[Federal Register Volume 69, Number 122 (Friday, June 25, 2004)]
[Proposed Rules]
[Pages 35982-35989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14406]



[[Page 35981]]

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Part VI





Securities and Exchange Commission





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17 CFR Parts 228, 229, and 240



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

  Federal Register / Vol. 69, No. 122 / Friday, June 25, 2004 / 
Proposed Rules  

[[Page 35982]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229 and 240

[Release Nos 34-49895; 35-27861; IC-26471; File No. S7-27-04]
RIN 3235-AJ27


Ownership Reports and Trading by Officers, Directors and 
Principal Security Holders

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to two rules that exempt certain transactions from the private right of 
action to recover short-swing profit provided by Section 16(b) of the 
Securities Exchange Act of 1934. The amendments are intended to clarify 
the exemptive scope of these rules, consistent with statements in 
previous Commission releases. We also propose to amend Item 405 of 
Regulations S-K and S-B to harmonize this item with the two-business 
day Form 4 due date and mandated electronic filing and Web site posting 
of Section 16 reports.

DATES: Comments should be received on or before August 9, 2004.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an E-mail to [email protected]. Please include 
File Number S7-27-04 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number S7-27-04. This file 
number should be included on the subject line if e-mail is used. To 
help us process and review your comments more efficiently, please use 
only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Anne Krauskopf, Senior Special 
Counsel, at (202) 942-2900, Division of Corporation Finance, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-
0402.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Rules 16b-3 
\1\ and 16b-7 \2\ under the Securities Exchange Act of 1934 (``Exchange 
Act''),\3\ and Item 405 of Regulations S-K and S-B.\4\
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    \1\ 17 CFR 240.16b-3.
    \2\ 17 CFR 240.16b-7. The proposed amendments would not revise 
paragraph (b) of this rule.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 17 CFR 229.405 and 17 CFR 228.405.
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I. Executive Summary and Background

    Section 16 \5\ of the Exchange Act applies to every person who is 
the beneficial owner of more than 10% of any class of equity security 
registered under Section 12 of the Exchange Act,\6\ and each officer 
and director (collectively, ``insiders'') of the issuer of such 
security. Upon becoming an insider, or upon the Section 12 registration 
of that security, Section 16(a) \7\ requires an insider to file an 
initial report with the Commission disclosing his or her beneficial 
ownership of all equity securities of the issuer. To keep this 
information current, Section 16(a) also requires insiders to report 
changes in such ownership, or the purchase or sale of a security-based 
swap agreement \8\ involving such equity security.\9\
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    \5\ 15 U.S.C. 78p.
    \6\ 15 U.S.C. 78l.
    \7\ 15 U.S.C. 78p(a).
    \8\ As defined in Section 206B of the Gramm-Leach-Bliley 
Financial Modernization Act of 1999, as amended by H.R. 4577, Pub. 
L. No. 106-554, 114 Stat. 2763.
    \9\ Insiders file transaction reports on Form 4 [17 CFR 249.104] 
and Form 5 [17 CFR 249.105].
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    Section 16(b) \10\ provides the issuer (or shareholders suing on 
behalf of the issuer) a private right of action to recover from an 
insider any profit realized by the insider from any purchase and sale 
(or sale and purchase) of any equity security of the issuer within any 
period of less than six months. This statute is designed to curb abuses 
of inside information by insiders. Unlike insider trading prohibitions 
under general antifraud provisions,\11\ which are violated if a trader 
knew or was reckless in not knowing of material non-public information, 
Section 16(b) operates without consideration of whether an insider 
actually was aware of material non-public information. Section 16(b) 
operates strictly, providing a private right of action to recover 
short-swing profits by insiders, on the theory that short-swing 
transactions (a purchase and sale within six months) present a 
sufficient likelihood of involving abuse of inside information that a 
strict liability prophylactic approach is appropriate.
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    \10\ 15 U.S.C. 78p(b).
    \11\ Exchange Act Section 10(b) [15 U.S.C. 78j(b)] and Exchange 
Act Rule 10b-5 [17 CFR 240.10b-5].
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    Section 16(b) grants the Commission authority to exempt, by rules 
and regulations, ``any transaction or transactions * * * not 
comprehended within the purpose of this subsection.'' \12\ Pursuant to 
this authority, we have adopted various exemptive rules, including Rule 
16b-3--``Transactions between an issuer and its officers or 
directors,'' \13\ and Rule 16b-7--``Mergers, reclassifications, and 
consolidations.'' \14\ These exemptive rules provide that transactions 
that satisfy their conditions will not be subject to Section 16(b) 
short-swing profit recovery.
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    \12\ 15 U.S.C. 78p(b).
    \13\ The current version of Rule 16b-3 was adopted in Exchange 
Act Release No. 37260 (May 31, 1996) [61 FR 30376].
    \14\ As amended in Exchange Act Release No. 28869 (Feb. 8, 1991) 
[56 FR 7242].
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    The recent opinion of the U.S. Court of Appeals for the Third 
Circuit (the ``Third Circuit'') in Levy v. Sterling Holding Company, 
LLC. (``Levy v. Sterling''),\15\ casts doubt as to the nature and scope 
of transactions exempted from Section 16(b) short-swing profit recovery 
by Rules 16b-3 and 16b-7. The Third Circuit held that neither rule 
exempted directors' acquisitions of issuer securities in a 
reclassification undertaken by the issuer preparatory to its initial 
public offering, matching those acquisitions for Section 16(b) profit 
recovery with the directors' sales within six months in the initial 
public offering.
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    \15\ 314 F.3d 106 (3d. Cir. 2002), cert. denied, Sterling 
Holding Co. v. Levy, 124 S. Ct. 389 (U.S., Oct. 14, 2003).
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    In particular, the Levy v. Sterling opinion reads Rules 16b-3 and 
16b-7 to require satisfaction of conditions that are neither contained 
in the text of the rules nor intended by the Commission. The resulting 
uncertainty regarding the exemptive scope of these rules has made it 
difficult for issuers and insiders to plan legitimate transactions. We 
seek to resolve any doubt as to the meaning and interpretation of these 
rules by reaffirming the views we have expressed

[[Page 35983]]

previously regarding their appropriate construction.\16\ The amendments 
to the text of the rules we propose in this release will clarify the 
regulatory conditions that apply to these exemptions, consistent with 
our previously expressed views.
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    \16\ See the discussion of previous Commission releases in 
Sections II and III, below. See also Memorandum of the Securities 
and Exchange Commission, Amicus Curiae, in Support of Appellees' 
Petition for Rehearing or Rehearing En Banc (Feb. 27, 2003). This 
brief is posted at http://www.sec.gov/litigation/briefs/levy-sterling022703.htm.
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    Item 405 of Regulations S-K and S-B requires issuer disclosure of 
Section 16 reporting delinquencies. This disclosure is required in the 
issuer's proxy or information statement \17\ for the annual meeting at 
which directors are elected, and its Form 10-K,\18\ 10-KSB \19\ or N-
SAR.\20\ Item 405(b)(1) permits an issuer to presume that a form it 
receives within three calendar days of the required filing date was 
filed with the Commission by the required filing date. In light of the 
two-business day due date generally applicable to Form 4 and the 
requirements of mandatory EDGAR filing and Web site posting of Section 
16 reports, this presumption no longer is appropriate and we propose to 
amend Item 405 to delete it.
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    \17\ 17 CFR 240.14a-101, Item 7.
    \18\ 17 CFR 249.310.
    \19\ 17 CFR 249.310b.
    \20\ 17 CFR 249.330; 17 CFR 274.101.
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II. Rule 16b-3

    Rule 16b-3 exempts from Section 16(b) certain transactions between 
issuers of securities and their officers and directors. In its Levy v. 
Sterling opinion, the Third Circuit construed Rule 16b-3(d), which 
applies to ``grants, awards, or other acquisitions'' to limit this 
exemption to transactions that have some compensation-related aspect. 
Specifically, since ``grants'' and ``awards'' are compensation-related, 
the Third Circuit reasoned that ``other acquisitions'' also must be 
compensation-related in order to be exempted by Rule 16b-3(d). This 
construction of Rule 16b-3(d) is not in accord with our clearly 
expressed intent in adopting the rule.
    The current version of Rule 16b-3 was adopted in 1996, and 
implemented substantial revisions designed to simplify the conditions 
that must be satisfied for the exemption to apply. In contrast to prior 
versions of Rule 16b-3, which had exempted only employee benefit plan 
transactions, the 1996 revisions broadened the Rule 16b-3 exemption and 
extended it to other transactions between issuers and their officers 
and directors. The revisions focused on the distinction between market 
transactions by officers and directors, which present opportunities for 
profit based on non-public information that Section 16(b) is intended 
to discourage, and transactions between an issuer and its officers and 
directors, which are subject to fiduciary duties under State law.\21\ 
In adopting the revised rule, we explicitly stated that ``a transaction 
need not be pursuant to an employee benefit plan or any compensatory 
program to be exempt, nor need it specifically have a compensatory 
element.'' \22\
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    \21\ Exchange Act Release No. 36356 (Oct. 11, 1995) [60 FR 
53832] (``Proposing Release'').
    \22\ Exchange Act Release No. 37260 (May 31, 1996) [61 FR 30376] 
(``Adopting Release'').
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    Rule 16b-3(a) provides that ``A transaction between the issuer 
(including an employee benefit plan sponsored by the issuer) and an 
officer or director of the issuer that involves issuer equity 
securities shall be exempt from section 16(b) of the Act if the 
transaction satisfies the applicable conditions set forth in this 
section.'' As this makes clear, the only limitations on the exemption 
for transactions between the issuer and its officer or director are the 
objective conditions set forth in later subsections of the rule, each 
of which applies to a different category of transactions.
    Rule 16b-3(d), entitled ``Grants, awards and other acquisitions 
from the issuer,'' exempts from Section 16(b) liability ``Any 
transaction involving a grant, award or other acquisition from the 
issuer (other than a Discretionary Transaction)'' \23\ if any one of 
three alternative conditions is satisfied. These conditions require:
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    \23\ ``Discretionary Transaction'' is defined in Rule 16b-
3(b)(1). A Discretionary Transaction is exempted by Rule 16b-3 only 
if it satisfies the conditions of Rule 16b-3(f).
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     Approval of the transaction by the issuer's board of 
directors, or board committee composed solely of two or more Non-
Employee Directors; \24\
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    \24\ Rule 16b-3(d)(1). ``Non-Employee Director'' is defined in 
Rule 16b-3(b)(3).
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     Approval or ratification of the transaction, in compliance 
with Exchange Act Section 14,\25\ by the issuer's shareholders; \26\ or
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    \25\ 15 U.S.C. 78n.
    \26\ Rule 16b-3(d)(2). With respect to shareholder, board and 
Non-Employee Director committee approval, Rule 16b-3(d) requires 
approval in advance of the transaction. Shareholder approval must be 
by either: the affirmative votes of the holders of a majority of the 
securities of the issuer present, or represented, and entitled to 
vote at a meeting duly held in accordance with the applicable laws 
of the state or other jurisdiction in which the issuer is 
incorporated; or the written consent of the holders of the majority 
of the securities of the issuer entitled to vote. Shareholder 
ratification, consistent with the same procedural conditions, may 
confer the exemption only if such ratification occurs no later than 
the date of the next annual meeting of shareholders following the 
transaction.
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     The officer or director to hold the acquired securities 
for a period of six months following the date of acquisition.\27\
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    \27\ Rule 16b-3(d)(3).
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    Consistent with the statements in the Adopting and Proposing 
Releases regarding the scope of the rule, the Commission staff has 
interpreted Rule 16b-3(d) to exempt a number of transactions outside of 
the compensatory context, such as:
     The acquisition of acquiror equity securities (including 
derivative securities) by acquiror officers and directors through the 
conversion of target equity securities in connection with a corporate 
merger;\28\ and
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    \28\ Division of Corporation Finance interpretive letter to 
Skadden, Arps, Slate, Meagher & Flom LLP (Jan. 12, 1999).
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     An officer's or director's indirect pecuniary interest in 
transactions between the issuer and certain other persons or 
entities.\29\
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    \29\ Division of Corporation Finance interpretive letter to 
American Bar Association (Feb. 10, 1999). The other persons or 
entities are immediate family members, partnerships, corporations 
and trusts, in each case where rules under Section 16(a) require the 
officer or director to report an indirect pecuniary interest in the 
transaction.
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    The application of Rule 16b-3(d) to extraordinary transactions also 
has been recognized in Section 16(b) litigation. In its 2002 opinion in 
Gryl v. Shire Pharmaceuticals Group PLC,\30\ the U.S. Court of Appeals 
for the Second Circuit construed Rule 16b-3(d) to exempt acquiror 
directors' acquisition of acquiror options upon conversion of their 
target options in a corporate merger.
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    \30\ 298 F.3d 136 (2d Cir. 2002).
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    To eliminate the uncertainty generated by the Levy v. Sterling 
opinion, the Commission proposes to amend Rule 16b-3(d). As amended, 
this paragraph would be entitled ``Acquisitions from the issuer,'' and 
would provide that any transaction involving an acquisition from the 
issuer (other than a Discretionary Transaction), including without 
limitation a grant or award, will be exempt if any one of the Rule's 
three existing alternative conditions is satisfied.
    Rule 16b-3(e) exempts an officer's or director's disposition to the 
issuer of issuer equity securities that is approved in advance in the 
manner prescribed by Rule 16b-3(d)(1) (by the issuer's board of 
directors, or board committee composed solely of two or more Non-
Employee Directors) or Rule 16b-3(d)(2) (by the issuer's shareholders 
in

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compliance with Exchange Act Section 14). Because these exemptive 
conditions of Rules 16b-3(d) and 16b-3(e) are identical \31\ and were 
intended to operate the same way, we believe that clarification should 
apply to both Rules 16b-3(d) and 16b-3(e). We propose to further amend 
Rule 16b-3 by adding Note 4, to state:

    \31\ Although shareholder ratification after the transaction 
exempts an acquisition under Rule 16b-3(d), it does not exempt a 
disposition under Rule 16b-3(e).
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    The exemptions provided by paragraphs (d) and (e) of this 
section apply to any securities transaction by the issuer with an 
officer or director of the issuer that satisfies the specified 
conditions of paragraph (d) or (e) of this section, as applicable. 
These exemptions are not conditioned on the transaction being 
intended for a compensatory or other particular purpose.

    We request comment on the proposed amendments to Rule 16b-3. 
Specifically, would the proposed amendments accomplish the goal of 
clarifying the exemptive scope of Rule 16b-3 as we originally intended 
the rule to apply? If not, what other language would accomplish this 
goal more effectively? Would the proposed amendment to Rule 16b-3(d) 
preclude the restrictive construction applied in the Levy v. Sterling 
opinion?
    As described above, proposed Note 4 reflects the fact that certain 
exemptive conditions of Rules 16b-3(d) and 16b-3(e) are identical and 
were not intended to be construed differently. On a prospective basis, 
however, does this identical treatment remain appropriate? 
Specifically, should a compensatory or other specified purpose 
ordinarily be necessary to exempt an officer's or director's 
disposition of issuer equity securities to the issuer, so that proposed 
Note 4 should apply only to Rule 16b-3(d) acquisitions?
    Alternatively, should proposed Note 4 be tailored more narrowly to 
clarify that Rules 16b-3(d) and 16b-3(e) are available to exempt 
officers' and directors' participation in transactions similar to the 
transaction at issue in Levy v. Sterling? For example, should proposed 
Note 4 instead state that an officer's or director's participation in 
an extraordinary securities transaction with the issuer (such as a 
merger, reclassification, or exchange offer) that satisfies the 
exemptive conditions of Rule 16b-3(d) or Rule 16b-3(e) is exempt?

III. Rule 16b-7

    Rule 16b-7, entitled ``Mergers, reclassifications, and 
consolidations,'' exempts from Section 16(b) certain transactions that 
do not involve a significant change in the issuer's business or assets. 
The rule is typically relied upon in situations where a company 
reincorporates in a different state or reorganizes its corporate 
structure. Rule 16b-7(a)(1) provides that the acquisition of a security 
pursuant to a merger or consolidation is not subject to Section 16(b) 
if the security relinquished in exchange is of a company that, before 
the merger or consolidation, owned:
     85% or more of the equity securities of all other 
companies party to the merger or consolidation, or
     85% or more of the combined assets of all companies 
undergoing merger or consolidation.
    Rule 16b-7(a)(2) exempts the corresponding disposition, pursuant to 
a merger or consolidation, of a security of an issuer that before the 
merger or consolidation satisfied either of these 85% ownership tests.
    While the Levy v. Sterling opinion acknowledged that Rule 16b-7 
could exempt a reclassification, it construed Rule 16b-7 not to exempt 
an acquisition pursuant to a reclassification that:
     Resulted in the insiders owning equity securities (common 
stock) with different risk characteristics from the securities 
(preferred stock) extinguished in the transaction, where the preferred 
stock previously had not been convertible into common stock; and
     Thus involved an increase in the percentage of insiders' 
common stock ownership, based on the fact that the insiders owned some 
common stock before the reclassification extinguished their preferred 
stock in exchange for common stock.
    The opinion thus imposed upon reclassifications exemptive 
conditions that are not found in the language of Rule 16b-7 and would 
not apply to a merger or consolidation relying upon the rule. Moreover, 
these conditions significantly restrict the exemption's availability 
for reclassifications by narrowing it to the less frequent situation 
where the original security and the security for which it is exchanged 
have the same characteristics. Imposing these conditions is 
inconsistent with the text of Rule 16b-7, the rule's interpretive 
history and the Commission's intent.
    Although Rule 16b-7 as originally adopted in 1952 only applied to 
``mergers'' and ``consolidations,''\32\ the Commission staff construed 
it as also applying to reclassifications.
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    \32\ Exchange Act Release No. 4696, 1952 SEC LEXIS 63 (Apr. 
1952).
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    In a 1981 interpretive release, the staff stated that ``Rule 16b-7 
does not require that the security received in exchange be similar to 
that surrendered, and the rule can apply to transactions involving 
reclassifications.'' \33\ In 1991, the Commission amended the title of 
Rule 16b-7 to include ``reclassifications,'' explaining that this 
amendment was not intended to effect any ``substantive'' changes to the 
rule, and reaffirmed the staff statement in the 1981 release that Rule 
16b-7 applies to reclassifications.\34\
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    \33\ Exchange Act Release No. 18114 (Sept. 24, 1981) [46 FR 
48147] (``1981 Release''), at Q. 142.
    \34\ Exchange Act Release No. 28869 (Feb. 8, 1991) [56 FR 7242] 
(``1991 Release''). More recently, in a 2002 proposing release we 
expressly described reclassifications as among the transactions 
exempted by Rule 16b-7. Exchange Act Release No. 45742 (Apr. 12, 
2002) [67 FR 19914], at n. 56.
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    Although the rule does not contain specific standards for exempting 
reclassifications, the staff has applied to reclassifications the same 
standards as for mergers and consolidations. In relevant respects a 
reclassification is little different from a merger exempted by Rule 
16b-7. In a merger exempted by the rule, the transaction satisfies 
either 85% ownership standard, so that the merger effects no major 
change in the issuer's business or assets. Similarly, in a 
reclassification the issuer owns all assets involved in the transaction 
and remains the same, with no change in its business or assets. The 
similarities are readily illustrated by the fact that an issuer also 
could effect a reclassification by forming a wholly-owned ``shell'' 
subsidiary, merging the issuer into the subsidiary, and exchanging 
subsidiary securities for the issuer's securities.
    Consistent with the 1981 and 1991 Releases, we propose to eliminate 
uncertainty regarding Rule 16b-7 generated by the Levy v. Sterling 
opinion by amending Rule 16b-7 so that, consistent with the rule's 
title, the text would state ``merger, reclassification or 
consolidation'' each place it currently states ``merger or 
consolidation.'' In addition, a proposed new paragraph would specify 
that the exemption specified by Rule 16b-7 applies to any securities 
transaction that satisfies the conditions of the rule and is not 
conditioned on the transaction satisfying any other conditions.\35\
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    \35\ Proposed Rule 16b-7(c). Current Rule 16b-7(c) would be 
redesignated as Rule 16b-7(d).
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    We request comment on the proposed amendments to Rule 16b-7. 
Specifically, would the proposed amendments accomplish the goal of 
clarifying the exemptive scope of Rules 16b-7 consistent with the 
statements of the 1981 and 1991 Releases and our amicus brief in Levy 
v. Sterling? If not,

[[Page 35985]]

what other language or regulatory action would better accomplish this 
goal?
    For example, Rule 16b-7(b) currently states that ``merger'' within 
the meaning of the rule includes ``the sale or purchase of 
substantially all the assets of one company by another in exchange for 
equity securities which are then distributed to the security holders of 
the company that sold its assets.'' Should we instead amend Rule 16b-
7(b) to clarify that ``merger'' within the meaning of the rule also 
includes a reclassification? Should the proposed paragraph stating that 
the Rule 16b-7 exemption is not conditioned on the transaction 
satisfying any other conditions specify that the particular conditions 
applied in the Levy v. Sterling opinion do not apply?
    Is any further amendment or regulatory action necessary to clarify 
that other transactions that do not involve a merger, but could be 
effected by merger, also are exempted by Rule 16b-7? For example, such 
transactions include a statutory exchange,\36\ conversion to a 
different form of entity,\37\ and redomicile or continuance in a 
different jurisdiction.\38\ Should we amend Rule 16b-7(b) to clarify 
that any of these transactions also is included as a ``merger'' within 
the meaning of the rule?
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    \36\ The staff has stated that ``the acquisition and disposition 
of stock in a statutory exchange would be exempt under Rule 16b-7, 
assuming all of the conditions of the rule are satisfied.'' 1981 
Release, at Q. 142.
    \37\ Some state statutes allow a corporation to convert to a 
different form of organization, such as a partnership, limited 
liability company or business trust, and vice versa, without merging 
into a newly-formed entity. See e.g., Del. Code Ann. Title 8 
Sec. Sec.  265 and 266.
    \38\ Some state statutes allow a corporation incorporated a 
different jurisdiction to register within the state and become a 
domestic corporation within the state, or continue as if 
incorporated in the state, without merging into a newly-formed 
entity. See e.g., Wyoming Statutes Sec. Sec.  17-16-1701, 17-16-1702 
and 17-16-1710.
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IV. Item 405 of Regulations S-K and S-B

    As noted above, issuers must disclose their insiders' Section 16 
reporting delinquencies as required by Item 405 of Regulations S-K and 
S-B. Item 405(b)(1) currently provides that ``a form received by the 
registrant within three calendar days of the required filing date may 
be presumed to have been filed with the Commission by the required 
filing date.'' When Item 405 was adopted in 1991,\39\ Form 4 was due 
within ten days after the close of the calendar month in which the 
reported transaction took place. Further, all Section 16 reports were 
filed on paper, since we did not permit insiders to file Section 16 
reports electronically on EDGAR on a voluntary basis until 1995.\40\
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    \39\ Item 405 was adopted in the 1991 Release.
    \40\ Securities Act Release No. 7241 (Nov. 13, 1995) [60 FR 
57682].
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    However, the Sarbanes-Oxley Act of 2002 \41\ amended Section 16(a) 
to require two-business day reporting of changes in beneficial 
ownership, effective August 29, 2002.\42\ The Sarbanes-Oxley Act also 
amended Section 16(a) to require insiders to file these reports 
electronically, and the Commission and issuers with corporate Web sites 
to post these reports on their Web sites not later than the end of the 
business day following filing.\43\ We adopted rules to implement these 
requirements effective June 30, 2003.\44\
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    \41\ Pub. L. No. 107-204, 116 Stat. 745.
    \42\ Section 16(a)(2)(C), as amended by Section 403 of the 
Sarbanes-Oxley Act. Effective on the same date, the Commission 
adopted rule amendments to implement the accelerated Form 4 due 
date. Exchange Act Release 46421 (Aug. 27, 2002) [67 FR 56462].
    \43\ Section 16(a)(4), as amended by Section 403 of the 
Sarbanes-Oxley Act.
    \44\ Securities Act Release No. 8230 (May 7, 2003) [68 FR 25788, 
with corrections at 68 FR 37044] (``Mandated EDGAR Release''). 
Recognizing that insiders may experience temporary difficulties in 
transitioning to mandated electronic filing, Section II.E of the 
Mandated EDGAR Release provided temporary Item 405 disclosure for a 
Form 4 that is (i) filed not later than one business day following 
the regular due date, and (ii) filed during the first 12 months 
following the effective date of mandated electronic filing. This 
temporary relief applies only to Forms 4 filed between June 30, 2003 
and June 30, 2004.
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    In adopting the Web site posting requirement, we noted that Rule 
16a-3(e) \45\ requires an insider, not later than the time a Section 16 
report is transmitted for filing with the Commission, to send or 
deliver a duplicate to the person designated by the issuer to receive 
such statements, or absent such designation, to the issuer's corporate 
secretary or person performing equivalent functions. We stated that we 
would expect an issuer, in making this designation, also to designate 
an electronic transmission medium compatible with the issuer's own 
systems, so that a form sent by that medium at the time specified by 
Rule 16a-3(e) would be received by the issuer in time to satisfy the 
Web site posting deadline.\46\
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    \45\ 16 CFR 240.16a-3(e).
    \46\ Mandated EDGAR Release at Section II.B. To assure that 
insiders are aware of the designated person and electronic 
transmission medium, we encouraged issuers to post this information 
on their Web sites together with the Section 16 filings. We also 
noted that the concern about timely obtaining an electronic copy of 
a filing would not arise for issuers that rely on a hyperlink (for 
example, to EDGAR) to satisfy their Web site posting requirement.
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    In light of the Section 16(a) amendments enacted by the Sarbanes-
Oxley Act, the Item 405(b)(1) presumption of timeliness for a Section 
16(a) report received by the issuer within three calendar days of the 
required filing date no longer is appropriate. By reviewing Section 16 
reports posted on EDGAR, an issuer is readily able to evaluate their 
timeliness. Moreover, a report that is not received by the issuer in 
time for the issuer to post that report on its Web site by the end of 
the business day following filing should not be presumed to have been 
timely filed. Accordingly, we propose to amend Item 405 of Regulations 
S-K and S-B to delete the Item 405(b)(1) presumption, without 
substituting a different presumption or otherwise modifying the 
substance of Item 405.
    We request comment on the proposed amendment to Item 405. 
Specifically, would the proposed amendment harmonize the Item 405 
delinquency disclosure requirement with the accelerated filing, 
electronic filing and Web site posting requirements adopted by the 
Sarbanes-Oxley Act amendments to Section 16(a) and our rules 
implementing those statutory amendments? Will issuers have any 
difficulty monitoring and reporting if we remove the presumption?

V. General Request for Comment

    We invite any interested person wishing to submit written comments 
on the proposed amendments to Rule 16b-3, Rule 16b-7, Item 405 of 
Regulations S-K and S-B and any other matters that might have an impact 
on the proposed amendments, to do so. We specifically request comment 
from persons who are subject to Section 16, and from issuers, 
investors, attorneys and others who use Section 16 information or are 
interested in the application of Section 16(b).
    We will consider all comments responsive to this inquiry in 
complying with our responsibilities under Section 23(a) of the Exchange 
Act.\47\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    Forms 3 (OMB Control No. 3235-0104), 4 (OMB Control No. 3235-0287) 
and 5 (OMB Control No. 3235-0362) prescribe transaction and beneficial 
ownership information that an insider must report under Section 16(a). 
Preparing and filing a report on any of these forms is a collection of 
information.
    Adoption of the Rule 16b-3 and Rule 16b-7 amendments proposed today 
would not change the transaction and beneficial ownership information 
that insiders currently are required to report on these forms. We 
therefore believe

[[Page 35986]]

that the overall information collection burden would remain the same 
because the same information will remain reportable.
    The proposed deletion of the Item 405 presumption of timeliness for 
a Section 16 report received by the issuer within three calendar days 
of the required filing date may result in some companies reporting more 
Section 16 reports as delinquent in their Forms 10-K (OMB Control No. 
3235-0063), 10-KSB (OMB Control No. 3235-0420) or N-SAR (OMB Control 
No. 3235-0330), and proxy (OMB Control No. 3235-0059) or information 
statements (OMB Control No. 3235-0057) for the annual meeting at which 
directors are elected. However, we believe that any such increased 
collection burden associated with those filings would be so minimal 
that it cannot be quantified.

VII. Cost-Benefit Analysis

    The amendments proposed today primarily would clarify existing 
rules. The Levy v. Sterling opinion has created uncertainty whether 
Rules 16b-3 and 16b-7 exempt transactions that they previously were 
commonly understood to exempt, making it difficult for issuers to plan 
legitimate transactions in reliance on these rules. The proposed 
amendments are intended to clarify the exemptive scope of Rules 16b-3 
and 16b-7, consistent with statements in our previous releases and our 
amicus brief in Levy v. Sterling. Without such clarification, insiders 
may be exposed unnecessarily to significant potential costs to the 
extent that a private action under Section 16(b) recovers short-swing 
profits with respect to a transaction that either of these rules was 
intended to exempt. For example, Levy v. Sterling involved alleged 
short-swing insider trading profits of more than $72 million. These 
costs also include potential litigation costs, and costs incurred to 
postpone a non-exempt transaction, such as the initial public offering 
involved in that case, more than six months following a transaction 
that properly is exempted by Rule 16b-3 or Rule 16b-7.
    Because the proposed amendments would clarify that the exemptive 
scope of Rules 16b-3 and 16b-7 is consistent with our previous 
statements, issuers and insiders would not incur additional costs to 
effect legitimate transactions in reliance on the rules as proposed to 
be amended. Issuers and shareholders also would not incur additional 
costs because the proposed amendments would not deprive issuers and 
shareholders of short-swing profit recovery to which they were intended 
to be entitled. Likewise, clarification of the rules should reduce 
litigation risk, and therefore costs, of some actions seeking short-
swing profits.
    Conversely, the proposed amendments should improve the ability to 
plan legitimate transactions with a clear understanding whether they 
will be exempt under Rule 16b-3 or Rule 16b-7, thereby providing 
significant benefits. These benefits, like the costs, are difficult to 
quantify.
    The proposed amendment to Item 405 of Regulations S-K and S-B to 
delete the presumption of timeliness for a Section 16 report received 
by the issuer within three calendar days of the required filing date 
may result in some issuers reporting more Section 16 reports as 
delinquent in their Forms 10-K, 10-KSB or N-SAR, and their proxy or 
information statements for the annual meeting at which directors are 
elected. However, Section 16 reports are posted on EDGAR, and thus are 
readily available to issuers to evaluate their timeliness. Further, 
because Section 16 requires an issuer to post a Section 16 report on 
its Web site by the end of the business day following filing, issuers 
are able to evaluate filing timeliness on an on-going basis. 
Consequently, deletion of the Item 405 timeliness presumption would not 
impose significant additional costs on issuers. The benefit of the 
proposal would be to provide investors with Item 405 disclosure that is 
fully consistent with accelerated reporting, mandatory electronic 
filing and Web site posting amendments to Section 16(a) effected by the 
Sarbanes-Oxley Act.
    To assist in a full evaluation of the costs and benefits of the 
proposals, we seek the views of and other data from the public.

VIII. Effect on Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \48\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, Section 23(a)(2) 
prohibits us from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. Furthermore, Section 2(b) of the Securities 
Act,\49\ Section 3(f) of the Exchange Act \50\ and Section 2(c) of the 
Investment Company Act of 1940 \51\ require 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 
whether the action will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78w(a)(2).
    \49\ 15 U.S.C. 77b(b).
    \50\ 15 U.S.C. 78c(f).
    \51\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    The Levy v. Sterling opinion has created uncertainty whether Rules 
16b-3 and 16b-7 exempt transactions that the Commission intended to 
exempt, making it difficult for issuers to plan legitimate transactions 
in reliance on these rules. This uncertainty has generated economic 
inefficiency by introducing potential litigation costs, and costs 
incurred to postpone a non-exempt transaction more than six months 
following a transaction that properly is exempted by Rule 16b-3 or Rule 
16b-7.
    The proposed amendments are intended to clarify the exemptive scope 
of Rules 16b-3 and 16b-7, consistent with statements in our previous 
releases and our amicus brief in Levy v. Sterling. This should improve 
issuers' and insiders' ability to plan transactions with a clear 
understanding whether either rule will provide an exemption. Informed 
transactional decisions generally promote market efficiency and capital 
formation. We believe the proposed amendments to Rules 16b-3 and 16b-7 
would not impose a burden on competition. The proposed amendment to 
Item 405 of Regulations S-K and S-B to delete the timeliness 
presumption also should not impose a burden, since issuers are readily 
able to evaluate the timeliness of Section 16 reports by examining the 
reports as filed on EDGAR.
    We request comment on whether the proposed amendments, if adopted, 
would impose a burden on competition. We also request comment on 
whether the proposed amendments, if adopted, would promote efficiency, 
competition and capital formation. Finally, we request commenters to 
provide empirical data and other factual support for their views if 
possible.

IX. Initial Regulatory Flexibility Act Analysis

    We have prepared an Initial Regulatory Flexibility Analysis, in 
accordance with 5 U.S.C. 603, concerning the amendments proposed today.

A. Reasons for and Objectives of the Proposed Amendments

    The purpose of the proposed amendments is to clarify the exemptive 
scope of Rules 16b-3 and 16b-7, and, consistent with the Sarbanes-Oxley 
Act amendments to Section 16(a), to delete the timeliness presumption 
in Item 405 of Regulations S-K and S-B.

[[Page 35987]]

B. Legal Basis

    The proposed amendments to Item 405 of Regulations S-K and S-B and 
Exchange Act Rules 16b-3 and 16b-7 would be adopted pursuant to 
Sections 3(a)(11),\52\ 3(a)(12),\53\ 3(b), \54\ 10(a), \55\ 12(h),\56\ 
13(a),\57\ 14,\58\ 16 and 23(a)\59\ of the Exchange Act, Sections 17 
\60\ and 20 \61\ of the Public Utility Holding Company Act of 1934, 
Sections 2(c), 30 \62\ and 38 \63\ of the Investment Company Act of 
1940, and Section 3(a) \64\ of the Sarbanes-Oxley Act of 2002.
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78c(a)(11).
    \53\ 15 U.S.C. 78c(a)(12).
    \54\ 15 U.S.C. 78c(b).
    \55\ 15 U.S.C. 78j(a).
    \56\ 15 U.S.C. 78l(h).
    \57\ 15 U.S.C. 78m(a).
    \58\ 15 U.S.C. 78n.
    \59\ 15 U.S.C. 78w(a).
    \60\ 15 U.S.C. 79q.
    \61\ 15 U.S.C. 79t.
    \62\ 15 U.S.C. 80a-29.
    \63\ 15 U.S.C. 80a-37.
    \64\ 15 U.S.C. 7202(a).
---------------------------------------------------------------------------

C. Small Entities Subject to the Proposed Amendments

    The proposed amendments would affect companies that are small 
entities. Exchange Act Rule 0-10(a) \65\ defines an issuer, other than 
an investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. As of March 30, 2003, we estimated 
that there were approximately 8840 insiders \66\ that may be considered 
small entities. The proposed Rule 16b-7 amendment would apply to all of 
these insiders. The proposed Rule 16b-3 amendments would apply only to 
such insiders who are directors or officers.
---------------------------------------------------------------------------

    \65\ 17 CFR 240.0-10(a).
    \66\ We estimated the number of small entity non-investment 
company insiders based on our estimates of the total number of 
insiders; the percentage of these insiders that are greater than ten 
percent holders; the percentage of these greater than ten percent 
holders that are non-natural persons; and the percentage of these 
non-natural persons that are small entities.
---------------------------------------------------------------------------

    We estimate that there are approximately 2,500 issuers, other than 
investment companies, that may be considered small entities. For 
purposes of the Regulatory Flexibility Act, an investment company is a 
small entity if it, together with other investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year. As of June 2002, we estimate that there were 36 closed-end 
investment companies, and 29 business development companies that are 
small entities. The proposed Item 405 amendments will apply to all of 
these small entities.

D. Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments to Item 405 may impose additional 
disclosure requirements to the extent that issuers may be required to 
disclose additional untimely Section 16 filings by their insiders. 
However, see assume that this burden is very small, if it exists at 
all, because the changes effected by the Sarbanes-Oxley Act likely made 
the presumption irrelevant. No other new reporting, recordkeeping or 
compliance requirements would be imposed. Other than the potential 
additional Item 405 disclosure, the primary impact of these proposals 
relates to clarifying the exemptive scope of Rules 16b-3 and 16b-7.

E. Overlapping or Conflicting Federal Rules

    We do not believe that any current Federal rules duplicate, overlap 
or conflict with the proposed amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives, while 
minimizing any significant adverse impact on small businesses. We 
considered the following types of alternatives:
    1. The establishment of different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    2. The clarification, consolidation or simplification of compliance 
and reporting requirements under the rule for such small entities;
    3. The use of performance rather than design standards; and
    4. An exemption from coverage of the rule, or any part thereof, for 
small entities.
    Regarding Alternative 1, we believe that differing compliance or 
reporting requirements for small entities would be inconsistent with 
Section 16, the Commission's intent when it adopted these rules, and 
the Commission's purpose of making the application of these rules more 
uniform. Regarding Alternative 2, the proposed amendments are concise 
and would clarify the Rule 16b-3 and Rule 16b-7 exemptive conditions 
and the Item 405 reporting requirement for all entities, including 
small entities. Regarding Alternative 3, we believe that design rather 
than performance standards are appropriate because use of performance 
standards for small entities would not be consistent with the statutory 
purpose of Section 16. Finally, an exemption for small entities is not 
appropriate because these amendments are designed to harmonize the 
application of the exemptive rules.

G. Solicitation of Comments

    We encourage the submission of written comments with respect to any 
aspect of this initial regulatory flexibility analysis, especially 
empirical data on the impact on small businesses. In particular we 
request comment on: (1) The number of small entities that would be 
affected by the proposed amendments; and (2) whether these amendments 
would increase the reporting, recordkeeping and other compliance 
requirements for small businesses. Such written comments will be 
considered in the preparation of the final regulatory flexibility 
analysis, if the proposed amendments are adopted.

X. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 \67\ (``SBREFA'') a rule is ``major'' if it has resulted, 
or is likely to result in:
---------------------------------------------------------------------------

    \67\ Pub. L. No. 104-121 tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data on 
(1) the potential effect on the U.S. economy on an annual basis; (2) 
any potential increase in costs or prices for consumers or individual 
industries; and (3) any potential effect on competition, investment or 
innovation.

XI. Statutory Basis

    The amendments contained in this release are proposed under the 
authority set forth in Sections 3(a)(11), 3(a)(12), 3(b), 10(a), 12(h), 
13, 14, 16 and 23(a) of the Exchange Act, Sections 17 and 20 of the 
Public Utility Holding Company Act of 1934, Sections 2(c), 30 and 38 of 
the Investment Company Act of 1940, and Section 3(a) of the Sarbanes-
Oxley Act of 2002.

Text of Proposed Rule Amendments

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

    Reporting and recordkeeping requirements, Securities.

    For the reasons set forth above, we propose to amend title 17, 
chapter II of

[[Page 35988]]

the Code of Federal Regulations as follows.

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

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

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *
    2. Amend Sec.  228.405 by revising the introductory text to 
paragraph (a), paragraph (a)(2) and paragraph (b) to read as follows:


Sec.  228.405 (Item 405)  Compliance With Section 16(a) of the Exchange 
Act.

* * * * *
    (a) Based solely upon a review of Forms 3 and 4 (17 CFR 249.103 and 
249.104) and amendments thereto furnished to the registrant under 17 
CFR 240.16a-3(e) during its most recent fiscal year and Forms 5 and 
amendments thereto (Sec.  249.105 of this chapter) furnished to the 
registrant with respect to its most recent fiscal year, and any written 
representation referred to in paragraph (b)(1) of this section:
* * * * *
    (2) For each such person, set forth the number of late reports, the 
number of transactions that were not reported on a timely basis, and 
any known failure to file a required Form. A known failure to file 
would include, but not be limited to, a failure to file a Form 3, which 
is required of all reporting persons, and a failure to file a Form 5 in 
the absence of the written representation referred to in paragraph 
(b)(1) of this section, unless the registrant otherwise knows that no 
Form 5 is required.
* * * * *
    (b) With respect to the disclosure required by paragraph (a) of 
this Item, if the registrant:
    (1) Receives a written representation from the reporting person 
that no Form 5 is required; and
    (2) Maintains the representation for two years, making a copy 
available to the Commission or its staff upon request, the registrant 
need not identify such reporting person pursuant to paragraph (a) of 
this Item as having failed to file a Form 5 with respect to that fiscal 
year.

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

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

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78mm, 79e, 79j, 79n, 79t, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *
    4. Amend Sec.  229.405 by revising the introductory text to 
paragraph (a), paragraph (a)(2) and paragraph (b) to read as follows:


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

* * * * *
    (a) Based solely upon a review of Forms 3 and 4 (17 CFR 249.103 and 
249.104) and amendments thereto furnished to the registrant under 17 
CFR 240.16a-3(e) during its most recent fiscal year and Forms 5 and 
amendments thereto (Sec.  249.105 of this chapter) furnished to the 
registrant with respect to its most recent fiscal year, and any written 
representation referred to in paragraph (b)(1) of this section.
* * * * *
    (2) For each such person, set forth the number of late reports, the 
number of transactions that were not reported on a timely basis, and 
any known failure to file a required Form. A known failure to file 
would include, but not be limited to, a failure to file a Form 3, which 
is required of all reporting persons, and a failure to file a Form 5 in 
the absence of the written representation referred to in paragraph 
(b)(1) of this section, unless the registrant otherwise knows that no 
Form 5 is required.
* * * * *
    (b) With respect to the disclosure required by paragraph (a) of 
this Item, if the registrant:
    (1) Receives a written representation from the reporting person 
that no Form 5 is required; and
    (2) Maintains the representation for two years, making a copy 
available to the Commission or its staff upon request, the registrant 
need not identify such reporting person pursuant to paragraph (a) of 
this Item as having failed to file a Form 5 with respect to that fiscal 
year.

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

    5. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 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, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    6. Amend Sec.  240.16b-3 by revising paragraph (d) and adding Note 
(4) to Notes to Sec.  240.16b-3, to read as follows:


Sec.  240.16b-3  Transactions between an issuer and its officers or 
directors.

* * * * *
    (d) Acquisitions from the issuer. Any transaction involving an 
acquisition from the issuer (other than a Discretionary Transaction), 
including without limitation a grant or award, shall be exempt if:
* * * * *

Notes to Sec.  240.16b-3:

* * * * *
    Note (4): The exemptions provided by paragraphs (d) and (e) of 
this section apply to any securities transaction by the issuer with 
an officer or director of the issuer that satisfies the specified 
conditions of paragraph (d) or (e) of this section, as applicable. 
These exemptions are not conditioned on the transaction being 
intended for a compensatory or other particular purpose.

    7. Section 240.16b-7 is revised to read as follows:


Sec.  240.16b-7  Mergers, reclassifications, and consolidations.

    (a) The following transactions shall be exempt from the provisions 
of Section 16(b) of the Act:
    (1) The acquisition of a security of a company, pursuant to a 
merger, reclassification or consolidation, in exchange for a security 
of a company that before the merger, reclassification or consolidation, 
owned 85 percent or more of either:
    (i) The equity securities of all other companies involved in the 
merger, reclassification or consolidation, or in the case of a 
consolidation, the resulting company; or
    (ii) The combined assets of all the companies involved in the 
merger, reclassification or consolidation, computed according to their 
book values before the merger, reclassification or consolidation as 
determined by reference to their most recent available financial 
statements for a 12 month period before the merger,

[[Page 35989]]

reclassification or consolidation, or such shorter time as the company 
has been in existence.
    (2) The disposition of a security, pursuant to a merger, 
reclassification or consolidation, of a company that before the merger, 
reclassification or consolidation, owned 85 percent or more of either:
    (i) The equity securities of all other companies involved in the 
merger, reclassification or consolidation or, in the case of a 
consolidation, the resulting company; or
    (ii) The combined assets of all the companies undergoing merger, 
reclassification or consolidation, computed according to their book 
values before the merger, reclassification or consolidation as 
determined by reference to their most recent available financial 
statements for a 12 month period before the merger, reclassification or 
consolidation.
    (b) A merger within the meaning of this section shall include the 
sale or purchase of substantially all the assets of one company by 
another in exchange for equity securities which are then distributed to 
the security holders of the company that sold its assets.
    (c) The exemption provided by this section applies to any 
securities transaction that satisfies the conditions specified in this 
section and is not conditioned on the transaction satisfying any other 
conditions.
    (d) Notwithstanding the foregoing, if a person subject to Section 
16 of the Act makes any non-exempt purchase of a security in any 
company involved in the merger, reclassification or consolidation and 
any non-exempt sale of a security in any company involved in the 
merger, reclassification or consolidation within any period of less 
than six months during which the merger, reclassification or 
consolidation took place, the exemption provided by this Rule shall be 
unavailable to the extent of such purchase and sale.

    By the Commission.

    Dated: June 21, 2004.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14406 Filed 6-24-04; 8:45 am]
BILLING CODE 8010-01-P