Mar. 8, 2022
March 8, 2022 Via E-Mail: rule-comments@sec.gov Securities and Exchange Commission 100 F Street, N. E. Washington, DC 20549-1090 Attention: Vanessa Countryman, Secretary Re: Release Nos. 33-11013 and 34-93782 – Rule 10b5-1 and Insider Trading File No. S7-20-21 Dear Ms. Countryman: We submit this letter in response to the above-referenced proposal (the “Proposal”) by the U.S. Securities and Exchange Commission (the “Commission”) to amend Rule 10b5-1 under the U.S. Securities Exchange Act of 1934, as amended (“Rule 10b5-1”) in order to curb potential misuse of material non-public information. The purpose of this letter is to raise certain questions regarding the potential effect of the Proposal, and propose certain resolutions, with respect to the operation of open market employee stock purchase plans and similar plans (collectively, “Open Market Plans”) that are created and administered by issuers, for the benefit of their employees and other eligible persons, in compliance with Rule 10b5-1 and Commission Release No. 33-4790 (July 13, 1965). These Open Market Plans, while uncommon among U.S. domestic issuers, are relatively common among Canadian publicly traded companies. Typically, an Open Market Plan is adopted by a Canadian issuer for the purpose of making available to all of its eligible employees the ability to purchase issuer stock through elective payroll deductions, which are applied, together with issuer matching funds, to purchase shares in the open market on the employee’s behalf on a periodic basis, often monthly. In Commission Release No. 33-4790 (1965), the Commission provided guidance on the treatment of Open Market Plans. The Commission noted that if the operation of an Open Market Plan involves substantial variations from an ordinary broker-client relationship, such as limitations on the right of the employee to withdraw from the plan or the accumulation of sums for material periods of time before investment, a separate security may be created and the Open Market Plan, as the issuer of this security, may be an investment company required to register under the U.S. Investment Company Act of 1940, as amended (the “Investment Company Act”). Registration as an investment company is a significant undertaking. In addition, pursuant to Section 7(d) of the Investment Company Act, non-U.S. issuers are specifically forbidden from registering under the Investment Company Act, absent an order by the Commission. In order to prevent the creation of a separate security and an investment company registration obligation that a non-U.S. issuer would not be permitted to satisfy, Open Market Plans are typically drafted, and operated, in such a manner as to avoid any substantial variations from an ordinary broker-client relationship. Based on the Commission’s guidance, the operation of an Open Market Plan will often involve, among other things: · The application of payroll deductions to purchase stock on a regular basis, often monthly, in order to avoid the accumulation of sums for material periods of time before investment; and · Provisions allowing participants to withdraw or modify their elections from time to time, or at any time, consistent with an ordinary brokerage relationship, subject however to compliance with applicable securities laws (for example, a participant not possessing material non-public information at the time of making a new election to participate). In order to satisfy the Commission’s guidance in Release 33-4790, issuers that operate Open Market Plans, and the participants in those Open Market Plans, must be able to rely on Rule 10b5-1 in order to facilitate the regular, periodic purchase of securities in the market. If Rule 10b5-1 were no longer available for transactions under Open Market Plans, if Rule 10b5-1 were amended to make compliance too onerous, or if compliance with Rule 10b5-1 prevented compliance with an exemption from the Investment Company Act, these issuers could be forced to discontinue their Open Market Plans. The Open Market Plans described above do not bear the same risks of abuse as other types of Rule 10b5-1 plans. They are generally institutionalized, broad-based plans adopted by an issuer and implemented on a regular, ongoing basis over a period of several years. Common features of these plans include the regular, often monthly purchases of shares on a pre-scheduled basis, the typically limited amount that a participant is able to purchase in any given period based on payroll deduction limitations, and the use of Rule 10b5-1 solely to protect purchases of shares, with no use of Rule 10b5-1 to protect sales of shares. These features greatly reduce the ability of participants to use Open Market Plans to trade opportunistically. PROPOSED TREATMENT OF OPEN MARKET PLANS Based on the foregoing, we respectfully request that if the Commission decides to amend Rule 10b5-1 as set forth in the Proposal, the Proposal be revised in the final rules to include the following exemptions relating to broad-based Open Market Plans adopted by an issuer for compensatory purposes: 1. Exemption From Cooling Off Periods. An exemption from applicable cooling off periods for purchases made under a broad-based Open Market Plan adopted by an issuer for compensatory purposes. 2. Exemption From the Prohibition on Overlapping Plans. A broad-based Open Market Plan adopted by an issuer for compensatory purposes should not count toward the limit on the number of Rule 10b5-1 plans that an issuer may have in effect. Similarly, purchases by an officer or director under a broad-based Open Market Plan adopted by an issuer for compensatory purposes should not count toward the limit on the number of Rule 10b5-1 plans that an officer or director may have in effect. If the Commission does not agree with the foregoing exemptions, then we respectfully request that the Commission revise the Proposal in the final rules to clarify the intended application of amended Rule 10b5-1 to Open Market Plans, including clarification of the following: 1. Issuer Amendment to Open Market Plan. If an issuer has an existing Open Market Plan, and the issuer later decides to amend the Open Market Plan without participant consent, would the officers and directors that participate in the plan be required to observe any cooling off period? Would a cooling off period be required if no officers or directors participate in the Open Market Plan? Would it depend on the nature of the amendments? If a cooling off period would apply, would the applicable cooling off period be the one applicable to issuers or to officers and directors? Would the issuer be expected to discontinue payroll deductions and matching contributions during the cooling off period, or could these potentially be accumulated during the cooling off period? 2. Newly Participating Officer or Director. If a new officer or director joins the issuer and becomes eligible to participate in an Open Market Plan, or if an existing officer or director elects to newly participate in an Open Market Plan, would the officer or director be required to observe a cooling off period before they could be allowed to make purchases? Of what length? Would the issuer be required to wait until the end of the cooling off period to begin payroll deductions and matching contributions, or could these potentially be accumulated during the cooling off period? 3. Existing Officer or Director Changes Election. If an officer or director currently participates in an Open Market Plan, and makes an election to change the level of participation (for example, an officer electing to change an existing 4% payroll deduction to either 3% or 5%), would the officer or director be required to observe a cooling off period? If so, what length? Would this mean that the change in contribution level could not be implemented until the cooling off period was over, but the participant could continue to rely on Rule 10b5-1 for the monthly purchases that continue to occur at the current contribution level? 4. Exclusivity of Open Market Plan. Does the Commission intend proposed Rule 10b5-1(c)(ii)(D) to mean that if an issuer maintains an Open Market Plan, it may only have one Open Market Plan, and as long as it continues to have an Open Market Plan it cannot use Rule 10b5-1 for any other purpose? Does the Commission intend proposed Rule 10b5-1(c)(ii)(D) to mean that if an officer or director participates in an issuer’s Open Market Plan, the officer or director cannot have any personal Rule 10b5-1 plan? 5. Investment Company Act. If compliance with amended Rule 10b5-1 may require an issuer that operates an Open Market Plan to take any action that could be considered inconsistent with the Commission’s guidance in Release 33-4790 (such as the accumulation of sums for material periods of time, or restrictions on the ability of officers, directors or others to make or change elections under Open Market Plans), we respectfully request that the final rules or adopting release confirm that taking such actions will not cause an Open Market Plan to be deemed to have issued a separate security, or to be an investment company. If you would like to discuss our comments, the Commission may contact Chris Doerksen. Regards, Dorsey & Whitney LLP