[Federal Register Volume 68, Number 18 (Tuesday, January 28, 2003)]
[Rules and Regulations]
[Pages 4338-4359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1884]



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Part III





Securities and Exchange Commission





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17 CFR Parts 240, 245, and 249



Insider Trades During Pension Fund Blackout Periods; Final Rule

  Federal Register / Vol. 68, No. 18 / Tuesday, January 28, 2003 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 245 and 249

[Release No. 34-47225; IC-25909; File No. S7-44-02]
RIN 3235-AI71


Insider Trades During Pension Fund Blackout Periods

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting rules that clarify the application and prevent 
evasion of Section 306(a) of the Sarbanes-Oxley Act of 2002. Section 
306(a) prohibits any director or executive officer of an issuer of any 
equity security from, directly or indirectly, purchasing, selling or 
otherwise acquiring or transferring any equity security of the issuer 
during a pension plan blackout period that temporarily prevents plan 
participants or beneficiaries from engaging in equity securities 
transactions through their plan accounts, 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. In addition, 
the rules 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. The rules are designed to 
facilitate compliance with the will of Congress as reflected in Section 
306(a), and to eliminate the inequities that may result when pension 
plan participants and beneficiaries are temporarily prevented from 
engaging in equity securities transactions through their plan accounts.

DATES: Effective Date: January 26, 2003. Compliance Date: Issuers must 
comply with Sec.  245.104(b)(3)(i) and (iii) of Regulation BTR 
beginning March 31, 2003.

FOR FURTHER INFORMATION CONTACT: Mark A. Borges, Special Counsel, 
Office of Rulemaking, at (202) 942-2910, or Anne Krauskopf, Special 
Counsel, Office of Chief Counsel, at (202) 942-2900, at the Division of 
Corporation Finance, United States Securities and Exchange Commission, 
450 Fifth Street, NW, Washington, DC 20549-0312.

SUPPLEMENTARY INFORMATION: We are adopting new Regulation BTR \1\ under 
the Securities Exchange Act of 1934 (the ``Exchange Act'')\2\ and 
amendments to Exchange Act Rules 13a-11\3\ and 15d-11\4\ and to Forms 
20-F,\5\ 40-F \6\ and 8-K \7\ under the Exchange Act.
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    \1\ 17 CFR 245.100-104.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.13a-11.
    \4\ 17 CFR 240.15d-11.
    \5\ 17 CFR 249.220f.
    \6\ 17 CFR 249.240f.
    \7\ 17 CFR 249.308.
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I. Introduction

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the ``Act'') was 
enacted.\8\ Section 306(a) of the Act,\9\ entitled ``Prohibition of 
Insider Trading During Pension Fund Blackout Periods,'' makes it 
unlawful for any 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 any 
pension plan 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) also requires an issuer to timely 
notify its directors and executive officers and the Commission of a 
blackout period that could affect them.\11\ Section 306(a) takes effect 
January 26, 2003, 180 days after the date of enactment of the Act.\12\
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    \8\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \9\ 15 U.S.C. 7244(a).
    \10\ Section 306(a)(1) of the Act [15 U.S.C. 7244(a)(1)].
    \11\ Section 306(a)(6) of the Act [15 U.S.C. 7244(a)(6)].
    \12\ Section 306(c) of the Act [15 U.S.C. 7244(c)].
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    Section 306(a) equalizes the treatment of corporate executives and 
rank-and-file employees with respect to their ability to engage in 
transactions involving issuer equity securities during a pension plan 
blackout period if the securities have been acquired in connection with 
their service to, or employment with, the issuer. When a director or 
executive officer engages in a transaction involving issuer equity 
securities at a time when participants or beneficiaries in the issuer's 
pension plans cannot engage in similar transactions through their plan 
accounts, the director or executive officer obtains an unfair advantage 
that the statute seeks to ameliorate. Section 306(a) restricts the 
ability of directors and executive officers to trade in such securities 
until a pension plan blackout period has ended and the ability to trade 
through the pension plan has been restored to plan participants and 
beneficiaries. This should align the interests of directors and 
executive officers more closely with those of the rank-and-file 
employees who engage in transactions involving issuer equity securities 
through an issuer's pension plans.
    After consulting with the Secretary of Labor, we proposed new 
Regulation Blackout Trading Restriction (``BTR'') on November 6, 2002 
to clarify the scope and operation of Section 306(a) and to prevent 
evasion of the statutory trading prohibition.\13\ We received 18 
letters commenting on the Proposing Release.\14\ Many commenters 
suggested changes to the proposed rules to better achieve the purposes 
of section 306(a). Today, we are adopting Regulation BTR, which has 
been revised as discussed below, to incorporate a number of the changes 
recommended by commenters.
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    \13\ Release No. 34-46778 (Nov. 2, 2002) [67 FR 69430] (the 
``Proposing Release'').
    \14\ The commenters included six members of the legal and 
accounting communities, eight professional associations, three 
issuers and one individual investor. These comment letters and a 
summary of comments are available for public inspection and copying 
in our Public Reference Room, 450 Fifth Street, NW, Washington, DC 
20549, in File No. S7-44-02. Public comments submitted 
electronically and the summary of comments is available on our Web 
site http://www.sec.gov.
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II. Regulation BTR

A. Statutory Trading Prohibition

    As adopted, Regulation BTR addresses the operation of section 
306(a) of the Act and its prohibition against trading in issuer equity 
securities by an issuer's directors and executive officers during a 
pension plan blackout period as follows:
    [sbull] New Rule 100 \15\ defines terms used in Section 306(a) and 
Regulation BTR.
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    \15\ 17 CFR 245.100.
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    [sbull] New Rule 101 \16\ clarifies the operation of the Section 
306(a) trading prohibition and establishes several exemptions from the 
prohibition.
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    \16\ 17 CFR 245.101.
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    [sbull] New Rule 102 \17\ describes the exceptions to the 
definition of ``blackout period'' set forth in Section 306(a)(4)(A) of 
the Act.\18\
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    \17\ 17 CFR 245.102.
    \18\ 15 U.S.C. Sec.  7244(a)(4)(A).
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    [sbull] New Rule 103 \19\ clarifies the operation of the private 
remedy for a violation of the Section 306(a) trading prohibition, 
including a method for calculation of recoverable profits.
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    \19\ 17 CFR 245.103.
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    [sbull] New Rule 104 \20\ sets forth the content and delivery 
requirements for the notice that an issuer must provide in connection 
with a blackout period.
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    \20\ 17 CFR 245.104.
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    As proposed and adopted, in order to give effect to section 306(a) 
in a manner consistent with Congressional intent, we are incorporating 
a number of concepts developed under Section 16 of the

[[Page 4339]]

Exchange Act \21\ into Regulation BTR. By doing so, we are able to take 
advantage of a well-established body of rules and interpretations 
concerning the trading activities of corporate insiders and, as to 
directors and executive officers of domestic issuers, facilitate 
enforcement of the Section 306(a) trading prohibition through 
monitoring of the reports publicly filed by directors and executive 
officers pursuant to Section 16(a) of the Exchange Act.\22\
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    \21\ 15 U.S.C. 78p. Because the purposes of Section 306(a) of 
the Act and Section 16 of the Exchange Act are not identical, 
however, we note that Section 306(a) and Regulation BTR will not 
always be interpreted the same as Section 16 if these purposes 
diverge or the interests of investors require a different 
interpretation.
    \22\ 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 Section 2(a)(7) of the Act.\23\ 
Consistent with this definition, new Rule 100(k) of Regulation BTR \24\ 
provides that the term ``issuer'' means an issuer (as defined in 
Section 3(a)(8) of the Exchange Act \25\):
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    \23\ 15 U.S.C. 7201(7).
    \24\ 17 CFR 245.100(k).
    \25\ 15 U.S.C. 78c(a)(8). Section 3(a)(8) of the Exchange Act 
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; \26\
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    \26\ 15 U.S.C. 78l.
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    [sbull] That is required to file reports under Section 15(d) of the 
Exchange Act; \27\ or
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    \27\ 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'') \28\ and that the issuer has not withdrawn.
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    \28\ 15 U.S.C. 77a et seq.
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    Accordingly, Section 306(a) and Regulation BTR apply to the 
directors and executive officers of domestic issuers, foreign private 
issuers, small business issuers and, in rare instances, registered 
investment companies.\29\
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    \29\ For a discussion of the application of Regulation BTR to 
registered investment companies, see the Proposing Release at 
Section II.B.1.d.
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    While some commenters questioned the application of Section 306(a) 
to foreign private issuers,\30\ the statute, by its terms, applies to 
these issuers.\31\ However, Regulation BTR limits Section 306(a)'s 
application to the directors and executive officers of a foreign 
private issuer to situations where 50% or more of the participants or 
beneficiaries located in the United States in individual account plans 
maintained by the issuer are subject to a temporary trading suspension 
in issuer equity securities, and the affected participants and 
beneficiaries represent an appreciable portion of the issuer's 
worldwide employees.\32\
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    \30\ See the Letter dated December 24, 2002 of the American Bar 
Association (the ``ABA Letter'') and the Letter dated November 27, 
2002 of the Organization for International Investment.
    \31\ Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)] defines the 
term ``foreign private issuer'' to mean ``any foreign issuer other 
than a foreign government except an issuer meeting the following 
conditions: (1) more than 50% 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% 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.''
    \32\ See Section II.B.5.d below.
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    Similarly, Section 306(a) does not distinguish between large and 
small issuers. Accordingly, the statute 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 a ``small business 
issuer.'' \33\ One commenter indicated that the compliance burden for 
small business issuers would not be disproportionate to the benefits to 
be obtained from compliance with Section 306(a) since concerns related 
to trading by corporate insiders are not unique to large issuers.\34\
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    \33\ Item 10(a)(1) of Regulation S-B [17 CFR 228.10(a)(1)] 
defines the term ``small business issuer'' 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.''
    \34\ See the Letter dated December 16, 2002 of 
PricewaterhouseCoopers LLP (the ``PWC Letter'').
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2. Persons Subject to Trading Prohibition
    Section 306(a) of the Act applies to directors and executive 
officers of issuers subject to the Act. While one commenter expressly 
supported the proposed definitions for these terms,\35\ some commenters 
suggested that we use the existing definition in Exchange Act Rule 3b-7 
\36\ to define the term ``executive officer.'' \37\ We continue to 
believe that the broader definition in Exchange Act Rule 16a-1(f) \38\ 
is more suitable for purposes of Section 306(a) and Regulation BTR 
because of its focus on the policy-making functions of the individual 
in question.\39\ In addition, as some commenters noted, this definition 
will make it easier for domestic issuers to coordinate their trading 
policies for their corporate insiders who are subject to Section 16 of 
the Exchange Act and monitor compliance with both Section 16 and 
Section 306(a). Accordingly, new Rule 100(c)(1) of Regulation BTR \40\ 
provides that, except in the case of a foreign private issuer, the term 
``director'' has the meaning set forth in Section 3(a)(7) of the 
Exchange Act \41\

[[Page 4340]]

and new Rule 100(h)(1) \42\ provides that, except in the case of a 
foreign private issuer, the term ``executive officer'' has the same 
meaning as the term ``officer'' in Exchange Act Rule 16a-1(f).
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    \35\ See the PWC Letter.
    \36\ 17 CFR 240.3b-7. This definition differs from the 
definition in Exchange Act Rule 16a-1(f) [17 CFR 240.16a-1(f)] in 
that it does not expressly include an issuer's principal financial 
officer or principal accounting officer (or controller). It also 
does not expressly cover officers of a parent corporation or explain 
how to identify an issuer's executive officers when the issuer is a 
limited partnership or trust.
    \37\ See the Letter dated December 16, 2002 of America's 
Community Bankers (the ``ACB Letter'') and the Letter dated December 
16, 2002 of the Profit Sharing/401k Council of America (the ``PSCA 
Letter'').
    \38\ 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.''
    \39\ Thus, the standard for determining whether an individual is 
an ``executive officer'' for purposes of Section 306(a) of the Act 
and Regulation BTR is the same as the standard applicable under 
Exchange Act Rule 16a-1(f). For example, the term ``policy-making 
functions'' does 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 will be presumed that the board of 
directors of the issuer made that judgment and that the individuals 
so identified are executive officers of the issuer for purposes of 
Section 306(a) and 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).
    \40\ 17 CFR 245.100(c)(1).
    \41\ 15 U.S.C. 78c(a)(7). As we have previously 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. Thus, for 
purposes of Section 306(a) of the Act and Regulation BTR, an 
individual's title is not dispositive as to whether he or she is a 
director. As under Section 16 of the Exchange Act, attention must 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.
    \42\ 17 CFR 245.100(h)(1).
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    In the case of a foreign private issuer, the commenters supported 
our proposal to specifically identify the directors and executive 
officers that are subject to the Section 306(a) trading 
prohibition.\43\ Thus, new Rule 100(c)(2) of Regulation BTR \44\ 
provides that the term ``director'' means a director who is a 
management employee of the issuer and new Rule 100(h)(2) \45\ provides 
that the term ``executive officer'' means the principal executive 
officer or officers, the principal financial officer or officers and 
the principal accounting officer or officers of the issuer.
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    \43\ See the ABA Letter and the Letter dated December 16, 2002 
of Cleary, Gottlieb, Steen & Hamilton (the ``Cleary Letter'').
    \44\ 17 CFR 245.100(c)(2).
    \45\ 17 CFR 245.100(h)(2).
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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.\46\ We did not receive any 
comments regarding the proposed definitions for the terms ``equity 
security,'' ``equity security of the issuer'' and ``derivative 
security.'' Accordingly, new Rule 100(e) of Regulation BTR \47\ 
provides that the term ``equity security'' has the meaning set forth in 
Section 3(a)(11) of the Exchange Act \48\ and Exchange Act Rule 3a11-
1,\49\ new Rule 100(f) \50\ provides that the term ``equity security of 
the issuer'' includes any equity security or derivative security 
relating to an issuer, whether or not issued by that issuer, and new 
Rule 100(d) \51\ provides that the term ``derivative security'' has the 
same meaning as in Exchange Act Rule 16a-1(c).\52\
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    \46\ New Rule 100(i) of Regulation BTR [17 CFR 245.100(i)] 
defines 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)].
    \47\ 17 CFR 245.100(e).
    \48\ 15 U.S.C. 78c(a)(11). Section 3(a)(11) of the Exchange Act 
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.''
    \49\ 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.''
    \50\ 17 CFR 245.100(f).
    \51\ 17 CFR 245.100(d).
    \52\ 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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    In the case of a derivative security, the definition in new Rule 
100(d) is to be interpreted in a manner consistent with the rules and 
interpretations 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, will 
be considered a derivative security for purposes of Section 306(a) and 
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 will be subject to the Section 306(a) 
trading prohibition unless the transaction qualifies as an exempt 
transaction under Regulation BTR.
4. Transactions Subject to Trading Prohibition
    Section 306(a) of the Act makes it unlawful for a director or 
executive officer of an issuer of any equity security, directly or 
indirectly,\53\ to purchase, sell or otherwise acquire or transfer any 
equity security of the issuer during a pension plan blackout period 
with respect to the equity security, if the director or executive 
officer ``acquires such equity security in connection with his or her 
service or employment as a director or executive officer.'' While 
Section 306(a) uses the word ``acquires'' to describe the equity 
securities that are subject to the statutory trading prohibition, we 
believe that Congress intended to cover both equity securities that a 
director or executive officer ``acquired'' before, or ``acquires'' 
during, a pension plan blackout period.\54\ Thus, we read the Section 
306(a) trading prohibition to cover:
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    \53\ Under Regulation BTR, a purchase, sale or other acquisition 
or transfer of an equity security will be attributed to a director 
or executive officer if he or she has a pecuniary interest in the 
transaction. To promote consistency and to simplify compliance, new 
Rule 100(l) of Regulation BTR [17 CFR 100(l)] defines 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)]. The definition in new Rule 100(l) also 
encompasses the portfolio exclusion of Exchange Act Rule 16a-
1(a)(2)(iii) [17 CFR 240.16a-1(a)(2)(iii)].
    \54\ This interpretation of the statute is reflected in new Rule 
101(a) of Regulation BTR [17 CFR 245.101(a)].
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    [sbull] An acquisition of issuer equity securities by a director or 
executive officer during a blackout period if the acquisition is in 
connection with his or her service or employment as a director or 
executive officer; and
    [sbull] A disposition of issuer equity securities by a director or 
executive officer during a blackout period if the disposition involves 
issuer equity securities acquired in connection with his or her service 
or employment as a director or executive officer.\55\
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    \55\ Accordingly, a transaction involving equity securities that 
are not acquired in connection with service or employment as a 
director or executive officer is not subject to the Section 306(a) 
trading prohibition.

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[[Page 4341]]

    (a) ``Acquired in Connection with Service or Employment as a 
Director or Executive Officer''.
    As adopted, new Rule 100(a) of Regulation BTR \56\ defines the term 
``acquired such equity security in connection with service or 
employment as a director or executive officer'' to include equity 
securities acquired by a director or executive officer:
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    \56\ 17 CFR 245.100(a).
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    [sbull] At a time when he or she was a director or executive 
officer under a compensatory plan, contract, authorization or 
arrangement,\57\ 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;
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    \57\ The scope of the phrase ``compensatory plan, contract, 
authorization or arrangement'' includes a ``plan'' as defined in 
Item 402(a)(7)(ii) of Regulation S-K [17 CFR 229.402(a)(7)(ii)], as 
well as an ``employee benefit plan'' as defined in Securities Act 
Rule 405 [17 CFR 230.405].
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    [sbull] At a time when he or she was a director or executive 
officer as a result of any transaction or business relationship 
described in paragraph (a) or (b) of Item 404 of Regulation S-K \58\ 
or, in the case of a foreign private issuer, Item 7.B of Form 20-F (but 
without application of the disclosure thresholds of such provisions), 
to the extent that he or she has a pecuniary interest \59\ in the 
equity securities;
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    \58\ 17 CFR 229.404(a) or (b). The descriptions in Item 404(a) 
and (b) of Regulation S-K are to be used without regard to whether 
the issuer is a ``small business issuer'' subject to the disclosure 
requirements of Regulation S-B [17 CFR 228.10 et seq.].
    \59\ See n. 53 above.
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    [sbull] At a time when he or she was a director or executive 
officer, as ``director's qualifying shares'' or other securities that 
he or she must hold to satisfy minimum ownership requirements or 
guidelines for directors or executive officers;
    [sbull] Prior to becoming, or while, a director or executive 
officer where the equity security was acquired as a direct or indirect 
inducement to service or employment as a director or executive officer; 
or
    [sbull] Prior to becoming, or while, a director or executive 
officer where the equity security was received as a result of a 
business combination in respect of an equity security of an entity 
involved in the business combination that he or she had acquired in 
connection with service or employment as a director or executive 
officer of that entity.
    Several commenters expressed concern that, as proposed, the 
definition was overly broad.\60\ One commenter objected to treating 
equity securities acquired in an arms-length, commercial transaction 
that is subject to disclosure under Item 404(a) or (b) of Regulation S-
K as ``acquired in connection with service or employment as a director 
or executive officer.''\61\ While this aspect of the definition may 
reach equity securities that were, in fact, acquired in arms-length, 
commercial transactions, we believe that it is necessary to prevent 
evasion of the trading prohibition of Section 306(a) of the Act.
---------------------------------------------------------------------------

    \60\ See the ABA Letter, the ACB Letter, the PSCA Letter, the 
PWC Letter and the Letter dated December 16, 2002 of Sullivan & 
Cromwell (the ``S&C Letter'').
    \61\ See the ACB Letter.
---------------------------------------------------------------------------

    Some commenters opposed treating equity securities acquired to 
satisfy minimum ownership requirements or guidelines as subject to the 
Section 306(a) trading prohibition, arguing that securities purchased 
in the open market are not ``acquired in connection with service or 
employment as a director or executive officer,'' regardless of the 
extrinsic motivation, and that the proposed definition was contrary to 
the statutory language and the intent of Section 306(a).\62\ They also 
asserted that requiring a director or executive officer subject to 
minimum ownership requirements or guidelines to identify and track 
equity securities purchased in the open market to satisfy such 
requirements or guidelines would impose an unjustified administrative 
burden.
---------------------------------------------------------------------------

    \62\ See the ABA Letter, the PSCA Letter and the S&C Letter.
---------------------------------------------------------------------------

    We agree that equity securities purchased in the open market before 
an individual becomes a director or executive officer (and, thus, 
before the minimum ownership requirements or guidelines apply) should 
not be subject to the Section 306(a) trading prohibition even if they 
are used to satisfy the ownership requirements or guidelines after the 
individual becomes a director or executive officer. We, therefore, 
revised this aspect of the definition to indicate that equity 
securities used as directors' qualifying shares or to satisfy an 
issuer's minimum security ownership requirements or guidelines will be 
considered ``acquired in connection with service or employment as a 
director or executive officer'' only where an individual acquires the 
equity securities at a time when he or she is a director or executive 
officer of the issuer. Since these equity securities are clearly 
``acquired in connection with service or employment as a director or 
executive officer,'' we do not believe that it is overly burdensome to 
require directors and executive officers to identify and track these 
securities for purposes of Section 306(a).
    Some commenters objected to treating equity securities acquired by 
an individual before becoming a director or executive officer as 
``acquired in connection with service or employment as a director or 
executive officer'' if the equity securities were awarded to induce the 
individual to become an employee or non-executive officer of the 
issuer.\63\ These commenters argued that subjecting these equity 
securities to the statutory trading prohibition at the time an employee 
or non-executive officer is promoted to director or executive officer 
status was contrary to the statutory language and did not serve the 
goals of Section 306(a). They suggested that inducement awards be 
treated as ``acquired in connection with service or employment as a 
director or executive officer'' only if they are directly related to an 
individual becoming a director or executive officer. Because, in some 
situations, an equity securities award to an individual joining an 
issuer as an employee or non-executive officer may be an inducement 
related to subsequent service or employment as a director or executive 
officer, we chose not to exclude inducement awards related to becoming 
an employee or non-executive officer from the definition. Instead, to 
ensure that this type of inducement award is not used to evade the 
statutory trading prohibition, we revised the definition to make it 
clear that an award acquired as a direct or indirect inducement to 
service or employment as a director or executive officer will be 
considered ``acquired in connection with service or employment as a 
director or executive officer.'' Awards that are an inducement to 
becoming an employee or non-executive officer, but are not a direct or 
indirect inducement to service or employment as a director or executive 
officer, will not be considered ``acquired in connection with service 
or employment as a director or executive officer.''
---------------------------------------------------------------------------

    \63\ See the ACB Letter and the S&C Letter.
---------------------------------------------------------------------------

    Finally, commenters requested clarification on one other aspect of 
the definition. New Rule 100(a)(5) of Regulation BTR \64\ makes clear 
that, in the case of equity securities acquired in connection with a 
merger, consolidation or other business combination by an individual 
who was a director or executive officer of the target entity and is to 
become a director or executive officer of the acquiring entity at the 
time

[[Page 4342]]

of, or following the completion of, the transaction, the securities 
will be considered ``acquired in connection with service or employment 
as a director or executive officer'' to the extent that they are 
received in respect of equity securities of the target entity that were 
``acquired in connection with service or employment as a director or 
executive officer'' of the target entity.\65\ For example, where an 
executive officer of a target entity becomes an executive officer of 
the acquiring entity in connection with a business combination and, in 
the transaction, receives equity securities of the acquiring entity in 
respect of equity securities of the target entity that he or she owned, 
the equity securities received will be considered ``acquired in 
connection with service or employment as a director or executive 
officer'' only to the extent that they are received in respect of 
securities that were previously ``acquired in connection with service 
or employment as a director or executive officer'' of the target 
entity.
---------------------------------------------------------------------------

    \64\ 17 CFR 245.100(a)(5).
    \65\ In addition, equity securities acquired in connection with 
a merger, consolidation or other business combination by an 
individual (whether or not a director or executive officer of the 
target entity) as an inducement to becoming a director or executive 
officer of the acquiring entity will be considered ``acquired in 
connection with service or employment as a director or executive 
officer.'' See new Rule 100(a)(4) of Regulation BTR [17 CFR 
245.100(a)(4)].
---------------------------------------------------------------------------

    (b) Service or Employment Presumption.
    To simplify identification of equity securities involved in a 
disposition subject to the trading prohibition of Section 306(a)(1) of 
the Act and to prevent evasion of the trading prohibition, we proposed 
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 a director or executive officer owned such 
securities at the time of the transaction, without regard to the actual 
source of the securities. One commenter supported the proposed 
presumption, citing the difficulty in tracing the actual source of the 
securities disposed.\66\ However, most commenters opposed the 
presumption, asserting that because it would treat all equity 
securities held as fungible, it would act as an absolute bar on sales 
or other dispositions during a blackout period, regardless of how the 
securities actually were acquired. \67\ Some commenters indicated that, 
because a violation of Section 306(a)(1) is not limited to a private 
action for profit recovery, an irrebuttable presumption would 
potentially expose directors and executive officers to civil and 
criminal penalties.\68\ They argued that the proposed presumption would 
effectively erase the ``acquired in connection with service or 
employment as a director or executive officer'' requirement from 
Section 306(a) of the Act.
---------------------------------------------------------------------------

    \66\ See the PWC Letter.
    \67\ See, for example, the ABA Letter, the Letter dated December 
16, 2002 of Intel Corporation (the ``Intel Letter'') and the PSCA 
Letter.
    \68\ See the ABA Letter and the S&C Letter.
---------------------------------------------------------------------------

    These commenters encouraged us to permit directors and executive 
officers to specifically identify, or ``trace,'' the source of equity 
securities sold or otherwise transferred during a blackout period to 
establish that the transaction did not involve securities ``acquired in 
connection with service or employment as a director or executive 
officer.'' They pointed out that because ``tracing'' is permitted under 
both the Internal Revenue Code \69\ and some federal securities 
laws,\70\ it would not impose an undue burden on directors and 
executive officers.
---------------------------------------------------------------------------

    \69\ See Treas. Reg. 1.1012-1(c).
    \70\ See, for example, Securities Act Rule 144(d) [17 CFR 
230.144(d)].
---------------------------------------------------------------------------

    We are persuaded by these comments that an irrebuttable presumption 
is unnecessary. Accordingly, new Rule 101(b) of Regulation BTR \71\ 
provides that any equity securities sold or otherwise transferred 
during a blackout period by a director or executive officer of an 
issuer will be considered to have been ``acquired in connection with 
service or employment as a director or executive officer'' to the 
extent that the director or executive officer owned such securities at 
the time of the transaction, unless he or she establishes that the 
equity securities were not ``acquired in connection with service or 
employment as a director or executive officer.'' To establish this 
defense, a director or executive officer must specifically identify the 
origin of the equity securities in question (which must not be 
``acquired in connection with service or employment as a director or 
executive officer'' as defined in new Rule 100(a)), and demonstrate 
that this identification of the equity securities is consistent for all 
purposes related to the transaction (such as tax reporting and any 
applicable disclosure and reporting requirements).\72\
---------------------------------------------------------------------------

    \71\ 17 CFR 245.101(b).
    \72\ While not required, a director or executive officer may 
want to add a note describing the date and nature of the transaction 
in which the securities were acquired in the ``Explanation of 
Responses'' section of the Form 4 [17 CFR 249.104] reporting the 
transaction.
---------------------------------------------------------------------------

    For example, if an executive officer owned 1,000 shares of an 
issuer's common stock, 250 shares 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 will be treated as a sale of the 
option shares and, therefore, subject to the Section 306(a) trading 
prohibition, unless the executive officer establishes a different 
source of the shares sold and this identification is consistent for all 
purposes related to the transaction (such as tax reporting and any 
applicable disclosure and reporting requirements).
    (c) Transitional Situations.
    Except as provided in new Rule 100(a), equity securities acquired 
by an individual before he or she becomes a director or executive 
officer are not ``acquired in connection with service or employment as 
a director or executive officer'' for purposes of Section 306(a) of the 
Act. Thus, equity securities acquired under a compensatory plan, 
contract, authorization or arrangement while an individual is an 
employee, but not a director or executive officer, will not be subject 
to the Section 306(a) trading prohibition. However, equity securities 
acquired by an employee before becoming a director or executive officer 
will be considered ``acquired in connection with service or employment 
as a director or executive officer'' if the equity securities are part 
of an inducement award.\73\
---------------------------------------------------------------------------

    \73\ See the discussion in Section II.B.4.a above.
---------------------------------------------------------------------------

    In contrast, equity securities acquired by an individual in 
connection with service or employment as a director or executive 
officer before an entity becomes an ``issuer'' (as defined in Section 
2(a)(7) of the Act and new Rule 100(k)) are considered ``acquired in 
connection with service or employment as a director or executive 
officer'' for purposes of Section 306(a) and Regulation BTR and are 
subject to the statutory trading prohibition. Similarly, equity 
securities acquired by a director or executive officer in connection 
with his or her service or employment as a director or executive 
officer of an ``issuer'' (as defined in Section 2(a)(7) of the Act and 
new Rule 100(k)) before the effective date of Section 306(a) are 
subject to that section and Regulation BTR.
    (d) Exempt Transactions.
    Because some transactions by a director or executive officer 
involving issuer equity securities do not present the concerns that 
Section 306(a) of the Act is intended to remedy, we are adopting new 
Rule 101(c) of Regulation BTR,\74\ which exempts from the statutory 
trading prohibition:
---------------------------------------------------------------------------

    \74\ 17 CFR 245.101(c).

---------------------------------------------------------------------------

[[Page 4343]]

    [sbull] Acquisitions of equity securities under dividend or 
interest reinvestment plans;
    [sbull] Purchases or sales of equity securities pursuant to a 
trading arrangement that satisfies the affirmative defense conditions 
of Exchange Act Rule 10b5-1(c); \75\
---------------------------------------------------------------------------

    \75\ 17 CFR 240.10b5-1(c).
---------------------------------------------------------------------------

    [sbull] Purchases or sales of equity securities, other than 
discretionary transactions,\76\ pursuant to certain ``tax-conditioned'' 
plans; \77\ and
---------------------------------------------------------------------------

    \76\ As defined in Exchange Act Rule 16b-3(b)(1) [17 CFR 
240.16b-3(b)(1)].
    \77\ These plans include Qualified Plans (as defined in Exchange 
Act Rule 16b-3(b)(4) [17 CFR 240.16b-3(b)(4)]), Excess Benefit Plans 
(as defined in Exchange Act Rule 16b-3(b)(2) [17 CFR 240.16b-
3(b)(2)]) and Stock Purchase Plans (as defined in Exchange Act Rule 
16b-3(b)(5) [17 CFR 240.16b-3(b)(5)]) and, with respect to foreign 
private issuers, specified similar plans. See n. 83 below and the 
accompanying text. Some commenters requested exemptions for specific 
transactions under these ``tax-conditioned'' plans. As discussed in 
this section, we do not believe that these exemptions are necessary. 
See n. 85 below and the accompanying text.
---------------------------------------------------------------------------

    [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.
    While commenters generally supported the proposed exemptions, some 
requested clarification as to the intent of the statement in the 
Proposing Release that ``[a]wareness of an impending blackout period 
would be considered awareness of material, non-public information that 
could render the [proposed exemption for a trading arrangement that 
satisfies the affirmative defense conditions of Exchange Act Rule 10b5-
1(c)] unavailable.'' In particular, commenters expressed concern that 
the statement could have implications beyond Section 306(a). One 
commenter noted that a broad reading of this statement could preclude a 
director or executive officer from establishing an Exchange Act Rule 
10b5-1(c) trading arrangement indefinitely if he or she was aware that 
a pension plan blackout period was planned, even if the dates of the 
blackout period had not been established.\78\ The same commenter 
asserted that the statement would not permit a director or executive 
officer to evaluate the materiality of his or her knowledge about an 
impending blackout period on the basis of applicable facts and 
circumstances. Another commenter noted that the statement created 
uncertainty as to whether ``awareness'' of an impending blackout period 
was material non-public information that would preclude trading in an 
issuer's securities by any person with such awareness until the 
blackout period was publicly disclosed.\79\ A third commenter suggested 
that we clarify the statement to provide that ``awareness'' of an 
impending blackout period would require awareness of the actual or 
approximate beginning and ending dates of a specific blackout period 
(whether or not notice of the blackout period as required by Section 
306(a)(6) of the Act had been received).\80\
---------------------------------------------------------------------------

    \78\ See the PSCA Letter.
    \79\ See the Intel Letter.
    \80\ See the ABA Letter.
---------------------------------------------------------------------------

    We did not intend for this statement to be read so broadly. The 
statement simply was intended to clarify that a director or executive 
officer who is aware of a scheduled blackout period could not 
subsequently enter into or modify an Exchange Act Rule 10b5-1(c) 
trading arrangement to circumvent the Section 306(a) trading 
prohibition. The ``awareness'' of an impending blackout period 
described in the statement would require awareness of the actual or 
approximate beginning or ending dates of a specific blackout period 
(whether or not notice of the blackout period as required by Section 
306(a)(6) had been received), and not merely awareness of the potential 
for a blackout period. Accordingly, we have modified new Rule 101(c)(2) 
of Regulation BTR \81\ to provide that transactions pursuant to a 
trading arrangement that satisfies the affirmative defense conditions 
of Exchange Act Rule 10b5-1(c) will be exempt from the Section 306(a) 
trading prohibition, as long as the arrangement is not entered into or 
modified during the blackout period in question or at a time when the 
director or executive officer is aware of the actual or approximate 
beginning or ending dates of the blackout period, whether or not the 
director or executive officer has received notice of the blackout 
period as required by Section 306(a)(6). This information may or may 
not be material non-public information for other purposes, depending on 
the applicable facts, including whether the information has not been 
disclosed or otherwise made public and whether the information is 
material under customary legal analysis.\82\ We do not intend that our 
treatment of this information under Regulation BTR affect that 
customary legal analysis of materiality.
---------------------------------------------------------------------------

    \81\ 17 CFR 245.101(c)(2).
    \82\ See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 
(1976); Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
---------------------------------------------------------------------------

    The exemption for purchases or sales of equity securities pursuant 
to certain ``tax-conditioned'' plans in new Rule 101(c)(3) of 
Regulation BTR \83\ has been expanded to include purchases or sales 
pursuant to an employee benefit plan of a foreign private issuer that 
either has been approved by the taxing authority of a foreign 
jurisdiction, or is eligible for preferential treatment under the tax 
laws of a foreign jurisdiction because the plan provides for broad-
based employee participation. This change is intended to equalize the 
treatment of directors and executive officers of domestic and foreign 
private issuers where a foreign issuer has an employee benefit plan 
maintained outside the United States that is substantially similar to a 
``tax-conditioned'' employee benefit plan.\84\
---------------------------------------------------------------------------

    \83\ 17 CFR 245.101(c)(3).
    \84\ See n. 77 above.
---------------------------------------------------------------------------

    As adopted, the exemption in new Rule 101(c)(3) does not extend to 
``discretionary transactions,'' 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 
occur during a blackout period. However, it would cover acquisitions or 
dispositions 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 because these 
transactions are not ``discretionary transactions.''\85\
---------------------------------------------------------------------------

    \85\ See n. 76 above.
---------------------------------------------------------------------------

    We have expanded new Rule 101(c) to include the following 
additional exemptions from the statutory trading prohibition that were 
suggested by commenters:
    [sbull] Compensatory grants and awards of equity securities 
(including options and stock appreciation rights) pursuant to a plan 
that, by its terms, permits directors or executive officers to receive 
grants or awards, provides for grants or awards to occur automatically 
and specifies the terms and conditions of the grants or awards;
    [sbull] Exercises, conversions or terminations of derivative 
securities that were not written or acquired by a director or executive 
officer during the blackout period in question or while aware of the 
actual or approximate beginning or ending dates of the blackout period, 
and where (i) the derivative security, by its terms, may be exercised, 
converted or terminated only on a fixed date, with no discretionary 
provision for earlier exercise, conversion or termination,\86\ or (ii) 
the derivative security is exercised, converted or terminated by a 
counterparty and the director or

[[Page 4344]]

executive officer does not exercise any influence on the counterparty 
with respect to whether or when to exercise, convert or terminate the 
derivative security;
---------------------------------------------------------------------------

    \86\ For example, European-style options.
---------------------------------------------------------------------------

    [sbull] Acquisitions or dispositions of equity securities involving 
a bona fide gift or a transfer by will or the laws of descent and 
distribution;
    [sbull] Acquisitions or dispositions of equity securities pursuant 
to a domestic relations order;
    [sbull] Sales or other dispositions of equity securities compelled 
by the laws or other requirements of an applicable jurisdiction; and
    [sbull] Acquisitions or dispositions of equity securities in 
connection with a merger, acquisition, divestiture or similar 
transaction occurring by operation of law.\87\
---------------------------------------------------------------------------

    \87\ See new Rules 101(c)(4)-(9) of Regulation BTR [17 CFR 
245.101(c)(4)-(9)].
---------------------------------------------------------------------------

    Section 306(a)(3) of the Act \88\ permits us to provide appropriate 
exemptions from the statutory trading prohibition, citing examples of 
transactions eligible for exemption such as purchases pursuant to an 
automatic dividend reinvestment program or purchases or sales made 
pursuant to an advance election. These examples reflect transactions 
that occur automatically, are made pursuant to an advance election or 
are otherwise outside the control of the director or executive officer. 
The exemptions that we originally proposed and are adopting embody one 
or both of these characteristics. The additional exemptions that we are 
adopting also reflect these characteristics.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 7244(a)(3).
---------------------------------------------------------------------------

    Compensatory grants and awards of equity securities during a 
blackout period pursuant to a plan that, by its terms, provides for 
grants and awards to be made to directors and executive officers 
automatically and specifies the terms and conditions of the grants or 
awards are outside the control of the directors and executive officers 
and do not present the concerns that Section 306(a) is intended to 
remedy. Similarly, an exercise, conversion or termination of a 
derivative security written or acquired by a director or executive 
officer before the blackout period in question and while not aware of 
the actual or approximate beginning or ending dates of the blackout 
period is a transaction that is outside the control of the director or 
executive officer where the derivative security either, by its terms, 
may be exercised, converted or terminated only on a fixed date, or is 
exercised, converted or terminated by a counterparty where the director 
or executive officer does not exercise any influence on the 
counterparty with respect to whether or when to exercise, convert or 
terminate the derivative security.
    The exemption for bona fide gifts and acquisitions or dispositions 
of equity securities by will or the laws of descent and distribution is 
modeled on a similar exemption under Section 16 of the Exchange 
Act.\89\ The exemption for acquisitions or dispositions pursuant to a 
domestic relations order is modeled on the exemption in Exchange Act 
Rule 16a-12.\90\
---------------------------------------------------------------------------

    \89\ See Exchange Act Rule 16b-5 [17 CFR 240.16b-5].
    \90\ 17 CFR 240.16a-12.
---------------------------------------------------------------------------

    The exemption for sales or other dispositions of equity securities 
compelled by the laws or other requirements of an applicable 
jurisdiction addresses a category of involuntary transactions that do 
not provide the opportunity for improper self-dealing or present the 
unfairness Section 306(a) was designed to address. Finally, the 
exemption for acquisitions or dispositions of equity securities in 
connection with a merger, acquisition, divestiture or similar 
transaction occurring by operation of law is intended to cover an 
exchange of equity securities affecting substantially all of an 
entity's equity security holders that occurs upon a statutory merger, 
acquisition, divestiture or similar transaction that closes during a 
blackout period.
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 an 
issuer to purchase, sell or otherwise acquire or transfer an interest 
in any equity security of the issuer held in such an individual account 
plan is temporarily suspended by the issuer or by a fiduciary \91\ of 
the plan. In the Proposing Release, we solicited comment on whether a 
trading suspension of three business days or less should be considered 
a ``blackout period'' for purposes of the statute.
---------------------------------------------------------------------------

    \91\ For purposes of the Act and Regulation BTR, a plan 
administrator will be considered a ``fiduciary'' of the plan even if 
it has invoked the rules under Section 404(c) of the Employment 
Retirement Income Security Act of 1974 (``ERISA'') [29 U.S.C. 
1104(c)] to avoid liability for losses in participant or beneficiary 
accounts where participants and beneficiaries are provided an 
opportunity to exercise control over the assets in their individual 
accounts and are given an opportunity to choose from a broad range 
of investments.
---------------------------------------------------------------------------

    Several commenters opposed expanding the definition of the term 
``blackout period'' to encompass periods of three business days or 
less. One commenter noted that the specific statutory language 
providing this standard had resulted from extensive discussions among 
policymakers and representatives of the voluntary employer-provided 
retirement system, and that blackout periods of three business days or 
less do not significantly impact the rights of plan participants and 
beneficiaries.\92\ Two commenters requested that Regulation BTR be 
consistent with the rules under Section 306(b) of the Act adopted by 
the Department of Labor (the ``DOL Rules''), so that issuers are not 
subject to different blackout period rules.\93\ Two commenters noted 
that because there may be unforeseen technical problems or other 
emergencies that could result in unscheduled temporary trading 
suspensions lasting one or two business days which would not be subject 
to the advance notice requirement of the DOL Rules, it would be 
impracticable to comply with Section 306(a) of the Act in these 
circumstances.\94\
---------------------------------------------------------------------------

    \92\ See the PSCA Letter.
    \93\ See the ACB Letter and the PWC Letter.
    \94\ See the ACB Letter and the Letter dated December 16, 2002 
of The ERISA Industry Committee (the ``ERIC Letter'').
---------------------------------------------------------------------------

    Although Regulation BTR retains the ``more than three consecutive 
business days'' language in its definition of the term ``blackout 
period,'' we remain concerned that the problems Section 306(a) is 
intended to address may not be limited to blackout periods that last 
longer than three consecutive business days. A sharp decline in the 
value of an issuer's equity securities can take place in a single day, 
and, if that decline coincides with a temporary trading suspension in 
the issuer's pension plans, it is still unfair that directors and 
executive officers may be able to dispose of the equity securities that 
they acquired in connection with service or employment as a director or 
executive officer while rank-and-file employees are precluded from 
selling issuer equity securities in their individual plan accounts. 
While most of these temporary trading suspensions are likely the result 
of unforeseeable technical problems or other emergencies, we are 
mindful that, given the requirements of the statute, issuers and plan 
administrators may be motivated to structure blackout periods to last 
three business days or less. We would view any such efforts to

[[Page 4345]]

circumvent Section 306(a) as potential violations of Regulation BTR. We 
will continue to consider these issues, to attempt to ascertain whether 
blackout periods of three business days or less are or may become a 
concern and to talk to the Department of Labor about possible 
solutions.
    (a) Individual Account Plan.
    New Rule 100(j) of Regulation BTR \95\ sets forth the definition of 
the term ``individual account plan'' for purposes of Section 306(a) of 
the Act. As specified in Section 306(a)(5) of the Act,\96\ this 
definition is based on Section 3(34) of ERISA.\97\ 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.
---------------------------------------------------------------------------

    \95\ 17 CFR 245.100(j).
    \96\ 15 U.S.C 7244(a)(5). Consequently, a temporary trading 
suspension in issuer equity securities in an individual account plan 
that is a pension plan as defined in ERISA may trigger the Section 
306(a) trading prohibition, whether or not the plan is actually 
subject to ERISA.
    \97\ 29 U.S.C. 1002(34). Section 3(2)(A) of ERISA [29 U.S.C. 
1002(2)(A)] defines the term ``pension plan'' to mean ``any plan, 
fund, or program . . . established or maintained by an employer or 
an employee organization, or by both, to the extent that by its 
express terms or as a result of surrounding circumstances such plan, 
fund, or program (i) provides retirement income to employees, or 
(ii) results in a deferral of income by employees for periods 
extending to the termination of covered employment or beyond, 
regardless of the method of calculating the contributions made to 
the plan, the method of calculating the benefits under the plan or 
the method of distributing benefits from the plan.''
---------------------------------------------------------------------------

    As specified in the statute, the definition excludes a one-
participant retirement plan.\98\ In addition, we have modified the 
definition to exclude pension plans, including deferred compensation 
plans, in which participation is limited to directors of the issuer. In 
the case of a temporary trading suspension in issuer equity securities 
in such a plan, the unfairness of directors and executive officers 
being able to trade their equity securities while an issuer's employees 
may not does not exist.\99\
---------------------------------------------------------------------------

    \98\ See Section 306(a)(5) of the Act.
    \99\ This change was made in response to a comment in the Letter 
dated December 13, 2002 of the Investment Company Institute (the 
``ICI Letter''). We have made this exclusion applicable to all 
issuers, not just investment companies, because we believe that it 
is unnecessary to include director-only plans within the scope of 
the rule, whether or not the issuer is an investment company.
---------------------------------------------------------------------------

    (b) Blackout Period.
    New Rule 100(b) of Regulation BTR \100\ contains the definition of 
the term ``blackout period'' as clarified to achieve the purposes of 
Section 306(a) of the Act. The new rule makes clear that, in 
determining whether a temporary trading suspension in issuer equity 
securities constitutes a ``blackout period,'' the individual account 
plans to be considered are individual account plans maintained by an 
issuer that permit participants or beneficiaries located in the United 
States to acquire or hold equity securities of the issuer. This 
includes individual account plans that:
---------------------------------------------------------------------------

    \100\ 17 CFR 245.100(b).
---------------------------------------------------------------------------

    [sbull] Permit participants or beneficiaries to invest their plan 
contributions in issuer equity securities;
    [sbull] Include an ``open brokerage window'' that permits 
participants or beneficiaries to invest in the equity securities of any 
publicly-traded company, including the issuer;
    [sbull] Match employee contributions with issuer equity securities; 
or
    [sbull] Reallocate forfeitures that include issuer equity 
securities to the remaining plan participants.
    This would include such an individual account plan, whether or not 
the plan actually contains equity securities of the issuer at the time 
of the temporary trading suspension and related determination.\101\ In 
addition, new Rule 100(b)(3)(i) of Regulation BTR \102\ provides 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 \103\ with respect to entities treated as a 
single employer are to be applied.
---------------------------------------------------------------------------

    \101\ Thus, a temporary trading suspension applicable to such an 
individual account plan in which no issuer equity securities are 
actually held by plan participants or beneficiaries will trigger a 
determination of whether a ``blackout period'' will occur in that 
plan. Similarly, an individual account plan maintained by an issuer 
that permits participants or beneficiaries to acquire or hold equity 
securities of the issuer, whether or not the plan actually contains 
equity securities of the issuer at the time of the determination, 
will be taken into account in determining whether a temporary 
trading suspension in a different plan constitutes a ``blackout 
period.''
    \102\ 17 CFR 245.100(b)(3)(i).
    \103\ 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.
---------------------------------------------------------------------------

    Two commenters questioned whether all individual account plans 
maintained by an issuer that permit participants or beneficiaries 
located in the United States to acquire or hold equity securities of 
the issuer should be included in the percentage test for determining 
whether a temporary trading suspension constitutes a ``blackout 
period.'' \104\ These commenters noted that, as proposed, the 50% test 
would take into account any individual account plan (wherever located) 
maintained by an issuer that permits any participants or beneficiaries 
located in the United States to acquire or hold issuer equity 
securities. Thus, even though an individual account plan may be 
maintained outside the United States, if even a single participant or 
beneficiary was located in the United States, all of the participants 
or beneficiaries in the plan would have to be taken into account under 
the 50% test. One commenter asserted that although foreign issuers may 
have a small number of U.S. employees participating in their pension 
plans maintained outside the United States, because these issuers may 
not keep records of such participation (because the plans are not 
subject to ERISA), to avoid confusion and inaccurate calculations the 
50% test should not apply to these plans.\105\
---------------------------------------------------------------------------

    \104\ See the ERIC Letter and the S&C Letter.
    \105\ See the S&C Letter.
---------------------------------------------------------------------------

    We believe that a clarification is warranted. Accordingly, new Rule 
100(b)(3)(ii) of Regulation BTR \106\ excludes an individual account 
plan maintained outside of the United States primarily for the benefit 
of nonresident aliens from the determination of whether a temporary 
trading suspension constitutes a ``blackout period.'' \107\ This should 
focus the determination of whether a blackout period will occur on 
those individual account plans that are primarily for the benefit of 
participants and beneficiaries located in the United States. Because 
ERISA applies to any ``individual account plan'' that is primarily for 
the benefit of U.S. participants or beneficiaries and Section 404(b) of 
ERISA \108\ provides that the indicia of ownership of the assets of 
plans subject to ERISA may not be maintained outside the jurisdiction 
of the United States, we do not believe that this modification is 
inconsistent with the objectives of Section 306(a).
---------------------------------------------------------------------------

    \106\ 17 CFR 245.100(b)(3)(ii).
    \107\ This type of employee benefit plan is excluded from the 
coverage provisions of ERISA. See Section 4(b)(4) of ERISA [29 
U.S.C. 1003(b)(4)].
    \108\ 29 U.S.C. 1104(b).
---------------------------------------------------------------------------

    (c) Determining Participants and Beneficiaries.
    Once an issuer has identified the relevant individual account 
plans, it must determine whether the temporary suspension of trading in 
its equity securities affects 50% or more of the participants or 
beneficiaries under these plans. This is accomplished by comparing the 
number of participants or beneficiaries located in the United

[[Page 4346]]

States who are subject to the temporary trading suspension in issuer 
equity securities to the number of participants or beneficiaries 
located in the United States under all individual account plans 
maintained by the issuer.\109\ In the case of a domestic issuer, where 
this percentage is 50% or more the temporary trading suspension 
constitutes a ``blackout period,'' so that the Section 306(a) trading 
prohibition applies to the issuer's directors and executive officers.
---------------------------------------------------------------------------

    \109\ See new Rule 100(b)(1) of Regulation BTR.
---------------------------------------------------------------------------

    We recognize that it may be difficult to determine the number of 
participants and beneficiaries in an individual account plan because 
participants and beneficiaries continuously enter and leave such plans. 
For example, newly eligible employees regularly enter plans, 
terminating and retiring employees regularly leave plans, beneficiaries 
of deceased employees frequently acquire benefit rights under plans and 
employees commonly enter and leave plans as a result of acquisitions 
and divestitures.\110\ On any day, it may be difficult for an issuer to 
know precisely how many participants and beneficiaries are then covered 
by all of its individual account plans. As a result, issuers will need 
to apply the 50% test on the basis of estimates.
---------------------------------------------------------------------------

    \110\ See the ERIC Letter.
---------------------------------------------------------------------------

    For purposes of determining the number of participants and 
beneficiaries in an individual account plan, commenters suggested a 
variety of ways to establish a reasonably accurate estimate.\111\ One 
commenter suggested that the determination be made using data as of any 
convenient date within the 12-month period preceding the start of the 
temporary trading suspension.\112\ We believe that this approach 
strikes the proper balance between ensuring that reasonably accurate 
data is used to make the required calculation and minimizing the burden 
on issuers. New Rule 100(b)(4)(i) of Regulation BTR \113\ provides that 
an issuer may use plan census data as of any date within the 12-month 
period preceding the beginning date of the temporary trading suspension 
in question (such as the last day of the most recently completed fiscal 
year) to determine the number of participants or beneficiaries in its 
individual account plans. However, where there has been a significant 
change in participation in an individual account plan since the date 
selected (for example, because of a merger or divestiture), an issuer 
is required to use plan census data as of the most recent practicable 
date that reflects such change (for example, the most recently 
completed fiscal quarter or month for that plan). This should provide 
adequate flexibility to issuers to determine the number of participants 
or beneficiaries in their individual account plans using reasonably 
accurate and available data.
---------------------------------------------------------------------------

    \111\ See, for example, the Letter dated December 16, 2002 of 
Computer Sciences Corporation, the PSCA Letter and the PWC Letter.
    \112\ See the ABA Letter.
    \113\ 17 CFR 245.100(b)(4)(i).
---------------------------------------------------------------------------

    In addition, new Rule 100(b)(4)(ii) of Regulation BTR \114\ 
provides that, in making the calculation, issuers may aggregate 
participants or beneficiaries under their individual account plans 
without regard to overlapping plan participation. This should alleviate 
the burden that might otherwise arise where individual employees 
participate in more than one individual account plan maintained by an 
issuer. Under this provision, an issuer is permitted to calculate the 
aggregate number of participants and beneficiaries under each of its 
individual account plans, even if an individual who participates in 
multiple plans is counted with respect to each plan in which he or she 
participates.
---------------------------------------------------------------------------

    \114\ 17 CFR 245.100(b)(4)(ii).
---------------------------------------------------------------------------

    (d) Foreign Private Issuers.
    In the case of a foreign private issuer, we proposed a concurrent 
second calculation to be applied to determine if a temporary trading 
suspension in issuer equity securities in the individual account plans 
maintained by the issuer constitutes a ``blackout period'' for purposes 
of Section 306(a) of the Act. This calculation would have compared the 
number of participants or beneficiaries located in the United States 
who are subject to the temporary trading suspension in issuer equity 
securities to the number of participants or beneficiaries under all 
individual account plans maintained by the issuer worldwide.\115\ Where 
this percentage exceeded 15% and the concurrent 50% test also was met, 
the Section 306(a) trading prohibition would have applied to the 
foreign private issuer's directors and executive officers.
---------------------------------------------------------------------------

    \115\ See proposed Exchange Act Rule 100(b)(2).
---------------------------------------------------------------------------

    However, commenters expressed concern that, as proposed, the 15% 
test would not operate as intended.\116\ These commenters noted that 
many foreign private issuers do not maintain pension plans that meet 
the ERISA definition of an ``individual account plan,'' other than the 
plans they maintain for their U.S. employees. In particular, they noted 
that outside the United States employees customarily participate in 
defined benefit pension plans, rather than individual account plans. 
Because the proposed 15% test was based on the percentage of an 
issuer's employees who participate in individual account plans, an 
issuer maintaining individual account plans only in the United States 
that were subject to a temporary trading suspension in issuer equity 
securities almost always would meet the test, even where the number of 
participants or beneficiaries in those plans was insignificant. In 
addition, one commenter indicated that many foreign issuers do not 
maintain centralized information on the types of plans they maintain or 
the numbers of participants or beneficiaries under the plans subject to 
the laws of jurisdictions other than the United States.\117\
---------------------------------------------------------------------------

    \116\ See the ABA Letter; the Cleary Letter; the S&C Letter and 
the Letter dated December 16, 2002 of Shearman & Sterling.
    \117\ See the S&C Letter.
---------------------------------------------------------------------------

    These commenters suggested that the appropriate balance between 
protecting U.S. participants and beneficiaries and accommodating the 
interests of foreign private issuers with a limited U.S. presence could 
be achieved by comparing the number of participants and beneficiaries 
located in the United States who are subject to the temporary trading 
suspension in issuer equity securities to the number of employees of 
the issuer worldwide. While we agree with this suggestion, we are 
mindful that, in some situations, such a test may frustrate the 
purposes of Section 306(a) where a significant number of U.S. employees 
are affected by a temporary trading suspension in issuer equity 
securities, even though that number may not represent at least 15% of a 
foreign private issuer's total number of employees. Accordingly, we are 
modifying the separate calculation for foreign private issuers in new 
Rule 100(b)(2) of Regulation BTR \118\ to provide that if the number of 
participants or beneficiaries located in the United States in 
individual account plans maintained by a foreign private issuer who are 
affected by a temporary trading suspension in issuer equity securities 
either exceeds 15% of the total number of employees of the issuer and 
its consolidated subsidiaries or 50,000 affected participants and 
beneficiaries \119\ and the concurrent 50% test is satisfied, the 
Section 306(a) trading prohibition will apply to the issuer's directors 
and executive officers.

[[Page 4347]]

Under new Exchange Act Rule 100(b)(2):
---------------------------------------------------------------------------

    \118\ 17 CFR 245.100(b)(2).
    \119\ We arrived at this number after examining the number of 
employees (including the number of employees based in the United 
States) of several foreign private issuers, applying the 15% 
calculation to these issuers and balancing the objectives of Section 
306(a) of the Act with the interests of foreign private issuers.
---------------------------------------------------------------------------

    [sbull] If the number of participants and beneficiaries located in 
the United States in individual account plans maintained by a foreign 
private issuer who are subject to a temporary trading suspension in 
issuer equity securities exceeds 15% of the number of employees of the 
issuer worldwide (and the concurrent 50% test is satisfied), the issuer 
will be considered to have a sufficient presence in the United States 
for purposes of applying the Section 306(a) trading prohibition to the 
issuer's directors and executive officers.
    [sbull] If the number of participants and beneficiaries located in 
the United States in individual account plans maintained by a foreign 
private issuer who are subject to a temporary trading suspension in 
issuer equity securities does not exceed 15% of the number of employees 
of the issuer worldwide but exceeds 50,000 participants and 
beneficiaries (and the concurrent 50% test is satisfied), the issuer 
will be considered to have a sufficient presence in the United States 
for purposes of applying the Section 306(a) trading prohibition to the 
issuer's directors and executive officers.
    [sbull] If the number of participants and beneficiaries located in 
the United States in individual account plans maintained by a foreign 
private issuer who are subject to a temporary trading suspension in 
issuer equity securities does not exceed 15% of the issuer's employees 
worldwide and is 50,000 or less participants and beneficiaries (even if 
the concurrent 50% test is satisfied), the issuer's presence in the 
United States will be considered sufficiently small so that its 
directors and executive officers will not be subject to the Section 
306(a) trading prohibition.
    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. 30,000 employees located in the United 
States participate in the company's two U.S. pension plans, which 
are individual account plans. A fiduciary of one of the U.S. pension 
plans temporarily suspends the ability of all plan participants to 
trade in issuer equity securities through their plan accounts. This 
temporary trading suspension affects 16,000 participants in the U.S. 
plans. Since the number of participants located in the United States 
in individual account plans maintained by the issuer who are subject 
to the temporary trading suspension comprises 50% or more of the 
total number of participants located in the United States in 
individual account plans maintained by the issuer (16,000/30,000), 
and since the number of participants located in the United States in 
individual account plans maintained by the issuer who are subject to 
the temporary trading suspension represents more than 15% of the 
issuer's employees worldwide (16,000/100,000), the temporary trading 
suspension is a ``blackout period'' for purposes of Section 306(a) 
of the Act and the statutory trading prohibition applies to the 
issuer's directors and executive officers.
    [sbull] Example 2. Company X is a foreign private issuer with 
1,000,000 employees worldwide. 100,000 employees located in the 
United States participate in the company's two U.S. pension plans, 
which are individual account plans. A fiduciary of one of the U.S. 
pension plans temporarily suspends the ability of all plan 
participants to trade in issuer equity securities through their plan 
accounts. This temporary trading suspension affects 60,000 
participants in the U.S. plans. Since the number of participants 
located in the United States in individual account plans maintained 
by the issuer who are subject to the temporary trading suspension 
comprises 50% or more of the total number of participants located in 
the United States in individual account plans maintained by the 
issuer (60,000/100,000), and since the number of participants 
located in the United States in individual account plans maintained 
by the issuer who are subject to the temporary trading suspension 
exceeds 50,000, the temporary trading suspension is a ``blackout 
period'' for purposes of Section 306(a) of the Act even though the 
60,000 participants located in the United States in individual 
account plans maintained by the issuer who are subject to the 
temporary trading suspension represent less than 15% of the issuer's 
employees worldwide (150,000/1,000,000). Consequently, the statutory 
trading prohibition applies to the issuer's directors and executive 
officers.
    [sbull] Example 3. Company X is a foreign private issuer with 
100,000 employees worldwide. 6,000 employees located in the United 
States participate in the company's two U.S. pension plans, which 
are individual account plans. A fiduciary of one of the U.S. pension 
plans temporarily suspends the ability of all plan participants to 
trade in issuer equity securities through their plan accounts. This 
temporary trading suspension affects 4,000 participants in the U.S. 
plans. Although the number of participants located in the United 
States in individual account plans maintained by the issuer who are 
subject to the temporary trading suspension is 50% or more of the 
total number of participants located in the United States in 
individual account plans maintained by the issuer (4,000/6,000), 
because this number represents 15% or less of the issuer's employees 
worldwide (4,000/100,000) and is less than 50,000 participants, the 
temporary trading suspension is not a ``blackout period'' for 
purposes of Section 306(a) of the Act. Consequently, the statutory 
trading prohibition does not apply to the issuer's directors and 
executive officers.

    (e) Exceptions to Definition of Blackout Period.
    Section 306(a)(4)(B) of the Act \120\ expressly excludes two types 
of temporary trading suspensions from the definition of the term 
``blackout period.'' These exceptions are for:
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 7244(a)(4)(B).
---------------------------------------------------------------------------

    [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;\121\ and
---------------------------------------------------------------------------

    \121\ See Section 306(a)(4)(B)(i) of the Act [15 U.S.C. 
7244(a)(4)(B)(i)].
---------------------------------------------------------------------------

    [sbull] any temporary trading suspension that would otherwise be a 
``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.\122\
---------------------------------------------------------------------------

    \122\ See Section 306(a)(4)(B)(ii) of the Act [15 U.S.C. 
7244(a)(4)(B)(ii)].
---------------------------------------------------------------------------

    New Rule 102 of Regulation BTR \123\ addresses the application of 
these exceptions.\124\ New Rule 102(a) of Regulation BTR \125\ 
clarifies the exception for regularly scheduled trading suspensions. It 
provides that the requirement that the regularly scheduled period be 
incorporated into the individual account plan may be satisfied by 
including a description of the regularly scheduled trading suspension 
in issuer equity securities, including the suspension's frequency and 
duration and the plan transactions to be suspended or otherwise 
affected, in either the official plan documents or other documents or 
instruments that govern plan operations. In the latter case, these 
documents or instruments may include an ERISA Section 404(c) notice or 
an advance notice included in either the plan's summary plan 
description or any other official plan communication.
---------------------------------------------------------------------------

    \123\ 17 CFR 245.102.
    \124\ 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 described temporary 
trading suspensions be ``blackout periods'' for purposes of Section 
306(a) of the Act.
    \125\ 17 CFR 245.102(a).
---------------------------------------------------------------------------

    The new rule also provides that disclosure of the regularly 
scheduled trading suspension will be considered timely if the employee 
is notified of the trading suspension at any time prior to, or within 
30 calendar days after, the employee's formal enrollment in the

[[Page 4348]]

plan, or, in the case of a subsequent amendment to the plan, within 30 
calendar days after adoption of the amendment. The new rule provides 
that the notice may be in any graphic form that is reasonably 
accessible to the intended recipient.\126\
    Some commenters indicated that the 30-day notice requirement would 
present a problem for existing plans with a regularly scheduled trading 
suspension.\127\ These commenters noted that ERISA typically requires 
delivery of information to a new plan participant within 90 days after 
enrollment in the plan, and that an issuer that previously provided 
notice of a regularly scheduled trading suspension in a summary plan 
description within this 90-day period would not qualify for the 
exception. To avoid this problem, they suggested that we establish a 
transition period during which issuers could cure any past failures to 
satisfy the 30-day notice requirement. Because we believe that the 
adoption of Regulation BTR should not penalize an issuer retroactively, 
we will consider an issuer to have satisfied the advance notice 
requirement of new Rule 102(a)(2) with respect to an individual account 
plan that includes a regularly scheduled trading suspension that is 
maintained by an issuer on January 26, 2003, the effective date of 
Section 306(a) of the Act, if the issuer previously provided the 
information described in the rule in the documents or instruments 
required by ERISA to be provided to plan participants within the time 
period authorized by ERISA.\128\
---------------------------------------------------------------------------

    \126\ See new Rule 102(a)(2) of Regulation BTR [17 CFR 
245.102(a)(2)].
    \127\ See the ABA Letter, the ERIC Letter and the S&C Letter.
    \128\ See Section 104(b) of ERISA [29 U.S.C. 1024(b)].
---------------------------------------------------------------------------

    In the case of a temporary trading suspension in issuer equity 
securities imposed in connection with a merger, acquisition, 
divestiture or similar transaction, new Rule 102(b) of Regulation BTR 
\129\ provides that the temporary suspension will not constitute a 
``blackout period'' for purposes of Section 306(a) if its principal 
purpose is to enable individuals to become participants or 
beneficiaries in an individual account plan by reason of the 
transaction, or to terminate participation in the plan, even though the 
suspension also is used to effect other administrative actions that are 
incidental to the admission or withdrawal of plan participants or 
beneficiaries. In addition, the new rule clarifies that the exception 
is available solely if the persons becoming participants or 
beneficiaries are not permitted to participate in the same class of 
equity securities after the merger, acquisition, divestiture or similar 
transaction as before the transaction. This will limit the scope of the 
exception to temporary trading suspensions affecting persons employed 
by or affiliated with the acquired or divested entity.
---------------------------------------------------------------------------

    \129\ 17 CFR 245.102(b).
---------------------------------------------------------------------------

6. Remedies
    As we discussed in the Proposing Release, Section 306(a) of the Act 
contains two distinct sets of remedies. A violation of the statutory 
trading prohibition in Section 306(a)(1) of the Act is treated as a 
violation of the Exchange Act and subject to all resulting sanctions, 
including Commission enforcement action.\130\ In addition, where a 
director or executive officer realizes a profit from a prohibited 
transaction during a blackout period, Section 306(a)(2) of the Act 
\131\ permits an issuer, or a security holder of the issuer on its 
behalf, to bring an action to recover that profit.\132\
---------------------------------------------------------------------------

    \130\ See Sections 3(b)(1) and 306(a)(1) of the Act [15 U.S.C. 
7202(b)(1) and 7244(a)(1)]. See also the Proposing Release at 
Section II.B.6.a.
    \131\ 15 U.S.C. 7244(a)(2).
    \132\ 15 U.S.C. 7244(a)(2).
---------------------------------------------------------------------------

    Under the latter provision, an issuer, or a security holder on its 
behalf, may initiate an action only if a director or executive officer 
realized a profit as a result of a prohibited 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 
profits'' means that the director or executive officer received a 
direct or indirect pecuniary benefit from the transaction.\133\ 
Although we did not propose a specific method for calculating the 
amount recoverable by an issuer under Section 306(a)(2) in the 
Proposing Release, we suggested several possible ways to calculate 
recoverable profits and solicited comment on these alternatives, as 
well as any other method consistent with the purposes of the statute.
---------------------------------------------------------------------------

    \133\ 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).
---------------------------------------------------------------------------

    Some commenters, acknowledging the potential complexity of the 
calculation, encouraged us not to provide a comprehensive rule.\134\ 
One commenter suggested that the calculation be left to the courts to 
determine on a case-by-case basis or, alternatively, that we establish 
a specific formula or guidelines for use in enforcement and private 
civil actions.\135\
---------------------------------------------------------------------------

    \134\ See the ACB Letter and the Cleary Letter.
    \135\ See the ACB Letter.
---------------------------------------------------------------------------

    In the Proposing Release, one of the potential methods to calculate 
profits on which we solicited comment was based on the difference 
between the actual amount paid or received by a director or executive 
officer as a result of the purchase, sale or other acquisition or 
transfer of an equity security during a blackout period and the market 
value of the issuer's equity securities on the first date after the end 
of the blackout period.\136\ One commenter endorsed this approach as 
the appropriate measure of the profit recoverable in a private action 
for a violation of the Section 306(a) trading prohibition.\137\ We 
believe that this approach has merit, both in terms of its simplicity 
and its adherence to the statute's purposes. Section 306(a)(2) seeks to 
equalize the treatment of corporate executives and rank-and-file 
employees with respect to their opportunity, during a pension plan 
blackout period, to engage in transactions in issuer equity securities 
that were acquired in connection with their service to, or employment 
with, the issuer. Since a plan participant or beneficiary may not 
engage in a transaction in issuer equity securities through his or her 
plan account until the blackout period has ended, the statute similarly 
restricts directors and executive officers. This profit recovery 
measure focuses on the difference between the amount that a director or 
executive officer actually paid or received in the transaction and the 
amount he or she would have paid or received had the transaction been 
conducted after the end of the blackout period.
---------------------------------------------------------------------------

    \136\ See the Proposing Release, at Section II.B.6.c.
    \137\ See the ABA Letter.
---------------------------------------------------------------------------

    To provide guidance to the courts in Section 306(a)(2) private 
actions against directors and executive officers who have violated the 
statutory trading prohibition, new Rule 103(c) of Regulation BTR \138\ 
provides that:
---------------------------------------------------------------------------

    \138\ 17 CFR 245.103(c).
---------------------------------------------------------------------------

    [sbull] Where a transaction involves a purchase, sale or other 
acquisition or transfer (other than a grant, exercise, conversion or 
termination of a derivative security) of an equity security of the 
issuer that is registered pursuant to Section 12(b) or 12(g) of the 
Exchange Act \139\ and listed on a national securities exchange or 
listed in an automated inter-dealer quotation system of a national 
securities association, profit is to be measured by comparing the 
difference between the amount paid or received for the equity security 
on the date of the transaction during the blackout period and the 
average market

[[Page 4349]]

price of the equity security calculated over the first three trading 
days after the ending date of the blackout period.
---------------------------------------------------------------------------

    \139\ 15 U.S.C. 78l(b) or (g).
---------------------------------------------------------------------------

    [sbull] Where a transaction is not otherwise described in the 
preceding paragraph, profit is to be measured in a manner that is 
consistent with the objective of identifying the amount of any gain 
realized or loss avoided as a result of the transaction taking place 
during the blackout period rather than taking place outside of the 
blackout period.
    To mitigate the effect of large fluctuations in the market price of 
an issuer's equity securities after a blackout period and deter 
attempts to manipulate this market price, new Rule 103(c)(1) of 
Regulation BTR \140\ uses a three-day average trading price to 
determine the amount that a director or executive officer would have 
paid or received if the transaction had occurred after the end of the 
blackout period. New Rule 103(c)(2) of Regulation BTR \141\ addresses 
transactions that do not lend themselves to a simple calculation (such 
as derivative securities transactions, transactions involving an issuer 
that is required to file reports under Section 15(d) of the Exchange 
Act and transactions involving an issuer that has filed a registration 
statement for an initial public offering that has not yet become 
effective). This rule reflects a pragmatic approach that should permit 
consideration of equitable factors in determining the amount 
recoverable in a private action consistent with the purposes of the 
Section 306(a) trading prohibition. New Rule 103(c)(3) of Regulation 
BTR \142\ provides that the calculation methods with respect to a 
private action under Section 306(a)(2) do not limit in any respect the 
authority of the Commission to seek or determine remedies as the result 
of a transaction taking place in violation of Section 306(a)(1) of the 
Act.
---------------------------------------------------------------------------

    \140\ 17 CFR 245.103(c)(1).
    \141\ 17 CFR 245.103(c)(2).
    \142\ 17 CFR 245.103(c)(3).
---------------------------------------------------------------------------

    This operation of the new rule is illustrated by the following 
examples:

    [sbull] Example 1: The XYZ Company Section 401(k) plan imposes a 
temporary trading suspension on plan participants and beneficiaries 
from December 1st through the following January 3rd that is a 
``blackout period'' for purposes of Section 306(a). Director A 
acquires 1,000 shares of XYZ Company common stock in connection with 
his or her service as a director on December 15th for $10.00. 
Between January 6th and 8th, the first three trading days after the 
end of the blackout period, XYZ Company common stock trades at an 
average price of $12.00 per share. Director A has ``realized'' a 
profit of $2000 that is recoverable under Section 306(a)(2).
    [sbull] Example 2: The XYZ Company Section 401(k) plan imposes a 
temporary trading suspension on plan participants and beneficiaries 
from December 1st through the following January 3rd that is a 
``blackout period'' for purposes of Section 306(a). Director A 
acquires 1,000 shares of XYZ Company common stock in connection with 
his or her service as a director on December 15th for $10.00. 
Between January 6th and 8th, the first three trading days after the 
end of the blackout period, XYZ Company common stock trades at an 
average price of $8.00 per share. There is no recoverable profit 
under Section 306(a)(2), as Director A received no price advantage 
over plan participants from purchasing the share of XYZ Company 
common stock during the blackout period.
    [sbull] Example 3: The XYZ Company Section 401(k) plan imposes a 
temporary trading suspension on plan participants and beneficiaries 
from December 1st through the following January 3rd that is a 
``blackout period'' for purposes of Section 306(a). Director A 
disposes of 1,000 shares of XYZ Company common stock previously 
acquired in connection with his or her service as a director on 
December 15th for $20.00. Between January 6th and 8th, the first 
three trading days after the end of the blackout period, XYZ Company 
common stock trades at an average price of $12.00 per share. 
Director A has ``realized'' a profit of $8000 that is recoverable 
under Section 306(a)(2).
    [sbull] Example 4: The XYZ Company Section 401(k) plan imposes a 
temporary trading suspension on plan participants and beneficiaries 
from December 1st through the following January 3rd that is a 
``blackout period'' for purposes of Section 306(a). Director A 
disposes of 1,000 shares of XYZ Company common stock previously 
acquired in connection with his or her service as a director on 
December 15th for $20.00. Between January 6th and 8th, the first 
three trading days after the end of the blackout period, XYZ Company 
common stock trades at an average price of $25.00 per share. There 
is no recoverable profit, as Director A received no price advantage 
over plan participants from selling the share of XYZ Company common 
stock during the blackout period.
    Without regard to whether any amount is recoverable under 
Section 306(a)(2), in each example Director A has violated Section 
306(a)(1) and, as a result, is subject to sanctions, including 
Commission enforcement action.
7. Notice
    Section 306(a)(6) of the Act \143\ 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 triggers the 
trading prohibition of Section 306(a) of the Act. New Rule 104 of 
Regulation BTR \144\ specifies how issuers must satisfy this notice 
requirement. As discussed in the Proposing Release, an issuer's failure 
to provide notice will not preclude a Commission enforcement action for 
a violation of Section 306(a)(1) of the Act or a private action to 
recover profits under Section 306(a)(2) of the Act. In addition, an 
issuer's failure to provide notice, whether or not a director or 
executive officer subsequently violates the Section 306(a) trading 
prohibition, may result in a Commission enforcement action against the 
issuer for violating the Exchange Act.\145\
---------------------------------------------------------------------------

    \143\ 15 U.S.C. 7244(a)(6).
    \144\ 17 CFR 245.104.
    \145\ See Section 3(b)(1) of the Act.
---------------------------------------------------------------------------

    (a) Content of Notice.
    New Rule 104(b)(1) of Regulation BTR \146\ sets forth the content 
requirements for the notice required by Section 306(a)(6) of the Act. 
With one exception, these content requirements track the requirements 
described in the Proposing Release. New Rule 104(b)(1)(iv) of 
Regulation BTR \147\ requires that the notice specify the length of the 
blackout period. As proposed, this requirement contemplated that the 
notice specify the actual or expected beginning and ending dates of the 
blackout period. One commenter indicated that many issuers would find 
it difficult to project in advance the beginning and ending dates of a 
blackout period, noting that a wide range of events (such as problems 
with plan records or recordkeeper, extensive document reviews and data 
reconciliation, required modifications to systems and software and the 
like) could affect these dates.\148\ As a result, the dates included in 
the notice could be missed and issuers would have to incur additional 
costs to furnish updated notices. To avoid this potential problem, this 
commenter speculated that issuers would be likely to establish longer 
blackout periods, thereby unnecessarily prolonging the inability of 
plan participants and beneficiaries, as well as directors and executive 
officers, to engage in transactions involving issuer equity securities. 
To address this concern, the commenter suggested that issuers be 
permitted to identify in the notice a range of possible dates during 
which the blackout period might begin or end.
---------------------------------------------------------------------------

    \146\ 17 CFR 245.104(b)(1).
    \147\ 17 CFR 245.104(b)(1)(iv).
    \148\ See the ICI Letter.
---------------------------------------------------------------------------

    We recognize the difficulty of predicting specific beginning and 
ending dates for a blackout period well in advance of when the blackout 
will occur. We also note that the DOL Rules have been modified to 
permit a more flexible approach in describing the

[[Page 4350]]

length of an impending pension plan blackout period.\149\ We are 
persuaded that the rules should afford issuers some flexibility in 
disclosing the beginning and ending dates of a blackout period in the 
required notice. As adopted, new Rule 104(b)(1)(iv) permits the length 
of a blackout period to be specified using either the actual or 
expected beginning date and ending date of the blackout period, or the 
calendar week or weeks during which the blackout period is expected to 
begin and end, provided that during such week or weeks information as 
to whether the blackout period has begun or ended is readily available, 
without charge, to affected directors and executive officers (such as 
via a toll-free telephone number or access to a specified web site) and 
the notice describes how to access the information.\150\ New Rule 
104(b)(1)(iv) further permits the length of the blackout period to be 
described in the notice to the Commission using the calendar week or 
weeks during which the blackout period is expected to begin and end, 
provided that the notice also describes how a security holder or other 
interested person may obtain, without charge, the actual beginning and 
ending dates of the blackout period. Under the rule, it is permissible 
to use a ``week of ------'' beginning date and a ``week of ------'' 
ending date. It also is permissible to use a specific beginning date 
and a ``week of ------'' ending date, or the converse. For purposes of 
the rule, a calendar week is defined to mean a seven-day period 
beginning on Sunday and ending on Saturday.\151\
---------------------------------------------------------------------------

    \149\ Comments about the difficulty in projecting in advance the 
beginning and ending dates of a blackout period were raised with the 
Department of Labor in response to the interim final rules adopted 
by the Department of Labor last year under Section 306(b) of the 
Act. See 67 FR 64766. As a result, the Department of Labor modified 
its rules to permit use of a limited range of dates for purposes of 
disclosing the beginning and ending dates of a blackout period.
    \150\ This rule is similar to the DOL Rules.
    \151\ See new Rule 104(b)(1)(iv)(C) of Regulation BTR [17 CFR 
245.104(b)(1)(iv)(C)].
---------------------------------------------------------------------------

    As discussed in the Proposing Release, if an issuer elects to 
provide the actual or expected beginning and ending dates of a blackout 
period in the required notice, and either or both of those dates 
change, the issuer is required to provide directors and executive 
officers and the Commission with an updated notice identifying the 
changed date or dates, explaining the reasons for the change in the 
date or dates and identifying all material changes in the information 
contained in the prior notice.\152\ The updated notice is required to 
be provided as soon as reasonably practicable.
---------------------------------------------------------------------------

    \152\ See new Rules 104(b)(2)(iii) and 104(b)(3)(iii) of 
Regulation BTR [17 CFR 245.104(b)(2)(iii) and 104(b)(3)(iii)].
---------------------------------------------------------------------------

    (b) Timing of Notice to Directors and Executive Officers.
    As proposed, the required notice to directors and executive 
officers would have been due at least 15 calendar days in advance of 
beginning date of a blackout period. However, one commenter noted that 
while the content requirements of the notice required under Section 
306(a) of the Act and the DOL Rules are essentially the same, the 
proposed timing requirements were very different and would have placed 
significantly increased reporting and compliance burdens on 
issuers.\153\ This commenter suggested that there be a single 
triggering event that would harmonize the different notice 
requirements.
---------------------------------------------------------------------------

    \153\ See the Letter dated December 12, 2002 of Compass 
Bancshares, Inc.
---------------------------------------------------------------------------

    We believe that, to the extent practicable, the notice requirement 
of Section 306(a)(6) of the Act should be coordinated with the required 
notice to pension plan participants and beneficiaries and the issuer 
under the DOL Rules.\154\ Consequently, new Rule 104(b)(2) of 
Regulation BTR \155\ provides that the notice to directors and 
executive officers will be considered timely if an issuer provides it 
no later than five business days after the issuer receives the notice 
from the pension plan administrator required by the DOL Rules.\156\ If 
the issuer does not receive such notice, the issuer must provide its 
notice to directors and executive officers at least 15 calendar days 
before the actual or expected beginning date of the blackout period. 
This requirement will ensure that an issuer typically will not be 
required to provide the notice required by Section 306(a)(6) to its 
directors and executive officers until it has received notice of an 
impending blackout period from the pension plan administrator. 
Notwithstanding this general requirement, new Rule 104(b)(2)(ii) of 
Regulation BTR \157\ provides that advance notice is not required in 
any case where an unforeseeable event or circumstances beyond the 
issuer's reasonable control prevent the issuer from providing advance 
notice to its directors and executive officers.
---------------------------------------------------------------------------

    \154\ As enacted under Section 306(b) of the Act, Section 
101(i)(2)(B) of ERISA [29 U.S.C. 1021(i)(2)(B)] requires that, at 
least 30 days in advance of a blackout period, a plan administrator 
notify affected plan participants and beneficiaries of the impending 
blackout period. In addition, Section 101(i)(2)(E) of ERISA [29 
U.S.C. 1021(i)(2)(E)] requires a plan administrator to timely notify 
the issuer of the plan securities of the impending blackout period.
    \155\ 17 CFR 245.104(b)(2).
    \156\ For purposes of the rule, notice will 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.
    \157\ 17 CFR 245.104(b)(2)(ii).
---------------------------------------------------------------------------

    (c) Notice to the Commission on Form 8-K.
    To ensure widespread dissemination of information about an 
impending blackout period, we proposed that issuers file the notice to 
the Commission required by Section 306(a)(6) of the Act on Form 8-K. 
The proposed content of this Form 8-K report was the same as the 
content of the required notice to directors and executive officers. 
While one commenter supported the use of Form 8-K to provide the 
required notice to the Commission,\158\ some commenters opposed the 
requirement, arguing that the disclosure would be of limited interest 
to investors.\159\
---------------------------------------------------------------------------

    \158\ See the PWC Letter.
    \159\ See the ABA Letter, the ACB Letter and the Intel Letter.
---------------------------------------------------------------------------

    One commenter noted that even if a director or executive officer 
engaged in a transaction in issuer equity securities during a blackout 
period, an investor who knew of the Form 8-K report would not know 
whether the securities in question were subject to the Section 306(a) 
trading prohibition, only that the transaction had taken place during a 
blackout period.\160\ Another commenter suggested that if public 
disclosure was necessary, an issuer should be permitted to file a copy 
of the notice given to participants and beneficiaries by the pension 
plan administrator under the DOL Rules as an exhibit to its periodic 
report for the fiscal period during which the blackout period 
began.\161\
    We continue to believe that Congress intended for the notice to the 
Commission to be publicly available to security holders and other 
interested persons. Consequently, we believe that Form 8-K is an 
appropriate vehicle for ensuring timely notice to the Commission of a 
blackout period that triggers the Section 306(a) trading prohibition.
---------------------------------------------------------------------------

    \160\ See the ACB Letter.
    \161\ See the ABA Letter.
---------------------------------------------------------------------------

    Some commenters expressed concern about the proposed two business 
days filing requirement for the Form 8-K.\162\ One commenter suggested 
that since the notice will contain the same information that is 
required in the notice to the issuer under the DOL Rules, a Form 8-K 
should be required

[[Page 4351]]

only upon an issuer's receipt of notice from the pension plan 
administrator.\163\ Otherwise, an issuer might learn of an impending 
blackout period, but not have the necessary information to satisfy the 
notice requirement. In addition, this commenter noted that requiring a 
Form 8-K to be filed before an issuer is prepared to communicate with 
plan participants and beneficiaries about an impending blackout period 
could result in significant confusion for the participants and 
beneficiaries and recommended that the issuer be permitted to give 
notice to the Commission only after it is prepared to give meaningful 
notice to plan participants and beneficiaries.
---------------------------------------------------------------------------

    \162\ See the ACB Letter and the Intel Letter.
    \163\ See the ACB Letter.
---------------------------------------------------------------------------

    As previously discussed, we believe that, to the extent 
practicable, the required notice under Section 306(a)(6) should be 
coordinated with the required notice to plan participants and 
beneficiaries and the issuer under the DOL Rules. Consequently, the 
instructions to Form 8-K have been revised to provide that the notice 
to the Commission on Form 8-K must be filed on the same day notice is 
transmitted to directors and executive officers.\164\ This requirement 
will ensure that, in most situations, an issuer will provide notice of 
an impending blackout period to its directors and executive officers 
and to the Commission within five days following receipt of notice of 
the blackout from the pension plan administrator required by the DOL 
Rules.
---------------------------------------------------------------------------

    \164\ See revised Instruction B.1 to Form 8-K.
---------------------------------------------------------------------------

    New Rule 104(b)(3)(ii) of Regulation BTR \165\ provides that a 
foreign private issuer subject to Section 306(a) must file as an 
exhibit to its annual report on Form 20-F or 40-F a copy of each notice 
provided to directors and executive officers pursuant to Section 
306(a)(6) and new Exchange Act Rule 104 during the most recently 
completed fiscal year, unless the notice previously was provided to the 
Commission in a report on Form 6-K.\166\ A foreign private issuer may 
make the required disclosure sooner under cover of Form 6-K, and we 
encourage foreign private issuers to do so.
---------------------------------------------------------------------------

    \165\ 17 CFR 245.104(b)(3)(ii).
    \166\ 17 CFR 249.306.
---------------------------------------------------------------------------

    We proposed to subject registered investment companies to Form 8-K 
requirements for the sole purpose of meeting their filing obligations 
under Regulation BTR. Two commenters objected to that proposal, 
suggesting instead alternative means of providing disclosure about 
blackout periods.\167\ However, because we believe that registered 
investment companies should be subject to the same filing obligations 
as other issuers in the infrequent instances where the Form 8-K filing 
requirement would be triggered,\168\ we do not believe it is 
appropriate to create a filing requirement for registered investment 
companies that is different from that applicable to other issuers under 
Regulation BTR. Accordingly, we are adopting the Form 8-K requirement 
for registered investment companies as proposed.\169\
---------------------------------------------------------------------------

    \167\ See the ICI Letter and the PWC Letter.
    \168\ For a discussion of the application of Regulation BTR to 
registered investment companies, see the Proposing Release at 
Section II.B.1.d.
    \169\ See amended Exchange Act Rules 13a-11(b) and 15d-11(b) [17 
CFR 240.13a-11(b) and 240.15d-11(b)].
---------------------------------------------------------------------------

    (d) Transition Period.
    Section 306(a) of the Act takes effect on January 26, 2003. 
Consequently, for purposes of Regulation BTR, the notice requirement of 
Section 306(a)(6) of the Act applies to blackout periods commencing on 
or after January 26, 2003.
    For blackout periods commencing between January 26, 2003 and 
February 25, 2003 (the date 30 days after the effective date of Section 
306(a)), issuers should furnish notice to directors and executive 
officers as soon as reasonably practicable. This approach is intended 
to ensure that the statutorily-required notice is provided with respect 
to blackout periods that commence before February 26, 2003. In no 
event, however, is notice required for a blackout period that commenced 
before January 26, 2003 and remains in effect on that date.
    In the case of notice to the Commission, new Rules 104(b)(3)(i) and 
(iii) of Regulation BTR are effective 60 days after publication in the 
Federal Register to allow time for the addition of new Form 8-K Item 11 
to the Electronic Data Gathering, Analysis and Retrieval (``EDGAR'') 
system. In the interim, an issuer may provide the required notice to 
the Commission by disclosing the information described in Item 11 under 
Item 5 of Form 10-Q \170\ or 10-QSB,\171\ ``Other Information,'' in the 
first quarterly report filed by the issuer after commencement of the 
blackout period.
---------------------------------------------------------------------------

    \170\ 17 CFR 249.308a.
    \171\ 17 CFR 249.308b.
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    The new rules and rule and form amendments contain new and affect 
existing ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\172\ The title for 
the new collection of information is ``Regulation BTR.'' The titles for 
the collections of information affected by the amendments are ``Form 
20-F'' (OMB Control No. 3235-0288), ``Form 40-F'' (OMB Control Number 
3235-0381) and ``Form 8-K'' (OMB Control No. 3235-0060). We estimated 
that preparation and distribution of the notice to directors and 
executive officers under the new rules would require approximately 
2,357 hours and cost approximately $253,075 annually. We also estimated 
that preparation of current reports on Form 8-K to provide the required 
notice to the Commission would require approximately 2,490 hours and 
cost approximately $336,000 annually. The inclusion of the required 
information in annual reports on Form 20-F was estimated to require 
approximately 249 hours and cost approximately $33,625 annually, and 
the inclusion of the required information in annual reports on Form 40-
F was estimated to require approximately 28 hours and cost 
approximately $3,735 annually.
---------------------------------------------------------------------------

    \172\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    We published a notice requesting comments on the collection of 
information requirements and submitted requests to the Office of 
Management and Budget (``OMB'') for approval of the new collection and 
changes to the existing collections in accordance with the PRA.\173\ 
These requests are pending before the OMB. We did not receive any 
comments on the PRA analysis contained in the proposing release. 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.
---------------------------------------------------------------------------

    \173\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    New Regulation BTR clarifies the application and prevents 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. Regulation BTR specifies the content

[[Page 4352]]

and timing of this notice. Compliance with the new rules will be 
mandatory. The information required by the new rules will not be kept 
confidential.

IV. 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 to 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 portion of the 
issuer's employees are unable to engage in transactions involving 
equity securities of the issuer through their individual pension plan 
accounts.
    The new rules 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 the new rules that specify the content and 
timing of the notice that issuers are required to provide to their 
directors and executive officers and that 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) and the new rules 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 new rules mitigate the differential opportunities between 
plan participants and beneficiaries and the directors and executive 
officers of the issuer with respect to such securities.
    The content requirements for the notice contemplated by Section 
306(a) will help ensure that directors and executive officers of an 
issuer have all relevant information about an impending blackout 
period. This will facilitate their compliance with the statutory 
trading prohibition. 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 holders 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 new rules are attributable primarily 
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.\174\
---------------------------------------------------------------------------

    \174\ We estimate that these burden hours will result in an 
aggregate cost of approximately $692,000 per year. This estimate is 
based on an estimated hourly rate of $100.00 to determine the 
estimated cost to issuers of having their employees handle the 
notice and filing requirements imposed by Section 306(a) of the Act 
and Regulation BTR. We arrived at this hourly rate estimate after 
consulting with several issuers and persons who assist issuers in 
filing reports with the Commission. We then multiplied this hourly 
rate by a factor of 1.35 to reflect appropriate overhead charges. 
5,125 hours x $135.00 per hour = $691,875.
---------------------------------------------------------------------------

    While compliance with Section 306(a)'s trading prohibition is the 
personal obligation of an issuer's directors and executive officers, it 
is likely that issuers will incur costs in assisting these individuals 
in observing the statutory trading prohibition. 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 statutory trading prohibition and in 
identifying and tracking the equity securities that are subject to the 
trading prohibition. These costs are difficult to quantify, but are all 
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 prohibition of Section 306(a) and new 
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 did not have data to quantify the cost of implementing, or upgrading 
and strengthening existing, internal insider trading procedures, we 
sought comments and supporting data on these costs. We did not receive 
any comments in response to our request.
    Section 306(a) also imposes costs on directors and executive 
officers that are 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 or reduced profits. To some extent, these restrictions may 
tend to discourage some individuals from serving as directors or 
executive officers. They also could discourage some directors and 
executive officers from investing in the equity securities of the 
companies they serve or discourage some issuers from requiring minimum 
equity security ownership requirements (which could, in turn, 
disconnect the interests of directors and executive officers from those 
of security holders).
    In addition, because many 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 the ``short-swing'' profits recovery provision of Section 16(b) 
of the Exchange Act, 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 or reduced 
profits. These costs are difficult to quantify, but may be mitigated 
somewhat by the timely notice required by Section 306(a).

V. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis, or FRFA, has been 
prepared in accordance with the Regulatory Flexibility Act.\175\ The 
FRFA pertains to new rules that we are adopting to clarify the 
application of Section 306(a) of the Act and to prevent evasion of its 
statutory trading prohibition. The new rules also specify the content 
and timing of notice that issuers are required to

[[Page 4353]]

provide to their directors and executive officers and the Commission 
about the imposition of a pension plan blackout period.
---------------------------------------------------------------------------

    \175\ 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 new rules, which 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 
opportunities 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. Significant Issues Raised by Public Comment

    One commenter indicated that the compliance burden for small 
business issuers would not be disproportionate to the benefits to be 
obtained from compliance with Section 306(a) since concerns related to 
trading by corporate insiders are not unique to large issuers.\176\
---------------------------------------------------------------------------

    \176\ See the Letter dated December 16, 2002 of 
PricewaterhouseCoopers LLP.
---------------------------------------------------------------------------

C. Small Entities Subject to the New Rules

    Section 306(a) of the Act affects, and the new rules 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 \177\ 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.\178\ 
Section 306(a) and the new rules apply only to issuers with pension 
plans as defined in Section 3(34) of ERISA; we do not have data to 
indicate the number of small issuers that maintain such pension plans, 
but according to DOL data, only 30% of all issuers maintain such plans. 
Furthermore, our data indicates that temporary trading suspensions that 
will be subject to Section 306(a) occur to a plan approximately once 
every five years. If these percentages are accurate regardless of an 
issuer's size, the new 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.\179\ There are 
approximately 225 registered investment companies that may be 
considered small entities. However, as noted in the Proposing Release, 
we anticipate that the burden imposed on investment companies by 
Section 306(a) and the new rules will be negligible.
---------------------------------------------------------------------------

    \177\ 17 CFR 240.0-10(a).
    \178\ A similar definition is provided under Securities Act Rule 
157 [17 CFR 230.157].
    \179\ This estimate is based on filings with the Commission.
---------------------------------------------------------------------------

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 new rules 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 will 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 per issuer for both large and small 
businesses.\180\ The notice requirement involves a design standard in 
that the content of the notice to directors and executive officers and 
the form and content of the notice to the Commission is dictated by the 
new rules and will be comparable for all issuers, including small, as 
well as large, entities. We do not believe that excepting small 
businesses from making the notice is in the interests of their 
directors and executive officers, or consistent with Section 306(a).
---------------------------------------------------------------------------

    \180\ ($253,073 + (2,357 x $200 per hour))/1,230 blackouts = 
$589. See also Section IV.B above.
---------------------------------------------------------------------------

    While the new rules specify the content of the required notice to 
directors and executive officers, they do not dictate the specific form 
of the notice. In addition, the required notice to the Commission will 
be provided electronically through the filing of a current report on 
Form 8-K in the case of domestic issuers, or in an annual report on 
Form 20-F or 40-F in the case of foreign private issuers. We did not 
receive any information with respect to any special issues facing small 
businesses with respect to blackout period notices, or any alternatives 
consistent with the objectives of Section 306(a) of the Act that may 
serve to facilitate compliance by small businesses.

E. Duplicative, Overlapping or Conflicting Rules

    We believe that there are no rules that duplicate, overlap or 
conflict with the new rules. We have intended the rules to coordinate 
with the rules adopted by the Department of Labor pursuant to Section 
306(b) of the Sarbanes-Oxley Act of 2002. We also have coordinated the 
rules with the requirements under Section 16 of the Exchange Act for 
directors and officers to report transactions in their company's equity 
securities.

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 considered 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 new rules generally 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

[[Page 4354]]

temporarily suspended. We do not currently believe that an exemption is 
necessary (since the cost of compliance is low) or appropriate (since 
Congress did not indicate that there should be different treatment for 
small businesses). While we solicited comment as to whether small 
business issuers should be excluded from the proposed rules, we did not 
receive any comments in response to our request. We also sought comment 
on the scope of the proposed disclosure, the cost of preparing it and 
whether the obligation can be simplified or clarified. We did not 
receive any comments in response to our request.

VI. Consideration of Burden on Competition

    Section 23(a)(2) of the Exchange Act \181\ requires us to consider 
the impact that any rule that we adopt will have on competition. In 
addition, Section 23(a)(2) prohibits us from adopting any rule that 
will impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \181\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The new rules 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 issuer 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 new rules further the Section 306(a)'s purpose of mitigating 
the differential opportunities 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. The 
statute may have a slight impact on competition by placing restrictions 
on the ability of directors and executive officers of some issuers with 
pension plans to trade that are not placed on other issuers, although 
we believe it to be necessary and appropriate in furtherance of the 
purposes of the Act. Issuers will incur some costs in complying with 
the new rules. These costs will include preparing the required notice 
with the information specified in the new 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 requested comment on 
whether the proposed rules, if adopted, would impose a burden on 
competition. We did not receive any comments in response to our 
request.

VII. Promotion of Efficiency, Competition and Capital Formation

    Section 3(f) of the Exchange Act \182\ 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 new rules 
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 
issuer 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.
---------------------------------------------------------------------------

    \182\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The new rules further Section 306(a)'s purpose of mitigating the 
differential opportunities 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. The statute may have a 
slight impact on competition, including some burden on the efficiency 
of the market on an issuer's equity securities during a pension plan 
blackout period, although we believe it to be necessary and appropriate 
in furtherance of the purposes of the Act. The statute imposes this 
burden. We are not aware of any impact on capital formation that will 
result from the new rules. Issuers will incur some costs in complying 
with the new rules. These costs will include preparing the required 
notice to include the information specified in the new 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 
requested comment on whether the proposed rules, if adopted, would 
impose a burden on competition. We did not receive any comments in 
response to our request.

VIII. Effective Date

    The new rules are effective on January 26, 2003. The Administrative 
Procedure Act, or APA, generally requires that an agency publish an 
adopted rule in the Federal Register 30 days before it becomes 
effective.\183\ This requirement, however, does not apply if the agency 
finds good cause for making the rule effective sooner.\184\ The 
Commission believes that it is appropriate to waive advance publication 
of new Regulation BTR and the related rule and form amendments. Section 
306(a) of the Act becomes effective on January 26, 2003. Congress has 
directed the Commission to clarify the operation of Section 306(a) by 
rule.\185\ Our rules were coordinated with, and are dependent upon 
rules issued by the Department of Labor before January 26, 2003. It is 
impracticable to satisfy the advance publication requirement of the APA 
within the statutory deadline. It would be unnecessary and against the 
public interest to delay effectiveness of the new rules to satisfy this 
administrative requirement. Accordingly, the Commission finds good 
cause to make the new Regulation BTR, and the amendments to related 
rules and forms, effective on January 26, 2003.
---------------------------------------------------------------------------

    \183\ See 5 U.S.C. 553(d).
    \184\ Id.
    \185\ See Section 306(a)(3) of the Act.
---------------------------------------------------------------------------

IX. Statutory Authority

    The rules contained in this release are being adopted 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 recordkeeping requirements, Securities.

Text of Final Rules and Forms

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of

[[Page 4355]]

Federal Regulations is 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 Sec.  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-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.  240.13a-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 Issuer right of recovery; right of action by equity security 
owner.
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 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:
    (1) At a time when he or she was a director or executive officer, 
under a compensatory plan, contract, authorization or arrangement, 
including, but not limited to, an option, warrants or rights plan, a 
pension, retirement or deferred compensation plan or a bonus, incentive 
or profit-sharing plan (whether or not set forth in any formal plan 
document), including a compensatory plan, contract, authorization or 
arrangement with a parent, subsidiary or affiliate;
    (2) At a time when he or she was a director or executive officer, 
as a result of any transaction or business relationship 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) At a time when he or she was a director or executive officer, 
as directors' qualifying shares or other securities that he or she must 
hold to satisfy minimum ownership requirements or guidelines for 
directors or executive officers;
    (4) Prior to becoming, or while, a director or executive officer 
where the equity security was acquired as a direct or indirect 
inducement to service or employment as a director or executive officer; 
or
    (5) Prior to becoming, or while, a director or executive officer 
where the equity security was received as a result of a business 
combination in respect of an equity security of an entity involved in 
the business combination that he or she had acquired in connection with 
service or employment as a director or executive officer of such 
entity.
    (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 located in the United 
States and its territories and possessions under all individual account 
plans (as defined in paragraph (j) of this section) maintained by the 
issuer that permit participants or beneficiaries 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 of paragraph (b)(1) of this section are met; and
    (ii)(A) The number of participants and beneficiaries located in the 
United States and its territories and possessions subject to the 
temporary suspension exceeds 15% of the total number of employees of 
the issuer and its consolidated subsidiaries; or
    (B) More than 50,000 participants and beneficiaries located in the 
United States and its territories and possessions are subject to the 
temporary suspension.
    (3) In determining the individual account plans (as defined in 
paragraph (j) of this section) maintained by an issuer for purposes of 
this paragraph (b):
    (i) 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; and
    (ii) An individual account plan that is maintained outside of the 
United States primarily for the benefit of persons substantially all of 
whom are

[[Page 4356]]

nonresident aliens (within the meaning of section 104(b)(4) of the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 1003(b)(4))) 
is not to be considered.
    (4) In determining the number of participants and beneficiaries in 
an individual account plan (as defined in paragraph (j) of this 
section) maintained by an issuer:
    (i) The determination may be made as of any date within the 12-
month period preceding the beginning date of the temporary suspension 
in question; provided that if there has been a significant change in 
the number of participants or beneficiaries in an individual account 
plan since the date selected, the determination for such plan must be 
made as of the most recent practicable date that reflects such change; 
and
    (ii) The determination may be made without regard to overlapping 
plan participation.
    (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 an individual 
within the definition set forth in section 3(a)(7) of the Exchange Act 
who is a management employee 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 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, 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))), nor does it include a pension plan in which 
participation is limited to directors of the issuer.
    (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. Section 240.16a-1(a)(2)(iii) of this chapter also shall apply 
to determine pecuniary interest for purposes of this regulation.


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 (15 U.S.C. 7244(a)(1)) 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 sale or other transfer of an equity security of the issuer 
during a blackout period will be treated as 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 equity security, 
unless the director or executive officer establishes by specific 
identification of securities that the transaction did not involve an 
equity security ``acquired in connection with service or employment as 
a director or executive officer.'' To establish that the equity 
security was not so acquired, a director or executive officer must 
identify the source of the equity securities and demonstrate that he or 
she has utilized the same specific identification for any purpose 
related to the transaction (such as tax reporting and any applicable 
disclosure and reporting requirements).
    (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 entered into by the 
director or executive officer that satisfies the affirmative defense 
conditions of Sec.  240.10b5-1(c) of this chapter; provided that the 
director or executive officer did not enter into or modify the 
contract, instruction or written plan during the blackout period (as 
defined in Sec.  245.100(b)) in question, or while aware of the actual 
or approximate beginning or ending dates of that blackout period 
(whether or not the director or executive officer received notice of 
the blackout period as required by Section 306(a)(6) of the Sarbanes-
Oxley Act of 2002 (15 U.S.C. 7244(a)(6))).
    (3) Any purchase or sale of equity securities, other than a 
Discretionary Transaction (as defined in Sec.  240.16b-3(b)(1) of this 
chapter), 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) (or, in the case of a foreign 
private issuer, pursuant to an employee benefit plan that either (i) 
has been approved by the taxing authority of a foreign jurisdiction, or 
(ii) is eligible for preferential treatment under the tax laws of a 
foreign jurisdiction because the plan provides for broad-based employee 
participation); provided that a Discretionary Transaction that meets 
the conditions of

[[Page 4357]]

paragraph (c)(2) of this section also shall be exempt;
    (4) Any grant or award of an option, stock appreciation right or 
other equity compensation pursuant to a plan that, by its terms:
    (i) Permits directors or executive officers to receive grants or 
awards; and
    (ii) Either:
    (A) States the amount and price of securities to be awarded to 
designated directors and executive officers or categories of directors 
and executive officers (though not necessarily to others who may 
participate in the plan) and specifies the timing of awards to 
directors and executive officers; or
    (B) Sets forth a formula that determines the amount, price and 
timing, using objective criteria (such as earnings of the issuer, value 
of the securities, years of service, job classification, and 
compensation levels);
    (5) Any exercise, conversion or termination of a derivative 
security that the director or executive officer did not write or 
acquire during the blackout period (as defined in Sec.  245.100(b)) in 
question, or while aware of the actual or approximate beginning or 
ending dates of that blackout period (whether or not the director or 
executive officer received notice of the blackout period as required by 
Section 306(a)(6) of the Sarbanes-Oxley Act of 2002); and either:
    (i) The derivative security, by its terms, may be exercised, 
converted or terminated only on a fixed date, with no discretionary 
provision for earlier exercise, conversion or termination; or
    (ii) The derivative security is exercised, converted or terminated 
by a counterparty and the director or executive officer does not 
exercise any influence on the counterparty with respect to whether or 
when to exercise, convert or terminate the derivative security;
    (6) Any acquisition or disposition of equity securities involving a 
bona fide gift or a transfer by will or the laws of descent and 
distribution;
    (7) Any acquisition or disposition of equity securities pursuant to 
a domestic relations order, as defined in the Internal Revenue Code or 
Title I of the Employment Retirement Income Security Act of 1974, or 
the rules thereunder;
    (8) Any sale or other disposition of equity securities compelled by 
the laws or other requirements of an applicable jurisdiction;
    (9) Any acquisition or disposition of equity securities in 
connection with a merger, acquisition, divestiture or similar 
transaction occurring by operation of law; and
    (10) The increase or decrease in the number of equity 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.


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 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 
such period, including its frequency and duration and the plan 
transactions to be suspended or otherwise affected, is:
    (1) Incorporated into the individual account plan or included in 
the documents or instruments under which the 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 graphic form that is reasonably 
accessible to the employee; or
    (b) Any trading suspension described in Sec.  245.100(b) that is 
imposed in connection with a corporate merger, acquisition, divestiture 
or similar transaction involving the plan or plan sponsor, 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; provided that the persons who become participants or 
beneficiaries in an individual account plan are not able to participate 
in the same class of equity securities after the merger, acquisition, 
divestiture or similar transaction as before the transaction.


Sec.  245.103  Issuer right of recovery; right of action by equity 
security owner.

    (a) Recovery of profits. Section 306(a)(2) of the Sarbanes-Oxley 
Act of 2002 (15 U.S.C. 7244(a)(2)) 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) of that Act (15 U.S.C. 7244(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 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.
    (c) Measurement of profit.
    (1) In determining the profit recoverable in an action undertaken 
pursuant to section 306(a)(2) of the Sarbanes-Oxley Act of 2002 from a 
transaction that involves a purchase, sale or other acquisition or 
transfer (other than a grant, exercise, conversion or termination of a 
derivative security) in violation of section 306(a)(1) of that Act of 
an equity security of an issuer that is registered pursuant to section 
12(b) or 12(g) of the Exchange Act (15 U.S.C. 78l(b) or (g)) and listed 
on a national securities exchange or listed in an automated inter-
dealer quotation system of a national securities association, profit 
(including any loss avoided) may be measured by comparing the 
difference between the amount paid or received for the equity security 
on the date of the transaction during the blackout period and the 
average market price of the equity security calculated over the first 
three trading days after the ending date of the blackout period.
    (2) In determining the profit recoverable in an action undertaken 
pursuant to section 306(a)(2) of the Sarbanes-Oxley Act of 2002 from a 
transaction that is not described in paragraph (c)(1) of this section, 
profit (including any loss avoided) may be measured in a manner that is 
consistent with the objective of identifying the amount of any gain 
realized or loss avoided by a director or executive officer as a result 
of a transaction taking place in violation of section 306(a)(1) of that 
Act during the blackout period as opposed to taking place outside of 
such blackout period.
    (3) The terms of this section do not limit in any respect the 
authority of the Commission to seek or determine remedies as the result 
of a transaction

[[Page 4358]]

taking place in violation of section 306(a)(1) of the Sarbanes-Oxley 
Act.


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 (15 U.S.C. 
7244(a)(1)) 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 length of the blackout period by reference to:
    (A) The actual or expected beginning date and ending date of the 
blackout period; or
    (B) The calendar week during which the blackout period is expected 
to begin and the calendar week during which the blackout period is 
expected to end, provided that the notice to directors and executive 
officers describes how, during such week or weeks, a director or 
executive officer may obtain, without charge, information as to whether 
the blackout period has begun or ended; and provided further that the 
notice to the Commission describes how, during the blackout period and 
for a period of two years after the ending date of the blackout period, 
a security holder or other interested person may obtain, without 
charge, the actual beginning and ending dates of the blackout period.
    (C) For purposes of this paragraph (b)(1)(iv), a calendar week 
means a seven-day period beginning on Sunday and ending on Saturday; 
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.
    (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):
    (A) No later than five business days after the issuer receives the 
notice required by section 101(i)(2)(E) of the Employment Retirement 
Income Security Act of 1974 (29 U.S.C. 1021(i)(2)(E)); or
    (B) If no such notice is received by the issuer, a date that is at 
least 15 calendar days before the actual or expected beginning date of 
the blackout period.
    (ii) Notwithstanding paragraph (b)(2)(i) of this section, the 
requirement to give 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 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.
    (iii) If there is a subsequent change in the beginning or ending 
dates of the blackout period as provided in the notice to directors and 
executive officers under paragraph (b)(2)(i) of this section, an issuer 
must 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 is required to be provided as soon as 
reasonably practicable, unless such notice in advance of the 
termination of a blackout period is impracticable.
    (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 or 
in an earlier filed report on Form 6-K (Sec.  249.306).
    (iii) If there is a subsequent change in the beginning or ending 
dates of the blackout period as provided in the notice to the 
Commission under paragraph (b)(3)(i) of this section, an issuer must 
file a current report on Form 8-K containing the updated beginning or 
ending dates of the blackout period, explaining the reasons for the 
change in the date or dates and identifying all material changes in the 
information contained in the prior report. The updated notice is 
required to be provided as soon as reasonably practicable.

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, 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. Redesignating 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 
directors and executive officers (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). 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

[[Page 4359]]

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 chapter) that it sent during the past 
fiscal year to directors and executive officers (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). 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 11 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 11 is required to 
be filed not later than the date prescribed for transmission of the 
notice to directors and executive officers required by Rule 104(b)(2) 
of Regulation BTR (Sec.  245.104(b)(2) of this chapter).
* * * * *
Information to be Included in the Report
* * * * *
Item 11. Temporary Suspension of Trading Under Registrant's Employee 
Benefit Plans
    Not later than the date prescribed for transmission of the notice 
required by Rule 104(b)(2) of Regulation BTR (Sec.  245.104(b)(2) of 
this chapter), provide the information specified in Sec.  245.104(b) of 
this chapter and the date the registrant received the notice required 
by section 101(i)(2)(E) of the Employment Retirement Income Security 
Act of 1974 (29 U.S.C. 1021(i)(2)(E)).
* * * * *

    Dated: January 22, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1884 Filed 1-27-03; 8:45 am]
BILLING CODE 8010-01-P