[Federal Register Volume 67, Number 221 (Friday, November 15, 2002)]
[Proposed Rules]
[Pages 69430-69453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28869]



[[Page 69429]]

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Part IV





 Securities and Exchange Commission





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 17 CFR Parts 240, 245 and 249



 Insider Trades During Pension Fund Blackout Periods; Proposed Rule

  Federal Register / Vol. 67, No. 221 / Friday, November 15, 2002 / 
Proposed Rules  

[[Page 69430]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 245 and 249

[Release No. 34-46778; IC-25795; File No. S7-44-02]
RIN 3235-AI71


Insider Trades During Pension Fund Blackout Periods

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing rules to clarify the application and prevent 
evasion of section 306(a) of the Sarbanes-Oxley Act of 2002. Section 
306(a) prohibits the directors and executive officers of an issuer from 
directly or indirectly purchasing, selling, or otherwise acquiring or 
transferring any equity security of the issuer during a pension plan 
blackout period that prevents plan participants or beneficiaries from 
engaging in equity securities transactions, if the equity security was 
acquired in connection with the director or executive officer's service 
or employment as a director or executive officer. In addition, the 
proposed rules would specify the content and timing of the notice that 
issuers must provide to their directors and executive officers and to 
the Commission about a blackout period.

DATES: Comments must be received on or before December 16, 2002.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, United States Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following electronic mail address: 
[email protected]. To help us process and review your comments more 
efficiently, comments should be submitted by one method only. All 
comment letters should refer to File No. S7-44-02; this file number 
should be included in the subject line if electronic mail is used. 
Comment letters will be available for public inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549. Electronically submitted comment letters will be 
posted on the Commission's Internet Web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Mark A. Borges, Special Counsel, or 
Elizabeth M. Murphy, Chief, Office of Rulemaking, Division of 
Corporation Finance, at (202) 942-2910, at the United States Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-
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0312.

SUPPLEMENTARY INFORMATION: We are proposing new Regulation BTR \2\ 
under the Securities Exchange Act of 1934 (``Exchange Act'') \3\ and 
amendments to Exchange Act rules 13a-11 \4\ and 15d-11 \5\ and to forms 
20-F,\6\ 40-F \7\ and 8-K \8\ under the Exchange Act.
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    \2\ 17 CFR 245.100-104.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 17 CFR 240.13a-11.
    \5\ 17 CFR 240.15d-11.
    \6\ 17 CFR 249.220f.
    \7\ 17 CFR 249.240f.
    \8\ 17 CFR 249.308.
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I. Introduction

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the ``Act'') was 
enacted.\9\ Section 306(a) of the Act, entitled ``Prohibition of 
Insider Trading During Pension Fund Blackout Periods,'' expressly 
prohibits any director or executive officer of an issuer of any equity 
security, directly or indirectly, from purchasing, selling or otherwise 
acquiring or transferring any equity security of the issuer during any 
blackout period with respect to such equity security, if the director 
or executive officer acquired the equity security in connection with 
his or her service or employment as a director or executive 
officer.\10\ Section 306(a) further directs us, in consultation with 
the Secretary of Labor, to issue rules to clarify the application of 
this provision and to prevent evasion thereof.\11\
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    \9\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \10\ Section 306(a)(1) of the Act.
    \11\ Section 306(a)(3) of the Act.
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    Pension plan ``blackout periods'' occur for a variety of 
administrative purposes. Their occurrence and timing are often, but not 
always, within the control of the plan administrator.\12\ The most 
common reasons for imposing a blackout period include:
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    \12\ These periods during which plan participants or 
beneficiaries are not permitted to access their accounts are 
sometimes also referred to as ``lockdowns,'' transition periods'' or 
``quiet periods.'' Blackout periods can range from a few days to 
several months in duration.
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    [sbull] Changes in investment alternatives;
    [sbull] Changes in the frequency of portfolio valuations;
    [sbull] Changes in plan record-keepers or other service providers;
    [sbull] Changes in plan trustees; and
    [sbull] Corporate mergers, acquisitions and spin-offs that affect 
the pension coverage of groups of participants.\13\
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    \13\ For example, in the case of a change in plan record-
keepers, the ``blackout period'' is intended to give the old record-
keeper time to perform final reconciliation of participant and 
beneficiary records and plan assets and to transfer the plan records 
to the new record-keeper. The new record-keeper then is given time 
to enter participant and beneficiary accounts into its 
administration system and to verify the accuracy of the plan 
records.
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    Generally, during a blackout period, plan participants can 
contribute to their accounts, but cannot switch their account funds 
between investment options. Understandably, plan participants often are 
troubled by the prospect of a blackout, which may lock them into their 
existing investment choices for an extended period of time. Even 
participants who view their plan accounts as part of an overall long-
term investment strategy may be uncomfortable with the possibility of 
being unable to change investment choices when an unforeseen event, 
such as a sudden stock price decline, occurs during a blackout period.
    In the past year, several highly-publicized cases have demonstrated 
the catastrophic consequences that can befall employees who have 
invested substantially all of their retirement savings in their 
employer's equity securities when the issuer's securities fall sharply 
during a blackout period.\14\ There also have been allegations that, at 
the time that rank-and-file employees were precluded from selling their 
employer's equity securities in their individual pension plan accounts, 
corporate executives were exercising and cashing out their employee 
stock options and selling other securities acquired through the 
company's equity compensation plans.
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    \14\ See, for example, Ellen E. Schultz & Theo Francis, Why 
Company Stock is a Burden for Many--And Less So for a Few, Wall St. 
J., Nov. 2, 2001, at A1; Elizabeth Wine, Enron Faces Lawsuits Over 
Handling of Pension Plan, Fin. Times, Nov. 28, 2002, at 30.
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    Section 306(a) is intended to address this problem. It prohibits an 
issuer's directors and executive officers from trading in equity 
securities of the issuer when a substantial number of the issuer's 
employees are unable to engage in transactions involving equity 
securities of the issuer through their individual pension plan 
accounts. Section 306(a) is designed to address the apparent unfairness 
of an issuer's directors and executive officers being able to sell 
their equity securities when the issuer's employees cannot. The 
statute's trading prohibition should mitigate the risk that corporate 
executives are putting their personal

[[Page 69431]]

interests ahead of their responsibilities to their companies, their 
employees and their companies' security holders. The required notice 
should ensure that directors and executive officers of an issuer, as 
well as investors, are aware of an impending blackout period on a 
timely basis.
    Section 306(a) becomes effective on January 26, 2003, 180 days 
after the date of enactment of the Act.\15\ We are proposing new 
Regulation Blackout Trading Restriction (``BTR'') to clarify the scope 
and application of section 306(a).\16\
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    \15\ See section 306(c) of the Act.
    \16\ Section 306(b) of the Act directs the Secretary of Labor to 
issue initial guidance and a model notice pursuant to section 
101(i)(6) of ERISA (requiring 30-day advance notice of a pension 
plan blackout period to the plan's participants and beneficiaries) 
not later than January 1, 2003. In addition, the Secretary of Labor 
must promulgate interim final rules not later than October 13, 2002 
(75 days after the date of enactment of the Act). These interim 
final rules were issued by the Department of Labor on October 11, 
2002 (67 FR 64766). For purposes of section 306(b), the term 
``blackout period'' is defined more expansively than in section 
306(a) of the Act and includes any period of more than three 
consecutive business days in which any ability to change investments 
in any assets, to obtain distributions or to obtain loans is 
suspended, limited or restricted. In addition, section 306(b) 
applies to pension plans regardless of whether the plans invest in 
an issuer's equity securities.
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II. Regulation BTR

A. Statutory Trading Prohibition

    Section 306(a) of the Act seeks to equalize the treatment of 
corporate executives and rank-and-file employees with respect to their 
ability to engage, during a pension plan blackout period, in 
transactions in an issuer's equity securities that were acquired in 
connection with their service to, or employment with, the issuer. As 
proposed, Regulation BTR would clarify, and seek to prevent evasion of, 
section 306(a)'s statutory trading prohibition as follows:
    [sbull] Proposed Exchange Act rule 100 would define terms used in 
the regulation.
    [sbull] Proposed Exchange Act rule 101 would clarify the operation 
of the general statutory prohibition on trading by directors and 
executive officers during a pension plan blackout period and set forth 
exceptions to the prohibition.
    [sbull] Proposed Exchange Act rule 102 would set forth exceptions 
to the definition of ``blackout period.''
    [sbull] Proposed Exchange Act rule 103 would clarify the operation 
of the general statutory private remedy for violation of section 
306(a).
    [sbull] Proposed Exchange Act rule 104 would set forth the content 
and delivery requirements for the notice that an issuer must provide in 
connection with a blackout period.
    In order to give effect to section 306(a) in a manner consistent 
with Congressional intent, we propose to use a number of concepts that 
have been developed under section 16 of the Exchange Act.\17\ This 
approach provides an appropriately broad scope to the statutory trading 
prohibition of section 306(a), seeks to prevent evasion of the 
prohibition, takes advantage of a well-established body of rules and 
interpretations concerning the trading activities of corporate insiders 
and facilitates enforcement of the trading prohibition of section 
306(a) by generally allowing reference to trading reports filed 
pursuant to section 16(a) of the Exchange Act.\18\ A discussion of each 
of these proposed rules and related issues follows.
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    \17\ 15 U.S.C. 78p. Because the purposes of section 306(a) of 
the Act and section 16 are not identical, however, we do not mean to 
suggest that section 306(a) and proposed Regulation BTR will always 
be interpreted the same as section 16 if the purposes diverge or the 
interests of investors require.
    \18\ 15 U.S.C. 78p(a).
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B. Discussion

1. Issuers Subject to Trading Prohibition
    Section 306(a) of the Act applies to directors and executive 
officers of issuers as defined in the Act. Section 2(a)(7) of the Act 
provides that the term ``issuer'' means an issuer (as defined in 
section 3(a)(8) of the Exchange Act): \19\
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    \19\ 15 U.S.C. 78c(a)(8). Section 3(a)(8) defines the term 
``issuer'' to mean ``any person who issues or proposes to issue any 
security; except that with respect to certificates of deposit for 
securities, voting-trust certificates, or collateral-trust 
certificates, or with respect to certificates of interest or shares 
in an unincorporated investment trust not having a board of 
directors or of the fixed, restricted management, or unit type, the 
term ``issuer'' means the person or persons performing the acts and 
assuming the duties of depositor or manager pursuant to the 
provisions of the trust or other agreement or instrument under which 
such securities are issued; and except that with respect to 
equipment-trust certificates or like securities, the term ``issuer'' 
means the person by whom the equipment or property is, or is to be, 
used.''
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    [sbull] The securities of which are registered under section 12 of 
the Exchange Act; \20\
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    \20\ 15 U.S.C. 78l.
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    [sbull] That is required to file reports under section 15(d) of the 
Exchange Act; \21\ or
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    \21\ 15 U.S.C. 78o(d).
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    [sbull] That files, or has filed, a registration statement that has 
not yet become effective under the Securities Act of 1933 (the 
``Securities Act'') \22\ and that has not been withdrawn.\23\
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    \22\ 15 U.S.C. 77a et seq.
    \23\ This definition of ``issuer'' would be set forth in 
proposed Exchange Act rule 100(k).
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    Accordingly, section 306(a) applies, and proposed Regulation BTR 
would apply, to the directors and executive officers of domestic 
issuers, foreign private issuers, banks and savings associations, small 
business issuers and, in rare instances, to registered investment 
companies.\24\
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    \24\ Section 306(a) does not, and proposed Regulation BTR would 
not, apply to entities that do not issue equity securities, such as 
issuers of asset-backed securities.
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    (a) Foreign Private Issuers
    Section 306(a) of the Act, by its terms, applies to foreign private 
issuers.\25\ Under proposed Regulation BTR, the statutory trading 
prohibition of section 306(a) would apply to equity security 
transactions by directors and executive officers of a foreign private 
issuer when 50% or more of the participants or beneficiaries in pension 
plans maintained by the issuer who are located in the United States and 
its territories and possessions \26\ are subject to a blackout period, 
and the affected employees represent a significant portion of the 
issuer's plan participants.\27\ It would not apply if a blackout period 
affected only plan participants or beneficiaries located outside the 
United States.
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    \25\ For purposes of the Exchange Act, a ``foreign private 
issuer'' is defined to mean ``any foreign issuer other than a 
foreign government except an issuer meeting the following 
conditions: (1) More than 50 percent of the issuer's outstanding 
voting securities are directly or indirectly held of record by 
residents of the United States; and (2) any of the following: (i) 
The majority of the executive officers or directors are United 
States citizens or residents; (ii) more than 50 percent of the 
assets of the issuer are located in the United States; or (iii) the 
business of the issuer is administered principally in the United 
States.'' See Exchange Act Rule 3b-4(c) (17 CFR 240.3b-4(c)).
    \26\ Proposed Regulation BTR would use the term ``state'' to 
identify the participants or beneficiaries located in the United 
States and its territories and possessions. Under proposed Exchange 
Act rule 100(m), the term ``state'' would have the meaning set forth 
in section 3(a)(16) of the Exchange Act (15 U.S.C. 78c(a)(16)). 
Section 3(a)(16) defines the term ``state'' to mean ``any State of 
the United States, the District of Columbia, Puerto Rico, the Virgin 
Islands, or any other possession of the United States.''
    \27\ See section II.B.5(c) below.
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    This approach is consistent with the purposes of the statute. We 
believe that, in enacting section 306(a), Congress was seeking 
principally to protect pension plan participants and beneficiaries 
located in the United States, and generally leaving to foreign 
authorities issues related to the interests of plan participants 
located outside the United States. It also conforms to our policy of 
focusing the protections of the federal securities laws on U.S.-based 
investors.

Request for Comment

    [sbull] What impact would section 306(a) and proposed Regulation 
BTR have on

[[Page 69432]]

the willingness of foreign private issuers to raise capital in the 
public U.S. capital markets, to list on U.S. markets and to register 
their securities under the Securities Act or the Exchange Act?
    [sbull] Will the application of proposed Regulation BTR to foreign 
private issuers unduly discourage these issuers from implementing 
equity-based compensation plans for the benefit of their U.S.-based 
employees?
    [sbull] Should section 306(a) and proposed Regulation BTR apply 
more broadly to foreign private issuers? If so, explain how.
    (b) Banks and Saving Associations
    The statutory trading prohibition of section 306(a) of the Act 
applies to directors and executive officers of banks and savings 
associations that satisfy the definition of ``issuer'' under section 
2(a)(7) of the Act. The Act amended section 12(i) of the Exchange Act 
\28\ to make it clear that the federal banking agencies have the 
authority to administer and enforce various provisions of the Act, 
including the statutory trading prohibition of section 306(a), with 
respect to banks and savings associations.\29\
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    \28\ 15 U.S.C. 78l(i).
    \29\ See section 3(b)(4) of the Act.
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    (c) Small Business Issuers
    Section 306(a) of the Act generally does not distinguish between 
large and small issuers. Accordingly, section 306(a)'s trading 
prohibition applies to any entity that satisfies the definition of 
``issuer'' under section 2(a)(7) of the Act without regard to the 
entity's size, including small business issuers.\30\ We note, however, 
that because many small companies do not file Exchange Act reports or 
registration statements under the Securities Act, not all small 
companies would be subject to section 306(a) and proposed Regulation 
BTR.
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    \30\ Under regulation S-B (17 CFR 228.10 et seq.), a ``small 
business issuer'' is defined to mean ``a company that meets all of 
the following criteria: (i) Has revenues of less than $25,000,000; 
(ii) is a U.S. or Canadian issuer; (iii) is not an investment 
company; and (iv) if a majority-owned subsidiary, the parent 
corporation is also a small business issuer. Provided however, that 
an entity is not a small business issuer if it has a public float 
(the aggregate market value of the issuer's outstanding securities 
held by non-affiliates) of $25,000,000 or more.'' See item 10(a)(1) 
of Regulation S-B (17 CFR 228.10).
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Request for Comment

    [sbull] Is the compliance burden for small business issuers 
disproportionate to the benefits to be obtained from compliance with 
section 306(a) and proposed Regulation BTR? If so, should we exclude 
them from section 306(a) and proposed Regulation BTR? Would some other 
threshold for exclusion be more appropriate than the small business 
issuer definition?
    [sbull] Is there any basis for treating pension plans sponsored by 
small business issuers differently than other pension plans? If 
blackout periods imposed on pension plans sponsored by small business 
issuers were excluded from proposed Regulation BTR, what would be the 
impact on plan participants?
    (d) Registered Investment Companies
    The statutory trading prohibition of section 306(a) of the Act 
applies to directors and executive officers of registered investment 
companies that register a class of securities under section 12 of the 
Exchange Act or that are required to file reports under section 15(d) 
of the Exchange Act or that file, or have filed, a registration 
statement that has not yet become effective under the Securities Act 
and that has not been withdrawn. Investment companies, however, 
typically do not have employees because they are externally managed, 
with investment advisory and other services provided by affiliated and 
unaffiliated parties pursuant to contracts with the investment company. 
Without employees, investment companies typically do not maintain 
employee pension plans, and, as a practical matter, there would 
generally be no blackout periods triggering the statutory trading 
prohibition. Nonetheless, there are some cases, for example, internally 
managed investment companies, where a registered investment company 
that compensates its officers and directors with its own shares may 
have employees of its own and the statutory trading prohibition could 
apply in practice.\31\
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    \31\ See Baker, Fentress & Company, et al., Release Nos. 40-
23571 (Nov. 24, 1998) (notice) and 40-23619 (Dec. 22, 1998) (order) 
(permitting internally managed closed-end investment company to 
provide equity-based compensation, including stock, stock options, 
and stock appreciation rights to its officers, directors, and 
employees); Association of Publicly Traded Investment Funds, Release 
Nos. 40-14541 (May 28, 1985) (notice) and 40-14594 (June 21, 1985) 
(order) (``1985 APTIF Order'') (permitting internally managed 
closed-end investment companies to offer their employees deferred 
compensation in the form of stock options and stock appreciation 
rights); Association of Publicly Traded Investment Funds, Release 
Nos. 40-15439 (Nov. 26, 1986) (notice) and 40-15496 (Dec. 23, 1986) 
(order) (amending 1985 APTIF Order to permit profit-sharing 
retirement plans qualified under section 401(a) of the Internal 
Revenue Code). See also Interpretive Matters Concerning Independent 
Directors of Investment Companies, Release No. 40-24083 (Oct. 14, 
1999) (release stating that the staff would not recommend 
enforcement action against registered open-end investment companies 
that compensate directors with their shares, provided that a fixed 
dollar value is assigned to directors' services prior to the time 
that the compensation in shares is payable).
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    Under proposed Exchange Act rule 104, the required notice to the 
Commission of a blackout period must be filed on form 8-K. However, 
Exchange Act rules 13a-11(b) \32\ and 15d-11(b) \33\ exempt registered 
management investment companies from form 8-K filing requirements. 
Accordingly, we are proposing an amendment to those rules that would 
subject such investment companies to form 8-K filing requirements for 
the sole purpose of meeting any filing obligation that might arise 
under proposed Regulation BTR.
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    \32\ 17 CFR 240.13a-11(b).
    \33\ 17 CFR 240.15d-11(b).
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Request for Comment

    [sbull] Should we exclude investment companies from proposed 
Regulation BTR? If so, what would be the rationale for the exclusion?
    [sbull] With regard to the proposed form 8-K filing requirement, we 
request public comment on feasible alternatives that minimize the 
reporting burdens on registered investment companies. In addition, we 
request comment on the utility to investors of the reports to the 
Commission in relation to the costs to registered investment companies 
and their affiliated persons of providing those reports.
2. Persons Subject to Trading Prohibition
    Section 306(a) of the Act applies to directors and executive 
officers of issuers subject to the Act. Proposed Exchange Act rule 100 
would define these terms for purposes of section 306(a).
    (a) Directors
    Under proposed Exchange Act rule 100(c)(1), for purposes of section 
306(a) of the Act and proposed Regulation BTR, the term ``director'' 
would have the meaning set forth in section 3(a)(7) of the Exchange 
Act.\34\ In determining whether an individual would be a director of an 
issuer for purposes of section 306(a) and proposed Regulation BTR, the 
individual's title would not be dispositive as to whether he or she is 
a director.\35\ An individual may be a

[[Page 69433]]

director without holding the title, if he or she functions as a 
director.\36\
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    \34\ 15 U.S.C. 78c(a)(7). Section 3(a)(7) defines the term 
``director'' to mean ``any director of a corporation or any person 
performing similar functions with respect to any organization, 
whether incorporated or unincorporated.'' As we recently noted, this 
definition reflects a functional and flexible approach to 
determining whether a person is a director of an entity. See Release 
No. 34-46685 (Oct. 18, 2002) (67 FR 65325) at n. 7.
    \35\ As under section 16 of the Exchange Act, in determining 
whether an advisory, emeritus or honorary director would be a 
director for purposes of section 306(a) and proposed Regulation BTR, 
attention would be given to the individual's underlying 
responsibilities or privileges with respect to the issuer and 
whether he or she has a significant policy-making role with the 
issuer. See Release No. 34-28869 (Feb. 21, 1991) (56 FR 7242), at 
section II.A.1. An individual may hold the title ``director'' and 
yet, because he or she is not acting as such, not be deemed a 
director. Release No. 34-26333 (Dec. 2, 1988) (53 FR 49997), at 
section III.A.2. (``In general, honorary directors need not be 
treated as directors for purposes of Section 16, because they 
usually do not take part in formulating and deciding policy issues 
concerning the issuer, and do not have general access to material, 
non-public information.'')
    \36\ See the Commission's amicus curiae brief filed in Gryl 
versus Shire Pharmaceuticals Group PLC, 298 F.3d 136 (2d Cir. 2002). 
Where the individual does not have the title, however, he or she 
must have more than access to non-public information about the 
issuer, and must do more than assist the board in formulating 
policy.
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Request for Comment

    [sbull] Is it appropriate to use the definition in section 3(a)(7) 
of the Exchange Act to define the term ``director'' for purposes of 
section 306(a) and proposed Regulation BTR? If not, what definition 
should we use?
    (b) Executive Officers
    Under proposed Exchange Act rule 100(h)(1), for purposes of section 
306(a) of the Act and proposed Regulation BTR, the term ``executive 
officer'' would be defined in the same manner as the term ``officer'' 
is defined in Exchange Act rule 16a-1(f).\37\ While the Exchange Act 
rules contain a separate definition of the term ``executive officer,'' 
\38\ we believe that, for purposes of section 306(a) and proposed 
Regulation BTR, the broader definition in Exchange Act rule 16a-1(f) is 
more appropriate because of its focus on the policy-making functions of 
the subject individual.\39\ In addition, by using this definition, 
issuers that are subject to section 16 of the Exchange Act would be 
better able to coordinate the operation of their insider trading 
programs and to monitor the individuals subject to the provisions of 
both section 16 and section 306(a).
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    \37\ 17 CFR 240.16a-1(f). Exchange Act rule 16a-1(f) defines the 
term ``officer'' to mean ``an issuer's president, principal 
financial officer, principal accounting officer (or, if there is no 
such accounting officer, the controller), any vice-president of the 
issuer in charge of a principal business unit, division or function 
(such as sales, administration or finance), any other officer who 
performs a policy-making function, or any other person who performs 
similar policy-making functions for the issuer. Officers of the 
issuer's parent(s) or subsidiaries shall be deemed officers of the 
issuer if they perform such policy-making functions for the issuer. 
In addition, when the issuer is a limited partnership, officers or 
employees of the general partner(s) who perform policy-making 
functions for the limited partnership are deemed officers of the 
limited partnership. When the issuer is a trust, officers or 
employees of the trustee(s) who perform policy-making functions for 
the trust are deemed officers of the trust.''
    \38\ See Exchange Act rule 3b-7 (17 CFR 240.3b-7). This 
definition differs from the definition in Exchange Act rule 16a-1(f) 
in that it does not expressly include a registrant's principal 
financial officer or principal accounting officer (or controller). 
It also does not expressly address officers of a parent corporation 
or how to identify a registrant's executive officers when a 
registrant is a limited partnership or a trust.
    \39\ Thus, the standard for determining whether an individual is 
an ``executive officer'' for purposes of section 306(a) of the Act 
and proposed Regulation BTR would be the same as those applicable 
under Exchange Act rule 16a-1(f). For example, the term ``policy-
making functions'' would not include policy-making functions that 
are not significant. Similarly, if pursuant to item 401(b) of 
Regulation S-K (17 CFR 229.401(b)), an issuer identifies an 
individual as an ``executive officer,'' it would be presumed that 
the board of directors of the issuer has made that judgment and that 
the individuals so identified are executive officers of the issuer 
for purposes of section 306(a) and proposed Regulation BTR, as are 
such other persons enumerated in Exchange Act rule 16a-1(f) but not 
in item 401(b). See the note to Exchange Act rule 16a-1(f).
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Request for Comment

    [sbull] Is it appropriate to use the definition of the term 
``officer'' in Exchange Act Rule 16a-1(f) to define the term 
``executive officer'' for purposes of section 306(a) and proposed 
Regulation BTR?
    [sbull] If not, should we use the definition in Exchange Act rule 
3b-7, or some other definition? Should the scope of the definition be 
broader or narrower? If so, explain why.

    (c) Foreign Private Issuers
    Under proposed Exchange Act rule 100(c)(2), for purposes of section 
306(a) of the Act and proposed Regulation BTR, in the case of a foreign 
private issuer, the term ``director'' would mean a director who is a 
management employee of the issuer. Under proposed Exchange Act rule 
100(h)(2), for purposes of section 306(a) and proposed Regulation BTR, 
in the case of a foreign private issuer, the term ``executive officer'' 
would mean the principal executive officer or officers, the principal 
financial officer or officers and the principal accounting officer or 
officers (or, if there is none, the controller) of the issuer. Because 
foreign private issuers are not subject to section 16 of the Exchange 
Act,\40\ we believe that it is appropriate to specifically enumerate 
the directors and executive officers of a foreign private issuer who 
would be subject to section 306(a) and proposed Regulation BTR rather 
than relying on a section 16 definition. This would assist foreign 
private issuers in identifying the individuals who would be subject to 
section 306(a) and proposed Regulation BTR. In addition, many foreign 
private issuers have lower-level employee representatives on their 
boards of directors, and we do not believe that section 306(a) and 
proposed Regulation BTR should be extended to these individuals or to 
other non-employee directors of foreign companies.
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    \40\ See Exchange Act rule 3a12-3 (17 CFR 240.3a12-3).
---------------------------------------------------------------------------

Request for Comment

    [sbull] Is it appropriate to use a different definition of the 
terms ``director'' and ``executive officer'' for foreign private 
issuers than for domestic issuers?
    [sbull] Is it appropriate to limit the individuals who would be 
considered the directors and executive officers of a foreign private 
issuer for purposes of section 306(a) and proposed Regulation BTR? If 
not, explain why.
    [sbull] Should the proposed definition cover other executive 
officers of a foreign private issuer in addition to the three 
enumerated officers? Should we exclude the principal accounting officer 
from the definition? In each case, explain why.
    [sbull] Are there other directors of a foreign private issuer who 
should be included in the definition other than management directors? 
If so, explain who and why.
    (d) Termination of Status
    Because of the definitions described above, the statutory trading 
prohibition of section 306(a) of the Act and the provisions of proposed 
Regulation BTR would no longer apply to an individual who ceases to be 
a director or executive officer of an issuer.
3. Securities Subject to Trading Prohibition
    Section 306(a) of the Act applies to any equity security of an 
issuer other than an exempt security.\41\ To effectuate the intended 
purpose of section 306(a) and to prevent evasion of the statutory 
trading prohibition, proposed Exchange Act rule 100(f) would define 
``equity security of the issuer'' to include any equity security or 
derivative security relating to an issuer, whether or not issued by 
that issuer.\42\ Thus, section 306(a) and proposed Regulation BTR would 
apply to any equity security that

[[Page 69434]]

relates to an equity security of the director or executive officer's 
company, even if the security is issued by a third party.\43\
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    \41\ For purposes of section 306(a) of the Act, proposed 
Exchange Act rule 100(i) would define the term ``exempt security'' 
by reference to the definition in section 3(a)(12) of the Exchange 
Act (15 U.S.C. 78c(a)(12)).
    \42\ For example, this would include a security-based swap 
agreement, a standardized option, a security future on an equity 
security and a security future on a narrow-based security index. 
See, for example, Release No. 34-28869 (Feb. 8, 1991) (56 FR 7242) 
and Release No. 33-8107 (Jun. 21, 2002) (67 FR 43234). A ``security-
based swap agreement'' is defined in section 206B of the Gramm-
Leach-Bliley Financial Modernization Act of 1999, as amended by H.R. 
4577, Pub. L. 106-554, 114 Stat. 2763.
    \43\ This would follow the approach that the Commission has 
taken under section 16 of the Exchange Act. See Exchange Act rule 
16a-1(d) (17 CFR 240.16a-1(d)).
---------------------------------------------------------------------------

    (a) Equity Security
    Under proposed Exchange Act Rule 100(e), for purposes of section 
306(a) of the Act and proposed Regulation BTR, the term ``equity 
security'' would have the same meaning as in the definition set forth 
in section 3(a)(11) of the Exchange Act \44\ and Exchange Act rule 
3a11-1.\45\ In the case of foreign issuers, this definition would 
include depositary shares evidenced by American Depositary Receipts 
(``ADRs'').\46\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78c(a)(11). Section 3(a)(11) defines the term 
``equity security'' to mean ``any stock or similar security; or any 
security future on any such security; or any security convertible, 
with or without consideration, into such a security, or carrying any 
warrant or right to subscribe to or purchase such a security; or any 
such warrant or right; or any other security which the Commission 
shall deem to be of similar nature and consider necessary or 
appropriate, by such rules and regulations as it may prescribe in 
the public interest or for the protection of investors, to treat as 
an equity security.''
    \45\ 17 CFR 240.3a11-1. Exchange Act rule 3a11-1 defines the 
term ``equity security'' to mean ``any stock or similar security, 
certificate of interest or participation in any profit sharing 
agreement, preorganization certificate or subscription, transferable 
share, voting trust certificate or certificate of deposit for an 
equity security, limited partnership interest, interest in a joint 
venture, or certificate of interest in a business trust; any 
security future on any such security; or any security convertible, 
with or without consideration into such a security, or carrying any 
warrant or right to subscribe to or purchase such a security; or any 
such warrant or right; or any put, call, straddle, or other option 
or privilege of buying such a security from or selling such a 
security to another without being bound to do so.''
    \46\ An ADR is a negotiable certificate of interest representing 
American depositary shares that represent an ownership interest in a 
specified number or fraction of securities that have been deposited 
with a depositary. Section 306(a) of the Act and proposed Regulation 
BTR would apply in the same manner whether the transaction or the 
benefit plan in question involved ADRs or the deposited securities 
that they represent. Likewise, section 306(a) and proposed 
Regulation BTR would apply to purchases, sales, acquisitions and 
transfers that occur in the United States or outside the United 
States.
---------------------------------------------------------------------------

Request for Comment

    [sbull] Is it appropriate to use the definitions in section 
3(a)(11) of the Exchange Act and Exchange Act rule 3a11-1 to define the 
term ``equity security'' for purposes of section 306(a) and proposed 
Regulation BTR? If not, what definition should we use?
    (b) Derivative Securities
    Under proposed Exchange Act rule 100(d), for purposes of section 
306(a) of the Act and proposed Regulation BTR, the term ``derivative 
security'' would have the same meaning as the definition of the term 
``derivative security'' set forth in Exchange Act rule 16a-1(c).\47\ As 
previously indicated, this definition would be interpreted in a manner 
consistent with the rules and interpretations that have developed under 
section 16 of the Exchange Act. For example, an interest that may be 
settled only in cash, but the value of which is denominated or based on 
an equity security, such as phantom stock, would be considered a 
derivative security for purposes of section 306(a) and proposed 
Regulation BTR. Consequently, an acquisition of a ``cash-only'' 
derivative security or the exercise, sale or other transfer of the 
security during a blackout period would be subject to the statutory 
trading prohibition unless pursuant to an exempt transaction.
---------------------------------------------------------------------------

    \47\ 17 CFR 240.16a-1(c). Exchange Act rule 16a-1(c) defines the 
term ``derivative securities'' to mean ``any option, warrant, 
convertible security, stock appreciation right, or similar right 
with an exercise or conversion privilege at a price related to an 
equity security, or similar securities with a value derived from the 
value of an equity security, but shall not include: (1) Rights of a 
pledgee of securities to sell the pledged securities; (2) rights of 
all holders of a class of securities of an issuer to receive 
securities pro rata, or obligations to dispose of securities, as a 
result of a merger, exchange offer, or consolidation involving the 
issuer of the securities; (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; (4) 
interests in broad-based index options, broad-based index futures, 
and broad-based publicly traded market baskets of stocks approved 
for trading by the appropriate federal governmental authority; (5) 
interests or rights to participate in employee benefit plans of the 
issuer; or (6) rights with an exercise or conversion privilege at a 
price that is not fixed; or (7) options granted to an underwriter in 
a registered public offering for the purpose of satisfying over-
allotments in such offering.''
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Request for Comment

    [sbull] Is it appropriate to use the Exchange Act Rule 16a-1(c) 
definition of ``derivative security'' for purposes of section 306(a) 
and proposed Regulation BTR? If not, what definition should we use?
    [sbull] Are there instruments included in the definition of 
``derivative security'' for purposes of section 16 of the Exchange Act 
that we should exclude from the definition of ``derivative security'' 
for purposes of section 306(a) and proposed Regulation BTR?

--Should we exclude an interest that may be settled solely in cash, the 
value of which is denominated or based on an equity security, from the 
definition of ``derivative security'' used for purposes of section 
306(a) and proposed Regulation BTR?
    [sbull] Are there instruments excluded from the definition of 
``derivative security'' for purposes of section 16 of the Exchange Act 
that we should include in the definition of ``derivative security'' for 
purposes of section 306(a) and proposed Regulation BTR?

--Should we include derivative securities without a fixed exercise 
price in the definition of ``derivative security'' used for purposes of 
section 306(a) and proposed Regulation BTR?
4. Transactions Subject to Trading Prohibition
    Section 306(a) of the Act prohibits a director or executive officer 
from purchasing, selling or otherwise acquiring or transferring any 
equity security of an issuer during a pension plan blackout period, if 
the equity security was acquired in connection with the director or 
executive officer's service or employment as a director or executive 
officer. Thus, the scope of the statutory trading prohibition is 
limited to:
    [sbull] An acquisition of equity securities during a blackout 
period if the acquisition is in connection with service or employment 
as a director or executive officer; and
    [sbull] A disposition of equity securities during a blackout period 
if the disposition involves equity securities acquired in connection 
with service or employment as a director or executive officer.\48\
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    \48\ While section 306(a) of the Act uses the word ``acquires'' 
to describe the equity securities that are subject to the statutory 
trading prohibition, we believe that Congress intended to cover 
equity securities whenever acquired, whether before or during a 
pension plan blackout period. The nature of the transactions that 
are subject to the trading prohibition confirm this conclusion. The 
language in proposed Exchange Act rule 101(a) reflects this 
interpretation.
---------------------------------------------------------------------------

    Proposed Regulation BTR would clarify how section 306(a) is 
intended to apply to each of these two categories of transactions.
    (a) ``Acquired in Connection with Service or Employment''
    Section 306(a) of the Act limits the statutory trading prohibition 
to equity securities that a director or executive officer acquires in 
connection with his or her service or employment as a director or 
executive officer.\49\ To implement this limitation, proposed

[[Page 69435]]

Exchange Act rule 100(a) defines this term to include equity securities 
acquired by a director or executive officer:
---------------------------------------------------------------------------

    \49\ Section 306(a)(1) of the Act expressly limits the scope of 
the statutory trading prohibition to equity securities that a 
director or executive officer acquires ``in connection with his or 
her service or employment as a director or executive officer.'' 
Accordingly, equity securities of an issuer that are not acquired in 
connection with service or employment as a director or executive 
officer would not be subject to section 306(a) or proposed 
Regulation BTR.
---------------------------------------------------------------------------

    [sbull] At a time when he or she was a director or executive 
officer of the issuer, under a compensatory plan, contract, 
authorization or arrangement, including, but not limited to, plans 
relating to options, warrants or rights, pension, retirement or 
deferred compensation or bonus, incentive or profit-sharing (whether or 
not set forth in any formal plan document), including a compensatory 
plan, contract, authorization or arrangement with a parent, subsidiary 
or affiliate of the issuer;
    [sbull] At a time when he or she was a director or executive 
officer of the issuer, as a result of any transaction or business 
relationship that is described in paragraph (a) or (b) of item 404 of 
Regulation S-K \50\ or, in the case of foreign private issuers, item 
7.B of form 20-F \51\ (but without application of the disclosure 
thresholds of such provisions), to the extent that he or she has a 
pecuniary interest \52\ in the equity securities;
---------------------------------------------------------------------------

    \50\ 17 CFR 229.404(a) and (b).
    \51\ 17 CFR 249.220f.
    \52\ For purposes of section 306(a) of the Act, proposed 
Exchange Act rule 100(l) would define the terms ``pecuniary 
interest'' and ``indirect pecuniary interest'' by reference to the 
definitions in Exchange Act rule 16a-1(a)(2) (17 CFR 240.16a-
1(a)(2)). Exchange Act rule 16a-1(a)(2)(i) (17 CFR 240.16a-
1(a)(2)(i)) defines the term ``pecuniary interest'' to mean ``the 
opportunity, directly or indirectly, to profit or share in any 
profit derived from a transaction in the subject securities.'' The 
definition in proposed Exchange Act rule 100(l) also would encompass 
the portfolio exclusion of Exchange Act rule 16a-1(a)(2)(iii) (17 
CFR 240.16a-1(a)(2)(iii)).
---------------------------------------------------------------------------

    [sbull] As ``director's qualifying shares'' or other securities 
that he or she must hold to meet an issuer's minimum ownership 
requirements for directors or executive officers; or
    [sbull] Prior to becoming, or while, a director or executive 
officer of the issuer if the equity security was acquired as an 
inducement to service or employment with the issuer or a parent, 
subsidiary or affiliate of the issuer or as a result of a merger, 
consolidation or other acquisition transaction involving the issuer.
    While it is clear that Congress intended section 306(a) to cover 
transactions involving equity securities that are acquired through 
grants and awards under employee stock option, restricted stock and 
other common equity compensation plans, we believe that the broad 
language of the statute encompasses any plan, contract, authorization 
or arrangement that results in the acquisition of issuer equity 
securities in exchange for the performance of services for, or 
employment with, an issuer. The definition in proposed Exchange Act 
rule 100(a)(1) is intended to reach these types of plans and 
arrangements. This would ensure that issuers do not shift the form of 
their compensation programs to enable directors and executive officers 
to evade the application of section 306(a).
    The definition in proposed Exchange Act rule 100(a)(2) would 
include equity securities that have been acquired solely or primarily 
as a result of an individual's status as a director or executive 
officer. While this definition may reach equity securities that were, 
in fact, acquired in arms-length commercial transactions, we believe 
that inclusion of these transactions is necessary to prevent evasion of 
the statutory trading prohibition.
    The definition in proposed Exchange Act rule 100(a)(3) would 
include securities that an individual has acquired to satisfy 
requirements that the individual be a security holder of the issuer in 
order to serve on the issuer's board of directors (so-called 
``directors' qualifying shares'') and securities that a director or 
executive officer has acquired to satisfy an issuer's minimum ownership 
guidelines or requirements for directors or executive officers, 
including equity securities acquired on the open market for such 
purposes. Finally, the definition in proposed Exchange Act rule 
100(a)(4) would include equity securities acquired at a time when an 
individual has not yet become a director or executive officer of the 
issuer, but which are clearly related to his or her service or 
employment, such as a grant or award made to induce an individual to 
join an issuer's board of directors or to become an employee of the 
issuer or as a result of a merger, consolidation or other acquisition 
transaction involving the issuer.

Request for Comment

    [sbull] Are the transactions involving the acquisition of equity 
securities described in proposed Exchange Act rule 100(a) consistent 
with purposes of section 306(a) and proposed Regulation BTR? Should any 
of the described transactions be excluded from the definition of 
``acquired in connection with service or employment''? If so, what 
would be the rationale for the exclusion?
    [sbull] Are there any other situations where equity securities 
acquired by a director or executive officer should be considered 
``acquired in connection with service or employment'' as a director or 
executive officer?
    [sbull] For purposes of determining whether equity securities 
received under a compensatory plan, contract or arrangement were 
``acquired in connection with service or employment,'' would it be 
helpful to reference the existing definition of an ``employee benefit 
plan'' under the federal securities laws?
    [sbull] In the case of equity securities acquired by an individual 
as result of a merger, consolidation or other acquisition transaction 
involving the issuer, should such equity securities be considered 
``acquired in connection with service or employment as a director or 
executive officer'' only where they replace equity securities that 
otherwise would satisfy the requirements of the definition? For 
example, where an employee of a target company becomes an executive 
officer of an acquiring company and, in connection with the merger, 
consolidation or other acquisition transaction of the two entities, is 
issued equity securities of the acquiring company to replace equity 
securities of the target company, should these equity securities 
received be considered ``acquired in connection with service or 
employment as a director of executive officer'' only to the extent that 
they were otherwise acquired in connection with service or employment 
as a director or executive officer of the target company?
    [sbull] Should proposed Regulation BTR contain a ``safe harbor'' 
provision specifying acquisitions of an issuer's equity securities by 
directors and executive officers of the issuer that are not ``acquired 
in connection with service or employment'' as a director or executive 
officer? If so, what acquisitions of an issuer's equity securities 
should fall within the ``safe harbor'?
    (b) Indirect Interests
    The statutory trading prohibition of section 306(a) of the Act 
applies to both indirect, as well as direct, purchases, sales or other 
acquisitions or transfers of equity securities of the issuer by a 
director or executive officer.\53\ Similarly, to prevent evasion of the 
statutory trading prohibition, the definition of ``acquired in 
connection with service or employment'' in proposed Exchange Act rule 
100(a) would apply to indirect, as well as direct, acquisitions of 
equity securities for the benefit of a director or executive officer. 
For purposes of section 306(a), an acquisition or disposition of equity 
securities would be considered an acquisition or disposition by a 
director or executive officer if the director or

[[Page 69436]]

executive officer has a pecuniary interest \54\ in the transaction.
---------------------------------------------------------------------------

    \53\ See proposed Exchange Act rule 101(a).
    \54\ See n. 52 above.
---------------------------------------------------------------------------

    To promote consistency and to simplify compliance, the term 
``pecuniary interest'' would be interpreted in a manner consistent with 
the rules and interpretations that have developed under section 16 of 
the Exchange Act. Accordingly, a purchase, sale or other acquisition or 
transfer of equity securities by immediate family members \55\ sharing 
the same household, a partnership, corporation, limited liability 
company or trust would be attributable to a director or executive 
officer for purposes of the statutory trading prohibition of section 
306(a)(1) and proposed Exchange Act rule 101(a) if he or she is deemed 
to have an indirect pecuniary interest \56\ in the equity securities in 
question. An acquisition of equity securities by an immediate family 
member sharing the same household, a partnership, corporation, limited 
liability company or trust would be attributable to a director or 
executive officer for purposes of determining whether the acquisition 
is ``in connection with service or employment'' if the acquisition 
otherwise satisfies the definition in proposed Exchange Act rule 100(a) 
and he or she is deemed to have an indirect pecuniary interest in the 
equity securities in question.
---------------------------------------------------------------------------

    \55\ As defined in Exchange Act rule 16a-1(e) (17 CFR 240.16a-
1(e)) to include ``any child, stepchild, grandchild, parent, 
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-
law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, 
and shall include adoptive relationships.''
    \56\ See proposed Exchange Act rule 100(l).
---------------------------------------------------------------------------

Request for Comment

    [sbull] Is it appropriate to use the definition in Exchange Act 
rule 16a-1(a)(2) to define the term ``pecuniary interest'' for purposes 
of section 306(a) and proposed Regulation BTR? If not, what definition 
should we use?

--Are the definitions that determine the operation of the definition of 
the term ``pecuniary interest'' for purposes of section 16 of the 
Exchange Act appropriate for determining the application of section 
306(a) and proposed Regulation BTR to indirect acquisitions of equity 
securities?
--Instead, should the application of section 306(a) and proposed 
Regulation BTR to indirect acquisitions of equity securities use a 
different standard, such as the beneficial ownership rules under 
section 13(d) of the Exchange Act,\57\ for purposes of determining 
whether equity securities were acquired ``in connection with service or 
employment'' as a director or executive officer? If so, explain why.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78m(d).
---------------------------------------------------------------------------

--Should the application of section 306(a) and proposed Regulation BTR 
to indirect acquisitions and dispositions of equity securities use a 
different standard, such as the beneficial ownership rules under 
section 13(d) of the Exchange Act, for purposes of determining whether 
an acquisition or disposition of equity securities during a blackout 
period is subject to the statutory trading prohibition? If so, explain 
why.

    (c) Service or Employment Presumption
    Since the statutory trading prohibition of section 306(a) of the 
Act applies only to equity securities acquired in connection with 
service or employment as a director or executive officer, the statute, 
by its terms, does not completely preclude a director or executive 
officer from engaging in an acquisition or disposition of the equity 
securities of the issuer during a blackout period. This possibility may 
present difficulties in determining whether a particular transaction 
during a blackout period, such as a sale on the open market, involves 
equity securities that are subject to section 306(a) or other equity 
securities.
    To simplify identification and eliminate tracing the source of 
equity securities involved in a disposition transaction and to prevent 
possible evasion of the statute, proposed Exchange Act rule 101(b) 
establishes an irrebuttable presumption that any equity securities sold 
or otherwise transferred during a blackout period were acquired in 
connection with service or employment as a director or executive 
officer to the extent that the director or executive officer holds such 
securities, without regard to the actual source of the securities 
disposed. To avoid an overly-broad application of the presumption, 
however, in a given blackout period, equity securities held by a 
director or executive officer that were acquired in connection with 
service or employment could only count against a single disposition 
transaction during that blackout period.
    For example, if an executive officer owned 1,000 shares of the 
issuer's common stock, 250 of which were acquired as the result of the 
exercise of an employee stock option, a sale of 250 shares of common 
stock during a blackout period would be presumed to be a sale of the 
option shares and therefore subject to the statutory trading 
prohibition of section 306(a) and proposed Exchange Act rule 101(a), 
without regard to the actual source of the shares sold. A subsequent 
sale of 250 shares of common stock during the same blackout period, 
however, would not trigger the statutory trading prohibition since the 
option shares would have been deemed sold in the first transaction.

Request for Comment

    [sbull] Is it appropriate to presume that any equity securities 
acquired or disposed of during a blackout period were acquired in 
connection with service or employment as a director or executive 
officer? If not, is there an alternative way to determine the source of 
equity securities acquired or disposed of during a blackout period that 
effectively prevents evasion of the statutory trading prohibition of 
section 306(a) and proposed Regulation BTR?
    [sbull] Where the presumption is applied, should the equity 
securities acquired in connection with service or employment as a 
director or executive officer that were deemed sold or otherwise 
disposed of be excluded for purposes of applying the presumption to a 
sale or other disposition of equity securities in a subsequent blackout 
period? If so, explain why.
    [sbull] Should the presumption that equity securities acquired or 
disposed of during a blackout period were acquired in connection with 
service of employment as a director or executive officer be rebuttable? 
If so, under what circumstances?
    (d) Transitional Matters
    Except as provided in proposed Exchange Act rule 100(a), equity 
securities acquired by an individual before he or she became a director 
or executive officer of an issuer would not be subject to section 
306(a) of the Act or proposed Regulation BTR.\58\ This would exclude 
from the statutory trading prohibition any equity securities acquired 
under a plan, contract, authorization or arrangement while the 
individual was an employee, but not a director or executive officer, of 
the issuer.
---------------------------------------------------------------------------

    \58\ See section II.B.4(a) above.
---------------------------------------------------------------------------

    On the other hand, equity securities acquired by an individual in 
connection with service or employment as a director or executive 
officer before a company constituted an ``issuer'' under the definition 
contained in section 2(a)(7) of the Act would be subject to the 
statutory trading prohibition of section 306(a) and proposed Regulation 
BTR. Similarly, equity securities acquired in connection with an 
individual's service or employment as a director or executive officer 
before the effective date of the Act would be subject to

[[Page 69437]]

section 306(a) and proposed Regulation BTR.

Request for Comment

    [sbull] Should we exclude equity securities acquired by an 
individual before he or she became a director or executive officer of 
an issuer from section 306(a) of the Act and proposed Regulation BTR?
    [sbull] Is it necessary or appropriate to treat equity securities 
acquired by a director or executive officer before a company became an 
``issuer'' as defined in section 2(a)(7) of the Act as equity 
securities subject to section 306(a) and proposed Regulation BTR to 
prevent evasion of the statutory trading prohibition?
    (e) Exempt Transactions
    Section 306(a)(3) of the Act permits us to provide appropriate 
exemptions from the statutory trading prohibition of section 306(a), 
including purchases pursuant to an automatic dividend reinvestment 
program or purchases or sales made pursuant to an advance election. 
Because we believe that there are a number of transactions involving 
the acquisition or disposition of an equity security of an issuer that 
do not appear to present the concerns that section 306(a) is intended 
to remedy, we propose to exempt several types of transactions from the 
statutory trading prohibition if adequate safeguards exist. Proposed 
Exchange Act rule 101(c) would exempt:
    [sbull] Acquisitions of equity securities under dividend or 
interest reinvestment plans;
    [sbull] Purchases or sales of equity securities pursuant to a 
contract, instruction or written plan that satisfies the affirmative 
defense conditions of Exchange Act rule 10b5-1(c); \59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.10b5-1(c).
---------------------------------------------------------------------------

    [sbull] Purchases or sales of equity securities pursuant to certain 
``tax-conditioned'' plans,\60\ other than discretionary transactions; 
\61\ and
---------------------------------------------------------------------------

    \60\ See Exchange Act rule 16b-3(c) (17 CFR 240.16b-3(c)). These 
include Qualified Plans, Excess Benefit Plans and Stock Purchase 
Plans as defined in Exchange Act rule 16b-3(b) (17 CFR 240.16b-
3(b)). See nn. 65, 66 and 67 below.
    \61\ As defined in Exchange Act rule 16b-3(b)(1) (17 CFR 
240.16b-3(b)(1)).
---------------------------------------------------------------------------

    [sbull] Increases or decreases in the number of equity securities 
held as a result of a stock split or stock dividend applying equally to 
all equity securities of that class, including a stock dividend in 
which equity securities of a different issuer are distributed, and 
acquisitions of rights, such as shareholder or pre-emptive rights, 
pursuant to a pro rata grant to all holders of the same class of equity 
securities registered under section 12 of the Exchange Act.
    In the case of the acquisition of an equity security pursuant to a 
dividend or interest reinvestment plan, under proposed Exchange Act 
rule 101(c)(1) the acquisition would be exempt from the statutory 
trading prohibition of section 306(a) and proposed Regulation BTR if 
made under a broad-based plan providing for the regular reinvestment of 
dividends or interest that does not discriminate in favor of employees 
of the issuer and operates on substantially the same terms for all plan 
participants.\62\ Similarly, under proposed Exchange Act rule 
101(c)(4), an increase or decrease in the number of equity securities 
held by a director or executive officer resulting from a stock split or 
stock dividend would be exempt where the transaction applies equally to 
all equity securities of that class, including a stock dividend in 
which equity securities of a different issuer are distributed, as would 
an acquisition of rights, such as shareholder or pre-emptive rights, 
pursuant to a pro rata grant to all holders of the same class of equity 
securities registered under section 12 of the Exchange Act.\63\
---------------------------------------------------------------------------

    \62\ This exemption would be similar to the exemption for 
dividend and interest reinvestment plans under Exchange Act rule 
16a-11 (17 CFR 240.16a-11).
    \63\ This exemption would be similar to the exemption for stock 
splits, stock dividends and pro rata rights under Exchange Act rule 
16a-9 (17 CFR 240.16a-9).
---------------------------------------------------------------------------

    Because a purchase or sale of equity securities pursuant to a 
contract, instruction or written plan for the purchase or sale of 
equity securities of the issuer that satisfies the affirmative defense 
conditions of Exchange Act rule 10b5-1(c) is made pursuant to an 
advance election, such a transaction does not necessarily give rise to 
the problem that section 306(a) is intended to address as long as the 
individual was not aware of the impending blackout.\64\ Under proposed 
Exchange Act rule 101(c)(2), transactions that satisfy the affirmative 
defense conditions of Exchange Act rule 10b5-1(c) would be exempt from 
the statutory trading prohibition of section 306(a) and proposed 
Regulation BTR as long as the advance election was not made or modified 
during the blackout period or at the time the director or executive 
officer was aware of the impending blackout. To be eligible for the 
exemption, the binding contract must have been executed, the 
instruction must have been given or the written plan must have been 
adopted, before the director or executive officer received notice of 
the imposition of the blackout period. In addition, a director or 
executive officer must not be aware of the impending blackout at the 
time the contract is executed, the instruction is given or the plan is 
adopted, including any modifications to the contract, instruction or 
plan.
---------------------------------------------------------------------------

    \64\ Awareness of an impending blackout period would be 
considered awareness of material, nonpublic information that would 
render the affirmative defense unavailable. See Exchange Act rule 
10b5-1(c)(1)(i)(A) (17 CFR 240. 10b5-1(c)(1)(i)(A)).
---------------------------------------------------------------------------

    Under proposed Exchange Act rule 101(c)(3), a purchase or sale of 
equity securities pursuant to a Qualified Plan,\65\ Excess Benefit Plan 
\66\ or Stock Purchase Plan \67\ would be exempt from the statutory 
trading prohibition of section 306(a) and proposed Regulation BTR.\68\ 
These plans must satisfy specified provisions of the Internal Revenue 
Code that are designed to ensure non-discriminatory treatment of plan 
participants and generally involve automatic, periodic acquisitions of 
equity securities made pursuant to advance elections. Foreign private 
issuers may have employee benefit plans that are not required to 
satisfy the Internal Revenue Code, but instead satisfy foreign tax and 
other laws. As proposed, these plans would not come within the 
exemption under proposed Exchange Act rule 101(c)(3).
---------------------------------------------------------------------------

    \65\ As defined in Exchange Act rule 16b-3(b)(4) (17 CFR 
240.16b-3(b)(4)).
    \66\ As defined in Exchange Act rule 16b-3(b)(2) (17 CFR 
240.16b-3(b)(2)).
    \67\ As defined in Exchange Act rule 16b-3(b)(5) (17 CFR 
240.16b-3(b)(5)).
    \68\ Accordingly, as proposed an acquisition or disposition of 
equity securities made in connection with death, disability, 
retirement or termination of employment or a transaction involving a 
diversification or distribution required by the Internal Revenue 
Code to be made available to plan participants would be exempt from 
the statutory trading prohibition of section 306(a) of the Act 
because these transactions are not discretionary transactions.
---------------------------------------------------------------------------

    Generally, the exemption would not extend to ``discretionary 
transactions,'' \69\ such as an intra-plan transfer involving an issuer 
equity securities fund or a cash distribution funded by a volitional 
disposition of an issuer equity security, that occurred during a 
blackout period. Except as described in the following sentence, these 
transactions would be considered

[[Page 69438]]

a purchase or sale of equity securities of the issuer subject to the 
statutory trading prohibition of section 306(a) and proposed Regulation 
BTR. Notwithstanding the foregoing, a discretionary transaction that 
occurred during a blackout period pursuant to an advance election that 
satisfies the affirmative defense conditions of Exchange Act rule 10b5-
1(c) as described above would be eligible for exemption from the 
statutory trading prohibition of section 306(a) and proposed Regulation 
BTR.
---------------------------------------------------------------------------

    \69\ 17 CFR 240.16b-3(b)(1). Exchange Act rule 16b-3(b)(1) 
defines the term ``discretionary transaction'' to 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.''
---------------------------------------------------------------------------

Request for Comment

    [sbull] Is it appropriate to exempt the described transactions from 
the statutory trading prohibition of section 306(a) and proposed 
Regulation BTR? If not, explain why.
    [sbull] Should we consider other transactions for exemption from 
the statutory trading prohibition of section 306(a) and proposed 
Regulation BTR? If so, what would be the rationale for the exemption?

--Should we exempt a transfer of equity securities without the receipt 
of consideration, such as a bona fide gift, from the statutory trading 
prohibition of section 306(a) and proposed Regulation BTR? If so, what 
would be the rationale for the exemption?
--Should we exempt an acquisition or disposition of equity securities 
resulting from an involuntary event, such as the death of a director or 
executive officer or pursuant to an order of a court or other judicial 
or administrative authority, from the statutory trading prohibition of 
section 306(a) and proposed Regulation BTR? If so, what would be the 
rationale for the exemption?
--Should we exempt the closing of a derivative security position as a 
result of its exercise or conversion, and the acquisition of underlying 
securities at a fixed exercise price due to the exercise or conversion 
of a call equivalent position, such as an employee stock option, from 
the statutory trading prohibition of section 306(a) and proposed 
Regulation BTR? If so, what would be the rationale for the exemption? 
Commenters are requested to justify their views in light of the express 
statutory prohibition against acquiring equity securities of an issuer 
in connection with service or employment as a director or executive 
officer during a blackout period. Should such an exemption be limited 
to situations where the position was established without awareness of 
an impending blackout period? Should such an exemption be limited to 
situations where the position would expire, mature or otherwise 
terminate during the blackout period?

--Should we exempt the closing of a derivative security position as a 
result of its exercise or conversion, and the disposition of underlying 
securities at a fixed exercise price due to the exercise of a put 
equivalent position, from the statutory trading prohibition of section 
306(a) and proposed Regulation BTR? If so, what would be the rationale 
for the exemption? Should such an exemption be limited to situations 
where the position was established without awareness of an impending 
blackout period?

    [sbull] Should we provide an express exemption for the exercise of 
a put equivalent position during a blackout period written by a 
director or executive officer before a blackout period that is 
exercised by a counterparty during the blackout period? Should such an 
exemption be limited to circumstances where the director or executive 
officer does not exercise any influence over the timing of the 
exercise?
    [sbull] Should we provide an express exemption for a sale or other 
transfer of the equity security by a director or executive officer that 
is compelled by the laws or other requirements of an applicable 
jurisdiction? If so, what should be the scope of the exemption?
    [sbull] Is it appropriate to exempt a discretionary transaction 
from the statutory trading prohibition of section 306(a) and proposed 
Regulation BTR where the transaction occurs pursuant to an advance 
election that satisfies the affirmative defense conditions of Exchange 
Act rule 10b5-1(c)? If not, should a discretionary transaction that 
otherwise would occur during a blackout period be deferred until the 
end of the blackout period rather than prohibited?
    [sbull] Should an acquisition or disposition of equity securities 
made in connection with death, disability, retirement or termination of 
employment or transactions involving a diversification or distribution 
required by the Internal Revenue Code to be made available to plan 
participants be subject to the statutory trading prohibition of section 
306(a) and proposed Regulation BTR? If so, explain why.
    [sbull] Do foreign private issuers have employee benefit plans that 
are substantially similar to Qualified Plans, Excess Benefit Plans and 
Stock Purchase Plans that should be exempt from the statutory trading 
prohibition of section 306(a) and proposed Regulation BTR? If so, what 
would be the rationale for the exemption?
    [sbull] Because there may be a variety of employee benefit plans 
and other compensatory arrangements under foreign law that may not be 
eligible for the exemption under proposed Exchange Act rule 100(c)(3) 
because they do not satisfy the requirements of the Internal Revenue 
Code, should we exempt purchases and sales of equity securities 
pursuant to compensatory plans and arrangements of a foreign private 
issuer that are substantially similar to Qualified Plans, Excess 
Benefit Plans and Stock Purchase Plans? Alternatively, because of the 
potential number of variations in plans and arrangements, should we 
address exemptions in this area on a case-by-case basis?
5. Blackout Period
    Section 306(a)(4)(A) of the Act defines the term ``blackout 
period'' to mean any period of more than three consecutive business 
days during which the ability of not fewer than 50% of the participants 
or beneficiaries under all individual account plans maintained by the 
issuer to purchase, sell or otherwise acquire or transfer an interest 
in any equity security of such issuer held in such an individual 
account plan is temporarily suspended by the issuer or by a fiduciary 
of the plan. Proposed Exchange Act rule 100(b) would clarify the scope 
of this provision and address the application of this definition to 
both domestic and foreign private issuers.

Request for Comment

    [sbull] Should we define the term ``blackout period'' to be shorter 
than the three consecutive business days specified in the statute? If 
so, how long should the period be and why? Are there particular types 
of abuses that we should consider in determining the appropriate length 
of the period?

--In view of the fact that the statutory definition will automatically 
become effective on January 26, 2003, would there be any adverse 
consequences from having a more restrictive definition in our rules 
than the definition that will become effective under the statute?
--If we were to define the term ``blackout period'' to be shorter than 
three consecutive business days, how should we harmonize the definition 
with the definition of ``blackout period'' contained in the interim 
final rule recently issued by the Department of Labor under section 
306(b) of the Act?

    (a) Individual Account Plans
    Section 306(a)(5) of the Act defines the term ``individual account 
plan'' by

[[Page 69439]]

reference to section 3(34) of the Employee Retirement Income Security 
Act of 1974 (``ERISA'').\70\ Section 3(34) defines the term 
``individual account plan'' to mean ``a pension plan which provides for 
an individual account for each participant and for benefits based 
solely upon the amount contributed to the participant's account, and 
any income, expenses, gains and losses, and any forfeitures of accounts 
of other participants which may be allocated to such participant's 
account.'' \71\ This definition encompasses a variety of pension plans, 
including section 401(k) plans, profit-sharing and savings plans, stock 
bonus plans and money purchase pension plans. Proposed Exchange Act 
rule 100(j) would clarify that, for purposes of section 306(a) of the 
Act, this definition also includes non-qualified deferred compensation 
arrangements that reflect the elements described in the definition. As 
provided under section 306(a)(5), proposed Exchange Act rule 100(j) 
would exclude a one-participant retirement plan from the 
definition.\72\

Request for Comment
---------------------------------------------------------------------------

    \70\ 29 U.S.C. 1002(34).
    \71\ Id.
    \72\ A ``one-participant retirement plan'' is defined under 
section 101(i)(8)(B) of ERISA (29 U.S.C. 1021(i)(8)(B)) to mean ``a 
retirement plan that: (i) On the first day of the plan year: (I) 
covered only the employer (and the employer's spouse) and the 
employer owned the entire business (whether or not incorporated), or 
(II) covered only one or more partners (and their spouses) in a 
business partnership (including partners in an S or C corporation 
(as defined in section 1361(a) of the Internal Revenue Code of 
1986)), (ii) meets the minimum coverage requirements of section 
410(b) of the Internal Revenue Code of 1986 (as in effect on the 
date of the enactment of this paragraph) without being combined with 
any other plan of the business that covers the employees of the 
business, (iii) does not provide benefits to anyone except the 
employer (and the employer's spouse) or the partners (and their 
spouses), (iv) does not cover a business that is a member of an 
affiliated service group, a controlled group of corporations, or a 
group of businesses under common control, and (v) does not cover a 
business that leases employees.''
---------------------------------------------------------------------------

    [sbull] Does the general statement about non-qualified deferred 
arrangements provide sufficient guidance as to when these arrangements 
would be considered ``individual account plans'' for purposes of 
section 306(a)(5) and proposed Exchange Act rule 100(j)? If not, what 
additional guidance should we give in this area?
    (b) 50% Test
    Under section 306(a)(4)(A) of the Act, a blackout period occurs 
only where at least 50% of the participants or beneficiaries under all 
individual account plans maintained by the issuer are subject to a 
temporary suspension by the issuer or by a fiduciary of the plan of 
more than three consecutive business days that prevents the 
participants or beneficiaries from purchasing, selling or otherwise 
acquiring or transferring an interest in any equity security of the 
issuer held in the individual account plans. Proposed Exchange Act rule 
100(b) would clarify that, for purposes of making this calculation, the 
individual account plans ``maintained by the issuer'' would include 
only individual account plans in which participants or beneficiaries 
held or could hold equity securities of the issuer, whether or not the 
account plan actually contained equity securities of the issuer at the 
time of the calculation. This would include individual account plans 
that:
    [sbull] Permit participants or beneficiaries to invest their plan 
contributions in the equity securities of the issuer;
    [sbull] Include an ``open brokerage window'' that permit 
participants or beneficiaries to invest in the equity securities of any 
publicly-traded company, including the issuer;
    [sbull] Match employee contributions with equity securities of the 
issuer; or
    [sbull] Reallocate forfeitures that included equity securities of 
the issuer to the remaining plan participants.
    The proposed rule also would provide that, for purposes of 
determining the individual account plans ``maintained by the issuer,'' 
the rules under section 414(b), (c), (m) and (o) of the Internal 
Revenue Code \73\ with respect to entities treated as a single employer 
with respect to an issuer would apply.\74\ The ``single employer'' 
rules of section 414 are designed to aggregate the employees of an 
affiliated group of businesses to ensure compliance with the 
limitations on the absolute and relative amounts of benefits that can 
be provided to individual employees or groups of employees under tax-
qualified employee benefit programs.\75\ While each business within a 
controlled group \76\ may have its own employee benefit plan or plans, 
and each plan can provide different benefit structures, profiles of the 
covered employee groups, including the compensation and benefit levels 
for each participant, must be maintained and monitored to enable the 
single employer, deemed to exist for the controlled group, to determine 
that the plans are in compliance with the applicable requirements. We 
believe that these rules reflect the appropriate principles for 
determining the individual account plans of an issuer and its parent, 
subsidiary and affiliated entities that should be aggregated for 
purposes of determining whether a blackout period affects 50% or more 
of the individual account plans maintained by an issuer.
---------------------------------------------------------------------------

    \73\ 26 U.S.C. 414(b), (c), (m) and (o). Section 414(b) provides 
that, for purposes of various provisions of the Internal Revenue 
Code, all employees of all corporations that are members of a 
``controlled group'' of corporations are to be treated as employed 
by a single employer. Section 414(c) provides ``single-employer'' 
treatment for certain groups of partnerships and proprietorships 
under common control, while section 414(m) provides ``single-
employer'' treatment for organizations that provide services for one 
another.
    \74\ See proposed Exchange Act rule 100(b)(3).
    \75\ These include prohibitions against discriminating in favor 
of highly compensated employees, vesting requirements and benefit 
limits.
    \76\ A ``controlled group'' of corporations is defined in 
section 1563(a) of the Internal Revenue Code (26 U.S.C. 1563(a)).
---------------------------------------------------------------------------

Request for Comment

    [sbull] Is it necessary or appropriate to apply the ``single 
employer'' rule of section 414(b), (c), (m) and (o) of the Internal 
Revenue Code for purposes of determining the individual account plans 
``maintained by the issuer'' for purposes of the 50% test? If not, why 
not? Should some of the provisions be applied, but not others? If so, 
which ones? For example, is it necessary or appropriate to apply the 
rules under section 414(m), which address whether separate service 
organizations constitute an affiliated group, for purposes of 
identifying individual account plans maintained by the issuer?
    [sbull] Is there an alternative ``control group'' concept that we 
should use to determine the individual account plans that are to be 
considered ``maintained by the issuer'' for purposes of the 50% test? 
For example, would it be appropriate to use the definition of an 
``affiliate'' set forth in section 407(d)(7) of the Employee Retirement 
Income Security Act of 1974 to determine which individual account plans 
are ``maintained by the issuer'' for purposes of section 306(a)(4)(A)?
    [sbull] Is it necessary or appropriate to include individual 
account plans that merely provide for an ``open brokerage window'' that 
permit participants or beneficiaries to invest in the equity securities 
of any publicly-traded company in the description of individual account 
plans that should be considered in the 50% test? If not, explain why.
    (c) Application of 50% Test
    For purposes of section 306(a) of the Act, once an issuer 
identified the relevant individual account plans for purposes of the 
50% test, it would apply the test by comparing the number of 
participants or beneficiaries located in the United States and its 
territories and possessions under all individual account plans 
maintained by the issuer that will be subject to a temporary

[[Page 69440]]

suspension of trading in such equity securities to the overall number 
of participants or beneficiaries located in the United States and its 
territories and possessions under all individual account plans 
maintained by the issuer.\77\ If this percentage is at least 50%, the 
statutory trading prohibition would apply to the directors and 
executive officers of a domestic issuer.
---------------------------------------------------------------------------

    \77\ See proposed Exchange Act rule 100(b)(1).
---------------------------------------------------------------------------

    In the case of a foreign private issuer, however, a concurrent 
second calculation would be applied to determine if the statutory 
trading prohibition was triggered. This calculation would compare the 
number of participants or beneficiaries located in the United States 
and its territories and possessions under all individual account plans 
maintained by the issuer subject to the temporary suspension of trading 
in such equity securities to the overall number of participants or 
beneficiaries under all individual account plans maintained by the 
issuer worldwide.\78\ If this percentage is greater than 15% and the 
concurrent 50% test also is met, the statutory trading prohibition 
would apply to the directors and executive officers of the foreign 
private issuer. As previously discussed, although this second 
calculation is not reflected in section 306(a), we believe that such a 
test should be applied to ensure that the statutory trading prohibition 
is limited to the directors and executive officers of foreign private 
issuers where a significant portion of their overall plan participants 
or beneficiaries are located in the United States.
---------------------------------------------------------------------------

    \78\ See proposed Exchange Act rule 100(b)(2).
---------------------------------------------------------------------------

    The application of these principles is illustrated by the following 
examples:

    [sbull] Example 1. Company X is a foreign private issuer with 
100,000 employees worldwide who participate in pension plans 
maintained by the issuer. 30,000 participants are located in the 
United States. A fiduciary of the issuer's U.S. pension plan 
initiates a blackout that will affect 16,000 of the U.S. 
participants. Since plan participants located in the United States 
who are subject to the blackout comprise 50% or more of the total 
number of participants located in the United States (16,000/30,000), 
and plan participants located in the United States who are subject 
to the blackout represent more than 15% of the total number of plan 
participants worldwide (16,000/100,000), the statutory trading 
prohibition of section 306(a) would apply to the foreign private 
issuer's directors and executive officers.
    [sbull] Example 2. Company X is a foreign private issuer with 
100,000 employees worldwide who participate in pension plans 
maintained by the issuer. 10,000 participants are located in the 
United States. A fiduciary of the issuer's U.S. pension plan 
initiates a blackout that will affect 7,000 of the U.S. 
participants. Although plan participants located in the United 
States who are subject to the blackout comprise 50% or more of the 
total number of participants located in the United States (7,000/
10,000), because plan participants located in the United States who 
are subject to the blackout represent less than 15% of the total 
number of plan participants worldwide (7,000/100,000), the statutory 
trading prohibition of Section 306(a) would not apply to the 
directors and executive officers of the foreign private issuer.

Request for Comment

    [sbull] Is it appropriate to limit the scope of the definition of 
the term ``blackout period'' to situations where the participants or 
beneficiaries under individual account plans that are affected by the 
temporary trading suspension represent 50% or more of the participants 
or beneficiaries under individual account plans located in the United 
States and its territories and possessions?
    [sbull] Is it appropriate to limit the scope of the definition of 
the term ``blackout period'' in the case of a foreign private issuer to 
situations where the participants or beneficiaries located in the 
United States under all individual account plans maintained by the 
issuer subject to the temporary trading suspension also represent a 
significant portion of the overall number of the participants or 
beneficiaries under all individual account plans maintained by the 
issuer worldwide? If so, should the threshold for applying section 
306(a) be higher or lower (such as 20% or 10%) than 15% of worldwide 
individual account plan participants or beneficiaries? If not, what 
would be the rationale for applying section 306(a) to a broader group 
of foreign private issuers?
    [sbull] What would be an appropriate measurement date for 
determining the number of participants or beneficiaries in an 
individual account plan for purposes of conducting the 50% test? Should 
this number be determined as of the end of the most recent plan fiscal 
year, the end of the most recent fiscal quarter or some other date? 
What are the relevant considerations in selecting an appropriate 
measurement date?
    [sbull] Is it necessary or appropriate for the proposed rules to 
ensure that the 50% test considers plan participants or beneficiaries 
who are United States citizens or residents who are on temporary 
assignment abroad?
    [sbull] Would it be helpful for us to provide additional examples 
of the application of the 50% test? If so, are there specific fact 
patterns that we should address in the examples?
    (d) Exceptions to Definition of Blackout Period
    Section 306(a)(4)(B) of the Act expressly excludes two categories 
of transactions from the definition of ``blackout period.'' These 
exceptions include:
    [sbull] A regularly scheduled period in which the participants and 
beneficiaries may not purchase, sell or otherwise acquire or transfer 
an interest in any equity security of an issuer, if such period is:

--Incorporated into the individual account plan; and
--Timely disclosed to employees before they become participants under 
the individual account plan or as a subsequent amendment to the plan; 
and
--Any suspension described in the general definition of ``blackout 
period'' that is imposed solely in connection with persons becoming 
participants or beneficiaries, or ceasing to be participants or 
beneficiaries, in an individual account plan by reason of a corporate 
merger, acquisition, divestiture or similar transaction involving the 
plan or plan sponsor.\79\
---------------------------------------------------------------------------

    \79\ See section 306(a)(4)(B)(i) and (ii) of the Act.
---------------------------------------------------------------------------

    Section 306(a)(4)(B) further directs us to prescribe regulations to 
implement these exceptions. Accordingly, proposed Exchange Act rule 102 
clarifies the application of the exceptions.\80\ Proposed Exchange Act 
rule 102(a) would address the exception for regularly scheduled 
blackout periods by providing that the requirement that the blackout 
period be incorporated in the individual account plan could be 
satisfied by including a description of the regularly scheduled 
blackout period, including the plan transactions to be suspended 
during, or otherwise affected by, the blackout and its frequency and 
duration, in the documents or instruments under which the plan 
operates. The proposed rule also would provide that disclosure of the 
blackout period to an employee would be timely if the employee was 
provided notice of the blackout period at any time prior to when, or 
within 30 calendar days after, he or she formally enrolled in the plan, 
or, in the case of a subsequent amendment to the plan, within 30 
calendar days after the adoption of the amendment. The notice could be 
in any

[[Page 69441]]

graphic form that is reasonably accessible to the intended recipient.
---------------------------------------------------------------------------

    \80\ These clarifications are necessary to resolve ambiguities 
that might otherwise require literal compliance with the conditions 
of the exceptions in order to avoid having the temporary trading 
suspension constitute a blackout period for purposes of section 
306(a)(1).
---------------------------------------------------------------------------

    In the case of a blackout imposed to consolidate plans following a 
merger acquisition, divestiture or similar transaction, proposed 
Exchange Act rule 102(b) would clarify that the blackout period would 
not trigger the statutory trading prohibition of section 306(a) if its 
principal purpose is to enable individuals to become participants or 
beneficiaries in the plan, or to terminate participation in the plan, 
even though the blackout also is used to effect other administrative 
actions that are incidental to the admission or withdrawal of plan 
participants or beneficiaries. In addition, the proposed rule would 
provide that the exception would be available only with respect to the 
participants or beneficiaries of the acquired or divested entity.

Request for Comment

    [sbull] Is it necessary or appropriate to clarify in proposed 
Exchange Act rule 102(a) that a regularly scheduled blackout period 
will be considered ``incorporated'' into an individual account plan if 
it is included in any of the documents or instruments, such as the 
summary plan description, under which the account plan operates? If so, 
explain why.
    [sbull] Is it necessary or appropriate to clarify in proposed 
Exchange Act rule 102(a) that disclosure of a regularly scheduled 
blackout period to an employee would be timely if the employee was 
provided notice of the blackout period at any time prior to when, or 
within 30 calendar days after, he or she formally enrolls in the plan? 
If not, explain why. Should the timeliness of disclosure be measured 
with respect to an event other than formal enrollment in an individual 
account plan?
    [sbull] Is it necessary or appropriate to clarify in proposed 
Exchange Act rule 102(a) that disclosure of a regularly scheduled 
blackout period to an employee would be timely in the event of a 
subsequent amendment to an individual account plan if the employee was 
provided notice of the blackout period within 30 calendar days after 
the adoption of the amendment? If not, explain why. Should the 
timeliness of disclosure be measured with respect to an event other 
than formal enrollment in an individual account plan?
    [sbull] Is it necessary or appropriate to clarify in proposed 
Exchange Act rule 102(a) the method by or form in which an issuer may 
timely disclose to employees the existence of a regularly scheduled 
blackout period? If so, explain why.
    [sbull] Should the exception in proposed Exchange Act rule 102(a) 
contain a de minimis threshold that would not cause the loss of the 
exception in the event that some plan participants or beneficiaries 
failed to receive timely notice of the regularly scheduled blackout 
period? If so, should the de minimis threshold be a number (such as 
fewer than 5 or 10) or a percentage (such as fewer than 1% or 2%) of 
participants or beneficiaries that have individual account plans? What 
should the threshold be?
    [sbull] Is it necessary or appropriate to clarify in proposed 
Exchange Act rule 102(b) that a blackout period following a merger, 
acquisition, divestiture or similar transaction would be excepted if it 
principally involves the enrollment of individuals in an individual 
account plan? If not, why not? Should we identify the type of 
administrative activities that would be considered incidental to the 
principal purpose of the blackout period?
    [sbull] Is it necessary or appropriate to limit the exception in 
proposed Exchange Act rule 102(b) to the participants or beneficiaries 
of the acquired or divested entity? If not, why not?
6. Remedies
    Section 306(a) of the Act contains two distinct remedies. First, a 
violation of the statutory trading prohibition of section 306(a) is 
subject to a possible Commission enforcement action.\81\ In addition, 
where a director or executive officer realizes a profit from a 
prohibited transaction during a blackout period, an issuer, or a 
security holder of the issuer on its behalf, may bring an action to 
recover the profit.\82\ Accordingly, liability under section 306(a) of 
the Act is not limited solely to recovery of the profit realized by a 
director or executive officer from a prohibited transaction.\83\ 
Proposed Regulation BTR embodies both of these contemplated remedies.
---------------------------------------------------------------------------

    \81\ See sections 3(b)(1) and 306(a)(1) of the Act.
    \82\ See section 306(a)(2)(A) and (B) of the Act.
    \83\ In this respect, section 306(a) of the Act differs from 
section 16(b) of the Exchange Act, where the statute provides solely 
a private right of action (and profit disgorgement can be the only 
consequence). In addition, a transaction that is subject to the 
statutory trading prohibition of section 306(a) may, under some 
circumstances, also result in the operation of the ``short-swing 
profits'' recovery provision of section 16(b) of the Exchange Act 
and form the basis for an action under Exchange Act rule 10b-5 (17 
CFR 240.10b-5).
---------------------------------------------------------------------------

    (a) Commission Enforcement
    Section 306(a)(1) of the Act provides that it is unlawful for a 
director or executive officer of an issuer of any equity security, 
directly or indirectly, to purchase, sell or otherwise acquire or 
transfer any equity security of the issuer during a blackout period 
with respect to the equity security if the director or executive 
officer acquired the equity security in connection with his or her 
service or employment as a director or executive officer. This express 
prohibition against the trading of equity securities during a blackout 
period, as contemplated by section 306(a)(1) of the Act, provides the 
necessary predicate for enforcement actions and sanctions under the 
Exchange Act.\84\
---------------------------------------------------------------------------

    \84\ Section 3(b)(1) of the Act provides that ``[a] violation of 
any provision of the Act, any rule or regulation of the Commission 
issued under this Act, or any rule of the Board shall be treated for 
all purposes in the same manner as a violation of the Securities 
Exchange Act of 1934 * * * or the rules and regulations issued 
thereunder, consistent with the provisions of this Act, and any such 
person shall be subject to the same penalties, and to the same 
extent, as for a violation of that Act or such rules and 
regulations.'' Thus, a violation of section 306(a) of the Act, 
although not codified in the Exchange Act, would be subject to the 
same penalties as an Exchange Act violation.
---------------------------------------------------------------------------

    Consequently, a director or executive officer who violates the 
statutory trading prohibition of section 306(a) would be subject to 
possible civil injunctive actions, cease-and-desist proceedings, civil 
penalties and all other remedies available to the Commission to redress 
violations of the Exchange Act.\85\ Under appropriate circumstances, a 
director or executive officer also could be subject to possible 
criminal liability.\86\
---------------------------------------------------------------------------

    \85\ See sections 21 and 21C of the Exchange Act (15 U.S.C. 78u 
and 78u-3).
    \86\ See section 32 of the Exchange Act (15 U.S.C. 78ff).
---------------------------------------------------------------------------

    (b) Private Right of Action
    Section 306(a)(2) of the Act provides that any profit realized by a 
director or executive officer subject to the statutory trading 
prohibition of section 306(a)(1) of the Act inures to, and is 
recoverable by, the issuer, irrespective of the director or executive 
officer's motive or intention upon entering into the transaction. This 
remedy reflects a strict standard of liability for prohibited 
transactions that is similar to the standard that forms the basis for a 
private right of action under section 16(b) of the Exchange Act.\87\
---------------------------------------------------------------------------

    \87\ As under section 16(b) of the Exchange Act, issues of 
scienter and materiality, which are necessary elements of an anti-
fraud action under the Exchange Act, would not be relevant to a 
private action under section 306(a) and proposed Regulation BTR.
---------------------------------------------------------------------------

    Under section 306(a)(2)(B) of the Act, the issuer may institute an 
action to recover a director or executive officer's realized profits 
from a prohibited transaction at law or in equity in any court of 
competent jurisdiction. If the issuer fails or refuses to bring an 
action within 60 days after the date of request, or fails diligently to 
prosecute the action

[[Page 69442]]

thereafter, the owner of any equity security of the issuer may bring 
such an action in the name, and on behalf of, the issuer.
    Because section 306(a) protects pension plan participants or 
beneficiaries, we believe that Congress intended to provide standing to 
bring an action to all holders of the equity securities of the issuer, 
including plan participants and beneficiaries who hold equity 
securities of the issuer in their individual account plans, as of the 
date of the subject transaction. Proposed Exchange Act rule 103 would 
reflect this approach. As set forth in section 306(a)(2)(B), no suit 
may be brought more than two years after the date on which the 
recoverable profits were realized.

Request for Comment

    [sbull] Where a transaction involving the equity securities of an 
issuer gives rise to both private right of action under section 306(a) 
and section 16(b) of the Exchange Act, should a recovery under one 
provision be offset against a recovery under the other provision? If 
so, explain why.
    [sbull] Similarly, where a transaction involving the equity 
securities of an issuer gives rise to both private right of action 
under section 306(a) and an action under Exchange Act rule 10b-5, 
should a recovery under one provision be offset against a recovery 
under the other provision? If so, explain why.
    As noted above, the private right of action under section 306(a)(2) 
serves a remedial purpose that is similar to the purpose of section 
16(b). While foreign private issuers would be subject to section 
306(a)(2), they are not subject to the profit recovery and other 
provisions of section 16. This treatment reflects foreign private 
issuers' concerns relating to the strict liability nature of section 
16(b), as well as jurisdictional issues that would likely arise in 
connection with applying section 16(b) to offshore transactions 
involving the equity securities of foreign private issuers by non-U.S. 
resident directors and officers.

Request for Comment

    [sbull] Should foreign private issuers be exempt from the private 
right of action under section 306(a)(2)? If so, what are the 
jurisdictional and policy reasons that would support such an exemption? 
Are there other ways to address the jurisdictional issues and other 
matters relating to foreign private issuers in this area? Is the 
potential for Commission enforcement action under section 306(a) a 
sufficient remedy with respect to foreign private issuers?
    (c) Realized Profits
    For purposes of section 306(a) of the Act, a security holder could 
initiate a private action only if a director or executive officer 
realized a profit as a result of a purchase, sale or other acquisition 
or transfer of an equity security during a blackout period. As under 
section 16(b) of the Exchange Act, this concept of realized profit 
would mean that the director or executive officer received a direct or 
indirect pecuniary benefit from the transaction.\88\ The question of 
whether a transaction has resulted in the realization of recoverable 
profits is complex. It is further complicated where the prohibited 
transaction is a purchase or other acquisition of equity securities 
during a blackout period.
---------------------------------------------------------------------------

    \88\ See Exchange Act rule 16a-1(a)(2)(i) (17 CFR 240.16a-
1(a)(2)(i)). See also Feder v. Frost, 220 F.3d 29, 34 (2d Cir. 
2000).
---------------------------------------------------------------------------

    There are several possible ways to calculate realized profits. In 
the case of a sale or other disposition of equity security during a 
blackout period, this includes:
    [sbull] The difference between the purchase or acquisition price, 
if any, of the equity security and (a) the actual amount received in 
the case of a sale or (b) the market value of the equity security at 
the time of transfer in the case of a transfer without receipt of 
consideration;
    [sbull] The difference between the most recent purchase or 
acquisition price, if any, of an equity security acquired in connection 
with service or employment as a director or executive officer before 
the commencement of the blackout period and (a) the actual amount 
received in the case of a sale or (b) the market value of the equity 
security at the time of transfer in the case of a transfer without 
receipt of consideration;
    [sbull] The difference between the lowest purchase or acquisition 
price, if any, of an equity security acquired in connection with 
service or employment as a director or executive officer during a 
specified period before the commencement of the blackout period and (a) 
the actual amount received in the case of a sale or (b) the market 
value of the equity security in the case of a transfer without receipt 
of consideration;
    [sbull] The difference between the average market value of the 
equity securities of the issuer during a specified period before the 
commencement of the blackout period and (a) the actual amount received 
in the case of a sale or (b) the market value of the equity security at 
the time of transfer in the case of a transfer without receipt of 
consideration; and
    [sbull] The difference between the actual amount received as a 
result of the sale or other transfer of the equity security and the 
market value of the equity securities of the issuer on the first date 
after the end of the blackout period.\89\
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    \89\ In addition, where the prohibited transaction involves the 
disposition of a derivative security, the profit recovery guidelines 
of Exchange Act rule 16b-6(c) and (d) (17 CFR 240-16b-6(c) and (d)) 
could possibly apply.
---------------------------------------------------------------------------

    In the case of a purchase or other acquisition of an equity 
security during a blackout period, this includes:
    [sbull] The difference between the purchase or acquisition price, 
if any, of the equity security and (a) the actual amount received in 
the case of a sale of the equity security or (b) the market value of 
the equity security at the time of transfer in the case of a transfer 
without receipt of consideration;
    [sbull] The difference between the purchase or acquisition price, 
if any, of the equity security and the market value of the equity 
securities of the issuer on the first date after the end of the 
blackout period;
    [sbull] The difference between the purchase or acquisition price, 
if any, of the equity security and (a) the actual amount received or 
(b) the market value of the equity security at the time of transfer 
without receipt of consideration in the case of a sale or other 
transfer of any equity security (whether or not the security purchased 
or acquired) after the end of the blackout period; and
    [sbull] The difference between the purchase or acquisition price, 
if any, of the equity security and the earlier of (a) the actual amount 
received upon the sale or other disposition of the equity security or 
(b) the market value of the equity security on the first anniversary of 
the last day of the blackout period.
    In view of the complexity associated with this issue, we are not 
proposing a specific approach for calculating realized profits at this 
time. Instead, we solicit comment on the various approaches described 
above, as well as any other approaches that would be consistent with 
the purposes of section 306(a).

Request for Comment

    [sbull] Should we propose a specific formula for the calculation of 
``realized profits'' that are recoverable under the private right of 
action provided in section 306(a)?

--If so, what would be an appropriate calculation for a transaction 
involving a sale or other transfer of equity securities during a 
blackout period?

[[Page 69443]]

--Similarly, what would be an appropriate calculation for a transaction 
involving a purchase or other acquisition of equity securities during a 
blackout period? In either case, explain how the suggested calculation 
specifically relates to the ability to profit by trading during the 
blackout period.

    [sbull] Should we refrain from providing guidance, and instead 
leave profit calculations to the courts based on the facts and 
circumstances of the particular case?
7. Notice
    Section 306(a)(3) of the Act requires an issuer to provide timely 
notice to its directors and executive officers and to the Commission of 
the imposition of a blackout period that would trigger the statutory 
trading prohibition of section 306(a)(1). Proposed Exchange Act rule 
104 would clarify how issuers would satisfy this statutory directive.
    (a) Notice Requirement
    Proposed Exchange Act rule 104(a) would reflect the general 
requirement of section 306(a)(3) of the Act that, in any case in which 
a director or executive officer of an issuer of any equity security is 
subject to the statutory trading prohibition of section 306(a) and 
proposed Regulation BTR, the issuer of the equity securities must 
provide notice of the blackout period to the director or executive 
officer, as well as to the Commission.\90\
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    \90\ Although notice is required by section 306(a)(6) of the 
Act, an issuer's failure to provide notice would not be an 
affirmative defense to an enforcement action for a violation of 
section 306(a)(1) or proposed Exchange Act rule 101(a) or to a 
private action to recover profits under section 306(a)(2) or 
proposed Exchange Act rule 103(a). In addition, an issuer's failure 
to provide notice where a director or executive subsequently 
violated the statutory trading prohibition of section 306(a)(1) may 
result in an enforcement action against the issuer for causing the 
director or executive officer's violation.
---------------------------------------------------------------------------

    (b) Content of Notice
    The required content of the notice would be set forth in proposed 
Exchange Act rule 104(b)(1).\91\ As proposed, the notice would include 
the following information:
---------------------------------------------------------------------------

    \91\ While section 306(a)(3) of the Act does not require a 
notice to contain any specific information, we believe that it is 
essential to fulfilling the purpose of the provision to ensure that 
the notice contain certain minimum information about the blackout 
that would be of value to affected directors and executive officers 
and the public.
---------------------------------------------------------------------------

    [sbull] The reason or reasons for the blackout period;
    [sbull] A description of the plan transactions to be suspended 
during, or otherwise affected by, the blackout period;
    [sbull] The description of the class of equity securities subject 
to the blackout period;
    [sbull] The actual or expected beginning and ending dates of the 
blackout period; and
    [sbull] The name, address and telephone number of the person 
designated by the issuer to respond to inquiries about the blackout 
period, or, in the absence of such a designation, the issuer's human 
resources director or person performing equivalent functions.
    An indication of the beginning and ending dates of the blackout 
period is intended to enable directors and executive officers to factor 
the anticipated duration of the blackout into their pre-blackout period 
investment activities and decisions and to apprise them as to when they 
would be able to recommence their trading activities. Given the 
potential impact of a blackout period on a director or executive 
officer's ability to engage in transactions involving equity securities 
of the issuer, it is likely that they may have questions about a 
blackout period. For this reason, the proposed notice would have to 
contain the name, address and telephone number of the person designated 
by the issuer to answer questions concerning the blackout period.

Request for Comment

    [sbull] Is the information proposed to be included in the required 
notice useful? Should the required notice include additional or 
different information?
    (c) Notice to Directors and Executive Officers
    Proposed Exchange Act rule 104(b)(2) would require notice to 
directors and executive officers to be provided at least 15 calendar 
days in advance of commencement of the blackout period. The notice 
could be in any graphic form that is reasonably accessible to the 
intended recipient. For purposes of the proposed rule, notice would be 
considered provided as of the date of mailing, if mailed by first class 
mail, or as of the date of electronic transmission, if transmitted 
electronically.
    In some instances, it may not be practicable for an issuer to 
provide the required notice to its directors and executive officers 
within the time period specified in the proposed rule. For example, 
where commencement of the blackout period was due to events that were 
unforeseeable, or to circumstances that were beyond the reasonable 
control of, the issuer, such as a major computer or other technical 
failure, a 15-day advance notice requirement may be impracticable.\92\ 
The proposed rule would excuse an issuer from the 15-day notice 
requirement where the issuer makes a written determination that the 
circumstances preclude compliance with the requirement and notifies the 
affected directors and executive officers as soon as reasonably 
practicable. We anticipate that issuers would need to rely on this 
exception only in rare circumstances.
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    \92\ We note that, for purposes of section 306(b) of the Act, 
the 30-day advance notice requirement does not apply if deferral of 
the blackout period would result in a violation of the exclusive 
purpose and prudence requirements of section 404(1)(A) and (B) of 
ERISA or where commencement of the blackout period is due to events 
that were unforeseeable or circumstances that were beyond the 
control of the issuer or the plan administrator. See section 
306(b)(1)(i)(2)(C) of the Act.
---------------------------------------------------------------------------

    If there was a subsequent change in the beginning or ending dates 
of the blackout period, an issuer would be required to provide 
directors and executive officers with an updated notice explaining the 
reasons for the change in the date or dates and identifying all 
material changes in the information contained in the prior notice. The 
updated notice would be required to be provided as soon as reasonably 
practicable, unless such notice in advance of the termination of a 
blackout period is impracticable.

Request for Comment

    [sbull] Is 15 days advance notice sufficient? Should the advance 
notice period be longer or shorter (such as 30 days or 10 days)? Should 
the reference to days be ``business,'' rather than ``calendar,'' days? 
Should we adopt a more flexible ``reasonable time'' standard?
    [sbull] For purposes of the notice requirement as it applies to 
directors and executive officers, should we establish an outside 
maximum period (such as 30 days) in which to provide the notice to 
ensure that notice is not provided so far in advance of the blackout 
period commencement date as to undermine its importance to directors 
and executive officers?
    [sbull] Is the proposed exception to the 15-day notice requirement 
of proposed Exchange Act rule 104 appropriate? Is the proposed 
exception too broad? If so, how should it be revised to ensure that 
issuers provide timely notice while still providing flexibility for 
unforeseeable events?
    [sbull] Does a general exception for ``unforeseeable 
circumstances'' and ``circumstances that are beyond the control of the 
issuer'' provide issuers with sufficient guidance as to the types of 
situations that would not be subject

[[Page 69444]]

to the 15-day notice requirement? If not, what additional guidance 
should we give in this area?
    [sbull] Is there a better means of ensuring that directors and 
executive officers receive timely notification of an impending blackout 
period? Does the required notice need to be in graphic form or would 
directors and executive officers find oral notice sufficient?
    (d) Notice to the Commission
    While section 306(a)(6) of the Act merely requires that an issuer 
provide notice of an impending blackout period to the Commission, we 
believe that the principal purpose of this requirement is to ensure 
that an issuer's security holders have notice of the blackout period so 
that they can monitor compliance with the statutory trading 
prohibition. This objective is best achieved by requiring that the 
notice to the Commission be provided in a publicly-available document. 
Accordingly, proposed Exchange Act rule 104(b)(3) would require that 
notice to the Commission be provided on form 8-K. The content of the 
required report on form 8-K would be the same as the content of the 
required notice to directors and executive officers.
    The proposed new disclosure item under form 8-K would require an 
issuer to disclose the imposition of a blackout period (as defined in 
proposed Exchange Act rule 100(b)) upon the earlier of receipt of 
notice of the blackout from the plan administrator \93\ or actual 
knowledge of the blackout period by the person designated by the issuer 
to oversee the issuer's pension plans, or, in the absence of such a 
designation, the issuer's human resources director or person performing 
equivalent functions.\94\
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    \93\ Such notice is required to be provided to the issuer under 
section 306(b)(1)(i)(2)(E) of the Act.
    \94\ See proposed item 5.04 of form 8-K. This proposed amendment 
to form 8-K would supersede the proposal adding an item requiring 
disclosure of any known event that would have the effect of 
materially limiting, restricting or prohibiting participants in an 
employee benefit, retirement or stock ownership plan from acquiring, 
disposing or converting their holdings, other than a periodic or 
other limitation, restriction or prohibition based on presumed or 
actual knowledge of or access to material non-public information, if 
that plan is broadly available to the issuer's employees. See 
proposed item 5.04 to form 8-K, Release No. 33-8106 (June 17, 2002) 
(67 FR 42914). While today's proposal is narrower than the June 
proposal, it is consistent with section 306(a) of the Act.
---------------------------------------------------------------------------

    Foreign private issuers are not required to file current reports on 
form 8-K.\95\ We are not proposing to change this reporting requirement 
at this time. Instead, we are proposing changes to forms 20-F and 40-F 
that would require a foreign private issuer to file as an exhibit to 
the report copies of all notices provided to directors and executive 
officers pursuant to section 306(a)(3) of the Act and proposed Exchange 
Act rule 104 during the previous fiscal year, unless the notices 
previously have been provided to the Commission in a report on form 6-
K. Of course, a foreign private issuer may make the required disclosure 
under cover of form 6-K, and we encourage foreign private issuers to do 
so.
---------------------------------------------------------------------------

    \95\ Foreign private issuers are required to file under the 
cover of form 6-K (17 CFR 249.306) copies of all material 
information that the foreign private issuer makes, or is required to 
make, public under the laws of its jurisdiction of incorporation, 
files, or is required to file, under the rules of any stock exchange 
or otherwise distributes to its security holders.
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should the required notice to the Commission have to be 
filed on form 8-K? Is another approach for filing the required notice 
with the Commission, such as a posting on an issuer's Internet web 
site, more appropriate? If so, how would the imposition of the blackout 
period be communicated to investors?
    [sbull] Is the information in the proposed form 8-K item useful? 
Should the proposed form 8-K item include additional or different 
information?
    [sbull] Is the proposed triggering event for the form 8-K filing 
appropriate? Is the person designated by the issuer to oversee the 
issuer's pension plans the proper person to whom the issuer should look 
for determining when a form 8-K is required? Would another person, such 
as the agent for service of legal process for the issuer, be more 
appropriate?
    [sbull] Should we require foreign private issuers to file the 
notice required under section 306(a)(3) and proposed Exchange Act rule 
104 under cover of form 6-K? Should we otherwise require a foreign 
private issuer to make such notices public before the filing of an 
annual report on form 20-F or 40-F? If so, how?
    [sbull] Where the pension plan of a foreign private issuer is 
subject to section 15(d) of the Exchange Act and files reports on form 
11-K,\96\ should the plan be required to file a form 8-K disclosing the 
blackout period? If so, should such a requirement be in addition to, or 
replace, the requirement that the foreign private issuer provide notice 
to the Commission?
---------------------------------------------------------------------------

    \96\ 17 CFR 249.311.
---------------------------------------------------------------------------

    (e) Transition Period
    Section 306(c) of the Act provides that section 306 will take 
effect on January 26, 2003. Consequently, for purposes of proposed 
Regulation BTR, the notice requirement would apply to blackout periods 
commencing on or after January 26, 2003. For blackout periods occurring 
between January 26, 2003 and February 10, 2003 (the date 15 days after 
the effectiveness of the statute), issuers should furnish notice as 
soon as reasonably possible. This approach is intended to ensure that 
the statutorily-required notice is provided with respect to blackout 
periods that commence before February 11, 2003.

III. General Request for Comment

    We are proposing Regulation BTR to implement section 306(a) of the 
Sarbanes-Oxley Act. We solicit comment, both specific and general, upon 
each aspect of the proposed rules. If you would like to submit written 
comments on the proposed rules, to suggest changes or to submit 
comments on other matters that might affect the proposed rules, we 
encourage you to do so.
    We also solicit comment on the following general aspects of the 
proposed rules:
    [sbull] Are there aspects of the proposed rules that we should 
eliminate? Are there aspects that we should supplement?
    [sbull] Are there aspects of the proposed rules where the concepts 
developed under section 16 of the Exchange Act should not be used as a 
guide to clarify the scope and application of section 306(a)?
    [sbull] Are the proposed transition provisions with respect to the 
required notice to directors and executive officers and the Commission 
appropriate? Should different transition provisions be considered?
    In addition, we request comment on whether any further changes to 
our rules and forms are necessary or appropriate to implement the 
objectives of section 306(a) of the Act and proposed Regulation BTR.

IV. Paperwork Reduction Act

    The proposed rules and form amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\97\ We are submitting the proposed 
rules and form amendments to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\98\ The title for the 
proposed collection of information with respect to the proposed rules 
will be ``Regulation BTR.'' The title for the collections of 
information with respect to the

[[Page 69445]]

proposed form amendments are ``Form 20-F,'' ``Form 40-F'' and ``Form 8-
K.''
---------------------------------------------------------------------------

    \97\ 44 U.S.C. 3501 et seq.
    \98\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    Form 20-F (OMB Control No. 3235-0288) is used by foreign private 
issuers to either register a class of securities under the Exchange Act 
or provide an annual report required under the Exchange Act. Form 40-F 
(OMB Control Number 3235-0381) is used by foreign private issuers to 
file reports under the Exchange Act after having registered securities 
under the Securities Act and by certain Canadian registrants.
    Form 8-K (OMB Control No. 3235-0060) prescribes information, such 
as material events or corporate changes, that an issuer that is subject 
to the reporting requirements of sections 13(a) or 15(d) of the 
Exchange Act must disclose on a current basis. Form 8-K also may be 
used, at an issuer's option, to report any events that the issuer deems 
to be of importance to security holders. Issuers also may use the form 
to satisfy the public disclosure requirements of Regulation FD.\99\ An 
agency may not conduct or sponsor, and a person is not required to 
respond to, an information collection unless it displays a currently 
valid OMB control number.
---------------------------------------------------------------------------

    \99\ 17 CFR 243.100-103.
---------------------------------------------------------------------------

A. Summary of Proposed Rules

    The proposed rules would clarify the application and prevent 
evasion of section 306(a) of the Sarbanes-Oxley Act. Section 306(a) 
prohibits the directors and executive officers of an issuer from, 
directly or indirectly, purchasing, selling or otherwise acquiring or 
transferring any equity security of the issuer during a pension plan 
blackout period that prevents plan participants or beneficiaries from 
engaging in equity securities transactions, if the equity security was 
acquired in connection with the director's or executive officer's 
service or employment as a director or executive officer. Section 
306(a) also requires an issuer to provide timely notice to its 
directors and executive officers and to the Commission of the 
commencement of a blackout period. The proposed rules would specify the 
content and timing of this notice. The required notice is a 
``collection of information'' requirement.
    Compliance with the proposed rules would be mandatory. The 
information required by the proposed rules would not be kept 
confidential.

B. Reporting and Cost Burden Estimates

    In order to estimate the potential compliance burden for the 
proposed collection of information, we have made the following 
assumptions. The notice requirements of section 306(a) of the Act apply 
to issuers that have a class of securities registered under section 12 
of the Exchange Act. These requirements also apply, via section 15(d) 
of the Exchange Act, to issuers with an effective registration 
statement under the Securities Act that are not otherwise subject to 
the registration requirements of section 12 of the Exchange Act, and to 
issuers that have filed a registration statement that has not yet 
become effective under the Securities Act and that has not been 
withdrawn. We estimate that there are approximately 18,200 entities 
that fit these descriptions.\100\
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    \100\ This estimate is based, in part, on the total number of 
issuers that are operating companies that filed annual reports on 
form 10-K (8,484), form 10-KSB (3,820), form 20-F (1,194) or form 
40-F (134) during the 2001 fiscal year, which are required of all 
operating company issuers with a class of securities registered 
under section 12 of the Exchange Act and all such companies subject 
to section 15(d) of the Exchange Act, and an estimate of the average 
number of issuers that may have a registration statement filed under 
the Securities Act pending with the Commission at any time (100). In 
addition, we estimate that approximately 4,500 investment companies 
currently file periodic reports on Form N-SAR, and these entities 
are included in our estimate of the number of entities that would be 
subject to the requirements of proposed Regulation BTR. With regard 
to investment companies, because these entities generally do not 
have employees, and therefore typically do not maintain pension 
plans, there generally would be no blackout periods that would 
trigger the statutory trading prohibition of section 306(a) and 
proposed Regulation BTR. Therefore, while there may be instances in 
which the proposed regulation would apply, we would expect the 
burden on investment companies as a group to be negligible. We 
request comment or additional information that might confirm or 
otherwise inform this assumption.
---------------------------------------------------------------------------

    We then calculated the number of issuers that are likely to 
maintain participant-directed individual account plans and the likely 
number of plans maintained by these issuers. Based on statistics 
tabulated by the Department of Labor with respect to the number of 
individual account plans currently in existence, we estimate that 30% 
of issuers maintain individual account plans and that, on average, 
these issuers maintain 1.5 plans each.\101\
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    \101\ Although the entities subject to the requirements of 
proposed Regulation BTR include registered investment companies, 
because it is unlikely that an investment company would maintain a 
pension plan and, as a practical matter, there would generally be no 
blackout periods triggering the statutory trading prohibition of 
section 306(a) of the Act, we excluded these entities from our 
subsequent calculations. (18,200 entities--4,500 investment 
companies x 30% x 1.5 plans = 6,165 plans.) This number is 
consistent with the Department of Labor's estimate of the number of 
participant-directed individual account plans that filed form 5500 
for fiscal year 1998 (6,145 plans).
---------------------------------------------------------------------------

    We then developed an assumption to account for the fact that not 
all potentially affected plans will impose blackout periods that would 
trigger the notice requirement, and not all of those imposing blackout 
periods would do so in a given year. Based on research conducted by the 
Department of Labor to estimate the frequency of the imposition of 
blackout periods that would trigger the notice requirement,\102\ as 
adjusted to reflect the narrower definition of the term ``blackout 
period'' for purposes of section 306(a),\103\ we estimate that 
potentially affected plans will impose blackout periods on average once 
every five years. Among these, some plans will not impose blackout 
periods, some will impose blackout periods that do not trigger the 
notice requirement (that is, a temporary suspension for a period of 
three or fewer consecutive business days) and some may have blackout 
periods more frequently.
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    \102\ In conducting its research, the Department of Labor 
reviewed available literature in an effort to establish a reasonable 
estimate of the frequency of the imposition of blackout periods that 
would trigger notice requirements. One small survey of 
administrators of very large plans indicated that their largest 
plans had undergone a blackout period at a rate of once each three 
to four years. A different survey indicated a lower frequency of 
blackout periods, at a rate in the area of about 7% of plans per 
year. No comprehensive statistics on this frequency are available. 
See Department of Labor Release (Oct. 11, 2002) (67 FR 64766), at 
section D, Paperwork Reduction Act Analysis.
    \103\ While the Department of Labor estimated that, on average, 
a pension plan would experience a blackout period once every four 
years, we have adjusted this estimate to reflect the fact that, for 
purposes of section 306(a) of the Act, the definition of a 
``blackout period'' is limited to a temporary trading suspension 
involving issuer equity securities, while, for purposes of section 
306(b), the definition of a ``blackout period'' includes a temporary 
suspension, limitation or restriction affecting the direction or 
diversification of account assets, plan loans or plan distributions.
---------------------------------------------------------------------------

    We therefore assume that 20% of potentially affected plans will 
impose a blackout period in any given year. We request comment and any 
additional information that would confirm or otherwise inform this 
assumption. The resulting number of plans assumed to be affected by the 
notice requirement is approximately 1,230 plans per year.\104\
---------------------------------------------------------------------------

    \104\ 6,165 plans x 20% = 1,233 plans. Based on the number of 
annual reports filed on forms 10-K, 10-KSB, 20-F and 40-F, we 
estimate that 90% of these plans are maintained by operating issuers 
(12,304/13632), 9% by foreign private issuers that file on form 20-F 
(1,194/13,632) and 1% by foreign private issuers that file on form 
40-F (134/13,632).
---------------------------------------------------------------------------

    In developing burden estimates, we estimated that it will take an 
issuer, on average, two hours to draft the notice to directors and 
executive officers and three hours to draft a current report on form 8-
K which must be filed to provide the required notice to the

[[Page 69446]]

Commission.\105\ We then estimated that 75% of the burden associated 
with the preparation of the required notices will be borne by the 
issuer and that 25% of the burden will be borne by outside counsel 
retained by the issuer to assist in preparing the notices to directors 
and executive officers and to the Commission.\106\ Preparation of the 
required notice for directors and executive officers is estimated to 
require approximately 1,845 hours \107\ and cost approximately $250,000 
annually,\108\ and preparation of current reports on form 8-K to 
provide the required notice to the Commission is estimated to require 
approximately 2,490 hours \109\ and cost approximately $336,000 
annually.\110\ The inclusion of the required information in annual 
reports on form 20-F is estimated to require approximately 249 hours 
\111\ and cost approximately $33,625 annually,\112\ and the inclusion 
of the required information in annual reports on form 40-F is estimated 
to require approximately 28 hours \113\ and cost approximately $3,735 
annually.\114\
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    \105\ These estimates are based on consultations with several 
issuers, law firms and other persons who regularly assist issuers in 
preparing and disseminating communications to directors and 
executive officers and filing Exchange Act reports with the 
Commission.
    \106\ These percentages are based on consultations with several 
issuers, law firms and other persons who regularly assist issuers in 
preparing and filing Exchange Act reports with the Commission. We 
have used an estimated hourly rate of $300.00 to determine the 
estimated cost to issuers of having the required notice reviewed by 
outside counsel. We arrived at this hourly rate estimate after 
consulting with several private law firms. We then have multiplied 
this hourly rate by a factor of 1.35 to reflect appropriate overhead 
charges.
    \107\ 1,230 plans x 2 hours x .75 = 1,845 hours.
    \108\ 1,230 plans x 2 hours x .25 x $405 = $249,075.
    \109\ 1,230 plans x 3 hours x .75 x .90 = 2,491 hours.
    \110\ 1,230 plans x 3 hours x .25 x $405 x .90 = $336,251.
    \111\ 1,230 plans x 3 hours x .75 x .09 = 249 hours. We note 
that, because under proposed Regulation BTR the statutory trading 
prohibition of Section 306(a) of the Act would be triggered, in the 
case of a foreign private issuer, only where number of plan 
participants or beneficiaries affected by a temporary trading 
suspension exceeds 15% of all participants or beneficiaries under 
plans maintained by the issuer, these estimates may overstate the 
actual compliance burden.
    \112\ 1,230 plans x 3 hours x .25 x $405 x .09 = $33,625.
    \113\ 1,230 plans x 3 hours x .75 x .01 = 28 hours.
    \114\ 1,230 plans x 3 hours x .25 x $405 x .01 = $3,736.
---------------------------------------------------------------------------

    The estimated burden for distribution of the notices takes several 
factors into account, including an assumed number of blackout periods 
triggering required notices, an assumed number of directors and 
executive officers affected annually, the number of notices that will 
be provided electronically and on paper and the differential costs of 
electronic and paper distribution methods.\115\ Notices provided to the 
Commission on a current report on form 8-K and in the annual reports on 
form 20-F and 40-F would be transmitted electronically via the 
Commission's Electronic Data Gathering, Analysis and Retrieval 
(``EDGAR'') system. Those directors and executive officers not 
estimated to receive notice electronically are assumed to receive the 
notice on paper. No time or direct cost is attributed to electronic 
distribution methods other than the time required to prepare the notice 
or form, as the case may be, because it is assumed that notices are 
drafted in electronic form, issuers use existing infrastructure to 
communicate electronically and the cost of electronic transmission is 
negligible. Paper notice distribution to directors and executive 
officers is estimated to require approximately 512 hours \116\ and cost 
approximately $3,075 annually.\117\
---------------------------------------------------------------------------

    \115\ For purposes of this estimate, we have assumed that the 
number of blackout periods triggering the notice requirement is 
1,230 each year, the average number of directors and executive 
officers of an issuer is 10, 50% of the notices would be provided 
electronically and that paper distribution would require five 
minutes per notice for copying and mailing, plus $0.50 for paper and 
postage. These estimates are based on consultations with several 
issuers, law firms and other persons who regularly assist issuers in 
preparing and disseminating communications to directors and 
executive officers.
    \116\ 1,230 blackout periods x five notices x five minutes per 
notice = 512.5 hours.
    \117\ 1,230 blackout periods x five notices x $0.50 per notice = 
$3,075.
---------------------------------------------------------------------------

    The total burden of providing the required notice to an issuer's 
directors and executive officers are estimated to be approximately 
2,357 hours \118\ and approximately $253,075 annually.\119\ The total 
burden hours of complying with form 8-K, revised to include the burden 
hours expected from providing the required notice to the Commission, 
are estimated to be 733,990 hours, an increase of 2,490 hours \120\ 
from the current annual burden of 731,500 hours. The total burden hours 
of complying with form 20-F, revised to include the burden hours 
expected from providing the required notice to the Commission, are 
estimated to be 652,472 hours, an increase of 249 hours \121\ from the 
current annual burden of 652,223 hours. The total burden hours of 
complying with form 40-F, revised to include the burden hours expected 
from providing the required notice to the Commission, are estimated to 
be 1,134 hours, an increase of 28 hours \122\ from the current annual 
burden of 1,106 hours.
---------------------------------------------------------------------------

    \118\ 1,845 hours + 512 hours = 2,357 hours.
    \119\ $250,000 + $3,075 = $253,075.
    \120\ See n. 109 above.
    \121\ See n. 111 above.
    \122\ See n. 113 above.
---------------------------------------------------------------------------

    The total dollar cost of complying with form 8-K, revised to 
include outside counsel costs expected from providing the required 
notice to the Commission, is estimated to be $73,492,000, an increase 
of $336,000 \123\ from the current annual burden of $73,156,000. The 
total dollar cost of complying with form 20-F, revised to include 
outside counsel costs expected from providing the required notice to 
the Commission, is estimated to be $587,033,625, an increase of $33,625 
\124\ from the current annual burden of $587,000,000. The total dollar 
cost of complying with form 40-F, revised to include outside counsel 
costs expected from providing the required notice to the Commission, is 
estimated to be $998,736, an increase of $3,736 \125\ from the current 
annual burden of $995,000. Comments concerning the accuracy of these 
burden estimates, and any suggestions for reducing the burden, should 
be directed to the Commission as described below.
---------------------------------------------------------------------------

    \123\ See n. 110 above.
    \124\ See n. 112 above.
    \125\ See n. 114 above.
---------------------------------------------------------------------------

C. Request for Comment

    We request comment in order to: (a) Evaluate whether the proposed 
information collection is necessary for the proper performance of the 
functions of the Commission, including whether the information will 
have practical utility; (b) evaluate the accuracy of our estimate of 
the burden of the proposed rules; (c) determine whether there are ways 
to enhance the quality, utility and clarity of the information to be 
collected; and (d) evaluate whether there are ways to minimize the 
burden of the proposed rules on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology.\126\
---------------------------------------------------------------------------

    \126\ Comments are requested pursuant to 44 U.S.C. 
3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons who desire to submit comments on the proposed 
collection of information requirement should direct their comments to 
the OMB, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy of the comments to Jonathan G. Katz, 
Secretary, Securities and Exchange

[[Page 69447]]

Commission, 450 Fifth Street NW., Washington, DC 20549-0609, with 
reference to File No. S7-44-02. Requests for materials submitted to the 
OMB by us with regard to this collection of information should be in 
writing, refer to File No. S7-44-02 and be submitted to the Securities 
and Exchange Commission, Records Management, Office of Filings and 
Information Services, 450 Fifth Street NW., Washington, DC 20549. 
Because the OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication, 
your comments are best assured of having their full effect if the OMB 
receives them within 30 days of publication.

V. Cost-Benefit Analysis

    Section 306(a) of the Act prohibits directors and executive 
officers of an issuer from purchasing, selling or otherwise acquiring 
or transferring any equity security of the issuer during a pension plan 
blackout period that prevents plan participants or beneficiaries from 
engaging in equity security transactions, if the equity security was 
acquired by the director or executive officer in connection with his or 
her service or employment as a director or executive officer. In 
addition, section 306(a) requires an issuer to provide timely notice to 
its directors and executive officers, and the Commission, of the 
imposition of a pension plan blackout period. The statute is intended 
to restrict the ability of corporate insiders to trade in the equity 
securities of an issuer at a time when a substantial number of the 
issuer's employees are unable to engage in transactions involving 
equity securities of the issuer through their individual pension plan 
accounts.
    The proposed rules would, upon adoption, clarify the application of 
section 306(a) and prevent evasion of its statutory trading 
prohibition. We recognize that any implementation of the Sarbanes-Oxley 
Act likely will result in costs as well as benefits and have an effect 
on the economy. We are sensitive to the costs and benefits of proposed 
rules that would specify the content and timing of the notice that 
issuers are required to provide to their directors and executive 
officers and that would mandate the required notice to the Commission 
to be provided on a form 8-K or, in the case of foreign private 
issuers, in their annual reports on form 20-F or 40-F. We discuss these 
costs and benefits below.

A. Benefits

    Section 306(a) will, and the proposed rules would, have several 
important benefits. By restricting the ability of directors and 
executive officers to trade in an issuer's equity securities when plan 
participants are unable to do so, the proposed rules would mitigate the 
differential treatment between plan participants and beneficiaries and 
the directors and executive officers of the issuer with respect to such 
securities. This should tie the interests of directors and executive 
officers more closely to that of other security holders.
    The content and timing requirements for the notice contemplated by 
section 306(a) would help ensure that directors and executive officers 
of an issuer have all relevant information about an impending blackout 
period. This will enable these individuals to conform their activities 
to the statutory trading prohibition and to avoid any appearance of a 
conflict of interest between their corporate responsibilities and their 
personal trading activities. In addition, requiring that notice to the 
Commission be provided on form 8-K or, in the case of a foreign private 
issuer, on form 20-F or 40-F, will help ensure that an issuer's 
security holders have notice of an impending blackout period. In turn, 
this will enable security holder to monitor compliance with the 
statutory trading prohibition of section 306(a). These benefits are 
difficult to quantify.

B. Costs

    The costs associated with the proposed rules are primarily 
attributable to the statutory requirement to prepare and distribute 
advance notice of the imposition of a blackout period to directors and 
executive officers and to the Commission. For purposes of the Paperwork 
Reduction Act, we estimated the aggregate costs for issuers required to 
provide this notice to be approximately $625,000 per year and the 
related burden to be approximately 5,125 hours.\127\
---------------------------------------------------------------------------

    \127\ See the discussion in section IV.B above.
---------------------------------------------------------------------------

    While compliance with the statute and the proposed rules is the 
individual obligation of an issuer's directors and executive officers, 
it is likely that issuers will incur costs in assisting these 
individuals in observing the proposed trading restriction. Accordingly, 
issuers may incur costs associated with assisting their directors and 
executive officers in determining whether transactions in equity 
securities of the issuer are exempt from the insider trading 
prohibition of the proposed rules and in identifying and tracking the 
equity securities that are subject to the insider trading prohibition. 
These costs are difficult to quantify, but all are imposed by the 
statute.
    We believe that many U.S. issuers already maintain internal 
procedures for assisting their directors' and officers' compliance with 
the provisions of section 16 of the Exchange Act and preventing 
violations of section 10(b) of the Exchange Act and Exchange Act rule 
10b-5. It is likely that these issuers will enhance these internal 
procedures to address the trading restrictions of section 306(a) of the 
Act and proposed Regulation BTR. Some issuers may need to institute 
appropriate internal procedures. Other issuers may need to modify 
existing procedures. Because the scope and sophistication of these 
internal procedures are likely to vary among issuers, it is difficult 
to provide an accurate estimate of the incremental cost of enhancing 
existing systems. Because we do not have data to quantify the cost of 
implementing, or upgrading and strengthening existing, internal insider 
trading procedures, we seek comments and supporting data on these 
costs.
    Section 306(a) also imposes costs on directors and executive 
officers of an issuer that is subject to section 306(a)'s trading 
prohibition. Restrictions on trading activities increase the financial 
exposure to directors and executive officers during blackout periods 
and reduce their financial flexibility. This may result in losses in 
their portfolios. In addition, because the directors and executive 
officers of issuers that are subject to the reporting requirements of 
the Exchange Act are already subject to restrictions on their trading 
activities, such as restrictions that confine their trading to 
designated ``window'' periods, the introduction of an additional 
trading restriction to this existing framework may, in some instances, 
limit the ability of a director or executive officer to trade for 
significant periods. This also may result in losses in their 
portfolios. These costs are difficult to quantify, but are mitigated 
somewhat by the timely notice required by the statute.

C. Request for Comments

    We request comment on all aspects of this cost-benefit analysis, 
including identification of any additional costs or benefits of, or 
suggested alternatives to, the proposed rules. Commenters are requested 
to provide empirical data and other factual support for their views to 
the extent possible.

[[Page 69448]]

VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis, or IRFA, has been 
prepared in accordance with the Regulatory Flexibility Act.\128\ The 
IRFA pertains to new rules that we are proposing to clarify the 
application of section 306(a) of the Act and to prevent evasion of its 
statutory trading prohibition. The proposed rules also would specify 
the content and timing of notice that issuers are required to provide 
to their directors and executive officers and the Commission about the 
imposition of a pension plan blackout period.
---------------------------------------------------------------------------

    \128\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, New Rules

    Section 306(a) of the Act prohibits directors and executive 
officers of an issuer from purchasing, selling or otherwise acquiring 
or transferring any equity security of the issuer during a pension plan 
blackout period that prevents plan participants or beneficiaries from 
engaging in equity security transactions, if the equity security was 
acquired in connection with the director or executive officer's service 
or employment as a director or executive officer. In addition, section 
306(a) requires issuers to provide timely notice to their directors and 
executive officers and the Commission of the imposition of a blackout 
period. The proposed rules, which would clarify the application of 
section 306(a) and prevent evasion of its statutory trading 
prohibition, are intended to further the statute's purpose of 
mitigating the differential treatment between an issuer's directors and 
executive officers and its employees who participate in pension plans 
maintained by the issuer at a time when a substantial number of those 
participants are unable to engage in transactions involving issuer 
equity securities through their individual pension plan accounts.

B. Legal Basis

    We are proposing the new rules under the authority set forth in 
sections 3, 13, 23(a) and 36 of the Exchange Act, sections 30 and 38 of 
the Investment Company Act and sections 3(a) and 306(a) of the Act.

C. Small Entities Subject to the Proposed Rules

    Section 306(a) of the Act affects, and the proposed rules would 
affect, small entities the securities of which are registered under 
section 12 of the Exchange Act, that are required to file reports under 
section 15(d) of the Exchange Act or that file, or have filed, a 
registration statement that has not yet become effective under the 
Securities Act and that has not been withdrawn. For purposes of the 
Regulatory Flexibility Act, the Exchange Act \129\ defines the term 
``small business,'' other than an investment company, to be an issuer 
that, on the last day of its most recent fiscal year, has total assets 
of $5 million or less.\130\ The statute and proposed rules apply only 
to issuers with pension plans; we do not have data to indicate the 
number of small issuers that maintain pension plans, but according to 
available data, only 30% of all issuers maintain such plans. 
Furthermore, our data indicates that temporary trading suspensions that 
would be subject to section 306(a) occur to a plan once every five 
years. If these percentages are accurate regardless of an issuer's 
size, the proposed rules should only affect approximately 150 small 
entities per year. We estimate that there are approximately 2,500 
issuers that are subject to the Act that are not investment companies 
and that have assets of $5 million or less.\131\ There are 
approximately 225 registered investment companies that may be 
considered small entities. However, as noted above,\132\ we anticipate 
that the burden imposed on investment companies by section 306(a) and 
the proposed rules would be negligible.
---------------------------------------------------------------------------

    \129\ 17 CFR 240.0-10(a).
    \130\ A similar definition is provided under Securities Act rule 
157 (17 CFR 230.157).
    \131\ This estimate is based on filings with the Commission.
    \132\ See the discussion in section IV.B above.
---------------------------------------------------------------------------

D. Reporting, Record Keeping and Other Compliance Requirements

    Section 306(a) of the Act requires issuers, including ``small 
businesses,'' to provide timely notice to directors and executive 
officers and the Commission of a blackout period. The proposed rules 
would specify the content and timing of this notice. The statute's 
basic prohibition against trading during blackout periods is largely 
self-executing and does not afford us with substantial discretion to 
exercise regulatory flexibility with respect to small businesses.
    While a cost will be incurred in complying with the notice 
requirement, we believe that these costs will be minimal for small 
businesses. A required notice is likely to be prepared once for each 
blackout period and distributed to affected directors and executive 
officers. In addition, a current report on form 8-K would be prepared 
and filed with the Commission. The cost of preparing and distributing 
the required notice to directors and executive officers is estimated to 
be approximately $590 annually for both large and small 
businesses.\133\ The notice requirement involves a design standard in 
that the content of the proposed notice to directors and executive 
officers and the form and content of the notice to the Commission is 
dictated by the proposed rules and would be comparable for all issuers, 
including small, as well as large, entities. We do not believe that 
excepting small businesses from making the notice would be in the 
interests of their directors and executive officers, or consistent with 
the statute.
---------------------------------------------------------------------------

    \133\ ($253,073 + (2,357 x $200 per hour)/1,230 blackouts = 
$589. See also section IV.B above.
---------------------------------------------------------------------------

    While we are proposing the specific content of the required notice 
to directors and executive officers, we do not dictate the specific 
form of the notice. In addition, we are proposing that the notice to 
the Commission be provided electronically through the filing of a 
current report on form 8-K. Nonetheless, we wish to address in our 
final rulemaking any special issues facing small businesses with 
respect to blackout period notices, and any alternatives consistent 
with the objectives of section 306(a) of the Act that may serve to 
facilitate compliance.

E. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no rules that duplicate, overlap or 
conflict with the proposed rules.

F. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives, while 
minimizing any significant adverse impact on small entities. In that 
regard, we are considering the following alternatives: (a) Establishing 
different compliance or reporting requirements that take into account 
the resources of small entities, (b) clarifying, consolidating or 
simplifying compliance and reporting requirements under the rules for 
small entities and (c) exempting small entities from all or part of the 
proposed rules. The proposed rules are intended to ensure that 
corporate insiders do not trade in an issuer's equity securities during 
periods when the ability of participants or beneficiaries in the 
issuer's pension plans to purchase, sell or otherwise acquire or 
transfer equity securities of the issuer has been temporarily 
suspended. We do not currently believe that an exemption is

[[Page 69449]]

necessary (since the cost of compliance is low) or appropriate (since 
Congress did not indicate that there should be different treatment for 
small businesses). Nevertheless, we solicit comment as to whether small 
business issuers should be excluded from the proposed rules. We also 
seek comment on the scope of the proposed disclosure, the cost of 
preparing it and whether the obligation can be simplified or clarified. 
If the cost is disproportionately large for small businesses, we will 
consider appropriate modifications to the proposed rules.

G. Request for Comments

    We encourage the submission of comments with respect to any aspect 
of the IRFA. In particular, we request comment on the number of small 
businesses that would be affected by the proposed rules, the nature of 
the impact, how to quantify the number of small businesses that would 
be affected and how to quantify the impact of the proposed rules. 
Commenters are requested to describe the nature of any effect and 
provide empirical data and other factual support for their views to the 
extent possible. These comments will be considered in the preparation 
of the Final Regulatory Flexibility Analysis, if the proposed rules are 
adopted, and will be placed in the same public file as comments on the 
proposed rules.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \134\ we must advise the Office of 
Management and Budget as to whether the proposed rules constitute a 
``major'' rule. Under SBREFA, a rule is considered ``major'' where, if 
adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \134\ Pub. L. 104-121, title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effects on competition, investment or 
innovation.
    Where a rule is ``major,'' its effectiveness will generally be 
delayed for 60 days pending Congressional review. We request comment on 
the potential impact of the proposed rules on the economy on an annual 
basis. Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

VIII. Consideration of Burden on Competition

    Section 23(a)(2) of the Exchange Act \135\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, section 23(a)(2) 
prohibits us from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The proposed rules would clarify the application and prevent 
evasion of section 306(a) of the Act. Section 306(a) prohibits the 
directors and executive officers of an issuer from purchasing, selling 
or otherwise acquiring or transferring any equity security of the 
issuer during a pension plan blackout period that prevents plan 
participants or beneficiaries from engaging in equity security 
transactions, if the equity security was acquired by the director or 
executive officer in connection with his or her service or employment 
as a director or executive officer. In addition, under section 306(a) 
an issuer is required to provide timely notice to its directors and 
executive officers and the Commission of the imposition of a pension 
plan blackout period.
    The proposed rules, which would clarify the application of section 
306(a), are intended to further the statute's purpose of mitigating the 
differential treatment between an issuer's directors and executive 
officers and its employees who participate in pension plans maintained 
by the issuer at a time when a substantial number of these participants 
are unable to engage in transactions involving issuer equity securities 
through their individual pension plan accounts. While the statute may 
have an impact on competition by placing restrictions on the ability of 
directors and executive officers of issuers with pension plans to trade 
that are not placed on issuers without such plans, we do not believe 
that the proposed rules would impose any burden on competition. Issuers 
would incur some costs in complying with the proposed rules. These 
costs would include preparing the required notice to include the 
information specified in the proposed rules and providing notice to the 
Commission on a current report on form 8-K or, in the case of a foreign 
private issuer, on form 20-F or 40-F. We request comment on whether the 
proposed rules, if adopted, would impose a burden on competition. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

IX. Promotion of Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \136\ requires us, when engaging 
in rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition and capital formation. The proposed 
rules would clarify the application and prevent evasion of section 
306(a) of the Act. Section 306(a) prohibits directors and executive 
officers of an issuer from purchasing, selling or otherwise acquiring 
or transferring any equity security of the issuer during a pension plan 
blackout period that prevents plan participants or beneficiaries from 
engaging in equity security transactions, if the equity security was 
acquired in connection with the director or executive officer's service 
or employment as a director or executive officer. In addition, section 
306(a) requires issuers to provide timely notice to their directors and 
executive officers and the Commission of the imposition of a pension 
plan blackout period.
---------------------------------------------------------------------------

    \136\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The proposed rules, which would clarify the application of section 
306(a), are intended to further the statute's purpose of mitigating the 
differential treatment between an issuer's directors and executive 
officers and its employees who participate in pension plans maintained 
by the issuer at a time when a substantial number of these participants 
are unable to engage in transactions involving issuer equity securities 
through their individual pension plan accounts. While the statute may 
have an impact on competition, we do not believe that the proposed 
rules would impose any burden on competition, other than some burden on 
the efficiency of the market on an issuer's equity securities during a 
pension plan blackout period. This burden is imposed by the statute. We 
are not aware of any impact on capital formation that would result from 
the proposed rules. Issuers would incur some costs in complying with 
the proposed rules. These costs would include preparing the required 
notice to include the information specified in the proposed rules and 
providing notice to the Commission on a current report on form 8-K or, 
in the case of a foreign private issuer, on form 20-F or 40-F. We 
request comment on whether the

[[Page 69450]]

proposed rules, if adopted, would impose a burden on competition. 
Commenters are requested to provide empirical data and other factual 
support or their views to the extent possible.

X. Statutory Authority

    The rules contained in this release are being proposed under the 
authority set forth in sections 3, 13, 23(a) and 36 of the Exchange 
Act, sections 30 and 38 of the Investment Company Act and sections 3(a) 
and 306(a) of the Sarbanes-Oxley Act of 2002.

List of Subjects in 17 CFR Parts 240, 245 and 249

    Reporting and record keeping requirements, Securities.

Text of Proposed Rules and Forms

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

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

    1. The authority citation for part 240 is amended by adding the 
following citations in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    Section 240.13a-11 is also issued under secs. 3(a) and 306(a), 
Pub. L. 107-204, 116 Stat. 745.
* * * * *
    Section 240.15d-11 is also issued under secs. 3(a) and 306(a), 
Pub. L. 107-204, 116 Stat. 745.
* * * * *
    2. Section 240.13a-11 is amended by:
    a. Removing the sectional authority following Sec.  240.13a-11; and
    b. Revising paragraph (b).
    The revision reads as follows:


Sec.  240.13a-11  Current reports on Form 8- (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.13a-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  270.30b1-1 of this chapter under the 
Investment Company Act of 1940, except where such investment companies 
are required to file notice of a blackout period pursuant to Sec.  
245.104 of this chapter.
    3. Section Sec.  240.15d-11 is amended by:
    a. Removing the sectional authority following Sec.  240.15d-11; and
    b. Revising paragraph (b).
    The revision reads as follows:


Sec.  240.15d-11  Current reports on Form 8-K (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file periodic reports pursuant to Sec.  270.30b1-1 of this chapter 
under the Investment Company Act of 1940, except where such investment 
companies are required to file notice of a blackout period pursuant to 
Sec.  245.104 of this chapter.
    4. Part 245 is added to read as follows:

PART 245--REGULATION BLACKOUT TRADING RESTRICTION

[Regulation BTR--Blackout Trading Restriction]

Sec.
245.100 Definitions.
245.101 Prohibition of insider trading during pension fund blackout 
periods.
245.102 Exceptions to definition of blackout period.
245.103 Remedy.
245.104 Notice.

    Authority: 15 U.S.C. 78w(a), unless otherwise noted.
    Sections 245.100--245.104 are also issued under secs. 3(a) and 
306(a), Pub. L. 107-204, 116 Stat. 745.


Sec.  245.100  Definitions.

    As used in Regulation BTR (Sec. Sec.  245.100 through 245.104), 
unless the context otherwise requires:
    (a) The term acquired such equity security in connection with 
service or employment as a director or executive officer, when applied 
to a director or executive officer, means that he or she acquired, 
directly or indirectly, an equity security of the issuer:
    (1) At a time when he or she was a director or executive officer of 
the issuer, under a compensatory plan, contract, authorization or 
arrangement, including, but not limited to, plans relating to options, 
warrants or rights, pension, retirement or deferred compensation or 
bonus, incentive or profit-sharing (whether or not set forth in any 
formal plan document), including a compensatory plan, contract, 
authorization or arrangement with a parent, subsidiary or affiliate of 
the issuer;
    (2) At a time when he or she was a director or executive officer of 
the issuer, as a result of any transaction or business relationship 
that is described in paragraph (a) or (b) of item 404 of Regulation S-K 
(Sec.  229.404 of this chapter) or, in the case of a foreign private 
issuer, item 7.B of form 20-F (Sec.  249.220f of this chapter) (but 
without application of the disclosure thresholds of such provisions), 
to the extent that he or she has a pecuniary interest (as defined in 
paragraph (l) of this section) in the equity securities;
    (3) As directors' qualifying shares or other securities that he or 
she must hold to meet an issuer's minimum ownership requirements for 
directors or executive officers; or
    (4) Prior to becoming, or while, a director or executive officer of 
the issuer if the equity security was acquired as an inducement to 
service or employment with the issuer or a parent, subsidiary or 
affiliate of the issuer or as a result of a merger, consolidation or 
other acquisition transaction involving the issuer.
    (b) Except as provided in Sec.  245.102, the term blackout period:
    (1) With respect to the equity securities of any issuer (other than 
a foreign private issuer), means any period of more than three 
consecutive business days during which the ability to purchase, sell or 
otherwise acquire or transfer an interest in any equity security of 
such issuer held in an individual account plan is temporarily suspended 
by the issuer or by a fiduciary of the plan with respect to not fewer 
than 50% of the participants or beneficiaries under all individual 
account plans (as defined in paragraph (j) of this section) maintained 
by the issuer that permit participants or beneficiaries located in any 
State (as defined in paragraph (m) of this section) to acquire or hold 
equity securities of the issuer;
    (2) With respect to the equity securities of any foreign private 
issuer (as defined in Sec.  240.3b-4(c) of this chapter), means any 
period of more than three consecutive business days during which both:
    (i) The conditions the paragraph (b)(1) of this section are met; 
and
    (ii) The participants or beneficiaries so restricted comprise more 
than 15% of the participants or beneficiaries under all individual 
account plans maintained by the issuer that permit participants or 
beneficiaries to acquire or hold equity securities of the issuer.

[[Page 69451]]

    (3) In determining the individual account plans (as defined in 
paragraph (j) of this section) maintained by the issuer for purposes of 
this paragraph (b), the rules under Section 414(b), (c), (m) and (o) of 
the Internal Revenue Code (26 U.S.C. 414(b), (c), (m) and (o)) are to 
be applied.
    (c) (1) The term director has, except as provided in paragraph 
(c)(2) of this section, the meaning set forth in section 3(a)(7) of the 
Exchange Act (15 U.S.C. 78c(a)(7)).
    (2) In the case of a foreign private issuer (as defined in Sec.  
240.3b-4(c) of this chapter), the term director means those individuals 
within the definition set forth in section 3(a)(7) of the Exchange Act 
who are management employees of the issuer.
    (d) The term derivative security has the meaning set forth in Sec.  
240.16a-1(c) of this chapter.
    (e) The term equity security has the meaning set forth in section 
3(a)(11) of the Exchange Act (15 U.S.C. 78c(a)(11)) and Sec.  240.3a11-
1 of this chapter.
    (f) The term equity security of the issuer means any equity 
security or derivative security relating to an issuer, whether or not 
issued by that issuer.
    (g) The term Exchange Act means the Securities Exchange Act of 1934 
(15 U.S.C. 78a et seq.).
    (h) (1) The term executive officer has, except as provided in 
paragraph (h)(2) of this section, the meaning set forth in Sec.  
240.16a-1(f) of this chapter.
    (2) In the case of a foreign private issuer (as defined in Sec.  
240.3b-4(c) of this chapter), the term executive officer means the 
principal executive officer or officers, the principal financial 
officer or officers and the principal accounting officer or officers 
(or, if there is none, the controller) of the issuer.
    (i) The term exempt security has the meaning set forth in section 
3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)).
    (j) The term individual account plan means a pension plan which 
provides for an individual account for each participant and for 
benefits based solely upon the amount contributed to the participant's 
account, and any income, expenses, gains and losses, and any 
forfeitures of accounts of other participants which may be allocated to 
such participant's account, including a deferred compensation 
arrangement that contains the aforementioned features, except that such 
term does not include a one-participant retirement plan (within the 
meaning of section 101(i)(8)(B) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1021(i)(8)(B))).
    (k) The term issuer means an issuer (as defined in section 3(a)(8) 
of the Exchange Act (15 U.S.C. 78c(a)(8))), the securities of which are 
registered under section 12 of the Exchange Act (15 U.S.C. 78l) or that 
is required to file reports under section 15(d) of the Exchange Act (15 
U.S.C. 78o(d)) or that files or has filed a registration statement that 
has not yet become effective under the Securities Act of 1933 (15 
U.S.C. 77a et seq.) and that it has not withdrawn.
    (l) The term pecuniary interest has the meaning set forth in Sec.  
240.16a-1(a)(2)(i) of this chapter and the term indirect pecuniary 
interest has the meaning set forth in Sec.  240.16a-1(a)(2)(ii) of this 
chapter. Sec.  240.16a-1(a)(2)(iii) of this chapter also shall apply to 
determine pecuniary interest for purposes of this regulation.
    (m) The term State has the meaning set forth in section 3(a)(16) of 
the Exchange Act (15 U.S.C. 78c(a)(16)).


Sec.  245.101  Prohibition of insider trading during pension fund 
blackout periods.

    (a) Except to the extent otherwise provided in paragraph (c) of 
this section, it is unlawful under section 306(a)(1) of the Sarbanes-
Oxley Act of 2002 (Pub. L. 107-204, 116 Stat. 745) for any director or 
executive officer of an issuer of any equity security (other than an 
exempt security), directly or indirectly, to purchase, sell or 
otherwise acquire or transfer any equity security of the issuer (other 
than an exempt security) during any blackout period with respect to 
such equity security, if such director or executive officer acquires or 
previously acquired such equity security in connection with his or her 
service or employment as a director or executive officer.
    (b) For purposes of section 306(a)(1) of the Sarbanes-Oxley Act of 
2002, any purchase, sale or other acquisition or transfer of an equity 
security of the issuer during a blackout period will be deemed to be a 
transaction involving an equity security ``acquired in connection with 
service or employment as a director or executive officer'' (as defined 
in Sec.  245.100(a)) to the extent that the director or executive 
officer has a pecuniary interest (as defined in Sec.  245.100(l)) in 
such an equity security and the equity security has not previously been 
subject to the operation of section 306(a)(1) during the same blackout 
period.
    (c) The following transactions are exempt from section 306(a)(1) of 
the Sarbanes-Oxley Act of 2002:
    (1) Any acquisition of equity securities resulting from the 
reinvestment of dividends in, or interest on, equity securities of the 
same issuer 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;
    (2) Any purchase or sale of equity securities of the issuer 
pursuant to a contract, instruction or written plan that satisfies the 
affirmative defense conditions of Sec.  240.10b5-1(c) of this chapter; 
provided that, for purposes of this section, awareness of an impending 
blackout period (as defined in Sec.  245.100(b)) will constitute 
awareness of material, non-public information;
    (3) Any purchase or sale of equity securities pursuant to a 
Qualified Plan (as defined in Sec.  240.16b-3(b)(4) of this chapter), 
an Excess Benefit Plan (as defined in Sec.  240.16b-3(b)(2) of this 
chapter) or a Stock Purchase Plan (as defined in Sec.  240.16b-3(b)(5) 
of this chapter) other than a Discretionary Transaction (as defined in 
Sec.  240.16b-3(b)(1) of this chapter) unless such Discretionary 
Transaction meets the conditions of paragraph (c)(2) of this section; 
and
    (4) 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 that class, including a stock dividend in which equity 
securities of a different issuer are distributed; and the acquisition 
of rights, such as shareholder or pre-emptive rights, pursuant to a pro 
rata grant to all holders of the same class of equity securities 
registered under section 12 of the Exchange Act.


Sec.  245.102  Exceptions to definition of blackout period.

    The term ``blackout period,'' as defined in Sec.  245.100(b), does 
not include:
    (a) A regularly scheduled period in which the participants and 
beneficiaries may not purchase, sell or otherwise acquire or transfer 
an interest in any equity security of an issuer, if a description of 
the blackout period, including the plan transactions to be suspended 
during, or otherwise affected by the blackout and its frequency and 
duration, is:
    (1) Included in the documents or instruments under which the 
individual account plan operates; and
    (2) Disclosed to an employee before he or she formally enrolls, or 
within 30 days following formal enrollment, as a participant under the 
individual account plan or within 30 days after the adoption of an 
amendment to the plan. For purposes of this paragraph (a)(2), the 
disclosure may be provided in any

[[Page 69452]]

graphic form that is reasonably accessible to the employee; or
    (b) Any suspension described in Sec.  245.100(b) the principal 
purpose of which is to permit persons affiliated with the acquired or 
divested entity to become participants or beneficiaries, or to cease to 
be participants or beneficiaries, in an individual account plan 
following a corporate merger, acquisition, divestiture or similar 
transaction involving the plan or plan sponsor.


Sec.  245.103  Remedy.

    (a) Recovery of Profits. Section 306(a)(1) of the Sarbanes-Oxley 
Act of 2002 (Pub. L. 107-204, 116 Stat. 745) provides that any profit 
realized by a director or executive officer from any purchase, sale or 
other acquisition or transfer of any equity security of an issuer in 
violation of section 306(a)(1) will inure to and be recoverable by the 
issuer, regardless of any intention on the part of the director or 
executive officer in entering into the transaction.
    (b) Actions to recover profit. Section 306(a)(2) of the Sarbanes-
Oxley Act of 2002 provides that an action to recover profit in 
accordance with may be instituted at law or in equity in any court of 
competent jurisdiction by the issuer, or by the owner of any equity 
security of the issuer in the name and on behalf of the issuer if the 
issuer fails or refuses to bring such action within 60 days after the 
date of request, or fails diligently to prosecute the action 
thereafter, except that no such suit may be brought more than two years 
after the date on which such profit was realized.


Sec.  245.104  Notice.

    (a) In any case in which a director or executive officer is subject 
to section 306(a)(1) of the Sarbanes-Oxley Act of 2002 (Pub. L. 107-
204, 116 Stat. 745) in connection with a blackout period (as defined in 
Sec.  245.100(b)) with respect to any equity security, the issuer of 
the equity security must timely notify each director or officer and the 
Commission of the blackout period.
    (b) For purposes of this section:
    (1) The notice must include:
    (i) The reason or reasons for the blackout period;
    (ii) A description of the plan transactions to be suspended during, 
or otherwise affected by, the blackout period;
    (iii) A description of the class of equity securities subject to 
the blackout period;
    (iv) The actual or expected beginning and ending dates of the 
blackout period; and
    (v) The name, address and telephone number of the person designated 
by the issuer to respond to inquiries about the blackout period, or, in 
the absence of such a designation, the issuer's human resources 
director or person performing equivalent functions; and
    (2) (i) Notice to an affected director or executive officer will be 
considered timely if the notice described in paragraph (b)(1) of this 
section is provided (in graphic form that is reasonably accessible to 
the recipient) at least 15 calendar days in advance of the commencement 
of the blackout period;
    (ii) Notwithstanding paragraph (b)(2)(i) of this section, the 
requirement to give at least 15 days advance notice will not apply in 
any case in which the inability to provide advance notice of the 
blackout period is due to events that were unforeseeable to or 
circumstances that were beyond the reasonable control of the issuer, 
and the issuer reasonably so determines in writing. Determinations 
described in the preceding sentence must be dated and signed by an 
authorized representative of the issuer. In any case in which this 
exception to the 15-day advance notice requirement applies, the issuer 
must provide the notice described in paragraph (b)(1) of this section, 
as well as a copy of the written determination, to all affected 
directors and executive officers as soon as reasonably practicable 
before the blackout period commences; and
    (3) Notice to the Commission will be considered timely if:
    (i) The issuer, except as provided in paragraph (b)(3)(ii) of this 
section, files a current report on form 8-K (Sec.  249.308 of this 
chapter) within the time prescribed for filing the report under the 
instructions for the form; or
    (ii) In the case of a foreign private issuer (as defined in Sec.  
240.3b-4(c) of this chapter), the issuer includes the information set 
forth in paragraph (b)(1) of this section in the first annual report on 
form 20-F (Sec.  249.220f of this chapter) or 40-F (Sec.  249.240f of 
this chapter) required to be filed after the receipt of the notice of a 
blackout period required by 29 CFR 2520.101-3(c) within the time 
prescribed for filing the report under the instructions for the form.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for part 249 is amended by revising the 
sectional authority for Sec.  249.308 to read as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
    Section 249.308 is also issued under 15 U.S.C. 80a-29, 15 U.S.C. 
80a-37 and secs. 3(a), 302 and 306(a), Pub. L. 107-204, 116 Stat. 
745.
* * * * *
    6. Form 20-F (referenced in Sec.  249.220f) is amended by:
    a. Renumbering paragraph (10) as paragraph (11) under 
``Instructions as to Exhibits''; and
    b. Adding paragraph (10) under ``Instructions as to Exhibits.''
    The addition reads as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 20-F

* * * * *

Instructions As To Exhibits

* * * * *
    10. Any notice required by rule 104 of Regulation BTR (17 CFR 
245.104 of this chapter) that you sent during the past fiscal year 
to a director or executive officer (as defined in 17 CFR 245.100(d) 
and (h) of this chapter) concerning any equity security subject to a 
blackout period (as defined in 17 CFR 245.100(c) of this chapter) 
under rule 101 of Regulation BTR (17 CFR 245.101 of this chapter) if 
the director or executive officer acquired the equity security in 
connection with his or her service or employment as a director or 
executive officer (as defined in 17 CFR 245.100(a)). Each notice 
must have included the information specified in 17 CFR 245.104(b) of 
this chapter.

    Note: The exhibit requirement in paragraph (10) applies only to 
an annual report, and not to a registration statement, on form 20-F. 
The Commission will consider the attachment of any rule 104 notice 
as an exhibit to a timely filed Form 20-F annual report to satisfy 
an issuer's duty to notify the Commission of a blackout period in a 
timely manner. Although an issuer need not submit a rule 104 notice 
under cover of a form 6-K, if an issuer has already submitted this 
notice under cover of form 6-K, it need not attach the notice as an 
exhibit to a form 20-F annual report.

* * * * *
    7. Form 40-F (referenced in Sec.  249.240f) is amended by adding 
new paragraph (7) to general instruction B to read as follows:

    Note: The text of form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 40-F

* * * * *

General Instructions

* * * * *

B. Information To Be Filed On This Form

* * * * *
    (7) An issuer must attach as an exhibit to an annual report 
filed on form 40-F a copy of any notice required by rule 104 of 
Regulation BTR (17 CFR 245.104 of this

[[Page 69453]]

chapter) that it sent during the past fiscal year to a director or 
executive officer (as defined in 17 CFR 245.100(d) and (h) of this 
chapter) concerning any equity security subject to a blackout period 
(as defined in 17 CFR 245.100(c) of this chapter) under rule 101 of 
Regulation BTR (17 CFR 245.101 of this chapter) if the director or 
executive officer acquired the equity security in connection with 
his or her service or employment as a director or executive officer 
(as defined in 17 CFR 245.100(a)). Each notice must have included 
the information specified in 17 CFR 245.104(b) of this chapter.

    Note: The Commission will consider the attachment of any rule 
104 notice as an exhibit to a timely filed form 40-F annual report 
to satisfy an issuer's duty to notify the Commission of a blackout 
period in a timely manner. Although an issuer need not submit a rule 
104 notice under cover of a form 6-K, if an issuer has already 
submitted this notice under cover of form 6-K, it need not attach 
the notice as an exhibit to a form 40-F annual report.

* * * * *
    8. Form 8-K (referenced in Sec.  249.308) is amended by:
    a. Revising General Instruction 1; and
    b. Adding item 5.04 under ``Information to be Included in the 
Report.''
    The revision and addition read as follows:

    Note: The text of form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K

* * * * *

General Instructions

* * * * *

B. Events to be Reported and Time for Filing of Reports

    1. * * * A report on this form pursuant to item 5.04 is required 
to be filed within two business days after the earlier of receipt of 
notice of the blackout period (as defined in Sec.  245.100(b)) from 
the plan administrator or actual knowledge of the blackout period by 
the person designated by the issuer to oversee the issuer's pension 
plans, or, in the absence of such a designation, the issuer's human 
resources director or person performing equivalent functions.
* * * * *

Information To Be Included in the Report

* * * * *

Item 5.04. Temporary Suspension of Trading Under Registrant's 
Employee Benefit Plans

    Upon the earlier of receipt of notice of a blackout period (as 
defined in Sec.  245.100(b)) from the plan administrator or actual 
knowledge of the blackout period by the person designated by the 
issuer to oversee the issuer's pension plans, or, in the absence of 
such a designation, the issuer's human resources director or person 
performing equivalent functions, provide the information specified 
in Sec.  245.104(b) of this chapter.
* * * * *

    Dated: November 6, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28869 Filed 11-14-02; 8:45 am]
BILLING CODE 8010-01-U