would be inconsistent with 
the section 16 statutory objectives.

X. Statutory Basis

    The amendments to Regulation S-B, Regulation S-K, and the section 
16 rules and forms are adopted by the Commission pursuant to Exchange 
Act sections 3(a)(11),171 3(a)(12),172 3(b),173 
9(b),174 10(a),175 12(h),176 13(a),177 14,178 
16, and 23(a). As the Section 16 rules and forms relate to the 
Investment Company Act and the Public Utility Holding Company Act, they 
also are adopted pursuant to Investment Company Act sections 30 
179 and 38,180 and Public Utility Holding Company Act 
Sections 17 181 and 20,182 respectively.
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78c(a)(11).
    \172\ 15 U.S.C. 78c(a)(12).
    \173\ 15 U.S.C. 78c(b).
    \174\ 15 U.S.C. 78i(b).
    \175\ 15 U.S.C. 78j(a).
    \176\ 15 U.S.C. 78l(h).
    \177\ 15 U.S.C. 78m(a).
    \178\ 15 U.S.C. 78n.
    \179\ 15 U.S.C. 80a-29.
    \180\ 15 U.S.C. 80a-37.
    \181\ 15 U.S.C. 79q.
    \182\ 15 U.S.C. 79t.
---------------------------------------------------------------------------

List of Subjects in 17 CFR 228, 229, 240, and 249

    Reporting, Recordkeeping requirements, and Securities.

Text of the Amendments

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

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for part 228 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.

    2. By amending Sec. 228.405 by revising the reference to ``Rule 
16a-3(d)'' in paragraph (a) to read ``Rule 16a-3(e)'' and by revising 
paragraphs (a)(1) and (a)(2) before the Note to read as follows:


Sec. 228.405   (Item 405) Compliance with section 16(a) of the Exchange 
Act.

* * * * *
    (a) * * *
    (1) Under the caption ``Section 16(a) Beneficial Ownership 
Reporting Compliance,'' identify each person who, at any time during 
the fiscal year, was a director, officer, beneficial owner of more than 
ten percent of any class of equity securities of the registrant 
registered pursuant to section 12 (``reporting person'') that failed to 
file on a timely basis, as disclosed in the above Forms, reports 
required by section 16(a) of the Exchange Act during the most recent 
fiscal year or prior fiscal years.
    (2) For each such person, set forth the number of late reports, the 
number of transactions that were not reported on a timely basis, and 
any known failure to file a required Form. A known failure to file 
would include, but not be limited to, a failure to file a Form 3, which 
is required of all reporting persons, and a failure to file a Form 5 in 
the absence of the written representation referred to in paragraph 
(b)(2)(i) of this section, unless the registrant otherwise knows that 
no Form 5 is required.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    3. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
    4. By amending Sec. 229.405 by revising paragraphs (a)(1) and 
(a)(2) before the Note to read as follows:


Sec. 229.405  (Item 405) Compliance with section 16(a) of the Exchange 
Act.

* * * * *
    (a) * * *
    (1) Under the caption ``Section 16(a) Beneficial Ownership 
Reporting Compliance,'' identify each person who, at any time during 
the fiscal year, was a director, officer, beneficial owner of more than 
ten percent of any class of equity securities of the registrant 
registered pursuant to section 12 of the Exchange Act, or any other 
person subject to section 16 of the Exchange Act with respect to the 
registrant because of the requirements of section 30 of the Investment 
Company Act or section 17 of the Public Utility Holding Company Act 
(``reporting person'') that failed to file on a timely basis, as 
disclosed in the above Forms, reports required by section 16(a) of the 
Exchange Act during the most recent fiscal year or prior fiscal years.
    (2) For each such person, set forth the number of late reports, the 
number of transactions that were not reported on a timely basis, and 
any known failure to file a required Form. A known failure to file 
would include, but not be limited to, a failure to file a Form 3, which 
is required of all reporting persons, and a failure to file a Form 5 in 
the absence of the written representation referred to in paragraph 
(b)(2)(i) of this section, unless the registrant otherwise knows that 
no Form 5 is required.
* * * * *

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

    5. 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.
* * * * *
    6. By amending Sec. 240.16a-1 by revising paragraphs (a)(3) and 
(c)(3), removing the word ``or'' at the end of paragraph (c)(5), 
replacing the period at the end of paragraph (c)(6) with a semi-colon 
followed by the word ``or'', and adding paragraph (c)(7) to read as 
follows:


Sec. 240.16a-1  Definition of terms.

* * * * *
    (a) * * *
    (3) Where more than one person subject to section 16 of the Act is 
deemed to be a beneficial owner of the same equity securities, all such 
persons must report as beneficial owners of the securities, either 
separately or jointly, as provided in Sec. 240.16a-3(j). In such cases, 
the amount of short-swing profit recoverable shall not be increased 
above

[[Page 30392]]

the amount recoverable if there were only one beneficial owner.
* * * * *
    (c) * * *
    (3) 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 the tax withholding consequences of 
receipt, exercise or vesting;
* * * * *
    (7) Options granted to an underwriter in a registered public 
offering for the purpose of satisfying over-allotments in such 
offering.
* * * * *
    7. By amending Sec. 240.16a-2 by revising paragraphs (b) and (d)(2) 
to read as follows:


Sec. 240.16a-2  Persons and transactions subject to section 16.

* * * * *
    (b) A transaction(s) following the cessation of director or officer 
status shall be subject to section 16 of the Act only if:
    (1) Executed within a period of less than six months of an opposite 
transaction subject to section 16(b) of the Act that occurred while 
that person was a director or officer; and
    (2) Not otherwise exempted from section 16(b) of the Act pursuant 
to the provisions of this chapter.

    Note to Paragraph (b): For purposes of this paragraph, an 
acquisition and a disposition each shall be an opposite transaction 
with respect to the other.
* * * * *
    (d)(1) * * *
    (2) Transactions by such person or entity acting in a capacity 
specified in paragraph (d)(1) of this section after the period 
specified in that paragraph shall be subject to section 16 of the Act 
only where the estate, trust or other entity is a beneficial owner of 
more than ten percent of any class of equity security registered 
pursuant to section 12 of the Act.
    8. By amending Sec. 240.16a-3 by revising paragraph (f)(1)(i), 
redesignating paragraphs (f)(1)(ii) and (f)(1)(iii) as (f)(1)(iii) and 
(f)(1)(iv), adding paragraph (f)(1)(ii), revising paragraph (g), and 
adding paragraph (j) to read as follows:


Sec. 240.16a-3  Reporting transactions and holdings.

* * * * *
    (f)(1) * * *
    (i) All transactions during the most recent fiscal year that were 
exempt from section 16(b) of the Act, except:
    (A) Exercises and conversions of derivative securities exempt under 
either Sec. 240.16b-3 or Sec. 240.16b-6(b) (these are required to be 
reported on Form 4);
    (B) Transactions exempt from section 16(b) of the Act pursuant to 
Sec. 240.16b-3(c), which shall be exempt from section 16(a) of the Act; 
and
    (C) Transactions exempt from section 16(a) of the Act pursuant to 
another rule;
    (ii) Transactions that constituted small acquisitions pursuant to 
Sec. 240.16a-6(a);
* * * * *
    (g) (1) A Form 4 shall be filed to report all transactions not 
exempt from section 16(b) of the Act and all exercises and conversions 
of derivative securities, regardless of whether exempt from section 
16(b) of the Act.
    (2) At the option of the reporting person, transactions that are 
reportable on Form 5 may be reported on Form 4, provided that the Form 
4 is filed no later than the due date of the Form 5 with respect to the 
fiscal year in which the transaction occurred.
* * * * *
    (j) Where more than one person subject to section 16 of the Act is 
deemed to be a beneficial owner of the same equity securities, all such 
persons must report as beneficial owners of the securities, either 
separately or jointly. Where persons in a group are deemed to be 
beneficial owners of equity securities pursuant to Sec. 240.16a-1(a)(1) 
due to the aggregation of holdings, a single Form 3, 4 or 5 may be 
filed on behalf of all persons in the group. Joint and group filings 
must include all required information for each beneficial owner, and 
such filings must be signed by each beneficial owner, or on behalf of 
such owner by an authorized person.
    9. By amending Sec. 240.16a-4 by revising paragraphs (b), (c) and 
(d) and the Note to read as follows:


Sec. 240.16a-4   Derivative securities.

* * * * *
    (b) The exercise or conversion of a call equivalent position shall 
be reported on Form 4 and treated for reporting purposes as:
    (1) A purchase of the underlying security; and
    (2) A closing of the derivative security position.
    (c) The exercise or conversion of a put equivalent position shall 
be reported on Form 4 and treated for reporting purposes as:
    (1) A sale of the underlying security; and
    (2) A closing of the derivative security position.
    (d) The disposition or closing of a long derivative security 
position, as a result of cancellation or expiration, shall be exempt 
from section 16(a) of the Act if exempt from section 16(b) of the Act 
pursuant to Sec. 240.16b-6(d).

    Note to Sec. 240.16a-4: A purchase or sale resulting from an 
exercise or conversion of a derivative security may be exempt from 
section 16(b) of the Act pursuant to Sec. 240.16b-3 or Sec. 240.16b-
6(b).

    10. By amending Sec. 240.16a-6 by revising paragraph (a) and 
removing paragraph (c) to read as follows:


Sec. 240.16a-6   Small acquisitions.

    (a) Any acquisition of an equity security not exceeding $10,000 in 
market value, or of the right to acquire such securities, shall be 
reported on Form 5, subject to the following conditions:
    (1) Such acquisition, when aggregated with other acquisitions of 
securities of the same class (including securities underlying 
derivative securities, but excluding acquisitions exempted by rule from 
section 16(b) or previously reported on Form 4 or Form 5) within the 
prior six months, does not exceed a total of $10,000 in market value; 
and
    (2) The person making the acquisition does not within six months 
thereafter make any disposition, other than by a transaction exempt 
from section 16(b) of the Act.
* * * * *
    11. By amending Sec. 240.16a-8 by revising paragraph (a)(1) and 
adding a note at the end of paragraph (b)(3) to read as follows:


Sec. 240.16a-8   Trusts.

    (a) Persons subject to section 16.--(1) Trusts. A trust shall be 
subject to section 16 of the Act with respect to securities of the 
issuer if the trust is a beneficial owner, pursuant to Sec. 240.16a-
1(a)(1), of more than ten percent of any class of equity securities of 
the issuer registered pursuant to section 12 of the Act (``ten percent 
beneficial owner'').
* * * * *
    (b) Trust holdings and transactions. * * *
    (3) Beneficiaries. * * *

    Note to Paragraph (b)(3): Transactions and holdings attributed 
to a trust beneficiary may be reported by the trustee on behalf of 
the beneficiary, provided that the report is signed by the 
beneficiary or other authorized person. Where the transactions and 
holdings are attributed both to the trustee and trust beneficiary, a 
joint report may be filed in accordance with Sec. 240.16a-3(j).
* * * * *
    12. By amending Sec. 240.16a-9 by revising paragraph (a) to read as 
follows:

[[Page 30393]]

Sec. 240.16a-9   Stock splits, stock dividends, and pro rata rights.

* * * * *
    (a) 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; and
* * * * *
    13. By adding Sec. 240.16a-11 to read as follows:


Sec. 240.16a-11   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 of the Act if the acquisition is made pursuant to a 
plan providing for the regular reinvestment of dividends or interest 
and 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.
    14. By adding Sec. 240.16a-12 to read as follows:


Sec. 240.16a-12   Domestic relations orders.

    The acquisition or disposition of equity securities pursuant to a 
domestic relations order, as defined in the Internal Revenue Code or 
Title I of the Employee Retirement Income Security Act, or the rules 
thereunder, shall be exempt from section 16 of the Act.
    15. By adding Sec. 240.16a-13 to read as follows:


Sec. 240.16a-13   Change in form of beneficial ownership.

    A transaction, other than the exercise or conversion of a 
derivative security or deposit into or withdrawal from a voting trust, 
that effects only a change in the form of beneficial ownership without 
changing a person's pecuniary interest in the subject equity securities 
shall be exempt from section 16 of the Act.


Sec. 240.16b-2   [Removed and reserved]

    16. By removing and reserving Sec. 240.16b-2.
    17. 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.
    (b) Definitions.
    (1) A Discretionary Transaction shall mean a transaction pursuant 
to an employee benefit plan that:
    (i) Is at the volition of a plan participant;
    (ii) Is not made in connection with the participant's death, 
disability, retirement or termination of employment;
    (iii) Is not required to be made available to a plan participant 
pursuant to a provision of the Internal Revenue Code; and
    (iv) 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.
    (2) 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 any benefit or contribution limitations set forth in the 
Internal Revenue Code of 1986, or any successor provisions thereof.
    (3) (i) A Non-Employee Director shall mean a director who:
    (A) 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 the issuer or a parent or subsidiary of the 
issuer;
    (B) Does not receive compensation, either directly or indirectly, 
from the issuer or a parent or subsidiary of the issuer, for services 
rendered as a consultant or in any capacity other than as a director, 
except for an amount that does not exceed the dollar amount for which 
disclosure would be required pursuant to Sec. 229.404(a) of this 
chapter;
    (C) Does not possess an interest in any other transaction for which 
disclosure would be required pursuant to Sec. 229.404(a) of this 
chapter; and
    (D) Is not engaged in a business relationship for which disclosure 
would be required pursuant to Sec. 229.404(b) of this chapter.
    (ii) Notwithstanding paragraph (b)(3)(i) of this section, a Non-
Employee Director of a closed-end investment company shall mean a 
director who is not an ``interested person'' of the issuer, as that 
term is defined in Section 2(a)(19) of the Investment Company Act of 
1940.
    (4) 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.
    (5) A Stock Purchase Plan shall mean an employee benefit plan that 
satisfies the coverage and participation requirements of sections 
423(b)(3) and 423(b)(5), or section 410, of the Internal Revenue Code 
of 1986, or any successor provisions thereof.
    (c) Tax-conditioned plans. Any transaction (other than a 
Discretionary Transaction) pursuant to a Qualified Plan, an Excess 
Benefit Plan, or a Stock Purchase Plan shall be exempt without 
condition.
    (d) Grants, awards and other acquisitions from the issuer. Any 
transaction involving a grant, award or other acquisition from the 
issuer (other than a Discretionary Transaction) shall be exempt if:
    (1) The transaction is approved by the board of directors of the 
issuer, or a committee of the board of directors that is composed 
solely of two or more Non-Employee Directors;
    (2) The transaction is approved or ratified, in compliance with 
section 14 of the Act, by either: the affirmative votes of the holders 
of a majority of the securities of the issuer present, or represented, 
and entitled to vote at a meeting duly held in accordance with the 
applicable laws of the state or other jurisdiction in which the issuer 
is incorporated; or the written consent of the holders of a majority of 
the securities of the issuer entitled to vote; provided that such 
ratification occurs no later than the date of the next annual meeting 
of shareholders; or
    (3) The issuer equity securities so acquired are held by the 
officer or director for a period of six months following the date of 
such acquisition, 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.
    (e) Dispositions to the issuer. Any transaction involving the 
disposition to the issuer of issuer equity securities (other than a 
Discretionary Transaction) shall be exempt, provided that the terms of 
such disposition are approved in advance in the manner prescribed by 
either paragraph (d)(1) or paragraph (d)(2) of this section.
    (f) Discretionary Transactions. A Discretionary Transaction shall 
be exempt only if effected pursuant to an election made at least six 
months following the date of the most recent election, with respect to 
any plan of the issuer, that effected a Discretionary Transaction that 
was:
    (1) An acquisition, if the transaction to be exempted would be a 
disposition; or

[[Page 30394]]

    (2) A disposition, if the transaction to be exempted would be an 
acquisition.

Notes to Sec. 240.16b-3

    Note (1): The exercise or conversion of a derivative security 
that does not satisfy the conditions of this section is eligible for 
exemption from section 16(b) of the Act to the extent that the 
conditions of Sec. 240.16b-6(b) are satisfied.
    Note (2): Section 16(a) reporting requirements applicable to 
transactions exempt pursuant to this section are set forth in 
Sec. 240.16a-3(f) and (g) and Sec. 240.16a-4.
    Note (3): The approval conditions of paragraphs (d)(1), (d)(2) 
and (e) of this section require the approval of each specific 
transaction, and are not satisfied by approval of a plan in its 
entirety except for the approval of a plan pursuant to which the 
terms and conditions of each transaction are fixed in advance, such 
as a formula plan. Where the terms of a subsequent transaction (such 
as the exercise price of an option, or the provision of an exercise 
or tax withholding right) are provided for in a transaction as 
initially approved pursuant to paragraphs (d)(1), (d)(2) or (e), 
such subsequent transaction shall not require further specific 
approval.
    18. By amending Sec. 240.16b-6 by adding a note following paragraph 
(b) to read as follows:


Sec. 240.16b-6  Derivative securities.

* * * * *
    Note to Paragraph (b): The exercise or conversion of a 
derivative security that does not satisfy the conditions of this 
section is eligible for exemption from section 16(b) of the Act to 
the extent that the conditions of Sec. 240.16b-3 are satisfied.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    19. The authority citation for part 249 continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    20. By amending Form 3 (referenced in Sec. 249.103) and the General 
Instructions thereto by adding a sentence at the end of paragraph (a) 
to General Instruction 3 after the note, adding paragraph (b)(v) to 
General Instruction 5, by revising General Instruction 6, and by 
revising Item 1 and adding Item 7 to the information preceding Table I 
to read as follows:

    Note: The text of Form 3 does not and this amendment will not 
appear in the Code of Federal Regulations.

Form 3  Initial Statement of Beneficial Ownership of Securities

* * * * *

General Instructions

* * * * *

3. Where Form Must be Filed

    (a) * * * Alternatively, this Form is permitted to be submitted 
to the Commission in electronic format at the option of the 
reporting person pursuant to Sec. 232.101(b)(4) of this chapter.
* * * * *

5. Holdings Required to be Reported

* * * * *
    (b) Beneficial Ownership Reported (Pecuniary Interest)
* * * * *
    (v) Where more than one person beneficially owns the same equity 
securities, such owners may file Form 3 individually or jointly. 
Joint and group filings may be made by any designated beneficial 
owner. Holdings of securities owned separately by any joint or group 
filer are permitted to be included in the joint filing. Indicate 
only the name and address of the designated filer in Item 1 of Form 
3 and attach a listing of the names and IRS or social security 
numbers (or addresses in lieu thereof) of each other reporting 
person. Joint and group filings must include all required 
information for each beneficial owner, and such filings must be 
signed by each beneficial owner, or on behalf of such owner by an 
authorized person. If the space provided for signatures is 
insufficient, attach a signature page. Submit any attached listing 
of names or signatures on another Form 3, copy of Form 3 or separate 
page of 8\1/2\ by 11 inch white paper, indicate the number of pages 
comprising the report (Form plus attachments) at the bottom of each 
report page (e.g., 1 of 3, 2 of 3, 3 of 3), and include the name of 
the designated filer and information required by Items 2 and 4 of 
the Form on the attachment.
* * * * *

6. Additional Information

    If the space provided in the line items of this Form or space 
provided for additional comments is insufficient, attach another 
Form 3, copy of Form 3 or a separate page of 8\1/2\ by 11 inch white 
paper to Form 3, completed as appropriate to include the additional 
comments. Each attached page must include information required in 
Items 1, 2 and 4 of the Form. The number of pages comprising the 
report (Form plus attachments) shall be indicated at the bottom of 
each report page (e.g., 1 of 3, 2 of 3, 3 of 3). If additional 
information is not provided in this manner, it will be assumed that 
no additional information was provided.
* * * * *

1. Name and Address of Reporting Person*

(Last)    (First)    (Middle)
    (Street)
(City)    (State)    (Zip)

    * If the Form is filed by more than one Reporting Person, see 
Instruction 5(b)(v).
* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

________ Form filed by One Reporting Person
________ Form Filed by More than One Reporting Person
* * * * *
    21. By amending Form 4 (referenced in Sec. 249.104) and the General 
Instructions thereto by adding a sentence at the end of paragraph (a) 
of General Instruction 2 after the note; by revising paragraph (a)(i) 
of General Instruction 4; by revising the Note following General 
Instruction 4(a)(ii) and adding paragraph (b)(v) to General Instruction 
4; by revising General Instruction 6; in General Instruction 8 by 
adding a sentence at the end of the paragraph appearing under the 
``Transaction Codes'' caption and revising the Transaction Codes; and 
by revising Item 1 and adding Item 7 to the information preceding Table 
I to read as follows:

    Note: The text of Form 4 does not and this amendment will not 
appear in the Code of Federal Regulations.

Form 4  Statement of Changes in Beneficial Ownership of Securities

* * * * *

General Instructions

* * * * *

2. Where Form Must be Filed

    (a) * * * Alternatively, this Form is permitted to be submitted 
to the Commission in electronic format at the option of the 
reporting person pursuant to Sec. 232.101(b)(4) of this chapter.
* * * * *

4. Transactions and Holdings Required to be Reported

* * * * *
    (a) General Requirements
    (i) Report, in accordance with Rule 16a-3(g), all transactions 
not exempt from section 16(b) of the Act and all exercises and 
conversions of derivative securities, regardless of whether exempt 
from section 16(b) of the Act, resulting in a change of beneficial 
ownership in the issuer's securities. Every transaction shall be 
reported even though acquisitions and dispositions during the month 
are equal. Report total beneficial ownership as of the end of the 
month for each class of securities in which a transaction was 
reported.
    Note: * * *
    (ii) * * *
    Note: Transactions reportable on Form 5 may, at the option of 
the reporting person, be reported on a Form 4 filed before the due 
date of the Form 5. (See Instruction 8 for the code for voluntarily 
reported transactions.)
    (b) Beneficial Ownership Reported (Pecuniary Interest)
* * * * *
    (v) Where more than one beneficial owner of the same equity 
securities must report transactions on Form 4, such owners may file 
Form 4 individually or jointly. Joint and group filings may be made 
by any designated beneficial owner. Transactions with respect to 
securities owned separately by any joint or group filer are 
permitted to be included in the joint filing. Indicate only the name 
and address of the designated filer in Item 1 of

[[Page 30395]]

Form 4 and attach a listing of the names and IRS or social security 
numbers (or addresses in lieu thereof) of each other reporting 
person. Joint and group filings must include all required 
information for each beneficial owner, and such filings must be 
signed by each beneficial owner, or on behalf of such owner by an 
authorized person. If the space provided for signatures is 
insufficient, attach a signature page. Submit any attached listing 
of names or signatures on another Form 4, copy of Form 4 or separate 
page of 8\1/2\ by 11 inch white paper, indicate the number of pages 
comprising the report (Form plus attachments) at the bottom of each 
report page (e.g., 1 of 3, 2 of 3, 3 of 3), and include the name of 
the designated filer and information required by Items 2 and 4 of 
the Form on the attachment.
* * * * *

6. Additional Information

    If the space provided in the line items of this Form or space 
provided for additional comments is insufficient, attach another 
Form 4, copy of Form 4 or a separate page of 8\1/2\ by 11 inch white 
paper to Form 4, completed as appropriate to include the additional 
comments. Each attached page must include information required in 
Items 1, 2 and 4 of the Form. The number of pages comprising the 
report (Form plus attachments) shall be indicated at the bottom of 
each report page (e.g., 1 of 3, 2 of 3, 3 of 3). If additional 
information is not provided in this manner, it will be assumed that 
no additional information was provided.
* * * * *

8. Transaction Codes

    * * * If a transaction involves an equity swap or instrument 
with similar characteristics, use transaction Code ``K'' in addition 
to the code(s) that most appropriately describes the transaction, 
e.g., ``S/K'' or ``P/K.''

General Transaction Codes

P--Open market or private purchase of non-derivative or derivative 
security
S--Open market or private sale of non-derivative or derivative 
security
V--Transaction voluntarily reported earlier than required

Rule 16b-3  Transaction Codes

A--Grant, award or other acquisition pursuant to Rule 16b-3(d)
D--Disposition to the issuer of issuer equity securities pursuant to 
Rule 16b-3(e)
F--Payment of exercise price or tax liability by delivering or 
withholding securities incident to the receipt, exercise, or vesting 
of a security issued in accordance with Rule 16b-3
I--Discretionary transaction in accordance with Rule 16b-3(f) 
resulting in acquisition or disposition of issuer securities
M--Exercise or conversion of derivative security exempted pursuant 
to Rule 16b-3

Derivative Securities Codes (Except for transactions exempted pursuant 
to Rule 16b-3)

C--Conversion of derivative security
E--Expiration of short derivative position
H--Expiration (or cancellation) of long derivative position with 
value received
O--Exercise of out-of-the-money derivative security
X--Exercise of in-the-money or at-the-money derivative security

Other Section 16(b) Exempt Transaction and Small Acquisition Codes 
(except for Rule 16b-3 codes above)

G--Bona fide gift
L--Small acquisition under Rule 16a-6
W--Acquisition or disposition by will or the laws of descent and 
distribution
Z--Deposit into or withdrawal from voting trust

Other Transaction Codes

J--Other acquisition or disposition (describe transaction)
K--Transaction in equity swap or instrument with similar 
characteristics
U--Disposition pursuant to a tender of shares in a change of control 
transaction
* * * * *

1. Name and Address of Reporting Person*

(Last)    (First)    (Middle)
    (Street)
(City)    (State)    (Zip)

    *If the Form is filed by more than one Reporting Person, see 
Instruction 4(b)(v).
* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

________Form filed by One Reporting Person
________Form Filed by More than One Reporting Person
* * * * *
    22. By amending Form 5 (referenced in Sec. 249.105) and the General 
Instructions thereto by adding a sentence at the end of paragraph (a) 
of General Instruction 2 after the note; by revising General 
Instruction 4(a)(i)(A); by removing General Instruction 4(a)(ii); by 
redesignating paragraphs (a)(iii) and (a)(iv) of General Instruction 4 
as paragraphs (a)(ii) and (a)(iii); by revising newly designated 
paragraph 4(a)(iii) and adding paragraph (b)(v) to General Instruction 
4; by revising General Instruction 6; in General Instruction 8 by 
adding a sentence at the end of the paragraph appearing under the 
``Transaction Codes'' caption and revising the Transaction Codes; by 
revising the last paragraph in the General Instructions, following the 
Transaction Codes, and caption thereto; and by revising Item 1 and 
adding Item 7 to the information preceding Table I to read as follows:

    Note: The text of Form 5 does not and this amendment will not 
appear in the Code of Federal Regulations.

Form 5  Annual Statement of Beneficial Ownership of Securities

* * * * *

General Instructions

* * * * *

2. Where Form Must be Filed

    (a) * * * Alternatively, this Form is permitted to be submitted 
to the Commission in electronic format at the option of the 
reporting person pursuant to Sec. 232.101(b)(4) of this chapter.
* * * * *

4. Transactions and Holdings Required to be Reported

    (a) General Requirements
* * * * *
    (i) * * *
    (A) any transaction during the issuer's most recent fiscal year 
that was exempt from section 16(b) of the Act, except: (1) any 
exercise or conversion of derivative securities exempt under either 
Sec. 240.16b-3 or Sec. 240.16b-6(b) (these are required to be 
reported on Form 4); (2) any transaction exempt from section 16(b) 
of the Act pursuant to Rule 16b-3(c) of this section, which is 
exempt from section 16(a) of the Act; and (3) any transaction exempt 
from section 16 of the Act pursuant to another section 16(a) rule;
* * * * *
    (iii) Every transaction shall be reported even though 
acquisitions and dispositions with respect to a class of securities 
are equal. 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.
    (b) Beneficial Ownership Reported (Pecuniary Interest)
* * * * *
    (v) Where more than one beneficial owner of the same equity 
securities must report on Form 5, such owners may file Form 5 
individually or jointly. Joint and group filings may be made by any 
designated beneficial owner. Transactions and holdings with respect 
to securities owned separately by any joint or group filer are 
permitted to be included in the joint filing. Indicate only the name 
and address of the designated filer in Item 1 of Form 5 and attach a 
listing of the names and IRS or social security numbers (or 
addresses in lieu thereof) of each other reporting person. Joint and 
group filings must include all required information for each 
beneficial owner, and such filings must be signed by each beneficial 
owner, or on behalf of such owner by an authorized person. If the 
space provided for signatures is insufficient, attach a signature 
page. Submit any attached listing of names or signatures on another 
Form 5, copy of Form 5 or separate page of 8\1/2\ by 11 inch white 
paper, indicate the number of pages comprising the report (Form plus 
attachments) at the bottom of each report page (e.g., 1 of 3, 2 of 
3, 3 of 3), and include the name of the designated filer and 
information required by Items 2 and 4 of the Form on the attachment.
* * * * *

[[Page 30396]]

6. Additional Information

    If the space provided in the line items of this Form or space 
provided for additional comments is insufficient, attach another 
Form 5, copy of Form 5 or a separate page of 8\1/2\ by 11 inch white 
paper to Form 5, completed as appropriate to include the additional 
comments. Each attached page must include information required in 
Items 1, 2 and 4 of the Form. The number of pages comprising the 
report (Form plus attachments) shall be indicated at the bottom of 
each report page (e.g., 1 of 3, 2 of 3, 3 of 3). If additional 
information is not provided in this manner, it will be assumed that 
no additional information was provided.
* * * * *

8. Transaction Codes

    * * * If a transaction involves an equity swap or instrument 
with similar characteristics, use transaction Code ``K'' in addition 
to the code(s) that most appropriately describes the transaction, 
e.g., ``S/K'' or ``P/K.''

General Transaction Codes

P--Open market or private purchase of non-derivative or derivative 
security
S--Open market or private sale of non-derivative or derivative 
security

Rule 16b-3 Transaction Codes

A--Grant, award or other acquisition pursuant to Rule 16b-3(d)
D--Disposition to the issuer of issuer equity securities pursuant to 
Rule 16b-3(e)
F--Payment of exercise price or tax liability by delivering or 
withholding securities incident to the receipt, exercise or vesting 
of a security issued in accordance with Rule 16b-3
I--Discretionary transaction in accordance with Rule 16b-3(f) 
resulting in acquisition or disposition of issuer securities
M--Exercise or conversion of derivative security exempted pursuant 
to Rule 16b-3

Derivative Securities Codes (Except for transactions exempted pursuant 
to Rule 16b-3)

C--Conversion of derivative security
E--Expiration of short derivative position
H--Expiration (or cancellation) of long derivative position with 
value received
O--Exercise of out-of-the-money derivative security
X--Exercise of in-the-money or at-the-money derivative security

Other Section 16(b) Exempt Transaction and Small Acquisition Codes 
(except for Rule 16b-3 codes above)

G--Bona fide gift
L--Small acquisition under Rule 16a-6
W--Acquisition or disposition by will or the laws of descent and 
distribution
Z--Deposit into or withdrawal from voting trust

Other Transaction Codes

J--Other acquisition or disposition (describe transaction)
K--Transaction in equity swap or instrument with similar 
characteristics
U--Disposition pursuant to a tender of shares in a change of control 
transaction
    To indicate that a holding should have been reported previously 
on Form 3, place a ``3'' in Table I, column 3 or Table II, column 4, 
as appropriate. Indicate in the space provided for explanation of 
responses the event triggering the Form 3 filing obligation. To 
indicate that a transaction should have been reported previously on 
Form 4, place a ``4'' next to the transaction code reported in Table 
I, column 3 or Table II, column 4 (e.g, an open market purchase of a 
non-derivative security that should have been reported previously on 
Form 4 should be designated as ``P4''). To indicate that a 
transaction should have been reported on a previous Form 5, place a 
``5'' in Table I, column 3 or Table II, column 4, as appropriate. In 
addition, the appropriate box on the front page of the Form should 
be checked.
* * * * *

1. Name and Address of Reporting Person*

(Last)    (First)    (Middle)
    (Street)
(City)    (State)    (Zip)
    * If the Form is filed by more than one Reporting Person, see 
Instruction 4(b)(v).
* * * * *

7. Individual or Joint/Group Filing

(Check applicable line)

________Form Filed by One Reporting Person
________Form Filed by More than One Reporting Person
* * * * *
    Dated: May 31, 1996.
    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-14184 Filed 6-13-96; 8:45 am]
BILLING CODE 8010-01-P