SEC Rule 16 b-3(a) and conditions in 16 b-3(d) and SEC staff explanations

Section 16(b) of the Securities Exchange Act of 1934 has as its purpose the "preventing the unfair use of information which may have been obtained by officers or directors by his relationship to the issuer".

Section 16 (b) allows the SEC to create exemptions for transactions that are not "comprehended within the purpose of section 16 (b)".

The SEC does not enforce section 16 (b) but allows the Company to enforce section 16 (b) or an owner of equity securities of the company to enforce it. Presently the SEC does not assist the enforcement but will assist the executives and the companies to avoid the enforcement.

And there are law firms who wish to help their clients to unfairly use information that "May have been obtained by officers or directors by their relationship to the issuer" especially with regards to equity compensation and with Mergers and Acquisitions.

These attorneys try to get the SEC staff to make interpretations of section 16 (b) and earlier created Rules, which effectively cancel Section 16 (b) and the SEC Rules.

Below are some examples of the attorneys interpreting SEC Rule 16 b-3 (a) and conditions (d).

But first some SEC rules themselves are below:

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

(a)General. A transaction between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer that involves issuer equity securities shall be exempt from section 16(b) of the Act if the transaction satisfies the applicable conditions set forth in this section.

(d) Acquisitions from the issuer. Any transaction, other than a Discretionary Transaction, involving an acquisition from the issuer (including without limitation a grant or award), whether or not intended for a compensatory or other particular purpose, shall be exempt if:

(1) The transaction is approved by the board of directors of the issuer, or a committee of the board of directors that is composed solely of two or more Non-Employee Directors;

(2) The transaction is approved or ratified, in compliance with section 14 of the Act, by either: the affirmative votes of the holders of a majority of the securities of the issuer present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the issuer is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote; provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or

(3) The issuer equity securities so acquired are held by the officer or director for a period of six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security.

End of   240.16 b-3-------------------------

SEC Rule 16 b-3(a) says that for a transaction to be exempt, there must be a transaction between the Officer or Director and the issuer in a transaction that involves issuer equity securities and it must satisfy the "conditions set forth in this section".

So just setting forth the conditions will not achieve an exemption. There must also satisfy the requirements of 16 b-3(a)

For example if a officer of ABC owns 100,000 shares of ABC and wishes to sell them to a subsidiary of the issuer ABC, which is approved by a Committee of the Board, that transaction is not exempt from 16 (b) since the transaction was not between the Officer or Director and the issuer.

Conditions in 16 b-3(d) is interpreted by some attorneys that  compliance with SEC Rule 16 -b(3)(a) is not necessary if compliance with a condition in 16 b-3(d) are satisfied.

Also some claim that if a transaction complies with SEC staff interpretation, it is not necessary to comply with SEC Rules.

Here is another example:

Assume that officer "X" of corporation "ABC"receives some Restricted Stock with one year vesting. One year passes and he sells the shares received from the issuer "ABC" to another officer "Y", of "ABC" which is approved by the board of "ABC". Is the purchase by officer "Y"exempt from 16 (b).

My view is that the purchase transaction is not exempt from section 16 (b) since it is not a transaction the between the officer "Y" and the issuer "ABC" as is required in SEC Rule 16 b-3(a), although the shares came originally from the issuer but the issuer was not in the transaction with the person buying the shares.

So "from the issuer" does not mean "a transaction between the issuer and an insider".


 Attached below is from an SEC No-Action letter of January 12, 1999 to Shadden Arps

2. Acquisitions from the Acquiror Issuer: Availability of Rule 16b-3(d).

The acquisition of acquiror equity securities (including acquiror derivative securities) by officers and directors of the acquiror through the conversion of target equity securities in connection with a merger constitutes an acquisition from the acquiror issuer eligible for exemption under Rule 16b-3(d).

This position applies equally to employees and directors of the target who become officers and/or directors of the acquiror before, or at the time of, the merger ("New Acquiror Insiders").


"Eligible for exemption" does not mean the transaction is exempt.

Did the No Action letter state that transactions in connection with a merger are exempt? The answer is no.  

The No Action letter is an SEC staff response to a request from Skadden Arps to expand the exemptions from section 16(b). But the SEC will not even answer questions regarding SEC Rule 16 b-3 if I wrote a similar type question.

The two paragraphs from the SEC above are hard to understand.

The question from Skadden Arps essentially is an attempt to make all transactions in mergers exempt from section 16(b). The Question and Answer by the SEC staff refers to just Rule 16 b-3(d) and not to SEC Rule 16 b-3(a).

16 b-3(d) is merely just a set of conditions that SEC Rule 16 b-3(a) requires for an exemption from 16(b).

Below is a Quote from the SEC Release of August 9, 2005:

SEC [RELEASE NOS. 33-8600; 34-52202; 35-28013; IC-27025; File No. S7-27-04]

"Rule 16b-3(a) provides that ""A transaction between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer that involves issuer equity securities shall be exempt from section 16(b) of the Act if the transaction satisfies the applicable conditions set forth in this section. As this makes clear, the only limitations on the exemption for transactions between the issuer and its officer or director are the objective conditions set forth in later subsections of the rule, each of which applies to a different category of transactions."""

This statement above copied from the SEC Release clearly states that to achieve an exemption from section 16 (b), the transaction must be between the insider and the issuer as stated in 16 b-3 (a) and the conditions in 16 b-3(d) must be satisfied if there is a acquisition of shares from the issuer.

Edited Sun, Apr 14, 2019 4:35 AM

Post Reply

You must be logged in and a member of this Groupsite in order to post a reply to this topic.
To post a reply, contact your group manager(s) Join this Groupsite


ECE - Equity Compensation Experts
Powered by

Visibility Public Membership By Invitation or Approved Request Default Profile Professional

Your Status Not Logged-In