Precise analysis of SEC Rule 240.16 b-3 --Transactions between an issuer and its officers or directors.

Below is the Title of SEC Rule 240. 16 b-3 followed by paragraph 16 b-3(a):


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.

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Lets analyze exactly what the above says:

The title refers to transactions between an issuer and its officers and directors.

There are two types of transactions that are between an issuer and its officers or directors

i) The first type is a sale transaction where the officer or director sells directly to the issuer

ii) the second type is a purchase transaction where the officer or director buys directly from the issuer.

a) General says that both a sale or a purchase  that is between the officer or director and the issuer, which involve 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.

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With the above in mind, we turn to

(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:

 Certain approval conditions are satisfied.

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Analyzing (d) Acquisitions from the issuer: above, we find that  it says " Any transaction, involving an acquisition from the issue shall be exempt if it satisfies the approval conditions.

(d) Acquisitions from the issuer above seems that it may incorporate the requirement that the transaction be between the officer or director and the issuer and incorporate the requirement that the transaction involve issuer equity securities.

But apparently the alleged experts called Romeo and Dye seem to not incorporate the requirement that the transaction be between the officer or director and the issuer and to not incorporate the requirement that the transaction involve issuer equity securities.

On page 1399 of their Treatise on Rule 16 b-3

[1] Transactions Covered

    [a] Broad Range

We find the sentence below:

Rule 16 b-3(d) indicates that the rule is available to exempt any acquisition by an officer or director from the issuer, other than a Discretionary Transaction, that satisfies one of the alternative methods of exemption outline in the rule...... And it is not necessary for the transaction to be made directly by an officer or director with the issuer, because indirect transactions through another party are permissible.

Romeo and Dye refer to the American Bar Association SEC No Action letter of February 10, 1999, as authority notwithstanding the fact that the SEC Committee stated in an Amicus Curiae Brief in the Gryl v. Shire Pharma case, that the SEC can not create No Acton letter relating to Section 16 (b) enforcement. And the Court in Gryl v. Shire accepted the SEC opinion and ruled that No Action letters can not be created in Section 16 (b) enforcement actions.

So if someone believes that Romeo and Dye are accurate in their Broad Range of SEC Rule 16 b-3(d), then that person believes SEC Rule 16 b-3 never applies when any purchase transaction of issuer shares is made .  

Edited Wed, Sep 11, 2019 6:19 AM

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