The Securities and Exchange Commission (the "SEC") recently issued final rules, the so-called "Regulation Blackout Trading Restriction" or "Regulation BTR," to implement Section 306(a) of the Sarbanes-Oxley Act of 2002 (the "Act") with respect to blackout periods under individual account retirement plans.
Section 306(a) of the Act and Regulation BTR generally prohibit insiders from trading, directly or indirectly, in company equity securities acquired in connection with their service as a director or executive officer during a retirement plan blackout period. Certain transactions are exempted from the trading prohibition. Regulation BTR also provides that the issuer must notify the directors and officers and the SEC of any blackout period. Section 306(a) of the Act took effect on January 26, 2003 and, for purposes of Regulation BTR, the notice requirement of Section 306(a) (as described below) applies to blackout periods commencing on or after January 26, 2003. For blackout periods commencing between January 26, 2003 and February 25, 2003, issuers should furnish notice to directors and executive officers as soon as reasonably practicable.
Issuers should consider and implement the following steps to be prepared to deal with Regulation BTR.
Step 1: Understand When "Blackout Periods" Trigger the Trading Restrictions
- For purposes of Regulation BTR, a "blackout period" is any period of more than three consecutive business days during which the ability to purchase, sell or otherwise acquire or transfer an interest in any equity security of an issuer held in an individual account plan is temporarily suspended by the issuer or by a fiduciary of the plan with respect to at least 50% of the participants or beneficiaries under all individual account plans maintained by the issuer.
- The "issuer" includes all members of the issuer's controlled group.
- This means that, for issuers with more than one individual account plan (for example, at different divisions or subsidiaries of the issuer), a blackout period relating to one plan will not trigger the requirements of Regulation BTR unless participants in the affected plan, together with participants in other plans that also are experiencing a blackout period, comprise 50% or more of all participants in all of the issuer's individual account plans.
- For foreign private issuers, a "blackout period" would occur when plan participants located in the U.S. subject to the blackout comprise 50% or more of all participants located in the U.S., and either (1) plan participants in the U.S. subject to the blackout represent more than 15% of all plan participants worldwide or (2) more than 50,000 plan participants in the U.S. are subject to the blackout.
- A "blackout period" does not include:
- Certain regularly scheduled periods incorporated into the plan and disclosed to participants beforehand in which the participants and beneficiaries may not purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer; and
- Temporary trading suspensions imposed solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, in a plan due to a corporate merger, acquisition, divestiture or similar transaction involving the plan or plan sponsor of an acquired or divested entity.
Step 2: Identify Covered Plans
- Regulation BTR applies to "individual account plans" under which participants may purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer.
- Covered plans clearly include (except for one-participant plans) all tax-qualified individual account retirement plans (e.g., 401(k) plans, ESOPs, profit sharing plans, stock bonus plans and money purchase pension plans).
- The rules also apply to non-qualified plans that provide for an individual account (e.g., "excess" 401(k) plans and other deferred compensation arrangements) under which a participant has an interest in any equity security of the issuer.
- Pension plans, including deferred compensation plans, in which participation is limited to directors of the issuer are excluded from the covered plans.
Step 3: Identify Covered Directors and Executives
- Under Regulation BTR, the term "director" has the same meaning set forth in Section 3(a)(7) of the Securities Exchange Act of 1934 (the "Exchange Act") (i.e., any director of a corporation or person performing similar functions with respect to any organization).
- The term "executive officer" has the same meaning as the term "officer" in Rule 16a-1(f) under the Exchange Act (i.e., an issuer's president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the issuer).
- The rules also apply to family members of such executives and officers.
Step 4: Establish Procedures for Triggering Trading Suspensions
- Identify the personnel who will determine, for each plan identified in Step 2 above, when the ability to purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer has been or will be temporarily suspended under a plan identified in Step 2 above (a "Plan-Level Suspension").
- Designate the position or department within the issuer (e.g., the General Counsel's office) that the personnel identified in the preceding paragraph must notify when a Plan-Level Suspension has occurred or will occur.
- The notification should indicate the number of participants who are affected and the total number of participants in the plan.
- Identify the person (e.g., the General Counsel) who will determine if one or more Plan-Level Suspensions affect enough participants under the numerical tests described in Step 1 above to trigger the trading restrictions required by Regulation BTR.
- To make this determination, the person described in this paragraph will need participant data for all individual account plans of the issuer and its controlled group members.
- If the trading suspension is triggered, distribute the required notice to the directors and executives identified in Step 3 above.
- Have on file a model notice.
- The notice must be provided no later than five business days after the issuer receives notice from the pension plan administrator that a blackout will occur or, if the issuer does not receive such notice, at least 15 calendar days before the actual or expected beginning date of the blackout period.
Step 5: Establish Programs to Facilitate Trading Suspensions
- Educate directors and executive officers regarding transactions that are prohibited in their own accounts (or in the accounts of their family members) during a pension blackout period.
- The company's insider trading policy (containing trading "windows" or "blackouts") would contain similar prohibitions on trading. Director and executive officer education regarding the trading prohibitions under Regulation BTR could dovetail with similar education procedures under the company's insider trading policy.
- Trading restrictions under Regulation BTR differ from those typically contained in a company's insider trading policy in that certain dispositions of shares a director or officer held prior to the time he or she became a director or officer (other than as inducements to become a director or officer) are not prohibited. For example, under Regulation BTR, securities purchased in the open market before an individual becomes a director or executive officer are not subject to the trading prohibition.
- There is a rebuttable presumption, however, that the shares sold are not exempt from the rule (i.e., the individual bears the burden of proving that the securities were not "acquired in connection with service or employment"). Careful tracing of share history will be required if dispositions are made by directors or officers during a pension blackout period.
- Consider whether the company should adopt a policy prohibiting all trades by a director or executive officer during a pension blackout period.
- Provide for safeguards in company plans that will block prohibited trades during a blackout period.
- Stock option grants and exercises are not permitted.
- Acquisitions of company stock pursuant to deferred compensation plans and other nonqualified stock purchase plans may be subject to restriction (unless the purchases are pursuant to an arrangement that satisfies the affirmative defense conditions of a 10b5-1 trading plan).
- Note the transactions that are not subject to the trading prohibition:
- acquisitions under dividend or interest reinvestment plans;
- purchases or sales pursuant to a trading arrangement that satisfies the affirmative defense conditions of Exchange Act Rule 10b5-1(c) (provided that the director or executive officer did not enter into or modify the plan during the blackout period or at a time when the director or executive officer is aware of the actual or approximate beginning or ending dates of the blackout period);
- purchases or sales (other than discretionary transactions such as intra-plan transfers involving an issuer equity securities fund) pursuant to certain tax-conditioned plans;
- any grant or award of an option, stock appreciation right or other equity compensation pursuant to a plan that by its terms permits directors or executive officers to receive grants or awards and either (1) states the amount and price of securities to be awarded to designated directors and executive officers and specifies the timing of the awards; or (2) sets forth a formula that determines the amount, price and timing, using objective criteria;
- any exercise, conversion or termination of a derivative security that the director or executive officer did not acquire during the blackout period or while aware of the actual or approximate beginning or ending dates of the blackout period and either (1) the derivative security, by its terms, may be exercised, converted or terminated only on a fixed date, with no discretionary provision for earlier exercise, conversion or termination; or (2) the derivative security is exercised, converted or terminated by a counterparty and the director or executive officer does not exercise any influence on the counterparty with respect to whether or when to exercise, convert or terminate the derivative security;
- any acquisition or disposition involving a bona fide gift or a transfer by will or the laws of descent and distribution;
- any acquisition or disposition pursuant to a domestic relations order;
- any sale or other disposition compelled by the laws or other requirements of an applicable jurisdiction;
- any acquisition or disposition in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law; and
- increases or decreases in the number of equity securities held as a result of a stock split or stock dividend applying equally to all equity securities of that class and the acquisition of rights, such as preemptive rights, pursuant to a pro rata grant to all holders of the same class.
Step 6: Prepare for Filing Notice With the SEC
- The issuer is required to file a Form 8-K report with the SEC not later than the date notice is transmitted to directors and executive officers (which, in most cases, must be provided no later than five business days after the issuer receives notice from the pension plan administrator of an impending blackout period).
- Issuers should consider having on file a model Form 8-K.
- Foreign private issuers must file, as an exhibit to their annual reports on 20-F or 40-F, a copy of each notice provided under Regulation BTR to directors and executive officers during the most recently completed fiscal year, unless the notice was previously provided to the SEC in a report on Form 6-K. Disclosure by filing a Form 6-K is encouraged by the SEC.
The foregoing is a highly condensed and generalized discussion of some key provisions of recently adopted rules. Application of the rules to particular circumstances will require further, detailed consideration and may be affected by subsequent administrative, judicial and other interpretation.
As always, please feel free to call your regular Jones Day contact if you have any questions or would like to discuss these matters further.
NOTE TO READER: This memorandum deals with blackout periods under the SEC's Regulation BTR. Another set of blackout period rules under the Act, which are administered by the Department of Labor (the "DOL") under ERISA, are not discussed in this memorandum. A Jones Day memorandum dated January 7, 2003 summarizes the DOL's blackout period rules. The discussion in that memorandum of the SEC's proposed rules is superseded by this document.
(1) Purchases under "tax conditioned" plans include on-going purchases in tax qualified plans (e.g., 401(k) plans), excess plans and stock purchase plans (all as defined in Rule 16b-3(b)).