Section 16 Interps // Cooley // Global Law Firm

By Cydney Posner

Last week, the SEC posted new interps under Section 16. These interps replace the Section 16 interps in the July 1997 Telephone Interps, the March 1999 Supplement, the Section 16 Electronic Reporting FAQs and the November 2002 SOX FAQs regarding Section 16. Some of the interps included are revised versions of interps previously published.

General Guidance

Generally, transactions effected by officers and directors of a foreign company before the loss of "foreign private issuer" status are not subject to Section 16. See, e.g., Thelen, Marrin, Johnson & Bridges (December 23, 1994). However, this position is not applicable if the loss of "foreign private issuer" status also involved the company's initial registration under Exchange Act Section 12. Accordingly, Rule 16a-2 would apply to directors and officers of a company reincorporating into the U.S. For purposes of Section 16, a reincorporation by a foreign company that causes it to lose its "foreign private issuer" status is analogous to a company's initial registration of equity securities under Section 12 because, in each event, the change in the company's status was within the control of the company, and insiders should have been aware of the change sufficiently in advance to take potential Section 16 responsibility into account when buying and selling the company's equity securities.

Section 16(a)

In connection with a bank holding company formation, in which jurisdiction over a Section 12(g) entity passes from a banking agency to the SEC, insiders are not required to file either a Form 3 or Form 4 to reflect the transaction establishing the holding company. However, in the interest of ownership reporting continuity, the next filing on Form 4 or Form 5 by an insider reporting a change in his or her ownership of equity securities should reflect that the holding company is the issuer for purposes of filing under Section 16(a).
An insider who purchases units consisting of common stock and debentures of the insider's company must file a Section 16(a) report covering the acquisition of the stock. The debentures need not be reported unless they are also deemed to be equity securities (e.g., convertible debentures).
Notwithstanding the language of Section 16(a)(3)(B) of the Exchange Act, which states that Forms 4 and 5 "shall indicate ownership by the filing person at the date of filing," an insider need not report ownership of all classes of equity securities each time the insider files a Form 4 or 5. Rather, the insider need only report ownership after the transaction or at the end of the fiscal year, respectively, of the classes of equity securities of the issuer as to which the insider reports a transaction.
To satisfy its website posting obligation, an issuer may post forms directly in PDF only, as long as the issuer otherwise satisfies its website posting requirements and the website explains clearly the need to use Adobe Acrobat to access the forms and provides clear directions on how to download it easily and without cost using a readily accessible link provided on the issuer's website.

Section 16(b)

Corp Fin will ordinarily not express a view as to whether a particular transaction involves a "purchase" or "sale" for purposes of Section 16(b) because the enforcement of Section 16(b) is left to private parties and the courts.

Section 16(d)

A broker-dealer that had ceased making a market in a public company's securities cannot rely upon the Section 16(d) exemption with respect to sales of securities remaining in its inventory. Furthermore, even if the cessation was only temporary, the broker-dealer would not regain eligibility for the exemption unless it resumed market-making activities on a bona fide basis, i.e., the broker-dealer cannot re-register as a market maker simply to liquidate its inventory.

Section 16(e)

Section 16(e) exempts foreign and domestic arbitrage transactions from the other provisions of Section 16. Rule 16e-1 provides that the Section 16(e) exemption does not apply to arbitrage transactions by officers and directors. Corp Fin will ordinarily not express a view as to whether any particular transaction qualifies for the Section 16(e) exemption. Although the SEC has rulemaking authority to define 'bona fide arbitrage,' it has not exercised this authority, opting instead to leave the interpretation to the courts, and Corp Fin will direct counsel to relevant case law, e.g., Falco v. Donner, 208 F.2d 600 (2d Cir. 1953).

Rule 16a-1 –Definition of Terms

Ordinarily, an Assistant Secretary would not be considered an officer under Section 16(a), unless he or she performs any of the functions that would make that person an officer as defined in Rule 16a-1(f).
For purposes of the various ownership tests of Rule 16a-1, an LLC should be treated consistently as a general partnership, limited partnership or a corporation, depending upon which form of organization it most closely resembles.
Following a company's buyback of its stock, a person who previously owned less than 10% of the company's stock may own more than 10% without having purchased additional shares. If, before the buyback, the person is aware that the buyback will occur and that it will have this effect on his or her holdings, the person should file a Form 3 within 10 days after the buyback. If the person does not have advance awareness of the buyback and/or its consequences, he or she would need to determine whether he or she is a more than 10% beneficial owner and satisfy any obligation to file a Form 3 within 10 days after information in the company's most recent quarterly, annual or current report indicates the amount of securities outstanding following the buyback.
In connection with termination of employment, an officer was awarded options that would become exercisable (in installments) when the issuer's stock reached and maintained specified price levels for a period of 30 days, conditioned on the terminated officer's continued provision of services as a consultant. These options would be derivative securities under Rule 16a-1(c) and subject to Section 16 upon grant because their exercisability would be subject to conditions (other than the passage of time and continued employment) that are tied to the market price of an equity security of the issuer. See Certilman Balin Adler & Hyman (April 20, 1992).
Rule 16a-1(c)(3) excludes from the definition of "derivative security" tax-withholding and stock-for-stock exercise rights or obligations. The federal, state, local and foreign taxes that may be paid through the withholding, tendering back or delivery of previously owned shares may exceed minimum withholding requirements as along as the amount withheld does not exceed the participant's estimated federal state, local and foreign tax obligations attributable to the underlying transaction. That amount may include capital gains tax on the shares that were surrendered or withheld in settlement of the tax-withholding right or exercising the derivative security.
The writer of a short put option (i.e., the counterparty would have the right to put the security to the writer at any point after execution of the contract) would not be deemed to be the beneficial owner of the securities underlying the put if the counterparty who is "long" the put option retains its discretion as to whether and when to exercise the put option. In that case, the right to receive the underlying securities is dependent upon factors that are not within the control of the writer of the put option, and, in calculating its beneficial ownership for purposes of Section 16, the party that is short the put option should not count the underlying securities.

Rule 16a-2 –Persons Subject to Section 16

Where Rule 16a-2(a) makes Section 16 applicable to a transaction that occurs before the issuer's Section 12 registration, the exemptions provided by the other rules under Section 16 are available to the same extent as for any other transaction subject to Section 16.

Rule 16a-3 –Reporting Transactions and Holdings

Non-qualified deferred compensation plans are not Excess Benefit Plans, as defined by Rule 16b-3(b)(2) under the Exchange Act, in which transactions are exempted by Rule 16b-3(c). (See interpretive letter to American Bar Association (Feb. 10, 1999, Q. 2(c)). Under Rule 16a-3(g)(1), as amended in Release No. 34-46421 (Aug. 27, 2002), each transaction in a non-qualified deferred compensation plan must be reported on a Form 4 within two business days. However, if a company maintains a dividend reinvestment plan that satisfies the exemptive conditions of Rule 16a-11, automatic dividend reinvestments under a non-qualified deferred compensation plan are also eligible for the Rule 16a-11 exemption. As a result, those reinvestment transactions would not be required to be reported, thus reducing the number of Forms 4 due. (See interpretive letter to American Home Products (Dec. 15, 1992)).
In a 10b5-1 plan, drafted by a broker-dealer, that specifies the dates on which plan transactions will be executed, the insider may not rely on Rule 16a-3(g)(2) to compute the Form 4 due date for plan transactions based on a deemed execution date. Because the plan specifies the dates on which plan transactions will be executed, the insider will have selected the date of execution for plan transactions and, consequently, will not be able to rely on Rule 16a-3(g)(2) to compute the Form 4 due date for plan transactions based on a deemed execution date.
When a new beneficial owner joins an existing set of beneficial owners who file as a group, the new beneficial owner must file a new Form 3, even if the new owner is not adding any new securities to the group holdings.
Each "sweep" transaction (e.g., for a non-qualified deferred compensation plan, the insider elects to have payroll deductions maintained in the plan's interest-only account and then "swept" on a quarterly basis into the plan's stock fund account) would be reportable separately on Form 4. If the "sweep" election satisfies the Rule 16b-3(f ) exemptive conditions for Discretionary Transactions (Rule 16b-3(b)(1)), the "sweep" transactions would be reported using Code I. Further, if the reporting person does not select the date of execution for a "sweep" that is a Discretionary Transaction, Rules 16a-3(g)(3) and (4) would apply to determine the deemed execution date.
A Discretionary Transaction in a phantom stock account that is exempt pursuant to Rule 16b-3(f) is reportable under Rule 16a-3(f)(1) on Table II of Form 4 on a single line using Code "I."
Any issuer that maintains a corporate website must post on that website by the end of the business day after filing any Form 3, 4 or 5 under Section 16(a) relating to the equity securities of that issuer, and must keep each form accessible on that website for at least a 12-month period in accordance with Section 16(a)(4)(C) and Rule 16a-3(k). In a bank holding company situation, where the bank subsidiary maintains a corporate website, but the bank holding company does not, the subsidiary website should be considered a corporate website for purposes of these posting requirements.
One public company will acquire another public company. After the merger, the acquiring company will shut down the website of the acquired company. Under Rule 16a-3(k), any issuer that maintains a website is required to post Section 16 forms on its website. Because the acquired company will no longer exist and its website will be shut down, the acquiring company may stop posting the pre-acquisition Section 16 reports of the acquired company.

Rule 16a-9 –Splits, Stock Dividends and Pro Rata Rights

Rule 16a-9(a) exempts from Section 16 "the increase or decrease in the number of securities held as a result of a stock split or stock dividend applying equally to all securities of a class, including a stock dividend in which equity securities of a different issuer are distributed." This rule is available to exempt payment of a "pay-in-kind" dividend where there is no choice to receive the dividend in cash rather than stock.
Rule 16a-9(a) would not exempt a stock dividend payable where there is only one shareholder (or a single group required to file a Schedule 13D) of the class on which the dividend is paid. The concern is that the transaction is manipulative.
Rule 16a-9(b) exempts from Section 16 the acquisition of rights, such as shareholder or preemptive rights, pursuant to a pro rata grant to all holders of the same class. Where the distribution of rights is pro rata, the acquisition of rights so distributed is exempt, including a pro rata acquisition by a shareholder who is a stand-by purchaser. However, the stand-by purchaser's acquisition of underlying shares pursuant to the exercise of rights not exercised by other shareholders is not exempted by Rule 16a-9(b) because the acquisition is the result of an independently negotiated contract with the issuer that is not available to all shareholders on a pro rata basis.
Rule 16a-9(a) is not applicable to a pro rata distribution of portfolio securities by a limited partnership to its limited partners. (The limited partnership is subject to Section 16 with respect to the securities distributed.) Instead, the scope of Rule 16a-9(a) is limited to persons subject to Section 16 who experience an increase or decrease in the number of securities held as a result of a stock distribution or reverse stock split effected by the distributing party and is not available to the distributing party.

Rule 16a-11 –Dividend or Interest Reinvestment Plans

Rule 16a-11 exempts from Sections 16(a) and 16(b) the acquisition of securities by insiders through the reinvestment of dividends pursuant to dividend reinvestment plans that satisfy the conditions of the rule. However, the disposition of the securities acquired is not so exempt. Further, Rule 16a-11 does not exempt from the liability provisions of Section 16(b) the acquisition of additional securities through voluntary additional investments permitted by dividend reinvestment plans.
When a dividend reinvestment plan meeting the requirements of Rule 16a-11 is terminated and the stock held by the plan is distributed to participants, the distribution of shares does not need to be reported, assuming that those shares previously had been reported as indirectly beneficially owned. because there is no effective change in beneficial ownership.
A dividend reinvestment plan that is sponsored by a broker-dealer and available only to customers of that broker-dealer does not provide for "broad-based participation" within the meaning of Rule 16a-11. Accordingly, Rule 16a-11 is not available to exempt dividend or interest reinvestment transactions pursuant to such a plan. However, if a dividend reinvestment plan sponsored by a broker-dealer essentially mirrors a dividend reinvestment plan sponsored by the issuer that satisfies the conditions of Rule 16a-11, acquisitions pursuant to dividend reinvestment under the broker-dealer-sponsored plan would be exempted by Rule 16a-11. See interpretive letter to Merrill, Lynch, Pierce, Fenner & Smith (Mar. 16, 1994).

Rule 16a-13 –Change in Form of Beneficial Ownership

With respect to a distribution by an LLC of portfolio securities to its members, if the members have been relying upon Rule 16a-1(a)(2)(iii) to exclude the portfolio securities from their individual pecuniary interest (where the members do not control the LLC and do not exercise voting or investment control over the portfolio securities), Rule 16a-13 cannot be relied upon to exempt (from reporting and profit liability) the distribution of the portfolio securities.
Where an insider-partner of a partnership has reported all of the issuer shares owned by the partnership, including shares in excess of the insider's pecuniary interest (and did not disclaim an interest in the excess), and the insider plans to "recapitalize" the partnership by contributing cash and withdrawing more issuer shares than his individual pecuniary interest, the insider cannot rely on Rule 16a-13 with respect to the amount that he withdraws in excess of his individual pecuniary interest.
For estate planning purposes, a director of an issuer transfers shares of that issuer to a newly created foreign domiciled mutual fund in exchange for shares of the mutual fund. The mutual fund's equity investments would be limited to the issuer's shares. While significant restrictions would likely make the mutual fund an unattractive investment to the general public, the fund would have one shareholder other than the director and would be open to investment by the general public. Rule 16a-13 would not be available for the director's transfer of the issuer's shares to the mutual fund.

Rule 16b-3 –Transactions Between an Issuer and Its Officers or Directors

Rule 16b-3 does not exempt issuer equity securities transactions between the issuer and persons who are subject to Section 16 solely because they are more than 10% beneficial owners. Rule 16b-3 is available to a more than 10% beneficial owner who is also subject to Section 16 by virtue of being an officer or director, including a "deputized" director (see SEC Amicus Brief in Roth v. Perseus, L.L.C).
Similarly, Rule 16b-3 does not exempt a transaction between the issuer and (1) an officer's charitable remainder trust or (2) an investment advisor of which a director is a principal. However, in its interpretive letter to American Bar Association (Feb. 10, 1999), Q. 4, Corp Fin stated that Rule 16b-3 is available to exempt an officer's or director's indirect pecuniary interest in certain transactions. According to the letter, These include transactions between the issuer and:
- a partnership or corporation in which beneficial ownership of the securities is reportable by the officer or director pursuant to Rule 16a-1(a)(2);
- a member of the officer's or director's immediate family where Rule 16a-1(a)(2)(ii)(A) requires the officer or director to report a pecuniary interest; and
- a trust where Rule 16a-8(b) requires the officer or director to report holdings and transactions.
However, in order to satisfy the specificity requirements of Note 3 to Rule 16b-3 for purposes of applying the approval conditions of Rules 16b-3(d) and 16b-3(e) to these transactions, the approving entity must know and the document evidencing the approval must specify both the existence and extent of the officer's or director's indirect interest in the transaction and that the approval is granted for purposes of making the transaction exempt under Rule 16b-3.
Rule 16b-3 could not be used to exempt an insider's purchase of shares in an underwritten public offering, even under a "friends and family" allocation. The rule was not intended to cover issuances where someone other than the issuer controls to whom the sales are made and on what terms.
The dispositions of issuer securities that take place in cashless exercises through a broker are not eligible for exemption pursuant to Rule 16b-3(e) because cashless exercises through a broker do not involve a transaction with the issuer or the issuer's employee benefit plan.
The Non-Employee Director standards of Rule 16b-3(b)(3) are independent of the "outside director" standards of IRC Section 162(m) and, as a result, satisfaction of the Non-Employee Director standards cannot be presumed based on satisfaction of the Section 162(m) "outside director" standards.
The relevant date for determining Non-Employee Director status is the date the director proposes to act as a Non-Employee Director, that is, the date on which approval for an award is obtained, even where an award is not deemed to occur until a later date (for example, upon the satisfaction of conditions (other than the passage of time and continued employment) that are not tied to the market price of an equity security of the issuer. (Cf. Bioject Medical Technologies Inc. (Nov. 24, 1993))
Rule 16b-3(b)(3)(i)(A) disqualifies for service as a Non-Employee Director any director who currently is an officer of or otherwise currently employed by the issuer, its parent or subsidiary. For purposes of this rule, "subsidiary" would be defined under the broad standards of Rule 12b-2, i.e., as an affiliate controlled directly or indirectly through one or more intermediaries.
Under Rule 16b-3(b)(3)(i)(B), receipt by a director of a higher director's fee for service as chairman of the board or on a committee of the board will not disqualify the director for service as a Non-Employee Director because the compensation is not considered to be "in any capacity other than as a director."
Rule 16b-3(b)(3)(i)(B) provides that a Non-Employee Director may not receive compensation from the issuer, its parent or subsidiary, for services in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure is required under Item 404(a) of Regulation S-K. The "services" in question refer to current services or services recently provided. Accordingly, a director's receipt from the issuer of a pension that is paid as a result of the director's prior service as an employee of the issuer would not trigger disqualification under paragraph (B), without regard to amount. In contrast, a director's receipt of a severance payment, in excess of the referenced amount, would trigger disqualification to the extent it relates to recent service.
Statements disclosed pursuant to Instruction 4.c to Item 404(a) (regarding loans by a bank, savings and loan association or broker-dealer made in the ordinary course of business, on substantially the same terms as for unrelated persons, no more than normal risk of collectibility, etc.) would not be considered Item 404(a) disclosure that would disqualify a director from being a Non-Employee Director. Release No. 33-8732A, in the Item 404 discussion at Section V.A.3, characterizes this instruction as addressing a situation that "do[es] not raise the potential issues underlying our principle for disclosure."
If a material term of a security is amended, further approval would be required under the full board, Non-Employee Director or shareholder approval conditions of Rule 16b-3(d). Otherwise, allowing a material term to be changed without subsequent approval would vitiate the specific approval requirement of the rule. Further approval is required whether or not the amendment would result in the cancellation and regrant of the security. For example, an amendment to accelerate vesting (which, pursuant to the interpretive letter to Foster Pepper & Shefelman (Dec. 20, 1991), does not effect a cancellation and regrant) would require further approval.
Where the specific terms and conditions of each acquisition are fixed in advance, such as in a formula plan, initial approval of the plan would satisfy the specificity requirement of the rule.
Similarly, approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis. The same result applies under Rule 16b-3(e) where the automatic feature is a tax- or exercise-withholding right.
Board approval of a plan providing for the issuer to buy back shares acquired upon exercise of options at any time at fair market value would not satisfy the approval requirement of Rule 16b-3(e), because the resultant open-ended buyback transactions would not have been approved with sufficient specificity.
Under a formula plan, following a change in control (as objectively defined in the plan), participants are to receive benefits in the form of cash or stock. Although issuer discretion is limited to the form of payment (rather than the amount), for the Rule 16b-3(d) exemption to apply, this exercise of discretion must be by the full board, the committee of Non-Employee Directors or shareholders. Alternatively, any securities received by insiders must be held for six months.
The six-month holding period of Rule 16b-3(d)(3) will remain satisfied if, during the six months, the insider transfers the securities to a family trust, provided that the insider retains a pecuniary interest in the securities so transferred. In contrast, an outright transfer to a family member during the six months (either by gift or for consideration) will result in failure to satisfy the six-month holding period.
Where a company grants options in reliance on the six-month holding period of Rule 16b-3(d)(3) and subsequently authorizes tax-withholding rights with respect to the same options under Rule 16b-3(e), this bifurcated procedure should not preclude the availability of Rule 16b-3(d)(3), provided that the withholding rights are not exercised before the conclusion of the six-month holding period for the related option grant.
A stand-alone top hat plan that qualifies for an exemption under Section 201(2) of ERISA would not be an Excess Benefit Plan eligible for exemption under Rule 16b-3(c), because the plan would not be operated in conjunction with a Qualified Plan, as defined in Rule 16b-3(b)(4).
A routine disposition of shares to fund an administrative fee assessment under a Tax-Conditioned Plan would be exempt, without further condition, as incidental to plan administration. However, dispositions that are not similarly incidental to plan administration are outside the purview of the plan and thus not exempted by Rule 16b-3(c). See the staff interpretive letter to American Bar Association (Oct. 15, 1999).
A plan may be bifurcated so that it is eligible in part for exemption under Rule 16b-3(c) only if it works entirely as a Tax-Conditioned Plan with respect to a segregable class of participants and entirely as a non-Tax-Conditioned Plan as to a different class of participants.
For purposes of determining whether a plan is a "Stock Purchase Plan," as defined by Rule 16b-3(b)(5), satisfaction of the coverage and participation requirements of Internal Revenue Code Section 410 are measured by reference to employees eligible to participate, rather than employees actually participating.
"Stock Purchase Plan," as defined in Rule 16b-3(b)(5), also includes IRC Sections 423(b)(3) and (b)(5) plans. To satisfy the definition, these plans must be broad-based. While Rule 16b-3(b)(5) does not specifically indicate that the plans must also meet the broad-based plan requirements in IRC Section 423(b)(4) (because these requirements may be more restrictive than was intended for purposes of Rule 16b-3(b)(5)), Rule 16b-3(b)(5) contemplates that Stock Purchase Plans are broad-based. See footnote 50 to Release No. 34-37260 (May 31, 1996). Accordingly, a director-only or senior-executive only plan would not be a Stock Purchase Plan within the meaning of Rule 16b-3(b)(5) or Rule 16b-3(c).
Dividend acquisitions pursuant to a dividend reinvestment feature in a Stock Purchase Plan, as defined in Rule 16b-3(b)(5), would be exempt by Rule 16b-3(c), because any acquisition pursuant to a Stock Purchase Plan is exempted by Rule 16b-3(c).
Stock acquisitions through an open market purchase plan that is not a Rule 16b-3(b) Stock Purchase Plan (and hence ineligible for Rule 16b-3(c) exemption) are not considered "acquisitions from the issuer" eligible for the Rule 16b-3(d) exemption, even if the plan is "sponsored by the issuer" as interpreted in the interpretive letter to American Bar Association (Oct. 15, 1999).
Sales into the open market from a Stock Purchase Plan or other Tax-Conditioned Plan or as Discretionary Transactions will not be eligible for exemption from Section 16(b) pursuant to Rule 16b-3.
A Section 423 plan that permits a lump sum purchase at the end of the purchase period as an alternative to payroll deductions, where, a participant must enroll at the beginning of a purchase period and elect at that time whether to use payroll deductions or the lump sum payment, would be a Stock Purchase Plan, as defined by Rule 16b-3(b)(5) and purchases under either form of payment would be exempt under Rule 16b-3(c).
A diversification transaction permitted by IRC Section 401(a)(35) is a "Discretionary Transaction," as defined in Rule 16b-3(b)(1), subject to the exemptive conditions of Rule 16b-3(f). IRC Section 401(a)(35) provides diversification rights to qualifying participants in defined contribution plans that hold publicly traded employer securities. Specifically, Section 401(a)(35) makes intra-plan transfers out of and back into the plan's issuer securities fund available no less frequently than quarterly. As explained in Release No. 34-37260 (May 31, 1996), periodic fund-switching transactions involving an issuer equity securities fund may present opportunities for abuse, because the investment decision is similar to that involved in a market transaction. Moreover, the plan may buy and sell issuer equity securities in the market in order to effect these transactions, so that the actual counterparty to the transaction is not the issuer, but instead is a market participant.
Rule 16b-3(b)(1)(iii) excludes from the definition of "Discretionary Transaction" a transaction "required to be made available to a plan participant pursuant to a provision of the Internal Revenue Code." This provision was adopted in 1996 to exclude:
- the diversification elections and distributions that Section 401(a)(28) of the Internal Revenue Code makes available to 10-year plan participants who have reached age 55, and
- the distributions that IRC Section 401(a)(9) requires at the later of the employee's retirement or reaching age 70½.
The basis for the Rule 16b-3(b)(1)(iii) exclusion was that the insider's opportunity to speculate in the context of the specified events was well circumscribed. In contrast, IRC Section 401(a)(35) makes available the periodic fund-switching transactions for which the exemptive conditions of Rule 16b-3(f) were designed to apply. Because the SEC did not consider the later-enacted IRC Section 401(a)(35) when it adopted Rule 16b-3(b)(1)(iii), this rule should not be construed to exclude Section 401(a)(35) transactions from the exemptive conditions of Rule 16b-3(f).
If, pursuant to the terms of a plan, a transaction to re-balance holdings among accounts, other than the issuer equity securities account, results in a transfer of assets into or out of an issuer equity securities account, the transaction will be a Discretionary Transaction, subject to Rule 16b-3(f).
A rollover of funds into the issuer equity securities fund from a plan maintained by the insider's former employer would not be a Discretionary Transaction subject to Rule 16b-3(f) because it does not involve a reallocation of funds already invested in a plan of the issuer. Similarly, an automatic rollover, upon the issuer's abolition of a plan, of a phantom stock account into a restricted stock account in another plan would not be a Discretionary Transaction. However, other rollovers or transfers between different plans sponsored by the same issuer may be Discretionary Transactions, which would need to be analyzed on a case-by-case basis as to the character of the funds involved and whether the transaction is volitional to the insider.
Where there are two issuer equity securities funds (one containing 100% issuer equity securities and the other 50% issuer equity securities), a transfer from the 100% fund to the 50% fund would be a transfer out of an issuer equity securities fund for purposes of measuring the six-month period before the next Discretionary Transaction. Similarly, a transfer from the 50% fund to the 100% fund would be a transfer into an issuer equity securities fund for the same purpose. A transfer out of either fund into a non-issuer equity securities fund would be a transfer out of, and a transfer into either fund from a non-issuer equity securities fund would be a transfer into, an issuer equity securities fund.
Where an insider elects to defer salary into a phantom stock account in a single fund plan and at the same time makes an election to receive the ultimate cash payout at a fixed date more than six months following the election, the payout election will not be subject to the conditions applicable to Discretionary Transactions under Rule 16b-3(f). See the staff interpretive letter to American Bar Association (Dec. 20, 1996).
A deferred compensation plan allows deferrals to either a phantom stock account or a cash account, with transfers permitted between the two accounts. At the time a participant elects to defer compensation, the participant determines that the balance of both accounts will be paid in cash at a fixed date more than six months following the election. Because of the transfer feature, the plan is treated as a multi-fund deferral plan under Q. 4(c) of the staff interpretive letter to American Bar Association (Dec. 20, 1996), rather than a single-fund deferral plan under Q. 4(b) of that interpretive letter. A cash-out from the phantom stock account pursuant to the election described above would be a Discretionary Transaction, eligible for exemption under Rule 16b-3(f). Because the transfer feature permits assets to be transferred between the accounts, the balance of assets that will be in the phantom stock account at the fixed date payout cannot be determined until the fixed date occurs. Therefore, for purposes of Rule 16b-3(f), the fixed date payout election will be deemed to occur on the fixed date. The fixed date payout is not eligible for exemption under Rule 16b-3(e).
A deferred compensation plan allows deferrals to either a phantom stock account or a cash account (which is credited with interest at the market rate); however, no transfers are permitted between the two accounts, except that if a participant elects a payout in installments, the participant may make a one-time election (effective simultaneously with commencement of payouts) to transfer all or part of the phantom stock account balance to the cash account. Because of this transfer feature, pursuant to the staff interpretive letter to American Bar Association (Dec. 20, 1996) Q. 4(c), the plan is treated as a multi-fund deferral plan, rather than as a single-fund deferral plan. Generally, a transfer pursuant to this feature would be a Discretionary Transaction, eligible for exemption under Rule 16b-3(f). However, where such a transaction is not a Discretionary Transaction (for example, where it is in connection with the participant's death, disability or retirement, as provided by Rule 16b-3(b)(1)), it is eligible for exemption under Rule 16b-3(e). In that case, if the participant irrevocably elects to make such a transfer at the time he or she elects to defer funds, the approval requirement of Rule 16b-3(e) and Note 3 may be satisfied by approval of the plan. See staff interpretive letter to American Bar Association (Dec. 20, 1996) Q. 4(b). However, if the election is made at a later point, approval of the individual transaction is necessary.
If an election to effect a Discretionary Transaction is revocable until a specified date, such specified date should be used as the date of the election for purposes of measuring the six-month period before election of the next "opposite way" Discretionary Transaction eligible for exemption under Rule 16b-3(f).

Rule 16b-6 –Derivative Securities

Rule 16b-6(b) would not be available to exempt the cash settlement of phantom stock, because the deemed sale of the underlying stock following exercise of the phantom stock is outside the exemptive scope of Rule 16b-6(b). In contrast, Rule 16b-6(b) would be available to exempt the stock settlement of phantom stock because that transaction involves only the exercise of a derivative security.

Rule 16c-4 –Derivative Securities

Rule 16c-4 provides that establishing or increasing a put equivalent position will be exempt from the Section 16(c) prohibition against short sales so long as the insider owns at least the amount of securities underlying the put equivalent position. Rule 16c-4 is construed to apply during the entire lifetime of the put equivalent, so that at no time would an insider have a net benefit resulting from a price decline in the issuer's shares. Where an insider has issued put equivalents (DECS) backed by issuer common stock, a subsequent sale of the stock, prior to maturity, in an amount exceeding the minimum amount deliverable in settlement of the put equivalent would violate Rule 16c-4. If a price decline occurred prior to maturity, the insider would need to deliver a greater number of shares, at which point the insider would be short (in violation of Section 16(c)) and would be benefited by a stock decline so that he or she could go into the market and cover.

Forms 3, 4 and 5 –General

If the issuer has no ticker or trading symbol (Item 3 of Form 3, and Item 2 of Forms 4 and 5), the insider should enter "NONE."
If the Form is signed on behalf of an individual by another person, the power of attorney establishing the authority of such person to sign the Form must be filed in an exhibit to the Form or as soon as practicable in an amendment to the Form, unless a previously filed paper or electronic power of attorney is still in effect. The power of attorney need only indicate that the reporting person authorizes and designates the named person or persons to sign and file the Form on the reporting person's behalf and state its duration.
When the Form is signed using a power of attorney, Corp Fin recommends that the document signature be the typed signature of the person holding the power of attorney. The remainder of the signature line would then indicate that the person is signing on behalf of the named insider under a power of attorney. For example, "John Jones, by power of attorney," where John Jones holds power of attorney for insider Susan Smith.
The title of the person filing the Form may be included on the same line as the signature.
Each insider will need his/her own CIK, CCC and Password codes, whether the insider is filing as an individual or as part of a group. It is very important to use the insider's CIK rather than, for example, the issuer's CIK, so that users can readily identify the insider filing the form. If the wrong CIK has been used, a new form with the correct CIK should be filed. Only one set of codes is permitted, even if the filer is an insider of more than one company. As a result, companies applying for codes on behalf of their insiders should verify that these persons do not already have codes assigned to them.
General Instruction 4(a)(i) to Form 4 requires an insider to "report total beneficial ownership following the reported transaction(s) for each class of securities in which a transaction was reported." In reporting derivative securities on Table II, options that have different economic characteristics (such as exercise price and expiration date) are considered different classes of options. For example, in reporting the grant of options with an exercise price of $10 per share and an expiration date of March 1, 2014, the holdings column should show the total number of shares subject to options with the same terms (e.g., should not include the insider's holdings of options with an exercise price of $8 per share and an expiration date of November 1, 2012). On a voluntary basis, the insider may report on separate lines holdings of options that are of different classes than the options transaction reported. General Instruction 4(a)(iii) to Form 5, which requires an insider to "report total beneficial ownership as of the end of the issuer's fiscal year for all classes of securities in which a transaction was reported," is construed the same way.
Column 8 of Table II in Form 4 and Form 5 requires disclosure of the "Price of Derivative Security." The price required in Column 8 is the price, if any, that the insider paid to acquire the derivative security (where an acquisition is reported) or received when disposing of the derivative security (where a disposition is reported). It is not the exercise price of the derivative security (which is reportable in Column 2) or the fair market value of the underlying security on the date of the reported transaction.
Where a transaction is executed in increments at different prices on the same day, or a series of transactions are executed at different prices on the same day, the number of securities transacted at each price must be reported in Column 4 of Form 4 or Form 5. It is not acceptable to report the aggregate number of securities and a weighted average price. Similarly, securities that are sold at the same price on different days may not be aggregated.
Phantom stock is a derivative security reportable on Table II of Forms 4 and 5. Accordingly, in reporting an open market purchase of common stock, an insider would not need to update phantom stock holdings, except when phantom stock units that settle automatically on a one-for-one basis in common stock have been reported on Table I as common stock, in reliance on the staff interpretive letters to Lincoln National Corporation (Mar. 20, 1992), Q. 3 and American Bar Association (Dec. 20, 1996), Q. 4(d)(3).
An insider may rely in good faith upon the last plan statement in reporting holdings pursuant to 401(k) plans and other plans eligible for the Rule 16b-3(c) exemption on Forms 4 and 5, unless the insider is aware of subsequent plan transactions.
When reporting a transaction on Form 4 or Form 5, it is important to characterize the transaction properly. For example, securities reported as "Acquired (A)" or "Disposed (D)" in Table I Column 4 or Table II Column 5 should be consistent with the transaction code reported in Table I Column 3 or Table II Column 4. For example, a transaction coded "P" should not report "D" in Table I Column 4 or Table II Column 5, because a purchase is not a disposition.

Form 3

An estate that holds more than 10% of a class of an issuer's equity securities must file a Form 3 to report its holdings. Rule 16a-2(d), which permits an executor not to report transactions in securities held by an estate for the first 12 months following appointment as an executor, does not apply to the reporting of holdings on a Form 3. However, if the executor is already an insider (e.g., by virtue of being an officer of the issuer), in accordance with Rule 16a-3(b)(2), the executor need not file an additional Form 3 in the capacity of executor. Rather, when the executor next files a Form 4 (e.g., in the executor's individual capacity or for the estate after the 12-month period has elapsed), the executor would indicate the additional capacity in Box 5.

Form 4

An officer of a company whose securities are registered under Section 12(g) of the Exchange Act may, but is not required to, file a Form 4 report, checking the exit box, solely to indicate the officer's resignation.
The date in Item 3 (Date of Earliest Transaction Required to be Reported) should be the transaction date of the earliest transaction required to be reported on Form 4, i.e., the same date entered in Column 2 of Table I (or Column 3 of Table II), not the Deemed Execution Date entered in Column 2A of Table I (or Column 3A of Table II). Where the transactions reported on the Form 4 include a transaction that the insider previously failed to report timely on Form 4, the transaction date for that transaction should be entered in Item 3.
For a Form 4 filed solely to report voluntarily a transaction that is eligible for deferred reporting on Form 5, such as a Rule 16b-5 gift or a Rule 16a-6(a) small acquisition, the date in Item 3 should be the transaction date reported in Column 2 of Table I (or Column 3 of Table II). In reporting the transaction, "V" should be designated in Column 3 of Table I (or Column 4 of Table II).
Where, in a closed-end investment company, each shareholder owns one share of stock, but a shareholder's voting interest is really tied to its economic interest, when the insider engages in a transaction in the shares, rather than the number of shares of stock held, the insider must include information that would convey the amount of equity sold or purchased in the transaction. Specifically, while the insider may report on the Form 4 that one share was involved in the transaction, the insider should also include a footnote to explain the amount of equity involved in the transaction, stating: (1) the percentage held before transaction; (2) the percentage sold/purchased in the transaction; and (3) the percentage held after the transaction.

Form 5

Discretionary Transactions are required to be reported on Form 5 individually, rather than on an aggregate basis, even when they are "same way" rather than "opposite way" transactions.

Section 16 Interps

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