On August 3, 2005, the Securities and Exchange Commission adopted amendments to Rules 16b-3 and 16b-7 to clarify the scope of those exemptions from short swing trading liability (SEC Rel. Nos. 33-8600; 34-52202; 35-28013; IC-27025; File No. S7-27-04; Aug. 3, 2005) (the "Release"). In light of the accelerated electronic filing deadlines applicable to Section 16 filings, the SEC also eliminated the presumption of timely filing provision in Rule 405 of Reg. S-K for purposes of disclosing delinquent filings.
The amendments to the Section 16(b) rules were intended to clarify what the SEC considered as its long-standing interpretations of the scope of the exemptions under Rule 16b-3 (transactions between an issuer of securities and its officers and directors) and Rule 16b-7 (securities exchanged in a transaction that does not represent a significant economic or business change by the issuer, such as reincorporation or reorganization).
The clarifications were necessitated by a Third Circuit case, Levy v. Sterling Holding Company, LLC, 314 F.3d 106 (3d Cir. 2002), cert. denied, Sterling Holding Co. v. Levy, 124 S.Ct. 389 (2003), in which the court read the two exemptions in a restrictive manner that created significant uncertainty about the scope of these exemptions. The Levy court had opined that Rule 16b-3 could only exempt transactions that had some compensation-related aspect, relying heavily on the references in the rule to "grants" and "awards." The SEC’s amendments to Rules 16b-3(d) and (e) clarify that the exemption covers any transaction (other than a Discretionary Transaction, as defined in Rule 16b-3(b)) by an officer or director dealing with the issuer that satisfies one of the rule’s alternative conditions, whether or not the transaction has a compensatory purpose. The SEC noted that its revisions to this rule in 1996 had explicitly stated that covered transactions did not need to have a compensatory element.
Similarly, the Levy court had read Rule 16b-7 to require that an exchange transaction would be exempt only where the original security and the security for which it is exchanged have the same characteristics. The SEC noted that it has, since 1981, not required that the security received in exchange be similar to that surrendered, and amended the rule to provide that the exemption applies to any securities transaction that satisfies the rule’s conditions and is not conditioned on the transaction satisfying any other condition.
Because the SEC considers these amendments to be clarifications of its existing position on the issues, the amendments have an effective date of August 9, 2005, but the exemptions as amended are available for transactions on or after the original effective date of the current rule in each case (August 15, 1996 for Rule 16b-3; May 1, 1991 for Rule 16b-7).
The Release also deleted the presumption of timely filing contained in Item 405(b)(1), governing the reporting by issuers of filing delinquencies by their Section 16 insiders. Under the deleted provision. an issuer could presume timely filing by an insider if the issuer received a copy of the Section 16 form within three calendar days after the filing deadline. In light of the current accelerated electronic filing deadlines mandated by the SEC, this provision was deleted as inappropriate. The SEC did not provide a substitute presumption, and noted that issuers have access to reports posted on EDGAR to evaluate the timeliness of insider filings.
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