Section 306(a) of the Sarbanes-Oxley Act of 2002 was enacted to prohibit any director or executive officer of an issuer of any

Trading Prohibitions during Pension Blackout Periods

M. Travis DeHaven

James L. Smith, III

T. Clayton Walts

Troutman Sanders LLP

Atlanta, Georgia

Section 306(a) of the Sarbanes-Oxley Act of 2002 (the “Act”) prohibits directors and executive officers of public companies from directly or indirectly purchasing, selling or otherwise acquiring or transferring any equity security of such company during any pension plan blackout period, if a director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer. On January 22, 2003, the Securities and Exchange Commission released final Regulation Blackout Trading Restriction (“Regulation BTR”) which provides guidance regarding the trading prohibition under Section 306(a) of the Act.

Companies Subject to Trading Prohibition

Under Regulation BTR, the trading prohibition under Section 306(a) of the Act applies to an issuer (i) the securities of which are registered under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”), (ii) that is required to file reports under Section 15(d) of the Exchange Act, or (iii) that files, or had filed, a registration statement that has not yet become effective under the Securities Act of 1933 and that has not been withdrawn. Thus, an issuer includes all domestic issuers, publicly-held banks and savings associations, small business issuers, and, in some circumstances, registered investment companies. Regulation BTR also provides that the trading prohibition applies to certain foreign private issuers and prescribes special rules for such issuers, a discussion of which is beyond the scope of this summary.

Individuals Subject to Trading Prohibition

The trading prohibition under Section 306(a) of the Act applies only to directors and executive officers of an issuer. For this purpose, Regulation BTR provides that the term “director” has the same meaning set forth in Section 3(a)(7) of the Exchange Act and the term “executive officer” has the same meaning set forth in Exchange Act Rule 16a-1(f). Thus, in each case an individual’s title is not dispositive. For example, an individual may be considered as a director if he or she performs functions similar to a director, even without holding such title. Similarly, an individual may be treated as an executive officer based on his or her policy-making functions and without regard to title. Under Regulation BTR, the trading prohibition no longer applies to an individual when he or she ceases to be a director or executive officer.

Determining which Equity Securities are Acquired in Connection with Service or Employment

The trading prohibition applies only to “equity securities that a director or executive officer acquires in connection with his or her service or employment as a director or executive officer.” Under Regulation BTR, these include equity securities acquired

at a time when the individual was a director or executive officer under a compensatory plan, contract, authorization or arrangement, including an options, warrants or rights plan, a pension, retirement or deferred compensation or bonus, incentive or profit sharing plan (whether or not set forth in a formal document), including a compensatory plan, contract, authorization or arrangement with a parent, subsidiary or affiliate;
at a time when the individual was a director or executive officer, as a result of any transaction or business relationship that is described in paragraph (a) or (b) of Item 404 of Regulation S-K--the related party transaction disclosure provisions--to the extent that the individual has a pecuniary interest in the equity security;
at a time when the individual was a director or executive officer, as directors’ qualifying shares or other securities that the individual must hold to satisfy minimum ownership requirements for directors or executive officers; or
prior to becoming, or while, a director or executive officer where the equity security was acquired as a direct or indirect inducement to service or employment with the issuer or an affiliate, or as the result of certain merger, consolidation or other acquisition transactions involving the issuer.

Thus, for example, the trading prohibition does not apply to securities purchased in the open market before the time an individual becomes a director or executive officer. Regulation BTR sets forth rules for identifying which securities are treated as having been acquired in connection with an individual’s service or employment as a director or executive officer.

Meaning of “Blackout Period”

Under Regulation BTR, a “blackout period” is defined as a 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 the issuer held in an “individual account plan” is temporarily suspended by the issuer, or by a fiduciary of the plan, with respect to not fewer than 50% of the participants or beneficiaries located in the United States under all individual account plans maintained by the issuer that permit participants or beneficiaries to acquire or hold equity securities of the issuer. For this purpose, an “individual account plan” means a pension plan which provides for an individual account for each participant and for which benefits are based solely upon the amount contributed to the participant’s account (as adjusted for earnings, forfeitures, etc.), but excluding certain one-participant plans and plans limited to directors. The definition of individual account plan would include a “typical” 401(k) plan, as well as a nonqualified deferred compensation plan which contains these features. Regulation BTR also sets forth certain exceptions with respect to what constitutes a blackout period. It should be noted that although blackout periods are not common, they routinely occur when an issuer changes plan administrators, and sometimes occur in connection with computer system upgrades and major plan changes.

Transactions Subject to Trading Prohibition and Exemptions

As indicated, Section 306(a) of the Act prohibits any director or executive officer from “purchasing, selling or otherwise acquiring or transferring” any equity security during a pension plan blackout period if the director or executive officer acquired the equity security in connection with his or her service or employment as a director or executive officer. However, Regulation BTR exempts various transactions from these trading restrictions. The exemptions include: acquisitions of equity securities under dividend or interest reinvestment plans; purchases or sales of equity securities pursuant to a “Rule 10b5-1 plan” that satisfies the affirmative defense conditions of Exchange Act Rule 10b5-1(c); purchases or sales of equity securities (other than certain discretionary transactions) pursuant to certain qualified, excess benefit or stock purchase plans; compensatory grants and awards pursuant to plans that provide for grants or awards to occur automatically; certain exercises, conversions or terminations of derivative securities; acquisitions or dispositions of equity securities involving a bona fide gift or transfer by will; acquisitions or dispositions of equity securities pursuant to a qualified domestic relations order; sales or other dispositions of equity securities compelled by laws of the applicable jurisdiction; acquisitions or dispositions of equity securities in connection with a merger, acquisition 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.

Remedies

There are two remedies available under Section 306(a) of the Act. First, violations of the trading prohibition are subject to enforcement by the SEC. This includes possible civil injunctive actions, cease-and-desist proceedings, civil penalties and all other remedies available to the SEC. Second, Section 306(a)(2) of the Act provides for a private right of action, similar to the short swing profit recovery provisions under Section 16(b) of the Exchange Act, by which the issuer, or other security holder on behalf of the issuer, may bring an action to recover profits realized by a director or executive officer from a prohibited transaction during a blackout period. For this purpose, the profit is the difference between the amount paid or received during the blackout period and the average market price during the three trading days after the last day of the blackout period.

Notice Requirements

Regulation BTR provides that in any case in which directors and executive officers of an issuer are subject to the trading prohibition, the issuer must provide notice of the blackout period to directors and executive officers, as well as to the SEC on Form 8-K. The notice to directors and executive officers, with certain exceptions for unforeseeable events or circumstances which are beyond the control of the issuer, must be provided no later than 5 business days after the issuer receives notice from the pension plan administrator of the blackout period (in accordance with DOL rules) or, if no such notice is received, at least 15 calendar days in advance of commencement of the blackout period. The notice must include certain information regarding the blackout period and trading restrictions, and may be in any form reasonably accessible to the intended recipient. The notice to the SEC on Form 8-K must be filed not later than the time prescribed for transmission of the notice to directors and executive officers.

Effective Date

The trading prohibition under Section 306(a) of the Act took place on January 26, 2003. Consequently, the notice requirements apply for blackout periods beginning on or after such date.

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