February 22, 1991
TO: SEC RULES MEMBERS NO. 12-91
UNIT INVESTMENT TRUST MEMBERS NO. 8-91
INVESTMENT ADVISER MEMBERS NO. 7-91
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 7-91
RE: SEC ADOPTS AMENDMENTS TO RULES UNDER SECTION 16
__________________________________________________________
The SEC has adopted amendments to the rules under Section
16 of the Securities Exchange Act of 1934, governing reporting
and short-swing profit recovery with respect to certain insider
transactions. The amendments, which become effective on May 1,
1991, were proposed originally in December 1988 and were
reproposed in August 1989. The Institute submitted comment
letters in response to both proposals, and the final amendments
incorporate most of the Institute’s suggestions.
A summary of the amended rules pertaining to beneficial
ownership status and special rules for trusts and trustees is set
forth below. Related excerpts from the adopting release are
attached.
Determination of Insider Status
Under the amended rules, ten percent holders under Section
16 are those persons deemed ten percent holders under Section
13(d) of the 1934 Act and related rules. However, the reporting
and short-swing profit provisions of Section 16 apply only to
those securities in which a ten percent holder has a "pecuniary
interest".
In determining ten percent holder status, institutions that
are eligible to file ownership reports on Schedule 13G ( e.g., a
registered investment company or a registered investment adviser)
are not deemed beneficial owners of securities held for the
benefit of third parties or in customer or fiduciary accounts in
the ordinary course of business, and without the purpose or
effect of changing or influencing control of the issuer. Thus,
an investment adviser generally would not have to aggregate
shares held by investment companies and private accounts managed
by the adviser and count those shares towards ten percent holder
status.
Pecuniary Interest Test
As noted above, the amended rules provide that the Section
16 reporting and short-swing profit recovery obligations apply
only with respect to securities in which an insider has a direct
or indirect pecuniary interest. As was proposed, the pecuniary
interest test includes a safe harbor with respect to certain
performance-related management fees. Specifically, no pecuniary
interest is created by a performance-related fee where the fee is
based on performance over a period of a year or more (regardless
of when it is payable), and no more than ten percent of the
portfolio’s market value is attributable to the issuer’s equity
securities. In addition, as suggested by the Institute, the
final rules make it clear that asset-based management fees do not
create a pecuniary interest on the part of an investment adviser
or trustee in the securities managed.
Attribution of Insider Status to Trusts
Under the original proposal, a trust would have become
subject to Section 16 if a trustee was an insider. However, the
rules as adopted attribute insider status to the trust only if an
insider trustee has or shares investment control over the trust’s
portfolio securities and the trustee, or a member of the
trustee’s immediate family, has a pecuniary interest in the
issuer’s securities held by the trust. As a result, as requested
by the Institute, an investment company organized as a trust
generally would not be subjected to Section 16 merely because a
member of the board of trustees was an insider. In addition, the
final rules provide that a trustee’s insider status does not
subject the trust to Section 16 if the trustee is an institution
eligible to file reports on Schedule 13G (e.g., a registered
investment adviser).
Frances M. Stadler
Assistant General Counsel
Attachment