Analysis of SEC Rule 16 b-3(a) and conditions in paragraph (d)

On August 5, 2005, the SEC issued Release Nos. 33-8600 and 34-52202 whereby they clarify regulatory conditions relating to SEC Rule 16 b-3.

Below is a copy of the current SEC Rule 16 b-3(a), which remained the same as prior.

§ 240.16b-3 Transactions between an issuer and its officers or directors.

(a) General. 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.

Below is the section (d) which was changed on August 5, 2005, which set out one of the conditions referred to in (a):

(d) Acquisitions from the issuer. Any transaction, other than a Discretionary Transaction, involving an acquisition from the issuer (including without limitation a grant or award), whether or not intended for a compensatory or other particular purpose, shall be exempt if:

(1) The transaction is approved by the board of directors of the issuer, or a committee of the board of directors that is composed solely of two or more Non-Employee Directors;

(2) The transaction is approved or ratified, in compliance with section 14 of the Act, by either: the affirmative votes of the holders of a majority of the securities of the issuer present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the issuer is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote; provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or

(3) The issuer equity securities so acquired are held by the officer or director for a period of six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security.

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The result of the clarification is that the SEC Rule 16 b-3 requires for an exemption of a transaction from Section 16 (b):

(a) that the transaction be between the issuer and the officer or director of the issuer that involves issuer equity securities.

and 

(d) if the transaction is an acquisition from the issuer, it must meet at least one of the 3 conditions in (d).

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If either (a) or (d) are not satisfied, then there is no exemption from section 16 (b) for the transaction.

For example:

If an officer of Trumpti Dumpti Corp (TDC) (a company trading on the NYSE) purchases 1,000,000 shares of Trumpti Dumpti Corp for $10.00 per share from his attorney Mr. Rudi Kamala, who received the shares the same day in a transaction that meets all three of the  conditions of (d), the transaction from Rudi to Trumpti is not exempt.

The reason that the transaction is not exempt  from Section 16 (b) is that the transaction is not between an officer or director and the issuer as required by SEC Rule 16 b-3(a) for an exemption from 16 (b). 

If the officer of TDC then sells the 1,000,000 shares to a Russian investor by the name of Carr Icant for $20.00 after 30 days of holding the shares, the profit of $10,000,000 is recoverable by TDC pursuant to 16 (b).

However, attorneys who claim to be experts, and write 16 (b) Treatises would claim that the purchase at $10.00 in a transaction between the officer of TDC and attorney Rudi Kamala the same day would be exempt from 16(b), claiming that although the purchase transaction was not between the issuer and the officer, it is still exempt from      16 (b) claiming the section (d) is a stand alone Rule that exempts transactions from Section 16 (b) that are not between the issuer and the officer or director. These attorneys claim that (d) of SEC Rule 16 b-3 cancels SEC Rule 16 b-3(a).

John Olagues