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46080 Federal Register / Vol. 70, No.

152 / Tuesday, August 9, 2005 / Rules and Regulations

cooperative agreements (except the recipient has elected title to a Availability dates: § 240.16b–3(d) and
Education and Training Grants) with subject invention in accordance with (e) are effective August 9, 2005, but
educational institutions, nonprofit § 1260.28. The report is due annually because they clarify regulatory
organizations and small businesses, and from the election date. conditions that applied to these
§ 1260.57 for all grants and cooperative (10) An Annual NASA Form 1018, exemptions since they became effective
agreements (except Education and NASA Property in the Custody of on August 15, 1996, they are available
Training Grants) with large businesses, Contractors, is required for all grants to any transaction on or after August 15,
respectively. The reporting of a subject and cooperative agreements with 1996 that satisfies the regulatory
invention under § 1260.28 shall be made commercial organizations. The reports conditions so clarified. § 240.16b–7 is
within two months after the inventor are due October 31st of each year. effective August 9, 2005, but because it
discloses it to the recipient. The Negative reports (i.e. no reportable clarifies regulatory conditions that
reporting of a reportable item under property) are required. applied to that exemption since it was
§ 1260.57 shall be made within two (c) * * * amended effective May 1, 1991, it is
months after the inventor discloses it to (1) A Final Summary Report listing all available to any transaction on or after
the recipient or, if earlier, within six subject inventions or reportable items, May 1, 1991 that satisfies the regulatory
months after the recipient becomes or certifying that there are none, is conditions so clarified.
aware that a reportable item has been required for all grants and cooperative
made. Disclosures of subject inventions FOR FURTHER INFORMATION CONTACT:
agreements (except Education and
and reportable items will be reported Anne Krauskopf, Senior Special
Training Grants), in accordance with
using either the electronic or paper Counsel, or Nina Mojiri-Azad, Special
§ 1260.28 or § 1260.57, respectively. The
version of NASA Form 1679, Counsel, at (202) 551–3500, Division of
report is due within 90 days after the
‘‘Disclosure of Invention and New Corporation Finance, Securities and
expiration of the grant or cooperative
Technology (Including Software)’’. Exchange Commission, 100 F Street,
agreement. The Final Summary Report
Electronic disclosures may be submitted NE., Washington, DC 20549–3010.
may be submitted electronically on the
at the electronic New Technology electronic New Technology Reporting SUPPLEMENTARY INFORMATION: We are
Reporting web site (eNTRe) at: http:// web site (eNTRe) at: http:// adopting 1 amendments to Rules 16b–3 2
invention.nasa.gov. invention.nasa.gov. and 16b–7 3 under the Securities
(6) An Election of Title to a Subject Exchange Act of 1934 (‘‘Exchange
* * * * *
Invention is required for all grants and Act’’),4 and Item 405 of Regulations S–
cooperative agreements (except [FR Doc. 05–15665 Filed 8–8–05; 8:45 am] K and S–B.5
Education and Training Grants), as BILLING CODE 7510–01–P
applicable, in accordance with I. Executive Summary and Background
§ 1260.28. The notice is due within two
Section 16 of the Exchange Act 6
years of disclosure of a subject SECURITIES AND EXCHANGE applies to every person who is the
invention being elected, except in any COMMISSION beneficial owner of more than 10% of
case where publication, on sale or
any class of equity security registered
public use of the subject invention being 17 CFR Parts 228, 229 and 240 under Section 12 of the Exchange Act,7
elected has initiated the one year
[Release Nos. 33–8600; 34–52202; 35– and each officer and director
statutory period wherein valid patent
protection can still be obtained in the 28013; IC–27025; File No. S7–27–04] (collectively, ‘‘insiders’’) of the issuer of
United Stated, notice is due at least 60 such security. Upon becoming an
RIN 3235–AJ27
days prior to the end of the statutory insider, or upon the Section 12
period. Ownership Reports and Trading by registration of that security, Section
(7) An Interim Summary Report Officers, Directors and Principal 16(a) 8 requires an insider to file an
listing all subject inventions or Security Holders initial report with the Commission
reportable items required to be disclosing his or her beneficial
disclosed during the preceding year is AGENCY: Securities and Exchange ownership of all equity securities of the
required for all grants and cooperative Commission. issuer.9 To keep this information
agreements (except Education and ACTION: Final rule. current, Section 16(a) also requires
Training Grants), in accordance with insiders to report changes in such
§ 1260.28 or § 1260.57, respectively. The SUMMARY: We are adopting amendments ownership, or the purchase or sale of a
listing is due annually. Interim to two rules that exempt certain
Summary Reports may be submitted transactions from the private right of 1 The amendments were proposed in Exchange

electronically on the electronic New action to recover short-swing profit Act Release No. 49895 (June 21, 2004) [69 FR
provided by Section 16(b) of the 35982] (‘‘Proposing Release’’). Comment letters are
Technology Reporting web site (eNTRe) available for public inspection and copying in the
at: http://invention.nasa.gov. Securities Exchange Act of 1934. The Commission’s Public Reference Room, 100 F Street,
(8) A Notification of Decision to amendments are intended to clarify the NE., Washington, DC 20549. We have posted
Forego Patent Protection is required for exemptive scope of these rules, electronically submitted comment letters on our
consistent with statements in previous Web site at http://www.sec.gov/rules/proposed/
all grants and cooperative agreements s72704.shtml. [Add when posted: A comment
(except Education and Training Grants), Commission releases. We also are summary also is available at http://www.sec.gov/
as applicable, in accordance with amending Item 405 of Regulations S–K rules/extra/s72704summary.htm.]
§ 1260.28. The notification is due not and S–B to harmonize this item with the 2 17 CFR 240.16b–3.

less than thirty days before the two-business day Form 4 due date and 3 17 CFR 240.16b–7.

expiration of the response period mandated electronic filing and Web site 4 15 U.S.C. 78a et seq.
5 17 CFR 229.405 and 17 CFR 228.405.
required by the relevant patent office. posting of Section 16 reports.
6 15 U.S.C. 78p.
(9) A Utilization of Subject Invention DATES: Effective dates: August 9, 2005, 7 15 U.S.C. 78l.
Report is required for all grants and except §§ 228.405(a), (a)(2) and (b) and 8 15 U.S.C. 78p(a).
cooperative agreements (except 229.405(a), (a)(2) and (b) are effective 9 Insiders file these reports on Form 3 [17 CFR

Education and Training Grants) where September 8, 2005. 249.103].

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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations 46081

security-based swap agreement 10 and scope of transactions exempted • The amendments to Rule 16b-3
involving such equity security.11 from Section 16(b) short-swing profit clarify the regulatory conditions that
Section 16(b) 12 provides the issuer (or recovery by Rules 16b–3 and 16b–7. At have applied to transactions that rely on
shareholders suing on behalf of the the outset of its analysis, the Third this exemption since its adoption
issuer) a private right of action to Circuit noted that Section 16(b) effective August 15, 1996; and
recover from an insider any profit ‘‘explicitly authorizes’’ the Commission • The amendments to Rule 16b–7
realized by the insider from any to exempt ‘‘any transaction * * * as not clarify the regulatory conditions that
purchase and sale (or sale and purchase) comprehended within the purpose of’’ have applied to transactions that rely on
of any equity security of the issuer the statute. ‘‘This section,’’ the Third this exemption since it was amended
within any period of less than six Circuit pointed out, ‘‘is critical for effective May 1, 1991.21
months. This statute is designed to curb courts to defer to an agency’s These amendments are adopted
abuses of inside information by interpretation of statutes, particularly substantially as proposed, with some
insiders.13 Unlike insider trading where the statute provides the agency language changes as discussed below.22
prohibitions under general antifraud with the authority to make the Item 405 of Regulations S–K and S–
provisions,14 Section 16(b) operates interpretation.’’ The Third Circuit B requires issuer disclosure of Section
without consideration of whether an declared, therefore, that its ‘‘threshold 16 reporting delinquencies. This
insider actually was aware of material challenge’’ was to ‘‘ascertain what in disclosure is required in the issuer’s
non-public information.15 Section 16(b) fact was [the Commission’s] proxy or information statement 23 for the
operates strictly, providing a private interpretation’’ when it adopted Rules annual meeting at which directors are
right of action to recover short-swing 16b–3 and 16b–7.18 Despite explicit elected, and its Form 10K,24 10–KSB 25
profits by insiders, on the theory that interpretations to the contrary,19 the or N–SAR.26 Item 405(b)(1) permits an
short-swing transactions (a purchase Third Circuit held that neither rule issuer to presume that a Section 16 form
and sale within six months) present a exempted the directors’ acquisitions of it receives within three calendar days of
sufficient likelihood of involving abuse issuer securities in a reclassification the required filing date was filed with
of inside information that a strict undertaken by the issuer preparatory to the Commission by the required filing
liability prophylactic approach is its initial public offering, which would date. In light of the two-business-day
appropriate. permit the matching of those due date generally applicable to Form 4
Since the enactment of the Exchange acquisitions for Section 16(b) profit and the requirements of mandatory
Act, we have adopted a number of recovery with the directors’ sales within EDGAR filing and Web site posting of
exemptive rules, including Rule 16b– six months in the initial public offering. Section 16 reports, this presumption no
3—‘‘Transactions between an issuer and In particular, the Levy v. Sterling longer is appropriate or necessary and
its officers or directors,’’ and Rule 16b– opinion read Rules 16b–3 and 16b–7 to we are amending Item 405 to rescind it,
7—‘‘Mergers, reclassifications, and require satisfaction of conditions that as proposed.
consolidations.’’ 16 These exemptive were neither contained in the text of the II. Rule 16b–3
rules provide that transactions that rules nor intended by the Commission.
satisfy their conditions will not be Rule 16b–3 exempts from Section
The resulting uncertainty regarding the 16(b) certain transactions between
subject to Section 16(b) short-swing exemptive scope of these rules has made
profit recovery. issuers of securities and their officers
it difficult for issuers and insiders to and directors. In its Levy v. Sterling
The recent opinion of the U.S. Court plan legitimate transactions, and may
of Appeals for the Third Circuit (the opinion, the Third Circuit construed
discourage participation by officers and Rule 16b–3(d), which applies to ‘‘grants,
‘‘Third Circuit’’) in Levy v. Sterling
directors in issuer stock ownership awards, or other acquisitions,’’ to limit
Holding Company, LLC. (‘‘Levy v.
programs or employee incentive plans. this exemption to transactions that have
Sterling’’),17 casts doubt as to the nature
With the clarifying amendments to some compensation-related aspect.
10 As defined in Section 206B of the Gramm-
Rules 16b–3 and 16b–7 that we adopt Specifically, since ‘‘grants’’ and
Leach-Bliley Financial Modernization Act of 1999, today, we resolve any doubt as to the ‘‘awards’’ are compensation-related, the
as amended by H.R. 4577, P.L. 106–554, 114 Stat. meaning and interpretation of these Third Circuit reasoned that ‘‘other
2763. rules by reaffirming the views we have
11 Insiders file transaction reports on Form 4 [17
acquisitions’’ also must be
consistently expressed previously compensation-related in order to be
CFR 249.104] and Form 5 [17 CFR 249.105].
12 15 U.S.C. 78p(b).
regarding their appropriate exempted by Rule 16b–3(d). This
13 The first sentence of Section 16(b) begins with construction.20 Consistent with our construction of Rule 16b–3(d) is not in
‘‘For the purpose of preventing the unfair use of previously expressed views: accord with our clearly expressed intent
information which may have been obtained by such in adopting the rule.
beneficial owner, director, or officer by reason of 18 314 F.3d at 112 (citing Chevron, U.S.A. Inc. v.
his relationship to the issuer [***].’’
The current version of Rule 16b–3
Natural Resources Defense Council, Inc., 467 U.S.
14 e.g., Exchange Act Section 10(b) [15 U.S.C.
837, 843–44 (1984)). See also National Cable &
was adopted in 1996, and implemented
78j(b)] and Exchange Act Rule 10b–5 [17 CFR Telecommunications v. Brand X Internet Service, substantial revisions designed to
240.10b–5]. U.S., 125 S.Ct. 2688, 2700 (June 27, 2005) (‘‘A simplify the conditions that must be
15 This type of remedy was described by its court’s prior judicial construction of a statute satisfied for the exemption to apply. In
drafters as a ‘‘crude rule of thumb.’’ Hearings on trumps an agency construction otherwise entitled to
Stock Exchange Practices before the Senate Chevron deference only if the prior court decision 21 We note in this regard that, consistent with the
Committee on Banking and Currency, 73d Cong., holds that its construction follows from the
1st Sess. Pt. 15,6557 (1934) (testimony of Thomas unambiguous terms of the statute and thus leaves Administrative Procedure Act, the effective date of
Corcoran as spokesman for the drafters of the no room for agency discretion.’’) Rules 16b–3 and 16b–7 is less than 30 days after
Exchange Act). 19 See discussion below. publication because the rule recognizes an
16 Section 16(b) grants the Commission authority 20 See the discussions of previous Commission
exemption and contains interpretative rules. See 5
U.S.C. 553(d)(1) and (d)(2).
to exempt, by rules and regulations, ‘‘any releases in Sections II and III, below, and the 22 See Section II below regarding Rule 16b–3 and
transaction or transactions * * * not comprehended Proposing Release. See also Memorandum of the
within the purpose of this subsection.’’ 15 U.S.C. Section III regarding Rule 16b–7.
Securities and Exchange Commission, Amicus 23 17 CFR 240.14a–101, Item 7.
78p(b). Curiae, in Support of Appellees’ Petition for
17 314 F.3d 106 (3d. Cir. 2002), cert. denied, 24 17 CFR 249.310.
Rehearing or Rehearing En Banc (Feb. 27, 2003).
25 17 CFR 249.310b.
Sterling Holding Co. v. Levy, 124 S. Ct. 389 (U.S., This brief is posted at http://www.sec.gov/litigation/
Oct. 14, 2003). briefs/levy-sterling022703.htm. 26 17 CFR 249.330; 17 CFR 274.101.

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46082 Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations

contrast to prior versions of Rule 16b– • Approval or ratification of the involve an acquisition of issuer equity
3, which had exempted only employee transaction, in compliance with securities from the issuer, the acquirer
benefit plan transactions, the 1996 Exchange Act Section 14,31 by the be a director or officer of the issuer at
revisions broadened the Rule 16b–3 issuer’s shareholders;32 or the time of the transaction, and the
exemption and extended it to other • The officer or director to hold the transaction be approved in advance by
transactions between issuers and their acquired securities for a period of six the issuer’s board of directors.37
officers and directors. The revisions months following the date of To eliminate the uncertainty
focused on the distinction between acquisition.33 generated by the Levy v. Sterling
market transactions by officers and Consistent with the terms of Rule opinion, we proposed to amend Rule
directors, which present opportunities 16b–3 and statements in the 1996 16b–3(d) so that this paragraph would
for profit based on non-public Adopting Release and 1995 Proposing be entitled ‘‘Acquisitions from the
information that Section 16(b) is Release regarding the meaning of the issuer,’’ and would provide that any
intended to discourage, and transactions rule, the Commission staff has transaction involving an acquisition
between an issuer and its officers and interpreted the Rule 16b–3(d) from the issuer (other than a
directors, which are subject to fiduciary exemption to include a number of Discretionary Transaction), including
duties under state law.27 In adopting the transactions outside of the without limitation a grant or award, will
revised rule, we explicitly stated that ‘‘a compensatory context, such as: be exempt if any one of the Rule’s three
transaction need not be pursuant to an • The acquisition of acquiror equity existing alternative conditions is
employee benefit plan or any securities (including derivative satisfied. Because the exemptive
compensatory program to be exempt, securities) by acquiror officers and conditions of Rule 16b–3(e), which
nor need it specifically have a directors through the conversion of exempts an officer’s or director’s
compensatory element.’’ 28 target equity securities in connection disposition to the issuer of issuer equity
Rule 16b–3(a) provides that ‘‘A with a corporate merger; 34 and securities, are identical to the advance
transaction between the issuer • An officer’s or director’s indirect approval conditions of Rule 16b–3(d)38
(including an employee benefit plan pecuniary interest in transactions and were intended to operate the same
sponsored by the issuer) and an officer between the issuer and certain other way, we proposed to clarify both rules
or director of the issuer that involves persons or entities.35 consistently by adding a Note to Rule
issuer equity securities shall be exempt The application of Rule 16b–3(d) to 16b–3.39
from section 16(b) of the Act if the such transactions also has been The majority of commenters
transaction satisfies the applicable recognized in Section 16(b) litigation. In addressing the Rule 16b–3 proposals,
conditions set forth in this section.’’ As its 2002 opinion in Gryl v. Shire other than attorneys who represent
this makes clear, the only limitations on Pharmaceuticals Group PLC,36 the U.S. plaintiffs in Section 16(b) cases,
the exemption for transactions between Court of Appeals for the Second Circuit supported them. Most commenters
the issuer and its officer or director are construed Rule 16b–3(d) to exempt stated that the proposals would
the objective conditions set forth in later acquiror directors’ acquisition of accomplish the goal of clarifying the
subsections of the rule, each of which acquiror options upon conversion of exemptive scope of Rule 16b–3 as the
applies to a different category of their target options in a corporate Commission originally intended the rule
transactions. merger. Although the securities to apply, and would preclude the
As adopted in 1996, Rule 16b–3(d), acquired in Gryl were options, the restrictive and unintended construction
entitled ‘‘Grants, awards and other Second Circuit’s holding in no way applied in the Levy v. Sterling opinion.
acquisitions from the issuer,’’ exempted relied upon a compensatory purpose. Commenters generally expressed the
from Section 16(b) liability ‘‘Any Instead, Gryl construed Rule 16b–3(d)(1) view that the exemptive conditions of
transaction involving a grant, award or to require only that the transaction Rule 16b–3(e) should remain identical
other acquisition from the issuer (other to the Rule 16b–3(d)(1) or Rule 16b–
than a Discretionary Transaction)’’ 29 if 31 15U.S.C. 78n. 3(d)(2) advance approval conditions. In
any one of three alternative conditions 32 Rule16b–3(d)(2). With respect to shareholder, response to our questions, most
is satisfied. These conditions require: board and Non-Employee Director committee commenters also stated that it would
• Approval of the transaction by the approval, Rule 16b–3(d) requires approval in
not be appropriate to limit either Rule
advance of the transaction. Shareholder approval
issuer’s board of directors, or board must be by either: the affirmative votes of the 16b–3(d) or Rule 16b–3(e) to
committee composed solely of two or holders of a majority of the securities of the issuer transactions that have a compensatory
more Non-Employee Directors;30 present, or represented, and entitled to vote at a purpose or to ‘‘extraordinary’’
meeting duly held in accordance with the
applicable laws of the state or other jurisdiction in
transactions, such as the reclassification
27 Exchange Act Release No. 36356 (Oct. 11, 1995)
which the issuer is incorporated; or the written at issue in Levy v. Sterling. For example,
[60 FR 53832] (‘‘1995 Proposing Release’’). one commenter stated that ‘‘the key
28 Exchange Act Release No. 37260 (May 31,
consent of the holders of the majority of the
securities of the issuer entitled to vote. Shareholder
1996) [61 FR 30376] (‘‘1996 Adopting Release’’). ratification, consistent with the same procedural 37 Id. at 141. Rule 16b–3(d)(1) also permits
29 ‘‘Discretionary Transaction’’ is defined in Rule
conditions, may confer the exemption only if such approval by ‘‘a committee of the board of directors
16b–3(b)(1). Generally, a Discretionary Transaction ratification occurs no later than the date of the next
is an employee benefit plan transaction that is at the that is composed solely of two or more Non-
annual meeting of shareholders following the Employee Directors.’’ Gryl noted that ‘‘[t]hat aspect
volition of a plan participant and results in either transaction.
an intra-plan transfer involving an issuer equity of the Board Approval exemption is not at issue in
33 Rule 16b–3(d)(3).
securities fund, or a cash distribution funded by a this appeal.’’ Id. at n. 2.
34 Division of Corporation Finance interpretive 38 Although shareholder ratification after the
volitional disposition of an issuer equity security.
However, the definition excludes such transactions letter to Skadden, Arps, Slate, Meagher & Flom LLP transaction exempts an acquisition under Rule 16b–
that are made in connection with the participant’s (Jan. 12, 1999). 3(d), it does not exempt a disposition under Rule
35 Division of Corporation Finance interpretive 16b–3(e).
death, disability, retirement or termination of
employment, or are required to be made available letter to American Bar Association (Feb. 10, 1999). 39 Proposed Note 4 stated that these exemptions

to a plan participant pursuant to a provision of the The other persons or entities are immediate family apply to any securities transaction by the issuer
Internal Revenue Code. A Discretionary Transaction members, partnerships, corporations and trusts, in with its officer or director that satisfies the specified
is exempted by Rule 16b–3 only if it satisfies the each case where rules under Section 16(a) require conditions of Rule 16b–3(d) or Rule 16b–3(e), as
conditions of Rule 16b–3(f). the officer or director to report an indirect applicable, and are not conditioned on the
30 Rule 16b–3(d)(1). ‘‘Non-Employee Director’’ is pecuniary interest in the transaction. transaction being intended for a compensatory or
defined in Rule 16b–3(b)(3). 36 298 F.3d 136 (2d Cir. 2002). other particular purpose.

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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations 46083

consideration of the statute is the securities, any profit obtained is not at judicial construction of Section 16(b)
absence of the ability to take advantage the expense of uninformed shareholders thus demonstrates that the exemptions
of the other party on the basis of inside and other market participants of the provided by Rules 16b–3(d) and 16b–
information.’’ 40 type contemplated by the statute.’’ 45 3(e), as adopted in 1996 and as clarified
Some commenters suggested, Section 16(b) specifically states that it today, do not conflict with Section
however, that it would be clearer that is ‘‘for the purpose of preventing the 16(b). As a different commenter
the exemptive scope of Rules 16b–3(d) unfair use of information which may observed, ‘‘Rule 16b–3 is entirely
and 16b–3(e) is not limited to have been obtained by such beneficial consistent with the intent of Congress in
transactions with a compensatory or owner, director, or officer by reason of enacting Section 16(b), since it exempts
other particular purpose if this were his relationship to the issuer.’’ This only transactions involving parties on
stated in the text of Rules 16b–3(d) and statement should be construed in light an equal footing from the standpoint of
16b–3(e) instead of a Note to Rule 16b– of the stated purpose of the Exchange knowledge of inside information.’’ 50
3.41 We have decided to apply this Act, inter alia, ‘‘to insure the The Section 16(b) Lawyers also
suggested approach in the amendments maintenance of fair and honest markets questioned our authority to adopt Rule
as adopted.42 in [securities] transactions.’’ 46 As the 16b–3 and these clarifying amendments.
Rule 16b–3(d), as adopted, exempts Second Circuit stated in Blau v. Lamb, Because Section 16(b) can be harsh in
any transaction, other than a ‘‘Section 16(b) helps to implement this imposing liability without fault,
Discretionary Transaction, involving an overriding purpose by making it ‘‘Congress itself limited carefully the
acquisition by an officer or director 43 unprofitable for ‘insiders’ to engage in liability imposed by Section 16(b),’’ 51
from the issuer (including without short-swing speculation.’’ 47 including by granting the Commission
limitation a grant or award), whether or The legislative history of Section specific exemptive authority. By its
not intended for a compensatory or 16(b) makes it clear that the ‘‘unfair use terms, Section 16(b) provides that it
other particular purpose, if any one of of information’’ that concerned Congress does not cover ‘‘any transaction or
the Rule’s three alternative conditions is was insiders’ transactions with investors transactions which the Commission by
satisfied. Rule 16b–3(e), as adopted, who were at an informational rules and regulations may exempt as not
exempts any transaction, other than a disadvantage. In a report summarizing comprehended within the purpose of
Discretionary Transaction, involving the the findings of its extensive this subsection.’’ The legislative history
disposition by an officer or director to investigation, the Senate Committee on explains that:
the issuer of issuer equity securities, Banking and Currency, in a section The expressed purpose of this provision is
whether or not intended for a entitled ‘‘Market Activities of Directors, to prevent the unfair use of inside
compensatory or other particular Officers, and Principal Shareholders of information. The Commission may exempt
purpose, provided that the terms of such Corporations,’’ stated: transactions not falling within this
disposition are approved in advance in Among the most vicious practices purpose.52
the manner prescribed by either Rule unearthed at the hearings before the Insider trading is rooted in inequality
16b–3(d)(1) or Rule 16b–3(d)(2). subcommittee was the flagrant betrayal of of information between persons who are
In their comment letters, attorneys their fiduciary duties by directors and aware of it and the persons they transact
who represent plaintiffs in Section 16(b) officers of corporations who used their
positions of trust and the confidential
with. The inequality of information
cases (‘‘the Section 16(b) Lawyers’’) contemplated by Section 16(b) generally
asserted that the premise that there is no information which came to them in such
positions, to aid them in their market does not exist when an officer or
opportunity for speculative abuse in director acquires securities from, or
activities.48
transactions between an issuer and its disposes of them to, the issuer. In both
officers and directors is faulty and In construing Section 16(b), the
Supreme Court has relied on a the 1996 adoption of Rule 16b–3 and the
without support.44 This assertion is clarifications adopted today, we
misplaced, however. As we explained in consistent understanding of
Congressional intent: carefully considered Congress’s purpose
1996, ‘‘[transactions between an issuer for enacting Section 16(b), and, in light
and its officers and directors] do not Congress recognized that insiders may of the strict remedy imposed by Section
appear to present the same have access to information about their
corporations not available to the rest of the
16(b), whether the exempted
opportunities for insider profit on the
investing public. By trading on this transactions actually pose a significant
basis of non-public information as do
information, those persons could reap profits risk of the abuses the statute was
market transactions by officers and
at the expense of less well informed concerned with. We concluded that it is
directors. Typically, where the issuer, investors. In Section 16(b) Congress sought to not appropriate to impose Section 16(b)
rather than the trading markets, is on ‘‘curb the evils of insider trading [by] * * * liability on the exempted acquisitions
the other side of an officer or director’s taking the profits out of a class of and dispositions because the risk of
transaction in the issuer’s equity transactions in which the possibility of abuse
was believed to be intolerably great.’’ 49
unfair use of information in these
40 Letter of American Bar Association (Aug. 16, transactions is generally diminished.53
2004).
The purpose expressed in the legislative
41 Letters of New York State Bar Association (Aug. history and acknowledged in the 50 Letter of New York State Bar Association (Aug.

9, 2004) and Sullivan & Cromwell LLP (Aug. 9, 9, 2004).


2004). 45 1996Adopting Release. 51 Foremost-McKesson, Inc. v. Provident

42 We note, however, that the Notes to our rules 46 Section2 of the Exchange Act, 15 U.S.C. 78b. Securities Co., 423 U.S. at 252.
are integral parts of our regulations. 47 Blau v. Lamb, 363 F.2d 507, at 514 (2d Cir. 52 S. Rep. No. 792, 73d Cong., 2d Sess., 21 (1934).
43 Note 4 as proposed referred to transactions by 1966). 53 Of course, Section 16(b) is not the sole

an officer or director satisfying the conditions of the 48 Stock Exchange Practices, S. Rep. No. 1455, Exchange Act deterrent to insider trading.
rule. Because that language essentially mirrored 73d Cong., 2d Sess. 55 (1934). Moreover, the strict liability imposed by Section
language already contained in the text of Rule 16b– 49 Foremost-McKesson, Inc. v. Provident 16(b) is distinguishable from the prohibitions of
3(a) itself, we have not adopted that portion of Securities Co., 423 U.S. 232 (1976), at 243 (quoting Section 10(b) and Rule 10b–5 and the remedies that
proposed Note 4. Reliance Electric Co. v. Emerson Electric Co., 404 attach to violations of those prohibitions. In light
44 Letter of Abraham Fruchter & Twersky LLP U.S. 418, at 422 (1972). The Supreme Court quoted of these distinctions, and the application of Section
(Aug. 5, 2004); Letter of Bragar Wexler Eagel & the same Reliance Electric Co. language in Kern 10(b) and Rule 10b–5 to the transactions exempted
Morgenstern, P.C. (Jul. 30, 2004); and Letter of County Land Co. v. Occidental Petroleum Corp., by Rule 16b–3, the Rule 16b–3(d) and 16b–3(e)
Sirianni Youtz Meier & Spoonemore (Aug. 9, 2004). 411 U.S. 582, at 592 (1972). Continued

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46084 Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations

Because the transactions exempted by clarifying nature of the amendments is the security for which it is exchanged
the rule are not of the type not a sudden and unexplained change have the same characteristics. Imposing
contemplated by the statute, our 1996 in our regulations (indeed, our these conditions is inconsistent with the
adoption of Rule 16b–3 and the interpretation has been consistent since terms of Rule 16b–7, the rule’s
clarifications adopted today clearly are the rule was adopted in 1996) and interpretive history and the
within our specific exemptive authority neither creates nor removes any rights Commission’s intent.
provided by Section 16(b), as well as or duties. Although Rule 16b–7 as originally
other statutory authority. We are adopted in 1952 only applied to
III. Rule 16b–7 ‘‘mergers’’ and ‘‘consolidations,’’ 59 the
clarifying our own rule and resolving
any ambiguity that might exist. In Rule 16b–7, entitled ‘‘Mergers, Commission staff construed it as also
addition to the specific exemptive reclassifications, and consolidations,’’ applying to reclassifications. In a 1981
authority provided by Section 16(b), the exempts from Section 16(b) certain interpretive release, the staff stated that
Commission also has authority under transactions that do not involve a ‘‘Rule 16b–7 does not require that the
our general rulemaking authority in significant change in the issuer’s security received in exchange be similar
Section 23(a) of the Exchange Act 54 and business or assets. The rule is typically to that surrendered, and the rule can
general exemptive authority in Section relied upon in situations where a apply to transactions involving
36 of the Exchange Act.55 company reincorporates in a different reclassifications.’’ 60 In 1991, the
The Section 16(b) Lawyers further state or reorganizes its corporate Commission amended the title of Rule
asserted that this rulemaking is an structure. Rule 16b–7(a)(1) provides that 16b–7 to include ‘‘reclassifications,’’
unlawful attempt to engage in the acquisition of a security pursuant to explaining that this amendment was not
retroactive rulemaking, rather than a a merger or consolidation is not subject intended to effect any ‘‘substantive’’
clarification. This assertion also is to Section 16(b) if the security changes to the rule, and reaffirmed the
misplaced. The clarifications adopted relinquished in exchange is of a staff statement in the 1981 Release that
today do not deprive issuers and company that, before the merger or Rule 16b–7 applies to
shareholders of short-swing profit consolidation, owned: reclassifications.61
recovery to which they were intended to • 85% or more of the equity securities Although the rule as amended in 1991
be entitled. The clarifications are of all other companies party to the did not contain specific standards for
consistent with the terms of Rule 16b– merger or consolidation, or exempting reclassifications, the staff
3 and our statements in the 1996 • 85% or more of the combined assets applied to reclassifications the same
Adopting Release regarding the scope of of all companies undergoing merger or standards as for mergers and
Rules 16b–3(d) and 16b–3(e),56 and our consolidation. consolidations. In relevant respects a
amicus brief in Levy v. Sterling.57 The Rule 16b–7(a)(2) exempts the reclassification is little different from a
clarifications also are consistent with corresponding disposition, pursuant to a merger exempted by Rule 16b–7. In a
the August 2002 construction of Rule merger or consolidation, of a security of merger exempted by the rule, the
16b–3(d) by the U.S. Court of Appeals an issuer that before the merger or transaction satisfies either 85%
for the Second Circuit in Gryl v. Shire consolidation satisfied either of these ownership standard, so that the merger
Pharmaceuticals Group PLC.58 The 85% ownership tests. These effects no major change in the issuer’s
transactions do not significantly alter in business or assets. Similarly, in a
exemptions do not impair the protection of an economic sense the investment the reclassification the issuer owns all
investors. insider held before the transaction. assets involved in the transaction and
54 In pertinent part, Section 23(a) authorizes the
While the Levy v. Sterling opinion remains the same, with no change in its
Commission ‘‘to make such rules and regulations as
may be necessary or appropriate to implement the acknowledged that Rule 16b–7 could business or assets. The similarities are
provisions of this title * * * or for the execution exempt a reclassification, it construed readily illustrated by the fact that an
of the functions vested in [the Commission] by this Rule 16b–7 not to exempt an acquisition issuer also could effect a reclassification
title, and may for such purposes classify persons, pursuant to a reclassification that: by forming a wholly-owned ‘‘shell’’
securities, transactions, statements, applications,
reports, and other matters within [its] jurisdiction[], • Resulted in the insiders owning subsidiary, merging the issuer into the
and prescribe greater, lesser, or different equity securities (common stock) with subsidiary, and exchanging subsidiary
requirements for different classes thereof.’’ different risk characteristics from the securities for the issuer’s securities.
55 Section 36 generally provides that ‘‘the
securities (preferred stock) extinguished Consistent with the 1981 and 1991
Commission, by rule, regulation, or order, may
conditionally or unconditionally exempt any
in the transaction, where the preferred Releases and our amicus brief in Levy v.
person, security, or transaction, or any class or stock previously had not been Sterling, to eliminate uncertainty
classes of persons, securities or transactions, from convertible into common stock; and regarding Rule 16b–7 generated by the
any provision or provisions of this title or of any • Thus involved an increase in the Levy v. Sterling opinion, we proposed to
rule or regulation thereunder, to the extent that
such exemption is necessary or appropriate in the
percentage of insiders’ common stock amend Rule 16b–7 so that, consistent
public interest, and is consistent with the ownership, based on the fact that the with the rule’s title, the text states
protection of investors.’’ For the reasons discussed insiders owned some common stock ‘‘merger, reclassification or
in the Proposing Release and this release, the before the reclassification extinguished consolidation’’ each place it previously
Commission believes that the Rule 16b–3
exemption (as well as the exemption in Rule 16b– their preferred stock in exchange for stated ‘‘merger or consolidation.’’ To
7 discussed below) is necessary or appropriate in common stock.
the public interest and is consistent with the The opinion thus imposed upon 59 Exchange Act Release No. 4696 (Apr. 3, 1952)

protection of investors. reclassifications exemptive conditions [17 FR 3177] (proposing Rule 16b–7), and Exchange
56 For example, the 1996 Adopting Release stated, Act Release No. 4717 (Jun. 9, 1952) [17 FR 5501]
that are not found in the language of (adopting Rule 16b–7).
with respect to Rule 16b–3(e), ‘‘In the context of a
merger, the new rule will exempt the disposition of Rule 16b–7 and would not apply to a 60 Exchange Act Release No. 18114 (Sept. 24,

issuer equity securities (including derivative merger or consolidation relying upon 1981) [46 FR 48147] (‘‘1981 Release’’), at Q. 142.
securities) solely to the issuer, provided the the rule. Moreover, these conditions 61 Exchange Act Release No. 28869 (Feb. 8, 1991)
conditions of the rule are satisfied.’’ [56 FR 7242] (‘‘1991 Release’’). More recently, in a
57 The clarifications also are consistent with staff
significantly restrict the exemption’s
2002 proposing release we expressly described
interpretations of these rules. See text at nn. 34 and availability for reclassifications by reclassifications as among the transactions
35, above. narrowing it to the less frequent exempted by Rule 16b–7. Exchange Act Release No.
58 See text at n. 37, above. situation where the original security and 45742 (Apr. 12, 2002) [67 FR 19914], at n. 56.

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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations 46085

further clarify the rule’s consistent addition to the reclassified class or explained, Rule 16b–7 is based on the
application, we proposed an additional series of securities, and have the same premise that the exempted transactions
paragraph to specify that the Rule 16b– effect on all holders of the reclassified are of relatively minor importance to the
7 exemption applies to any securities class or series, do not present insiders shareholders of a particular company
transaction that satisfies the conditions the significant opportunities to profit by and do not present significant
of the rule and is not conditioned on the advance information that Section 16(b) opportunities to insiders to profit by
transaction satisfying any other was designed to address. A transaction advance information concerning the
conditions.62 that has the same characteristics and transaction. Indeed, as noted above, by
The majority of commenters effect as a reclassification, whether satisfying either of the rule’s 85%
addressing the Rule 16b–7 proposals, domestic or foreign, is exempt without ownership tests, an exempted
other than the Section 16(b) Lawyers, regard to its formal name, including but transaction does not significantly alter
supported them. Most commenters not limited to a statutory exchange,65 the economic investment held by the
stated that the proposals would conversion to a different form of insider before the transaction.70
accomplish the goal of clarifying the entity,66 and redomicile or continuance Exempting these transactions from
exemptive scope of Rule 16b–7, and are in a different jurisdiction.67 Similarly, a Section 16(b) is consistent with
consistent with our previous statements transaction that has the same Congressional intent that the
regarding the scope of this rule. We are characteristics and effect as a merger or Commission exempt transactions that
adopting the Rule 16b–7 amendments as consolidation, whether domestic or do not fall within the statute’s purpose
proposed. foreign, is exempt without regard to its of preventing the unfair use of inside
Some commenters suggested that the formal name, including but not limited information.71 Because the form of
rule should include a definition of to an amalgamation or scheme of insiders’ holdings changes without
‘‘reclassification.’’ Other commenters arrangement.68 affecting the substance of their interest
suggested that the rule should exempt The exercise or conversion of a in the issuer, it is not in accordance
transactions that are substantively derivative security, however, is not with the purpose of Section 16(b) to
similar to reclassifications, and exempted by Rule 16b–7, but instead treat the transaction as involving a
transactions in foreign jurisdictions that must satisfy the conditions of Rule 16b– purchase or sale.72 Further, the
use different names, such as 3 or Rule 16b–6(b). Similarly, a stock clarifications adopted today do not
‘‘amalgamations’’ or ‘‘schemes of split, stock dividend, or the acquisition deprive issuers and shareholders of
arrangement,’’ that are substantively of shareholder rights is not exempted by short-swing profit recovery to which
equivalent to transactions named in the Rule 16b–7, but instead must satisfy the they were intended to be entitled. The
rule. conditions of Rule 16a–9.69 The clarifications are consistent with our
In order to preserve flexibility to amendments adopted today do not statements in adopting Rule 16b–7, and
apply the rule appropriately to evolving change this analysis. our amicus brief in Levy v. Sterling.73 As
forms of transactions, the rule as The comment letters of the Section with the Rule 16b–3 amendments
adopted does not define 16(b) Lawyers also questioned our adopted today, the clarifying nature of
‘‘reclassification.’’ However, authority to apply Rule 16b–7 to the Rule 16b–7 amendments is not a
transactions that are exempt as reclassifications and to adopt these sudden and unexplained change in our
reclassifications generally include clarifying amendments, and asserted regulations (indeed our interpretation
transactions in which the terms of the that this rulemaking is an unlawful has been consistent since at least 1991)
entire class or series are changed, or attempt to engage in retroactive and neither creates nor removes any
securities of the entire class or series are rulemaking, rather than a clarification. rights or duties.
replaced with securities of a different As our previous releases have
class or series of securities of the IV. Item 405 of Regulations S–K and S–
company,63 and all holders of the 65 The staff has stated that ‘‘the acquisition and
B
reclassified class or series are entitled to disposition of stock in a statutory exchange would As noted above, issuers must disclose
be exempt under Rule 16b–7, assuming all of the
receive the same form and amount of conditions of the rule are satisfied.’’ 1981 Release,
their insiders’ Section 16 reporting
consideration per share. Rule 16b–7 also at Q. 142. delinquencies as required by Item 405 of
applies in such transactions where 66 Some state statutes allow a corporation to Regulations S–K and S–B. Previously,
shareholders have the right to receive convert to a different form of organization, such as Item 405(b)(1) provided that ‘‘a form
a partnership, limited liability company or business received by the registrant within three
cash instead of stock by exercising their trust, and vice versa, without merging into a newly-
dissenters’ appraisal rights, or the formed entity. See e.g., Del. Code Ann. Title 8 calendar days of the required filing date
option to surrender their shares for Sections 265 and 266. may be presumed to have been filed
stock or for cash in certain 67 Some state statutes allow a corporation
with the Commission by the required
circumstances.64 incorporated a different jurisdiction to register filing date.’’ When Item 405 was
within the state and become a domestic corporation
These transactions, which do not within the state, or continue as if incorporated in adopted in 1991,74 Form 4 was due
involve a substantial change in the the state, without merging into a newly-formed within ten days after the close of the
business owned, do not involve the entity. See e.g., Wyoming Statutes §§ 17–16–1701, calendar month in which the reported
holders’ payment of consideration in 17–16–1702 and 17–16–1710.
68 For example, Division of Corporation Finance
70 See Exchange Act Release No. 4696, Exchange
interpretive letter to Manpower PLC (Mar. 14,
62 Rule 16b–7(c). Former Rule 16b–7(c) is Act Release No. 4717, and the 1981 Release.
1991), expressing the view that Rule 16b–7 would 71 As discussed above, the Commission has
redesignated as Rule 16b–7(d). exempt an exchange offer and subsequent
63 For a transaction to be a reclassification
compulsory acquisition that were the substantive exemptive authority under Section 16(b). In
exempted by Rule 16b–7, it is not necessary for the equivalent of a merger, consolidation or sale of addition, the Commission has general rulemaking
class or series of security that is surrendered to have assets, recognized that ‘‘English law does not have authority in Section 23(a) of the Exchange Act and
been previously convertible into the class or series the equivalent to a merger or consolidation statute.’’ general exemptive authority in Section 36 of the
of security to be received. See also Division of Corporation Finance letter to Exchange Act. See nn. 54 and 55 and related text,
64 These respective factual circumstances were Varity Corporation (Oct. 15, 1981), expressing the above.
72 Exchange Act Release No. 4696.
discussed in Division of Corporation Finance letters staff’s view that the acquisition and disposition of
securities pursuant to an amalgamation would fall 73 The clarifications also are consistent with staff
to Pan American World Airways, Inc. (May 28,
1984) and Public Service Electric and Gas Co. (Apr. within the operation of Rule 16b–7. interpretations of this rule.
28, 1986). 69 17 CFR 240.16a–9. 74 Item 405 was adopted in the 1991 Release.

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46086 Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations

transaction took place. Further, all In light of the Section 16(a) VI. Cost-Benefit Analysis
Section 16 reports were filed on paper, amendments enacted by the Sarbanes- The Rule 16b–3 and Rule 16b–7
since we did not permit insiders to file Oxley Act, the presumption of amendments adopted today clarify
Section 16 reports electronically on timeliness for a Section 16(a) report existing rules. The Levy v. Sterling
EDGAR on a voluntary basis until received by the issuer within three opinion created uncertainty whether
1995.75 calendar days of the required filing date Rules 16b–3 and 16b–7 exempt
However, the Sarbanes-Oxley Act of no longer is appropriate or necessary. transactions that they previously were
2002 76 amended Section 16(a) to By reviewing Section 16 reports posted commonly understood to exempt,
require two-business day reporting of on EDGAR, an issuer is readily able to making it difficult for issuers to plan
changes in beneficial ownership, evaluate their timeliness. Moreover, a legitimate transactions in reliance on
effective August 29, 2002.77 The report that is not received by the issuer these rules. The amendments clarify the
Sarbanes-Oxley Act also amended in time for the issuer to post that report exemptive scope of Rules 16b–3 and
Section 16(a) to require insiders to file on its Web site by the end of the 16b–7, consistent with statements in our
these reports electronically, and the business day following filing should not previous releases and our amicus brief
Commission and issuers with corporate be presumed to have been timely filed. in Levy v. Sterling. Without such
Web sites to post these reports on their Accordingly, we proposed to amend clarification, insiders may be exposed
Web sites not later than the end of the Item 405 of Regulations S–K and S–B to unnecessarily to significant potential
business day following filing.78 We delete the former three-calendar day costs to the extent that a private action
adopted rules to implement these presumption, without substituting a under Section 16(b) recovers short-
requirements effective June 30, 2003.79 different presumption or otherwise swing profits with respect to a
In adopting the Web site posting modifying the substance of Item 405. transaction that either of these rules was
requirement, we noted that Rule 16a– intended to exempt. These costs also
3(e) 80 requires an insider, not later than This proposal generated minimal include potential litigation costs, and
the time a Section 16 report is comments, all of which were favorable. costs incurred to postpone a legitimate
transmitted for filing with the We adopt the amendments to Item 405 non-exempt transaction, such as an
Commission, to send or deliver a as proposed. initial public offering, more than six
duplicate to the person designated by V. Paperwork Reduction Act months following a transaction that
the issuer to receive such statements, or properly is exempted by Rule 16b–3 or
absent such designation, to the issuer’s Forms 3 (OMB Control No. 3235– Rule 16b–7. The comments we received
corporate secretary or person 0104), 4 OMB Control No. 3235–0287) also noted increased legal costs to
performing equivalent functions. We and 5 (OMB Control No. 3235–0362) analyze the availability of an
stated that we would expect an issuer, prescribe transaction and beneficial exemption,82 and that the legal
in making this designation, also to ownership information that an insider uncertainty generated by the Levy v.
designate an electronic transmission must report under Section 16(a). Sterling opinion affects a large
medium compatible with the issuer’s Preparing and filing a report on any of percentage of U.S. public companies.83
own systems, so that a form sent by that these forms is a collection of Because the amendments clarify the
medium at the time specified by Rule information. exemptive scope of Rules 16b–3 and
16a–3(e) would be received by the 16b–7 consistent with the terms of these
The clarifying amendments to Rule rules and our previous statements,
issuer in time to satisfy the Web site
16b–3 and Rule 16b–7 adopted today do issuers and insiders will not incur
posting deadline.81
not change the transaction and additional costs to effect legitimate
75 Securities Act Release No. 7241 (Nov. 13, 1995) beneficial ownership information that transactions in reliance on the rules as
[60 FR 57682]. insiders currently are required to report amended. Issuers and shareholders also
76 Pub. L. 107–204, 116 Stat. 745. on these forms. We therefore believe will not incur additional costs because
77 Section 16(a)(2)(C), as amended by Section 403
that the overall information collection the amendments do not deprive issuers
of the Sarbanes-Oxley Act. Effective on the same burden remains the same because the
date, the Commission adopted rule amendments to
and shareholders of short-swing profit
implement the accelerated Form 4 due date. same information remains reportable. recovery to which they were intended to
Exchange Act Release No. 46421 (Aug. 27, 2002) [67 The deletion of the Item 405 be entitled. Likewise, clarification of the
FR 56462]. rules should reduce litigation risk, and
78 Section 16(a)(4), as amended by Section 403 of
presumption of timeliness for a Section
16 report received by the issuer within therefore costs, of some actions seeking
the Sarbanes-Oxley Act.
79 Securities Act Release No. 8230 (May 7, 2003) three calendar days of the required short-swing profits.
[68 FR 25788, with corrections at 68 FR 37044] filing date may result in some Conversely, the amendments should
(‘‘Mandated EDGAR Release’’). Recognizing that improve the ability to plan legitimate
companies reporting more Section 16
insiders may experience temporary difficulties in transactions with a clear understanding
transitioning to mandated electronic filing, Section reports as delinquent in their Forms 10–
whether they will be exempt under Rule
II.E of the Mandated EDGAR Release provided Item K (OMB Control No. 3235–0063), 10–
405 disclosure relief for a Form 4 that is (i) filed
16b–3 or Rule 16b–7, thereby providing
KSB (OMB Control No. 3235–0420) or significant benefits. These benefits, like
not later than one business day following the
regular due date, and (ii) filed during the first 12
N–SAR (OMB Control No. 3235–0330), the costs, are difficult to quantify. The
months following the effective date of mandated and proxy (OMB Control No. 3235– comments that we received did not
electronic filing. This limited relief applies only to 0059) or information statements (OMB quantify costs or benefits.
Forms 4 filed between June 30, 2003 and June 30, Control No. 3235–0057) for the annual
2004. The amendment to Item 405 of
80 17 CFR 240.16a–3(e).
meeting at which directors are elected. Regulations S–K and S–B to delete the
81 Mandated EDGAR Release at Section II.B. To However, we believe that any such presumption of timeliness for a Section
assure that insiders are aware of the designated increased collection burden associated 16 report received by the issuer within
person and electronic transmission medium, we with those filings will be so minimal three calendar days of the required
encouraged issuers to post this information on their that it cannot be quantified.
Web sites together with the Section 16 filings. We
82 Letter of Goodwin Procter (Aug. 9, 2004).
also noted that the concern about timely obtaining
an electronic copy of a filing would not arise for EDGAR) to satisfy their Web site posting 83 Letter of New York State Bar Association (Aug.
issuers that rely on a hyperlink (for example, to requirement. 9, 2004).

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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations 46087

filing date may result in some issuers The amendments clarify the B. Legal Basis
reporting more Section 16 reports as exemptive scope of Rules 16b–3 and The amendments to Item 405 of
delinquent in their Forms 10–K, 10– 16b–7, consistent with the terms of Regulations S–K and S–B and Exchange
KSB or N–SAR, and their proxy or these rules, statements in our previous Act Rules 16b–3 and 16b–7 are adopted
information statements for the annual releases and our amicus brief in Levy v. pursuant to Section 19(a) of the
meeting at which directors are elected. Sterling. This will improve issuers’ and Securities Act,90 Sections 3(a)(11),91
However, Section 16 reports are posted insiders’ ability to plan transactions 3(a)(12),92 3(b),93 10(a),94 12(h),95
on EDGAR, and thus are readily with a clear understanding whether 13(a),96 14,97 16, 23(a) 98 and 36 99 of the
available to issuers to evaluate their either rule will provide an exemption. Exchange Act, Sections 17 100 and 20 101
timeliness. Further, because Section 16 Informed transactional decisions of the Public Utility Holding Company
requires an issuer to post a Section 16 generally promote market efficiency and Act of 1935, Sections 30 102 and 38 103
report on its Web site by the end of the capital formation. We believe the of the Investment Company Act of 1940,
business day following filing, issuers are amendments to Rules 16b–3 and 16b–7 and Section 3(a) 104 of the Sarbanes-
able to evaluate filing timeliness on an will not impose a burden on Oxley Act of 2002.
on-going basis. Consequently, deletion competition. The amendment to Item
of the Item 405 timeliness presumption 405 of Regulations S–K and S–B to C. Significant Issues Raised by Public
does not impose significant additional delete the timeliness presumption also Comment
costs on issuers. The benefit of the will not impose a burden, since issuers The Initial Regulatory Flexibility Act
amendment will be to provide investors are readily able to evaluate the Analysis (‘‘IRFA’’) appeared in the
with Item 405 disclosure that is fully timeliness of Section 16 reports by Proposing Release. We requested
consistent with accelerated reporting, examining the reports as filed on comment on any aspect of the IRFA,
mandatory electronic filing and Web EDGAR. including the number of small entities
site posting amendments to Section In the proposing release, we requested that would be affected by the proposals,
16(a) effected by the Sarbanes-Oxley comments on whether the proposed the nature of the impact, and how to
Act. amendments, if adopted, would impose quantify the impact of the proposals.
a burden on competition. We also One commenter suggested that we
VII. Effect on Efficiency, Competition
requested comment on whether the extend the requirements of Section 16 to
and Capital Formation
proposed amendments, if adopted corporate insiders of publicly traded
Section 23(a)(2) of the Exchange would promote efficiency, competition securities that are not registered under
Act 84 requires us, when adopting rules and capital formation. The comments Section 12 of the Exchange Act,105 an
under the Exchange Act, to consider the we received suggested that adoption of action that would affect many small
impact that any new rule would have on the proposed amendments would entities. Such an extension of Section 16
competition. In addition, Section eliminate a burden on competition, and was not the purpose of this rulemaking,
23(a)(2) prohibits us from adopting any promote efficiency, competition and which merely clarifies existing Rules
rule that would impose a burden on capital formation by eliminating legal 16b–3 and 16b–7 and amends Item 405.
competition not necessary or uncertainty that makes it difficult to We did not receive other comments in
appropriate in furtherance of the plan legitimate business transactions.88 response to our request.
purposes of the Exchange Act. Finally, we requested commenters to D. Small Entities Subject to the
Furthermore, Section 2(b) of the provide empirical data and other factual Amendments
Securities Act,85 Section 3(f) of the support for their views, if possible. The
Exchange Act 86 and Section 2(c) of the The proposed amendments affect
comments we received noted that the companies that are small entities.
Investment Company Act of 1940 87 legal uncertainty generated by the Levy
require us, when engaging in Exchange Act Rule 0–10(a) 106 defines
v. Sterling opinion affects a large
rulemaking where we are required to an issuer, other than an investment
percentage of U.S. public companies.89
consider or determine whether an action company, to be a ‘‘small business’’ or
is necessary or appropriate in the public VIII. Final Regulatory Flexibility Act ‘‘small organization’’ if it had total
interest, to consider whether the action Analysis assets of $5 million or less on the last
will promote efficiency, competition, day of its most recent fiscal year. We
and capital formation. We have prepared a Final Regulatory estimate that there are approximately
Flexibility Analysis, in accordance with 2,500 issuers, other than investment
The Levy v. Sterling opinion created 5 U.S.C. 603, concerning the companies, that may be considered
uncertainty whether Rules 16b–3 and amendments adopted today. small entities. For purposes of the
16b–7 exempt transactions that the
Commission intended to exempt, A. Reasons for and Objectives of the 90 15 U.S.C. 77s(a).
making it difficult for issuers to plan Proposed Amendments 91 15 U.S.C. 78c(a)(11).
legitimate transactions in reliance on 92 15 U.S.C. 78c(a)(12).

these rules. This uncertainty generated The purpose of the amendments is to 93 15 U.S.C. 78c(b).

economic inefficiency by introducing clarify the exemptive scope of Rules 94 15U.S.C. 78j(a).

potential litigation costs, and costs 16b–3 and 16b–7, and, consistent with 95 15 U.S.C. 78l(h).

incurred to postpone a non-exempt the Sarbanes-Oxley Act amendments to 96 15 U.S.C. 78m(a).

transaction more than six months Section 16(a), to delete the timeliness 97 15 U.S.C. 78n.

following a transaction that properly is presumption in Item 405 of Regulations 98 15 U.S.C. 78w(a).

exempted by Rule 16b–3 or Rule 16b– S–K and S–B. 99 15 U.S.C. 78jj.
100 15 U.S.C. 79q.
7. 101 15 U.S.C. 79t.
88 Letter of Allen & Overy (Aug. 27, 2004), Letter
102 15 U.S.C. 80a–29.
of American Society of Corporate Secretaries (Aug.
84 15 U.S.C. 78w(a)(2). 103 15 U.S.C. 80a–37.
9, 2004), and Letter of Securities Industry
85 15 U.S.C. 77b(b). 104 15 U.S.C. 7202(a).
Association (Aug. 10, 2004).
86 15 U.S.C. 78c(f). 89 Letter of New York State Bar Association (Aug. 105 Letter of Pink Sheets LLC (Sept. 27, 2004).
87 15 U.S.C. 80a–2(c). 9, 2004). 106 17 CFR 240.0–10(a).

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46088 Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations

Regulatory Flexibility Act, an Alternative 2, the amendments are written representation referred to in
investment company is a small entity if concise and clarify the Rule 16b–3 and paragraph (b)(1) of this section:
it, together with other investment Rule 16b–7 exemptive conditions and * * * * *
companies, has net assets of $50 million amend the Item 405 reporting (2) For each such person, set forth the
or less as of the end of its most recent requirement for all entities, including number of late reports, the number of
fiscal year. As of December 2004, we small entities. Regarding Alternative 3, transactions that were not reported on a
estimate that there were 28 registered we believe that design rather than timely basis, and any known failure to
closed-end investment companies, and performance standards are appropriate file a required Form. A known failure to
68 business development companies because use of performance standards file would include, but not be limited
that are small entities. The Item 405 for small entities would not be to, a failure to file a Form 3, which is
amendments apply to all of these small consistent with the statutory purpose of required of all reporting persons, and a
entities. Section 16. Finally, an exemption for failure to file a Form 5 in the absence
small entities is not appropriate because of the written representation referred to
E. Reporting, Recordkeeping and Other these amendments are designed to
Compliance Requirements in paragraph (b)(1) of this section,
harmonize the application of the unless the registrant otherwise knows
The amendments to Item 405 may exemptive rules. that no Form 5 is required.
impose additional disclosure
IX. Statutory Basis * * * * *
requirements to the extent that issuers (b) With respect to the disclosure
may be required to disclose additional The amendments contained in this
required by paragraph (a) of this section,
untimely Section 16 filings by their release are adopted under the authority
if the registrant:
insiders. However, we assume that this set forth in Section 19(a) of the
(1) Receives a written representation
burden is very small, if it exists at all, Securities Act, Sections 3(a)(11),
from the reporting person that no Form
because the changes effected by the 3(a)(12), 3(b), 10(a), 12(h), 13, 14, 16,
5 is required; and
Sarbanes-Oxley Act likely made the 23(a) and 36 of the Exchange Act, (2) Maintains the representation for
presumption irrelevant. No other new Sections 17 and 20 of the Public Utility two years, making a copy available to
reporting, recordkeeping or compliance Holding Company Act of 1935, Sections the Commission or its staff upon
requirements are imposed. Other than 30 and 38 of the Investment Company request, the registrant need not identify
the potential additional Item 405 Act of 1940, and Section 3(a) of the such reporting person pursuant to
disclosure, the primary impact of these Sarbanes-Oxley Act of 2002. paragraph (a) of this section as having
amendments relates to clarifying the Text of Rule Amendments failed to file a Form 5 with respect to
exemptive scope of Rules 16b–3 and that fiscal year.
16b–7, which should not have any new List of Subjects in 17 CFR Parts 228,
impact. 229 and 240 PART 229—STANDARD
F. Overlapping or Conflicting Federal Reporting and recordkeeping INSTRUCTIONS FOR FILING FORMS
Rules requirements, Securities. UNDER SECURITIES ACT OF 1933,
■ For the reasons set forth above, we
SECURITIES EXCHANGE ACT OF 1934
We do not believe that any current AND ENERGY POLICY AND
Federal rules duplicate, overlap or amend title 17, chapter II of the Code of
Federal Regulations as follows. CONSERVATION ACT OF 1975—
conflict with the amendments. REGULATION S–K
G. Significant Alternatives PART 228—INTEGRATED
DISCLOSURE SYSTEM FOR SMALL ■ 3. The authority citation for part 229
The Regulatory Flexibility Act directs continues to read, in part, as follows:
us to consider significant alternatives BUSINESS ISSUERS
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
that would accomplish the stated ■ 1. The authority citation for part 228 77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
objectives, while minimizing any continues to read, in part, as follows: 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
significant adverse impact on small Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
businesses. We considered the following 77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 78o, 78u–5, 78w, 78ll, 78mm, 79e, 79j, 79n,
types of alternatives: 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 79t, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30,
1. The establishment of different 77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll, 80a–31(c), 80a–37, 80a–38(a), 80a–39, 80b–
compliance or reporting requirements or 78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b– 11, and 7201 et seq.; and 18 U.S.C. 1350,
timetables that take into account the 11, and 7201 et seq.; and 18 U.S.C. 1350. unless otherwise noted.
resources available to small entities; * * * * * * * * * *
2. The clarification, consolidation or ■ 2. Amend § 228.405 by revising the ■ 4. Amend § 229.405 by revising the
simplification of compliance and introductory text to paragraph (a), introductory text to paragraph (a),
reporting requirements under the rule paragraph (a)(2) and paragraph (b) to paragraph (a)(2) and paragraph (b) to
for such small entities; read as follows: read as follows:
3. The use of performance rather than
design standards; and § 228.405 (Item 405) Compliance with § 229.405 (Item 405) Compliance with
4. An exemption from coverage of the section 16(a) of the Exchange Act. section 16(a) of the Exchange Act.
rule, or any part thereof, for small * * * * * * * * * *
entities. (a) Based solely upon a review of (a) Based solely upon a review of
Regarding Alternative 1, we believe Forms 3 and 4 (17 CFR 249.103 and Forms 3 and 4 (17 CFR 249.103 and
that differing compliance or reporting 249.104) and amendments thereto 249.104) and amendments thereto
requirements for small entities would be furnished to the registrant under 17 CFR furnished to the registrant under 17 CFR
inconsistent with Section 16, the 240.16a–3(e) during its most recent 240.16a–3(e) during its most recent
Commission’s intent when it adopted fiscal year and Forms 5 and fiscal year and Forms 5 and
these rules, and the Commission’s amendments thereto (17 CFR 249.105) amendments thereto (17 CFR 249.105)
purpose of making the application of furnished to the registrant with respect furnished to the registrant with respect
these rules more uniform. Regarding to its most recent fiscal year, and any to its most recent fiscal year, and any

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Federal Register / Vol. 70, No. 152 / Tuesday, August 9, 2005 / Rules and Regulations 46089

written representation referred to in purpose, shall be exempt, provided that specified in this section and is not
paragraph (b)(1) of this section. the terms of such disposition are conditioned on the transaction
* * * * * approved in advance in the manner satisfying any other conditions.
(2) For each such person, set forth the prescribed by either paragraph (d)(1) or (d) Notwithstanding the foregoing, if a
number of late reports, the number of paragraph (d)(2) of this section. person subject to section 16 of the Act
transactions that were not reported on a * * * * * makes any non-exempt purchase of a
timely basis, and any known failure to ■ 7. Section 240.16b–7 is revised to read security in any company involved in the
file a required Form. A known failure to as follows: merger, reclassification or consolidation
file would include, but not be limited and any non-exempt sale of a security
to, a failure to file a Form 3, which is § 240.16b–7 Mergers, reclassifications, in any company involved in the merger,
required of all reporting persons, and a and consolidations. reclassification or consolidation within
failure to file a Form 5 in the absence (a) The following transactions shall be any period of less than six months
of the written representation referred to exempt from the provisions of section during which the merger,
in paragraph (b)(1) of this section, 16(b) of the Act: reclassification or consolidation took
unless the registrant otherwise knows (1) The acquisition of a security of a place, the exemption provided by this
that no Form 5 is required. company, pursuant to a merger, section shall be unavailable to the
reclassification or consolidation, in extent of such purchase and sale.
* * * * *
exchange for a security of a company
(b) With respect to the disclosure Dated: August 3, 2005.
that before the merger, reclassification
required by paragraph (a) of this section, By the Commission.
or consolidation, owned 85 percent or
if the registrant: Jill M. Peterson,
(1) Receives a written representation more of either:
(i) The equity securities of all other Assistant Secretary.
from the reporting person that no Form
companies involved in the merger, [FR Doc. 05–15682 Filed 8–8–05; 8:45 am]
5 is required; and
(2) Maintains the representation for reclassification or consolidation, or in BILLING CODE 8010–01–P

two years, making a copy available to the case of a consolidation, the resulting
the Commission or its staff upon company; or
(ii) The combined assets of all the SECURITIES AND EXCHANGE
request, the registrant need not identify
companies involved in the merger, COMMISSION
such reporting person pursuant to
reclassification or consolidation,
paragraph (a) of this section as having 17 CFR Part 240
computed according to their book
failed to file a Form 5 with respect to
values before the merger,
that fiscal year. [Release No. 34–51983A; File No. S7–02–
reclassification or consolidation as 04]
PART 240—GENERAL RULES AND determined by reference to their most
REGULATIONS, SECURITIES recent available financial statements for RIN 3235–AI02
EXCHANGE ACT OF 1934 a 12 month period before the merger,
reclassification or consolidation, or such Amendments to the Penny Stock Rules
■ 5. The authority citation for part 240 shorter time as the company has been in AGENCY: Securities and Exchange
continues to read, in part, as follows: existence. Commission.
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, (2) The disposition of a security,
ACTION: Final rule; corrections.
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, pursuant to a merger, reclassification or
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, consolidation, of a company that before SUMMARY: In Release No. 34–51983, the
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, the merger, reclassification or Securities and Exchange Commission
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q, consolidation, owned 85 percent or issued amendments concerning the
79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, more of either:
80b–4, 80b–11, and 7201 et seq.; and 18
‘‘penny stock rules’’ under the
(i) The equity securities of all other Securities Exchange Act of 1934, which
U.S.C. 1350, unless otherwise noted. companies involved in the merger, appeared in the Federal Register of July
* * * * * reclassification or consolidation or, in 13, 2005 (70 FR 40614). In Release No.
■ 6. Amend § 240.16b–3 by revising the the case of a consolidation, the resulting 34–51808, the Commission issued
introductory text of paragraph (d) and company; or Regulation NMS, which appeared in the
paragraph (e) to read as follows: (ii) The combined assets of all the Federal Register of June 29, 2005 (70 FR
companies undergoing merger, 37496), and which, among other things,
§ 240.16b–3 Transactions between an reclassification or consolidation,
issuer and its officers or directors. made technical amendments to the
computed according to their book definition of penny stock. Since the
* * * * * values before the merger,
(d) Acquisitions from the issuer. Any effective date of Regulation NMS
reclassification or consolidation as predates that of the amendments to the
transaction, other than a Discretionary determined by reference to their most
Transaction, involving an acquisition penny stock rules, the Commission is
recent available financial statements for making technical corrections to the
from the issuer (including without a 12 month period before the merger,
limitation a grant or award), whether or amendments to the penny stock rules to
reclassification or consolidation. conform to the changes made in
not intended for a compensatory or (b) A merger within the meaning of
other particular purpose, shall be connection with Regulation NMS.
this section shall include the sale or
exempt if: purchase of substantially all the assets DATES: Effective September 12, 2005.
* * * * * of one company by another in exchange FOR FURTHER INFORMATION CONTACT:
(e) Dispositions to the issuer. Any for equity securities which are then Catherine McGuire, Chief Counsel,
transaction, other than a Discretionary distributed to the security holders of the Paula R. Jenson, Deputy Chief Counsel,
Transaction, involving the disposition company that sold its assets. Brian A. Bussey, Assistant Chief
to the issuer of issuer equity securities, (c) The exemption provided by this Counsel, or Norman M. Reed, Special
whether or not intended for a section applies to any securities Counsel, at 202/551–5550, Office of
compensatory or other particular transaction that satisfies the conditions Chief Counsel, Division of Market

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