SEC Q and A on issuer discretion and Rule 16 b-3(e) exemptions

Q and A to and from Staff of the SEC and analysis by Romeo and Dye

Question: Would approval of a grant that by its terms provides for automatic reloads satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants?

Answer: Yes. Approval of a grant that by its terms provides for automatic reloads would satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants, unless the automatic reload feature permitted the reload grants to be withheld by the issuer on a discretionary basis.

The same result applies under Rule 16b-3(e) where the automatic feature is a tax- or exercise-withholding right. [May 23, 2007]
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Romeo and Dye expressing their views on their website about the above Q and A is below:

(6) Issuer Discretion To Disallow Stock Withholding, Surrender, Or Delivery May Call Into Question Availability Of Rule 16b-3(e).

The staff (of the SEC) has taken the position that a net exercise or tax withholding transaction that is subject to issuer discretion would require specific approval of individual transaction in order for the Rule 16b-3(e) exemption to be available.

See Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, Q. 123.16 (May 23, 2007).

Apparently the staff is concerned that the issuer's discretion means the board or committee delegated to management the decision whether to approve withholding, rather than making the decision itself.

Issuers might consider assuring the availability of the exemption by
(i) eliminating the discretionary feature and making the right entirely elective on the part of the insider,
(ii) having the administering committee adopt a resolution providing that withholding is permissible unless the committee (not management) concludes that it should not be permitted in a particular case, or
(iii) having the committee establish clear guidelines for management's disallowance of withholding, so that the decision by management is ministerial rather than discretionary.
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So Romeo and Dye are recommending one way to eliminate the absence of approval and the absence of an exemption under Rule 16 b-3(e), when the issuer has discretion.

That way is to design the plan or grant agreement so that the officer or director can dispose shares to the issuer when they have inside information and the issuer has no discretion to not accept the disposition.

Of course the recommended design by Romeo and Dye will not get an exemption from 16 (b) since the purpose of 16 (b) is to prohibit trading unfairly on inside information and the statute allows the SEC to give exemptions for transactions only "not comprehended within the purpose of section 16 (b)."

In addition the strategy recommended by Romeo and Dye also would not satisfy the specific approvals required to receive a Rule 16 b-3(e) exemption.

John Olagues

Edited Fri, Jun 2, 2017 11:03 AM

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