On January 28, 2003, the SEC published final rules implementing Section 306(a) of the Sarbanes-Oxley Act of 2002, which generally prohibits insider trading during pension plan blackout periods. These rules became effective on January 26, 2003; however, the requirement to file notices of blackout periods with the SEC on Form 8-K is not effective until 60 days after publication of the rules in the Federal Register. For blackout periods occurring between January 26, 2003 and February 25, 2003, reporting companies should furnish blackout notices to directors and executive officers as soon as reasonably practicable. Blackout notices are not required for currently effective blackout periods that started before January 26, 2003.

Which Issuers Are Subject to the Trading Prohibition?

In general, the final rules, now known as Regulation Blackout Trading Restriction ("BTR"), apply to directors and executive officers of all reporting companies, including domestic issuers, foreign private issuers, small business issuers and, in rare instances, registered investment companies. The term "director" has the same meaning as set forth in Exchange Act Section 3(a)(7) (except in the case of a foreign private issuer). The term "executive officer" has the same meaning as the term "officer" as defined in Exchange Act Rule 16a-1(f) (except in the case of a foreign private issuer), and generally includes an issuer's president, principal financial officer, principal accounting officer (or, if there is no such accounting officer, the controller), any vice-president of an issuer in charge of a principal business unit, division or function and any other officer or person who performs a policy-making function for an issuer. Regulation BTR provides separate definitions for directors and executive officers of foreign private issuers.

Which Securities Are Subject to the Trading Prohibition?

The trading prohibition applies only to equity securities, including derivative securities (such as options) relating to an equity security of an issuer, whether or not issued by the issuer, that are "acquired in connection with the director's or executive officer's service or employment as a director or executive officer." Regulation BTR interprets this concept very broadly. Excluded from the trading prohibition are equity securities acquired under a plan, contract, authorization or arrangement while the individual was an employee, but not a director or executive officer.

Regulation BTR establishes a presumption that any sale or other transfer of equity securities by a director or executive officer during a blackout period violates the trading prohibition. This presumption can be rebutted, however, if the director or executive officer can (a) trace the source of the securities back to an acquisition that is unconnected with service or employment as a director or executive officer and (b) demonstrate that the tracing is consistent for all purposes related to the transaction. For instance, an individual can rebut the presumption by tracing securities back to a purchase made in the open market before such individual became a director or executive officer if the tracing of such securities is otherwise consistent, e.g., the individual uses the same identification for related tax and other reporting.

Which Transactions Are Subject to the Trading Prohibition?

The trading prohibition is limited to transactions (purchases, sales or other means of acquisition or transfer) involving equity securities subject to Regulation BTR that are acquired in connection with service or employment as a director or executive officer, including an award made as a direct or indirect inducement to service as a director or executive officer. The SEC's informal view is that this prohibition can extend even to arm's-length, commercial transactions. Moreover, Regulation BTR prohibits indirect transactions (such as by family members) if the director or executive officer has a pecuniary interest in the equity securities. On the other hand, the prohibition generally does not cover purchases or sales of equity securities in the open market before an individual becomes a director or executive officer (such as when he or she is a non-director and non-executive officer employee).

Regulation BTR expands the proposed rules' list of exempt transactions, which now include:

• acquisitions of equity securities under dividend or interest reinvestment plans;

• purchases or sales of equity securities that meet the "Affirmative Defences" conditions of Exchange Act Rule 10b5-1(c), so long as the election was not made or modified during the blackout period or when the individual was aware of the actual or approximate dates of the blackout period;
• purchases or sales of equity securities pursuant to certain domestic and foreign tax-qualified plans (other than discretionary transactions);
• acquisitions or dispositions of equity securities resulting from stock splits, dividends or pro rata rights distributions;
• compensatory grants and awards pursuant to a plan that, by its terms, states the terms and conditions of the grants or awards (added by Regulation BTR);
• exercises, conversions or terminations of derivative securities not contracted for or acquired during the blackout period or while the director or executive officer was aware of the blackout period's actual or approximate dates, which, by their terms, occur only on a fixed date, or are initiated by a counterparty without influence from the director or executive officer (added by Regulation BTR);
• acquisitions or dispositions of equity securities involving a bona fide gift, transfer by will or the laws of descent and distribution, or pursuant to a domestic relations order;
• sale or other dispositions compelled by law (added by Regulation BTR); and
• acquisitions or dispositions of equity securities in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law (added by Regulation BTR).

What Constitutes a Blackout Period?

A blackout period triggering the trading prohibition occurs when pension plan participants and beneficiaries cannot trade in securities held in their individual accounts for more than three consecutive business days; and

• in the case of a domestic issuer, this temporary suspension affects at least 50% of the participants and beneficiaries under all "individual account plans" maintained by the issuer; or

• in the case of a foreign private issuer, the 50% test applicable to domestic issuers is satisfied and the number of U.S. participants and beneficiaries subject to this temporary suspension is either (a) greater than 15% of the issuer's total international workforce or (b) more than 500,000. The determination of the number of participants and beneficiaries can be made as of any day within the 12 months prior to the blackout period if there have not been significant changes since the date chosen. Regulation BTR contains many additional details for making the blackout period determination. And, the SEC continues to consider whether three consecutive business days is the appropriate length of time, warning against attempts to circumvent the trading prohibition during periods of three consecutive business days or less.

Two types of suspensions are not considered blackout periods for purposes of the trading prohibition:

• a regularly scheduled period in which participants and beneficiaries may not engage in transactions of the equity securities if (a) such period is incorporated into the individual account plan's governing documents and (b) timely disclosed to employees before they become participants or as a subsequent amendment to the pension plan; or

• any temporary trading suspension imposed by the pension plan solely in connection with persons becoming participants or beneficiaries, or ceasing to be participants or beneficiaries, by reason of a corporate merger, acquisition or similar transaction.

Timely disclosure for purposes of the first exclusion means prior to or within 30 calendar days of an employee's formal enrollment in the pension plan or within 30 calendar days of the adoption of a subsequent plan amendment. In the case of the second exclusion, the trading prohibition is not triggered if the principal purpose of the blackout period is to enable individuals to initiate or terminate participation in the pension plan, even if the blackout period is also used to effect other administrative actions.

What Are the Blackout Period Notice Requirements?

An issuer must provide notice of a blackout period to its directors and executive officers, as well as to the SEC. Regulation BTR contains specific content requirements for the notice. A notice is timely if it is provided no later than five business days after the issuer receives notice of an ERISA blackout period from the plan administrator, as required by U.S. Department of Labor rules (see below), or, if the issuer does not receive such notice, the notice is provided at least 15 calendar days in advance of the start of the blackout period. Potential relief for an issuer is available where the notice is not timely provided due to events that were unforeseeable to, or circumstances that were beyond the reasonable control of, the issuer and the issuer makes a reasonable determination of such events or circumstances in writing. Notice is deemed "provided" as of the date of its mailing or electronic transmission.

Simultaneous notice to the SEC is designed to ensure widespread dissemination of the notice. A domestic issuer must provide this notice through filing a Form 8-K on the same day that the notice is provided to directors and executive officers or as otherwise provided in the instructions for the form. Issuers may need to file an additional Form 8-K as soon as reasonably practicable if the beginning or ending dates of the blackout period change. Foreign private issuers must notify the SEC by filing the notice information as exhibits to annual reports on Form 20-F or 40-F, unless the notices were previously filed on Form 6-K.

What Are the Remedies for Violations?

A violation of Section 306(a) can result in two distinct sets of remedies. First, the violation is treated as a violation of the Exchange Act and subject to all the Exchange Act's sanctions, including possible SEC enforcement action and related civil injunctive actions, penalties, cease and desist proceedings and possible criminal liability. In addition, an issuer, or a security holder on behalf of an issuer, may bring a private action to recover any profits realized by a director or executive officer from a prohibited transaction during a blackout period, regardless of the director's or executive officer's motive or intention. The statute of limitations for the private action runs for two years after the profits were realized.

Related Article; U.S. Department of Labor Rules

The U.S. Department of Labor has published final regulations to implement Section 306(b) of the Sarbanes-Oxley Act of 2002, which generally require plan administrators of pension plans to notify participants and beneficiaries at least 30 days in advance of an ERISA blackout period (defined more broadly than the insider trading blackout period under Section 306(a)). If the pension plan holds any issuer equity securities affected by the ERISA blackout period, the plan administrator must provide a copy of the ERISA blackout notice to the issuer of such securities. An article by Perkins Coie partner Kurt Linsenmayer describing the regulations appeared in the January 30, 2003 issue of the EBIA WEEKLY, a national newsletter published by the Employee Benefits Institute of America LLC. You may access the article via the following link: http://www.ebia.com/weekly/articles/2003/401k030130Blackout.jsp.

For issuers with nonqualified pension plans (such as deferred compensation plans), the U.S. Department of Labor's final regulations do not clearly exclude such plans from the ERISA blackout notice requirements. Perkins Coie has been in contact with the regulations' authors on this point. We received informal confirmation that nonqualified pension plans are not required to provide the ERISA blackout notice if they qualify as "top hat" or "excess benefit" plans. Even so, advance notice of transaction suspensions in these plans may still make sense for fiduciary or other reasons.

Text of Regulation BTR

As this Update is intended only as a summary of the rules, you are encouraged to review the full text of Regulation BTR at www.sec.gov/rules/final/34-47225.htm. You can find further discussion of other recent laws and regulations of interest to public companies on our website.

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