Requirements for an Exemption from Section 16 (b) of the Securities Act of 1934

 

To determine what is necessary for a transaction by the officers or directors to be exempt from Section 16 (b), we first have to review Section 16 (b) which is below:

"(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security or security-based swap agreement purchased or of not repurchasing the security or security-based swap agreement sold for a period exceeding six months.

Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized.

This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security or security-based swap agreement or a security-based swap involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection."
---------------------------------------------- End of section 16 (b)

The underlined sentence above makes clear that "this subsection shall not be construed to cover any transaction which the Commission (i.e. the SEC) by rules and regulations may exempt as not comprehended within the purpose of this subsection."


The main rule that supplies the exemptions for purchases and sales occurring within less than 6 months by an officer or director is
SEC Rule 16 b-(3) which has paragraphs (a),(d),(e).

On page 11 of the SEC Amicus Curiae Brief in the 16 (b) suit Dreiling v. American Express case in the Ninth Circuit No. 35715. April 5, 2005, signed by the SEC General Counsel, the Solicitor, the Deputy Solicitor and Special Counsel to the Solicitor we find the quote below:

"Rule 16 b-3(d) is available only to exempt transactions between an officer or director and the issuer. It applies in a limited type of transaction in which the risk of abuse is inherently limited."


 
and


 
On page 15 of the Dreiling Amicus Curiae Brief, we also find the paragraph below:
"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 16 b-3 exempts".

So both Rule 16 b-3 and 16 b-3(d) only exempt transactions between the officer or director and the issuer.

It can not be any clearer that there is no exemption unless the transaction is between insiders and the issuers.

The SEC in the 16 (b) suit, Levy v. Sterling No. 02-1698 3rd Circuit, stated the same as in its Amicus Curiae Brief in Dreiling v. American Express.

For example, the 2 quotes below are in the SEC Amicus Curiae Brief from Levy v. Sterling No. 02-1698 3rd Circuit where the SEC refers to transactions between the issuer and its officers and directors:               
"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."


Another quote from the Amicus Curiae brief in Levy v. Sterling is below:
"Based on its experience with the Section 16 rules," the Commission continued," transactions between the issuer and its officers and directors that are pursuant to plans meeting the administrative requirements, * * * or that satisfy other objective gate-keeping conditions, are not vehicles for the speculative abuse that Section 16(b) was designed to prevent." Id. The Commission viewed Section 16(b) liability as unnecessary in these transactions because they involve transactions with the issuer and because they are subject to "objective gate-keeping" conditions. Among those gate-keeping conditions were approval by the issuer's board or shareholders."---------

Also See Page 6 of the SEC August 3, 2005 Ownership Reports 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."

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."

The SEC made other similar statements in the August 3, 2005 Release.

So in summary, to receive an exemption for a purchase or sale of issuer equity securities by an officer or director within less than 6 months, there must be a SEC Rule which exempts the transaction. The only SEC Rule that applies for an exemption is Rule 16 (b)(3) whether the transaction is a purchase or a sale. For any exemption from Section 16 (b) pursuant to SEC Rule 16 (b)(3), it is required that the transaction is between the issuer and the officer or director and involves issuer equity securities.

But there is a small group of 2 attorneys, who wrote a Treatise on Section 16 (b), the purpose of which is to create interpretations which minimize the enforcement of Section 16 (b). The treatise has its first paragraph below:

[1] Transactions Covered

[a] [Broad Range]                                                                             
"Rule 16b-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 outlined in the rule. The purpose of a transaction is irrelevant to the availability of the Rule 16b-3(d), so the transaction need not be intended to provide compensation or serve some other particular purpose. Similarly, the fact that a transaction may involve illegitimate questionable activity, as in the case of backdated stock options. or spring loaded options, does not affect the availability of the exemption. 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."
---------------------
This 2 man group wants to expand the exemptions from Section 16 b by making incorrect statements alleging that any transaction by an officer or director is exempt even if the transaction is not between the officer or director and the issuer.                                                        
They want to forget SEC Rule 16 b(3) paragraph (a) and what the SEC counsel stated in several Amicus Curiae Briefs and the SEC Release of August 9, 2005.                                                                                
The 2 attorneys refer to letters that were sent to the American Bar Association and to the Skadden Arps law firm in January and February of 1999, which they allege are No Action letters. The 2 claim the alleged No Action letters, which do not meet the SEC definition of a No Action letter, as authority.                                                                  
The SEC Counsel and other SEC attorneys stated in the SEC Amicus Curiae Brief in the Gryl v. Shire Pharma case in the Second Circuit that the SEC does not issue No Action letters in Section 16 (b) enforcement since the SEC does not enforce Section 16 (b). Below is a footnote from the SEC Amicus Curiae Brief.                                                      
7 The Commission does not have the authority to enforce Section 16(b), which is enforced solely through private actions. Thus, its staff does not issue no-action letters in connection with that provision.                                                                        
However, the 2 man Group in the Treatise ignore the SEC and the Second Circuit and the Ninth Circuit.                                                   
And there are other attorneys who want to expand the range of exemptions from section 16 (b) for their clients. So they adopt the Treatise and assert its view in suits by shareholder plaintiffs who try to enforce Section 16 (b).                                                                      
These attorneys make statements that the 2 man group are experts, when the truth is that they have no experience in trading equity securities and do not understand the complicated rules. But the 2 man group are able to sell the Treatise as some kind of authority, when they are incompetent but are very good at deception.

John Olagues  





 

Edited Mon, Nov 25, 2019 8:31 AM

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