Questions on Exemptions from Section 16 (b).

Section 16 b of the 1934 Act has as its 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".

Section 16 (b) allows the SEC to exempt transactions not comprehended within the purpose above :

If the transaction is:

1) not comprehended within the purpose of section 16 (b) and

2) has been prior approved by the Board of Directors or the Compensation Committee with the specificity required to satisfy the approval conditions of SEC Rule 16 b-3(e),

the transaction will be exempt from section 16 (b).

So specific approval of a transaction by the Board or Committee will not get an exemption without the transaction being "not comprehended within the purpose of 16 b).".

And when the transaction  is "not comprehended within the purpose of 16 b), the transaction is not exempt unless it was specifically approved.

---------------------------------------------

So how does one determine whether the transaction is comprehended within the statute? One can refer to the American Bar Association and the New York Bar Association in letters to the SEC:

ABA paragraphs below were adopted by the SEC in the SEC Release August 3, 2005:

"We agree that transactions between the issuer and its officers and directors present little opportunity for the abuses to which Section 16(b) is directed when those transactions are subject to the "gate keeping conditions" set forth in the rule ..................because 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."

The NYSBA paragraphs say on August 9, 2004:


"Rule 16b-3 is entirely consistent with the intent of Congress in enacting Section 16(b), since it exempts only transactions involving parties on an equal footing from the standpoint of knowledge of inside information. Market transactions are not exempted by the Rule, and gate-keeping conditions exist to prevent overreaching. Given these circumstances, it is irrelevant to the purposes of Section 16(b) whether the transactions covered by the Rule are compensation-related or not. What is critical is that the Rule does not present the opportunities for the misuse of inside information, which the statute is intended to prevent".

 

Then we have the SEC answering a question about discretionary transactions as below:

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]

-----------------End of the Q and A.

So does Board permitting discretionary dispositions of stock to the issuer for tax withholding satisfy the requirements of the transaction being "not comprehended within the purpose of Section 16 (b)"?

And does the approval "satisfy the specificity of approval requirements under Rule 16b-3(d) for the reload grants"?

I believe the answer is no to either question.

Any comments are welome.

John Olagues

Edited Thu, Sep 14, 2017 5:40 AM

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