Attorneys try to expand the section 16 (b) exemptions to help executives extract additional wealth from shareholders

This article addresses the requirements for an exemption from Section 16 b) of the 1934 Securities Act. The transaction must be between an officer or director and the issuer. This article is about what the SEC stated in their Amicus Curiae Briefs in 16 b cases and in the SEC Release of August 3, 2005 .

Amicus Curiae Brief in Dreiling v. American Express Travel in the Ninth Circuit No 04 35715

Exact words on page 11 are below:

"Indeed, Dreiling does not dispute the common-sense proposition that, in general, an issuer knows any inside information that its officers or directors know, so that an issuer is typically not at an informational disadvantage in dealing with its insiders. Instead, he misstates the rule, contending that the rule allows a corporate board of directors to give its blessing to any transaction that would otherwise be subject to suit under Section 16(b) (Brief of the Plaintiff-Appellant, p. 9). But that simply is not the case. Rule 16b-3(d) is available ONLY to exempt transactions between an officer or director and the issuer. It only applies in a limited type of transaction in which the risk of abuse is inherently limited."

In the same Amicus Brief in the Dreiling case on page 15 , we find the following:

"The Commission, however, was not talking about the application of state fiduciary law to transactions between insiders and shareholders. It was talking about dealings between insiders and issuers, since that is all Rule 16b-3 exempts. "

In the Amicus Curiae Brief in Levy v. Sterling No. 02-1698 3rd Circuit
in the Discussion Paragraph

"Rule 16b-3 exempts from Section 16(b) certain transactions between issuers of securities and their officers and directors. Rule 16b-3(a) provides that any "transaction between the issuer * * * and an officer or director of the issuer that involves 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 those objective conditions set forth in the later subsections of the rule, each of which applies to different categories of transactions."


On pages 7 and 8 of the SEC August 3, 2005 Release, we see the paragraph below:

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.''

Also the SEC in its August 3, 2005 Ownership Reports effective August 9, 2005 on page 8 stated

"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 subsection of the rule, each of which applies to a different category of transactions."

Also See. A quote from the SEC Release of August 3, 2005 . The SEC confirmed the SEC Amicus Curiae Brief in Dreiling v. American Express decision when it stated on page 12:

"As we explained in 1996, "[transactions between an issuer and its officers or directors] do not appear to present the same opportunities for insider profit on the basis of non public information as do market transactions by officers or directors".

Also See Page 6 of the SEC August 3, 2005 release, on which we find the statement:

"RULE 16b-3 exempts from Section 16(b) certain transactions between issuers of securities and their officers and directors."

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Surely the SEC in its Amicus Curiae Briefs and the Release of August 3, 2005, confirms that an exemption from Section 16 (b) via SEC Rule 16 b-3, requires a transaction between the issuer and the officer or director.

But attorneys who write and sell Treatises which attempt to expand the exemptions from section 16 (b) for officers and directors ignore the requirements in the SEC Amicus Briefs and the SEC Release of August 3, 2005 shown above.

And apparently attorneys for officers and directors promote their expansion of the scope of the exemptions to allow these insiders to avoid section 16 (b). These attorneys get paid to allow the extraction of wealth from the shareholders.


John Olagues

 

Edited Tue, Nov 5, 2019 10:39 AM

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