Romeo and Dye Treatise filled with Errors

The SEC stated in an Amicus Curiae brief in the Dreiling v. American Express case .

Amicus Curiae Brief in Dreiling v. American Express Travel in the Ninth Circuit No 04 35715

Exact words on page 11 are below:

"Indeed, Dreiling does not dispute the common-sense proposition that, in general, an issuer knows any inside information that its officers or directors know, so that an issuer is typically not at an informational disadvantage in dealing with its insiders. Instead, he misstates the rule, contending that the rule allows a corporate board of directors to give its blessing to any transaction that would otherwise be subject to suit under Section 16(b) (Brief of the Plaintiff-Appellant, p. 9). But that simply is not the case. Rule 16b-3(d) is available only to exempt transactions between an officer or director and the issuer. It only applies in a limited type of transaction in which the risk of abuse is inherently limited."

In the same Amicus Brief in the Dreiling case on page 15 , we find the following:

"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 16b-3 exempts. "

 

 

Below are 3 pages from the Treatise of

Peter Romeo and Alan Dye. Parts in red are my highlights

14.04 Acquisitions from the issuer

(SEC)Rule 16b-3(d) provides a broad exemption for acquisitions from the issuer not involving a Discretionary Transaction. The rule makes available five different methods for exempting these acquisitions.

 
[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.

Among the acquisitions from the issuer acknowledged by the SEC or its staff to be eligible for exemption under Rule 16b-3(d) are:

* An award of bonus stock pursuant to a salary-based formula;
* A grant of stock options;
* A grant of restricted stock;
* An exercise of stock options;
* An election under a thrift plan to invest either the employee or
employer contribution in issuer equity securities;
* A deferral of bonus into phantom stock;
* An acquisition pursuant to a deferred compensation program;

* A purchase pursuant to the additional purchase feature of a dividend
reinvestment plan;

* An acquisition resulting from a contribution of "new" money to a plan, such as an acquisition funded by a loan repayment;

* An acquisition that does not qualify for the exemption provided by Rule16b-3(c) for transactions under Tax-Conditioned Plans; and

* An acquisition in a merger.

--End of the three pages from Romeo and Dye, without the footnotes---

 Romeo and Dye failed to state that several of the acquisitions mentioned above also require issuer Board Approval for an exemption.

So what are Romeo and Dye saying in those three pages?

Romeo and Dye are saying that as long as any transaction is by an officer or director from the issuer, if it satisfied 16 b-3(d)(1) or (d)(2) or (d)(3), the transaction is exempt.

Before I analyze that question further, lets examine SEC Rule 16 b-3 which shows the paragraph (d) which merely contains necessary conditions, which is below verbatim:

§ 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.

One of the sets of applicable conditions mentioned in (a) General is when the transaction between between the issuer and the officer or director is an Acquisition from the issuer and an officer or director as below:

(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.

Before going further lets check out the SEC Release of August 9, 2005 below: The SEC modified paragraph (d) due to the fact that

 LEVY V. v. STERLING 314 F.3d 106 (3d Cir 2002) seemed to narrow the exemption under SEC Rule 16 b-3

SEC [RELEASE NOS. 33-8600; 34-52202; 35-28013; IC-27025; File No. S7-27-04] OWNERSHIP REPORTS AND TRADING BY OFFICERS, DIRECTORS AND PRINCIPAL SECURITY HOLDERS of August 9, 2005 contains the paragraphs below:

"Rule 16b-3(a) provides that ""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. 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 subsections of the rule, each of which applies to a different category of transactions."

----------End of the quote from the SEC release on August 9, 2005---

See also-

In Levy v. Sterling the SEC stated in its Amicus Curiae Brief:

"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.

So if there is a transaction between the issuer and the officer or director of the issuer involving issuer equity securities and the transaction is a Acquisition of the issuer securities, there must be at least one of the 16 b-3d(1), 16 b-3d(2) approvals or 16 b-3d(3 ) that is satisfied to achieve and exemption. If the transaction is not between the officer or director and the issuer, the officer or director can not achieve an exemption regardless of what Romeo and Dye or some other attorney may state. 

So to achieve an exemption from 16 (b) for an Acquisition with the issuer, the following requirements must be satisfied.

The requirements in Rule 16 b-3(a) and the conditions in (d) must  be satisfied.

However, Romeo and Dye are claiming that when there is an Acquisition from the issuer, the requirements in 16 b-3(a) are not required to be satisfied. They are also claiming that to achieve an exemption, there is no need for a transaction to be between the issuer and the officer or director . They are also claiming that the only requirement for the exemption is that the conditions in (d) be satisfied and that:

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.

Romeo and Dye effectively are stating in their Treatise that exemptions from Section 16 (b) are available for 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 one of the conditions in paragraph (d) are present:

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

Effectively Romeo and Dye are illustrating that they do not understand how SEC Rule 16 (b) 3 works, so they will try to interpret the rule in a manner which expands the exceptions the most possible.

Effectively Romeo and Dye are claiming that in order for a transaction to be exempt from section 16 b, the only requirements are below;

1. the transaction is from the issuer

2. the transaction is other than a Discretionary Transaction

3. the transaction is by an officer or director

4. the transaction satisfies one of the conditions in Rule 16 (b)-3

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

So according to Romeo and Dye, the transaction does not need to involve issuer equity securities, nor does the transaction need to be between the officer or director and the issuer.

According to Romeo and Dye, if an officer or director of XYZ Corp buys shares of XYZ Corp in a transaction between ABC Corp and the officer or director of XYZ and the transaction is approved by XYZ Corp, the transaction is exempt from Section 16 (b).

Romeo and Dye's expressed view runs counter to what the SEC stated in the Q and As 123.17 and 123.18  below:

Question 123.17

Question: Could the six-month holding period of Rule 16b-3(d)(3) be used to exempt an officer's or director's purchase of the issuer's stock in an underwritten public offering?

 
Answer: No. Rule 16b-3 would not exempt this transaction, because the rule was not intended to cover a situation where someone other than the issuer controls to whom the sales are made and on what terms. For the same reasons, Rule 16b-3 would not exempt an officer's or director's purchase of the issuer's stock in a public offering pursuant to a "friends and family" allocation. [May 23, 2007]

and 

Question 123.18

Question: Are the dispositions of issuer securities that take place in cashless exercises through a broker eligible for exemption pursuant to Rule 16b-3(e)?

 
Answer: No. The dispositions that take place pursuant to these transactions are not eligible for exemption pursuant to Rule 16b-3(e) because cashless exercises through a broker do not involve a transaction with the issuer or the issuer's employee benefit plan. [May 23, 2007]

and what the court stated in a Section 16 (b) case Chechele v. Elstain No. 11 Civ. 3320 (SAS) U.S. District of New York.

 
Where we find the following paragraph:

"When interpreting a statute, the well-established rules of statutory construction instruct that "the inquiry begins with the plain language of the statute and `where the statutory language provides a clear answer, it ends there as well.'" A court must determine "`whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case.'" The provision at issue must be read in conjunction with the rest of the statute, but "as long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute."Nonetheless, a court may depart from the plain language "if literal application of the statute will produce a result demonstrably at odds with the intentions of [the statute's] drafters." The same principle applies to the interpretation of a regulation: "The plain language in a regulation governs unless that meaning would lead to absurd results."

John Olagues