[15593]
January 29, 2003
TO: PENSION MEMBERS No. 6-03
PENSION OPERATIONS ADVISORY COMMITTEE No. 6-03
SEC RULES MEMBERS No. 11-03
CLOSED-END INVESTMENT COMPANY MEMBERS No. 8-03
RE: SEC ADOPTS RULES REGARDING INSIDER TRADES DURING PENSION
BLACKOUT PERIODS
The Securities and Exchange Commission has adopted rules that implement Section
306(a) of the Sarbanes-Oxley Act of 2002 (the “Act”), which prohibit directors and officers of
issuers from trading equity securities of the issuer during pension blackout periods.1 Consistent
with proposed Regulation Blackout Trading Restriction (“Regulation BTR”), the final rule
applies to investment companies in certain instances.2 The elements of Regulation BTR that are
of most significance to investment companies are summarized below.
I. Blackout Period Definition
As in the proposal, Regulation BTR generally defines “blackout period” as any period of
more than three consecutive business days during which the ability to purchase, sell, or transfer
an interest in any equity security of an issuer held in an individual account plan is temporarily
suspended by such issuer or the fiduciary of the plan. The suspension must apply to at least
50% of the participants or beneficiaries under all individual account plans maintained by the
issuer that permit participants or beneficiaries located in any state to acquire or hold equity
securities of the issuer. Regulation BTR, as adopted, reflects a number of modifications to the
rules as proposed.3
1 SEC Release No. 34-47225, IC-25909 (January 22, 2003) (“Release”). A copy of the Release is available on the SEC’s
website at http://www.sec.gov/rules/final/34-47225.htm.
2 See Memorandum to Pension Members No. 54-02, SEC Rules Members No. 100-02, Closed-End Investment
Company Members No. 58-02, dated November 14, 2002.
3 While Regulation BTR retains the “more than three consecutive business days” language in the definition, the
Commission expressed concern that a sharp decline in securities could occur in a period of less than three days, and
that to the extent such a decline occurs during a temporary trading suspension, the issuer’s directors and executive
officers could trade the restricted securities, while rank-and-file employees would be unable to do so. The Release,
therefore, states that the Commission will continue to consider these issues to ascertain whether blackout periods of
three business days or less are of concern and discuss possible solutions with the Department of Labor.
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A. Definition of Individual Account Plan
Unlike the proposal, and consistent with the Institute’s comments, the final rules define
“individual account plan” to exclude pension plans, including deferred compensation plans, in
which participation is limited to directors of the issuer. The Release explains that in the case of
a temporary trading suspension in issuer equity securities in such a plan, the unfairness of
directors being able to trade their equity securities while an issuer’s employees are unable to do
so does not exist.
B. 50% Test
Regulation BTR provides several clarifications with regard to the 50% threshold
component of the blackout period definition. First, for purposes of identifying the relevant
individual account plans (to determine the relevant participant base), Regulation BTR excludes
individual account plans maintained outside of the United States primarily for the benefit of
nonresident aliens from the determination of whether a blackout period has occurred. Second,
for purposes of determining whether the trading restriction affects more than 50% of the
participants or beneficiaries under these plans, Regulation BTR permits greater flexibility by
allowing issuers to use plan census data as of any date within the 12-month period preceding
the commencement of the temporary trading suspension. However, where a significant change
in plan participation has occurred (e.g., because of a merger or divestiture), the most recent
practicable date reflecting the change must be used. Finally, Regulation BTR allows issuers to
aggregate participants or beneficiaries without regard to their participation in more than one
plan maintained by the issuer.
C. Exclusions from Blackout Period Definition
Regulation BTR reiterates and provides additional clarification on the two statutory
exclusions from the definition of “blackout period.” First, Regulation BTR provides that the
term “blackout period” does not include a regularly scheduled period in which participants and
beneficiaries may not purchase, sell or otherwise acquire or transfer an interest in any equity
security of an issuer, if a description of the period, including its frequency and duration and the
plan transactions to be suspended or otherwise affected, is (i) incorporated into the individual
account plan or included in documents or instruments under which the plan operates, and (ii)
disclosed (in any graphic form reasonably accessible to the employee) to an employee before he
or she formally enrolls (or within 30 days following formal enrollment) as a participant or, in
the case of a subsequent amendment to the plan, within 30 days after the adoption of a plan
amendment. The Release further provides that ERISA Section 404(c) notices or advance notices
included in either a plan’s summary plan description or any other official plan communication
qualify as “documents or instruments under which the plan operates.”
Second, Regulation BTR excludes from the blackout period definition any trading
suspension that is imposed in connection with a corporate merger, acquisition, divestiture or
similar transaction involving the plan or plan sponsor, the principal purpose of which is to
permit persons affiliated with the acquired or divested entity to become participants or
beneficiaries in a plan — provided that the persons who become participants or beneficiaries in
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the plan are not able to participate in the same class of equity securities after the merger,
acquisition, divestiture or similar transaction as before the transaction.
II. Transactions Subject to Trading Prohibition
A. Service or Employment Presumption
Unlike the proposal, and consistent with the Institute’s comments, Regulation BTR, as
adopted, does not establish an irrebuttable presumption that any equity securities sold or
otherwise transferred during a blackout period were acquired in connection with service as a
director or executive officer — without regard to the actual source of the securities disposed —
to the extent that the director or executive officer holds such securities. Rather, new Rule 101(b)
of Regulation BTR provides that any equity securities sold or otherwise transferred during a
blackout period by a director or executive officer of an issuer will be considered to have been
“acquired in connection with service or employment as a director or executive officer” to the
extent that the director or executive officer owned such securities at the time of the transaction,
unless he or she establishes that the equity securities were not “acquired in connection with
service or employment as a director or executive officer.” To establish this defense, a director or
executive officer must specifically identify the origin of the equity securities in question and
demonstrate that this identification of the equity securities is consistent for all purposes related
to the transaction (e.g., tax reporting).
B. Exempted Transactions
In addition to the exempted transactions set forth in the release proposing Regulation
BTR,4 the final regulation exempts a number of other transactions because, in the Commission’s
view, they occur automatically, are made pursuant to an advance election or are otherwise
outside the control of the director or executive officer. These additional exempted transactions
are as follows: (1) acquisitions or dispositions of equity securities pursuant to a domestic
relations order; (2) sales or other dispositions of equity securities compelled by the laws or other
requirements of an applicable jurisdiction; (3) acquisitions or dispositions of equity securities in
connection with a merger, acquisition, divestiture or similar transaction occurring by operation
of law; (4) certain compensatory grants and awards of equity securities; and (5) certain
exercises, conversions or terminations of derivative securities.
III. Notice of Blackout Period to Directors, Officers and the SEC
The Act requires an issuer to provide timely notice to its directors, executive officers and
the Commission of the imposition of a blackout period that triggers the trading restriction.
Regulation BTR, as adopted, reflects several modifications to the rules as proposed.
A. Content of Notice
Regulation BTR tracks the notice content requirements of the rules as proposed — with
one exception. Consistent with the Institute’s comments and the Department of Labor’s final
4 See Memorandum to Pension Members No. 54-02, SEC Rules Members No. 100-02, Closed-End Investment
Company Members No. 58-02, dated November 14, 2002.
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rules on the Act’s blackout notice provision, Regulation BTR provides issuers with additional
flexibility in describing the length of a blackout period by allowing the use of either (i) the
actual or expected beginning date and ending date of the blackout period, or (ii) the calendar
week or weeks during which the blackout period is expected to begin and end. To the extent
that the latter approach is used, the issuer must make readily available during such period
information on whether the blackout period has begun or ended, without charge, to affected
directors and executive officers (such as by a toll-free telephone number or website). The notice
also must set forth this information.
B. Timing of Notice
Regulation BTR provides that an issuer must provide a blackout notice to directors and
executive officers no later than five business days after the issuer receives the notice from the
pension plan administrator required by the Department of Labor’s final rules. Consistent with
the proposal, if the issuer does not receive the notice from the plan administrator, the issuer
must provide its notice to directors and executive officers at least 15 calendar days before the
actual or expected beginning date of the blackout period. Notwithstanding this requirement,
however, Regulation BTR reiterates that advance notice is not required where an unforeseeable
event or circumstances beyond the issuer’s reasonable control prevent the issuer from
providing advance notice to its directors and executive officers.
C. Notice to the Commission on Form 8-K
Regulation BTR, as adopted, requires all issuers, including investment companies, to file
a notice with the Commission on Form 8-K, with the same content as the required notice to
directors and executive officers. This approach is consistent with proposed Regulation BTR.
The Release states that because the Commission’s believes that registered investment companies
should be subject to the same filing obligations as other issuers in the infrequent instances
where the Form 8-K filing requirement would be triggered, it is not appropriate to create a filing
requirement for investment companies that is different from that applicable to other issuers
under Regulation BTR.
Consistent with the Department of Labor’s blackout notice requirements (and unlike
proposed Regulation BTR), final Regulation BTR provides that the Form 8-K must be filed on
the same day that the notice is transmitted to directors and executive officers — instead of 2
business days after the earlier of the receipt of a blackout notice from the plan administrator or
the issuer’s actual knowledge of the blackout.
IV. Remedies
Regulation BTR provides additional guidance on the calculation of realized profits in
violation of the statutory trading restriction by providing a rule to measure the recoverable
profit based on a three-day average trading price of a security. Examples are also set forth in
the Release to illustrate the operation of the rule.
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V. Effective Date
Section 306(a) of the Act took effect on January 26, 2003. As a result, the notice
requirement of Section 306(a) of the Act applies to blackout periods commencing on or after
January 26, 2003. According to the Release, for blackout periods commencing between January
26, 2003 and February 25, 2003, issuers should furnish notice to directors and executive officers
as soon as reasonably possible. In the case of notice to the Commission, Regulation BTR is
effective 60 days after publication in the Federal Register. The delayed effective date is to allow
time for the addition of a new Item 11 to Form 8-K to the Electronic Data Gathering, Analysis
and Retrieval System. In the interim, an issuer may provide notice to the Commission by
disclosing the information described on Item 11 under Item 5 of Form 10-Q, “Other
Information,” in the first quarterly report filed by the issuer after commencement of the
blackout period. The Release also notes that notice is not required for a blackout period that
commenced before January 26, 2003 and remains in effect on that date.
Dorothy M. Donohue
Associate Counsel
Thomas T. Kim
Associate Counsel