Purpose of Section 16 (b) of the 1934 Securities Exchange Act

Below is verbatim from Section 16 (b):

"(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.......involving any such equity security within any period of less than six months, 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."

It can not be any clearer that the purpose of 16 (b) is to prevent insiders from trading on inside information, even when the opposite party is the issuer or a market trader.

However: Section 16 (b) allows the SEC to exempt transactions that are "not comprehended within the purpose of Section 16 (b)."

The New York State Bar Association in a August 9, 2004 letter to the SEC stated :

"Rule 16b-3 is entirely consistent with the intent of Congress in enacting Section16(b), since it exempts only transactions involving parties on an equal footing from the standpoint of knowledge of inside information."

and

the American Bar Association in a August 16, 2004 letter to the SEC stated

" the key consideration of the statute is the absence of the ability to take advantage of the other party on the basis of inside information".

So if the officer or director can use the inside information to take advantage of the other party, the transaction can not be exempted from 16 (b).

It is 100% clear that if an officer or director has the choice of delivering shares or cash to the issuer to pay a tax liability and the issuer is required to accept the shares, that officer or director can use inside information to take advantage of the issuer. And that transaction is "comprehended within the purpose of section 16 (b)." and can not be exempted, regardless of approvals by the Board or Compensation Committee.

The designers of Plans and the Grant Agreements, the attorneys who advise on the design of Plans and the Grant Agreements and the officers or directors who have such choices are aware of the fact that having such a choice makes the transaction "comprehended within the purpose of section 16 (b)" and not exempt from 16 (b).

Yet these Plan and Grant Agreement Designers, the attorneys, and the officers and directors try to twist the Section 16 (b) and SEC Rules to get the transactions based on inside information to be considered exempt from 16 (b).

They are also becoming aware that such plan designs and subsequent transactions are in violation of the Fiduciary Duties that such designers, attorneys, and the officers and directors have towards the shareholders.

Rather than admit the obvious, they deny the obvious. And high profile law firms write articles claiming that discretionary delivery of shares to the issuer, which the issuer must accept, is not trading on inside information that they received as a result of their being an officer or director.

Regards:


John Olagues

 

 

Edited Fri, Jun 30, 2017 4:44 AM

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