PricewaterhouseCoopers LLPDecember 16, 2002 Mr. Jonathan G. Katz, Secretary
Re: File No. S7-44-02 Dear Mr. Katz: We at PricewaterhouseCoopers LLP appreciate the opportunity to comment on the Commission's Proposed Rule: Insider Trades During Pension Fund Blackout Periods. We applaud the Commission's initiative in this area and are supportive of the proposed rule. Our detailed answers to a narrow range of selected questions, as to which we believe we could provide insightful comments, are included in the attachment to this letter. We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the staff may have. Please do not hesitate to contact Jay P. Hartig at 973-236-7248 or James F. Harrington at 973-236-7203 regarding our submission.
Attachment - Responses to detailed questionsIssuers subject to the trading prohibition 1. Is the compliance burden for small business issuers disproportionate to the benefits to be obtained from compliance with Section 306(a) and proposed Regulation BTR? If so, should we exclude them from Section 306(a) and proposed Regulation BTR? Would some other threshold for exclusion be more appropriate than the small business issuer definition? We do not believe that the burden for small business issuers would be disproportionate. The application of the Act is very broad and we believe that the proposed rule complies with the spirit of the Act. Insider trading issues are not unique to "large issuers". A lesser standard for small business issuers would not be appropriate. 2. Should we exclude investment companies from proposed Regulation BTR? If so, what would be the rationale for the exclusion? Open-end investment companies should be entirely excluded since they are required to redeem their shares at net asset value, based on the definition of "redeemable security" in Section 2(a)(32) of the Investment Company Act of 1940. Redemption at net asset value alone means that corporate insiders would not be able to secure redemption terms for themselves that are more advantageous than any other holder, nor can the redemption price be affected by material developments during any "blackout" period (other than general changes in market values which are external to the fund). Imposing a "blackout" period for open-end investment company shares would seem to further no statutory purpose. Unit investment trusts should also be excluded since by definition they have no employees and similarly only return to a redeeming holder a pro-rata interest in the underlying securities (or equivalent cash). 3. With regard to the proposed Form 8-K filing requirement, we request public comment on feasible alternatives that minimize the reporting burdens on registered investment companies. In addition, we request comment on the utility to investors of the reports to the Commission in relation to the costs to registered investment companies and their affiliated persons of providing those reports. As noted in the proposing release, it is rare for closed-end funds to have employee pension plans that invest in the fund's stock. Business development companies could have employee pension plans (as well as executive stock option plans), and, since those companies typically invest in other businesses, which have more uncertain and volatile prospects and are more difficult to value, they exhibit more of the characteristics that proposed Regulation BTR is designed to address. Additionally, because other closed-end fund shares trade at market value based on, but independent from, net asset value, the trading price can be influenced by corporate developments, it is difficult to argue conceptually that they should be excluded. However, we do not believe that subjecting closed-end funds to a form 8-K that otherwise does not apply for any other reason, for this limited a use, would be a worthwhile exercise for either the registrant or the SEC. As a result, we would suggest that rather than imposing a Form 8-K reporting requirement on closed-end funds, the Commission might consider the alternative, proposed in its proposed rules implementing sections 406 and 407, of allowing disclosure of a "blackout" period to be posted on the entity's website as well as adding an Item to the Forms N-SAR and N-CSR, whichever is the next 1934 Act filing by the investment company. Persons subject to the trading prohibition 4. Is it appropriate to use the definition in Section 3(a)(7) of the Exchange Act to define the term "director" for purposes of Section 306(a) and proposed Regulation BTR? If not, what definition should we use? We believe the definition is appropriate. We agree with the Commission that an individual may be a director without holding a title, if he or she functions as a director, and that the trading prohibition should apply to individuals acting as directors. 5. Is it appropriate to use the definition of the term "officer" in Exchange Act Rule 16a-1(f) to define the term "executive officer" for purposes of Section 306(a) and proposed Regulation BTR? Yes, we believe it is appropriate. We concur with the Commission's choice of Exchange Act Rule 16a-1(f) because of its focus on the policy-making functions of the individual (i.e. individuals who through their policy-making decisions can affect the price and terms of the transaction). We also share the Commission's belief that issuers that are subject to Section 16 of the Exchange Act would be better able to coordinate the operation of their insider trading programs. Securities subject to the trading prohibition 6. Is it appropriate to use the definitions in Section 3(a)(11) of the Exchange Act and Exchange Act Rule 3a11-1 to define the term "equity security" for purposes of Section 306(a) and proposed Regulation BTR? If not, what definition should we use? Yes, we believe it is appropriate. 7. Is it appropriate to use the Exchange Act Rule 16a-1(c) definition of "derivative security" for purposes of Section 306(a) and proposed Regulation BTR? If not, what definition should we use? Yes, we believe it is appropriate. We agree with the Commission that there will be a benefit in using Section 16 of the Act, since the rules and interpretations that have been developed under Section 16 of the Exchange Act, could be useful in implementing the proposed rule. 8. Are there instruments included in the definition of "derivative security" for purposes of Section 16 of the Exchange Act that we should exclude from the definition of "derivative security" for purposes of Section 306(a) and proposed Regulation BTR? a. Should we exclude an interest that may be settled solely in cash, the value of which is denominated or based on an equity security, from the definition of "derivative security" used for purposes of Section 306(a) and proposed Regulation BTR? No, we believe those types of instruments should be included in the trading prohibition. While they may be settled in cash, profit would still be derived from the underlying security. Transactions subject to the trading prohibition 9. Are the transactions involving the acquisition of equity securities described in proposed Exchange Act Rule 100(a) consistent with purposes of Section 306(a) and proposed Regulation BTR? Should any of the described transactions be excluded from the definition of "acquired in connection with service or employment"? If so, what would be the rationale for the exclusion? No. We believe that the definition is adequate. We agree with the Commission's focus on the connection with the individual's service or employment as a director or executive officer. 10. For purposes of determining whether equity securities received under a compensatory plan, contract or arrangement were "acquired in connection with service or employment," would it be helpful to reference the existing definition of an "employee benefit plan" under the federal securities laws? Yes, we believe that would be helpful. 11. In the case of equity securities acquired by an individual as result of a merger, consolidation or other acquisition transaction involving the issuer, should such equity securities be considered "acquired in connection with service or employment as a director or executive officer" only where they replace equity securities that otherwise would satisfy the requirements of the definition? For example, where an employee of a target company becomes an executive officer of an acquiring company and, in connection with the merger, consolidation or other acquisition transaction of the two entities, is issued equity securities of the acquiring company to replace equity securities of the target company, should these equity securities received be considered "acquired in connection with service or employment as a director of executive officer" only to the extent that they were otherwise acquired in connection with service or employment as a director or executive officer of the target company? Yes, we believe that such equity securities should be considered "acquired in connection with service or employment as a director or executive officer" only where they replace equity securities that otherwise would satisfy the requirements of the definition. 12. Is it appropriate to use the definition in Exchange Act Rule 16a-1(a)(2) to define the term "pecuniary interest" for purposes of Section 306(a) and proposed Regulation BTR? If not, what definition should we use? Yes, we believe it is appropriate to use those definitions for the same reasons mentioned above. 13. Is it appropriate to presume that any equity securities acquired or disposed of during a blackout period were acquired in connection with service or employment as a director or executive officer? If not, is there an alternative way to determine the source of equity securities acquired or disposed of during a blackout period that effectively prevents evasion of the statutory trading prohibition of Section 306(a) and proposed Regulation BTR? Yes, we believe that is appropriate, since it may indeed be difficult to trace the actual source of the securities disposed. 14. Where the presumption is applied, should the equity securities acquired in connection with service or employment as a director or executive officer that were deemed sold or otherwise disposed of be excluded for purposes of applying the presumption to a sale or other disposition of equity securities in a subsequent blackout period? If so, explain why. While the suggested approach has its limitations, we believe that it is a practical approach to the problem. 15. Should we exclude equity securities acquired by an individual before he or she became a director or executive officer of an issuer from Section 306(a) of the Act and proposed Regulation BTR? Yes, we believe that is appropriate. 16. Is it necessary or appropriate to treat equity securities acquired by a director or executive officer before a company became an "issuer" as defined in Section 2(a)(7) of the Act as equity securities subject to Section 306(a) and proposed Regulation BTR to prevent evasion of the statutory trading prohibition? Yes, we believe it is appropriate. As stated above, we are of the view that the focus should be on the policy-making abilities of the individual, rather the company itself. As a result, we do not believe that the fact that the company was not an issuer when the securities were acquired by the director or executive officer is relevant to the prohibition. 17. Is it appropriate to exempt the described transactions from the statutory trading prohibition of Section 306(a) and proposed Regulation BTR? If not, explain why. Yes, we believe that the exemptions included in the proposed rule are appropriate, assuming as stated in the proposed rule that adequate safeguards are in place. We concur with the exemption for dividend reinvestment plans as long as the plans subject to the exemption are broad-based plans that do not favor highly-compensated employees. 18. Should we provide an express exemption for the exercise of a put equivalent position during a blackout period written by a director or executive officer before a blackout period that is exercised by a counterparty during the blackout period? Should such an exemption be limited to circumstances where the director or executive officer does not exercise any influence over the timing of the exercise? We believe that the exemption should only be provided to the extent the director or executive officer does not exercise any influence on the counterparty over the timing of the exercise. 19. Should we provide an express exemption for a sale or other transfer of the equity security by a director or executive officer that is compelled by the laws or other requirements of an applicable jurisdiction? If so, what should be the scope of the exemption? Yes, we believe that it would be appropriate since the director or executive officer would not be able to control nor influence those types of sales. 20. Should an acquisition or disposition of equity securities made in connection with death, disability, retirement or termination of employment or transactions involving a diversification or distribution required by the Internal Revenue Code to be made available to plan participants be subject to the statutory trading prohibition of Section 306(a) and proposed Regulation BTR? If so, explain why. Yes, we believe that an exemption should be made available to participants, since the acquisition or disposition would be out of the control of the director or executive officer. Blackout periods 21. Should we define the term "blackout period" to be shorter than the three consecutive business days specified in the statute? If so, how long should the period be and why? Are there particular types of abuses that we should consider in determining the appropriate length of the period? No, we do not believe that the black-out period should be shorter than the three consecutive days defined in the statute. Companies should not be subject to different black-out periods. The SEC should adopt a black-out period consistent with the Act and the interim final rule recently issued by the Department of Labor. 22. Is it appropriate to limit the scope of the definition of the term "blackout period" to situations where the participants or beneficiaries under individual account plans that are affected by the temporary trading suspension represent 50% or more of the participants or beneficiaries under individual account plans located in the United States and its territories and possessions? Yes, we believe that the limitation is appropriate. The protection and regulation of participants or beneficiaries located outside the United States should be left to foreign jurisdictions. 23. What would be an appropriate measurement date for determining the number of participants or beneficiaries in an individual account plan for purposes of conducting the 50% test? Should this number be determined as of the end of the most recent plan fiscal year, the end of the most recent fiscal quarter or some other date? What are the relevant considerations in selecting an appropriate measurement date? We believe that the most current information should be used for purposes of performing the test. As a result, we would suggest using the most recent fiscal quarter, unless there have been some significant changes in the composition of the plan that would warrant using a more current measurement date such as the most recently completed fiscal month. 24. Is it necessary or appropriate for the proposed rules to ensure that the 50% test considers plan participants or beneficiaries who are United States citizens or residents who are on temporary assignment abroad? Yes, we believe that would be appropriate, since those individuals may not be covered under the regulations of the foreign jurisdiction that are currently residing in. 25. Would it be helpful for us to provide additional examples of the application of the 50% test? If so, are there specific fact patterns that we should address in the examples? While an example for a domestic issuer could be derived from the example included in the release for a foreign private issuer, it may be useful to include an example for a domestic registrant. Notice 26. Should the required notice to the Commission have to be filed on Form 8-K? Is another approach for filing the required notice with the Commission, such as a posting on an issuer's Internet web site, more appropriate? If so, how would the imposition of the blackout period be communicated to investors? We believe that requiring the notice to the Commission to be filed on Form 8-K would be appropriate. Refer however, to our comments to Question 3 for closed-end funds. 27. Is the information in the proposed Form 8-K item useful? Should the proposed Form 8-K item include additional or different information? Yes, we believe that information requested is adequate. 28. Is the proposed triggering event for the Form 8-K filing appropriate? Is the person designated by the issuer to oversee the issuer's pension plans the proper person to whom the issuer should look for determining when a Form 8-K is required? Would another person, such as the agent for service of legal process for the issuer, be more appropriate? We believe that the triggering event should come from the agent for service of legal process for the issuer, since that person would be closer to the legal requirements and the design and operation of the plan. We do not believe that an individual responsible for the accounting aspects of the plan would be an appropriate trigger. |