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How to Enhance Section 16 Compliance and Avoid Insider Trading Violations
Revised as of September 2002
Michael L. Andresino, Esq. Basilios E. Tsingos, Esq. Posternak Blankstein & Lund LLP 100 (617) 973-6100 btsingos@pbl.com
THE COMPLETE INSIDER COMPLIANCE PROGRAM
Introduction - How to Use These Materials
Securities law compliance by corporate insiders, while always important, became even more critical following the passage of the Sarbanes-Oxley corporate responsibility legislation in July 2002.
The documents set forth on the following pages are intended to serve as a model for a comprehensive insider compliance program for a publicly-traded company. The goals of this program are to enhance compliance with the reporting and short-swing liability provisions of Section 16 of the 1934 Act and to avoid insider trading violations under Rule 10b‑5 of the 1934 Act. With the exception of those who maintain meticulous electronic records, we recommend that the documents making up the company’s insider compliance program be kept in a loose-leaf notebook or binder for future reference, along with copies of each insider’s Section 16 and Form 144 filings. In addition, certain of the documents must be distributed, either to officers and directors (the Section 16 and Insider Trading Procedures memoranda [Documents 4, 5, 6 and 8]) or to all employees (the Statement of Company Policy on insider trading [Document 7]).
Unless your company has only recently gone public, it is likely that you already have some type of insider compliance program in place. Even if this is the case, you should still find the enclosed materials helpful, either to fill in the gaps in your existing program or to suggest a way to standardize the program and establish control over your insiders’ trading and reporting activities.
As with any models, the documents provided here for the hypothetical "ABC Corporation" describe benefit plans or situations which do not apply to every company or may not cover an issue which is relevant for your company. In addition, the dates herein correspond to a December 31 fiscal year-end. If in doubt as to the application of a particular document to your company’s situation, please feel free to contact Michael L. Andresino at Posternak Blankstein & Lund LLP: phone (617) 973‑6100, facsimile (617) 367‑2315, e-mail: mandresino@pbl.com.
© 2002 by Posternak Blankstein & Lund LLP. This document, which may be considered advertising, is provided with the understanding that it does not constitute the rendering of legal or other professional advice. THE COMPLETE INSIDER COMPLIANCE PROGRAM
Contents Document No.
I. SECTION 16 COMPLIANCE MATERIALS
Filing Instructions for Section 16 Forms............................................................................ 1 Sample Cover Letter for Filings........................................................................................... 2 Section 16 Memorandum to CFO and General Counsel.................................................... 3 Short Section 16 Memorandum to Insiders......................................................................... 4 Blank Power of Attorney for Insiders.................................................................................. 5 Broker Notification Form for Insiders................................................................................ 6
II. INSIDER TRADING POLICY
Statement of Company Policy for All Employees.............................................................. 7 Insider Trading Procedures for Company Insiders.............................................................. 8 Board Resolutions.................................................................................................................. 9
III. FORMS AND FILINGS
Tabbed Section for Each Insider........................................................................................... 10
ABC CORPORATION
FILING INSTRUCTIONS FOR SECTION 16 FORMS
I. What Are the Section 16 Forms and When Are They Due?
1. Form 3 · For each new director, officer or 10% stockholder ("insider").
· Must be received at the SEC by the 10th day after the person becomes an insider.
2. Form 4 · Mandatory for open market or privately-negotiated purchases or sales, and grants or exercises of options, SARs, restricted stock or phantom stock. Voluntary, but recommended, for gifts, inheritances and other exempt but infrequent transactions.
· Must
be received at the SEC by
3. Form 5 · For once-a-year reports of certain exempt transactions such as gifts, inheritances and small acquisitions (under $10,000). Also used for any transaction not previously reported during the year on a required or voluntary Form 4.
· Due annually by the 45th day following the end of the fiscal year, unless no transactions to report.
II. Where Are the Forms Filed?
1. SEC · Three copies (one signed original and two photocopies) to:
450 Attn: Filing Desk
· Always use Federal Express or another reliable service that guarantees delivery by the due date in writing (critical for Form 4).
· Get a receipt for the filing (see Note 1 to Document No. 2).
· The
SEC will accept a signature that has been faxed to the company in place of the
original, and will also accept these filings
electronically by EDGAR. By not
later than
2. Stock Exchange · One photocopy by regular mail to:
[For NYSE Companies]
New York Stock Exchange, Inc. Attn: Filing Desk
[For NASDAQ Companies](optional)
National Association of Securities Dealers, Inc. Market Surveillance Department
3. Counsel · One photocopy by regular mail to:
___________________, Esq. (outside counsel)
4. ABC Corporation · One photocopy in this binder under the appropriate tab (see Document No. 10).
[ABC CORPORATION LETTERHEAD]
[Date]
FEDERAL EXPRESS
450 Attn: Filing Desk
Re: ABC Corporation
Ladies and Gentlemen:
Enclosed for filing please find three (3) copies of Form [3, 4 or 5], one of which has been manually executed, for the following ABC Corporation reporting person(s):
[LIST NAMES OF REPORTING PERSONS OR ENTITIES]
Please acknowledge receipt of this letter and its enclosures by date-stamping the enclosed copy of this letter and returning it in the enclosed self-addressed envelope.
Sincerely,
[__________________] Enclosures
cc: NYSE [or National Association of Securities Dealers, Inc.] ____________________, Esq.
NOTES: 1. Enclose an extra copy of the cover letter and a self-addressed, stamped return envelope in the package to the SEC. 2. This
letter will no longer be required when mandatory EDGAR filing becomes effective
(not later than M E M O R A N D U M
TO: ABC Corporation CFO and General Counsel
FROM: Posternak Blankstein & Lund LLP
RE: Section 16 Reporting Requirements and Short-Swing Liability
DATE: [_______________]
This memorandum contains information regarding the reporting requirements and short-swing liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as it applies to insiders of ABC Corporation (the "Company"). Section 16 has been the subject of extensive regulation by the SEC over the years, and a significant amendment was made by the Sarbanes-Oxley corporate responsibility act in July 2002.
(a) Section 16(a) Reporting Requirements
Section 16(a) of the Exchange Act requires a statutorily-defined group of Company "insiders" (executive officers, directors and beneficial owners of more than ten percent of the Company’s outstanding stock) to publicly report their holdings and transactions in the Company’s equity securities during the entire time they are insiders. In addition, in the case of officers and directors, but not ten-percent holders, reporting may be required for certain transactions occurring for a period of six months prior to or following insider status. The SEC has promulgated three forms for reports by insiders: Form 3 is used for the initial ownership report of an insider; Form 4 is the form on which insiders report periodic transactions in their companies’ stock; and Form 5 is used for annually reporting transactions exempt from current reporting on Form 4.
While Section 16 compliance is technically the responsibility of the insider and not the Company, as a practical matter, it is unrealistic to expect insiders to interpret and comply with the complex regulations on their own.
Form 3. Insiders are required to file an initial statement of their beneficial ownership of the Company’s stock on Form 3 within ten days after becoming insiders, except that in the case of the Company’s initial registration of securities under Section 12 of the Exchange Act, the Form 3 must be filed at or prior to the time of effectiveness. All officers and directors must file a Form 3 regardless of whether they hold any of the Company’s stock. [These forms have been filed with the SEC for all of the current insiders.] For purposes of Section 16, the term "officer" includes the president, any vice president in charge of a principal business division or function, the principal financial officer, the principal accounting officer or controller, and any other officer who performs a policy-making function, which could include an officer of a parent or subsidiary corporation.
Form 4. Most changes in an insider’s beneficial ownership of the Company’s stock, such as purchases, sales, option grants and exercises, and grants and exercises of other stock awards such as SARs, restricted or phantom stock, must be reported to the SEC on Form 4 by 5:30 p.m. on the second business day after the day on which the change occurred (i.e., the trade or grant date). The SEC has provided that for two categories of transactions where the exact trade date may not be immediately available to the insider, namely, a transaction at the discretion of a broker under a written insider trading plan and a fund-switching transaction in a 401(k) plan, the trade date for Form 4 purposes is deemed to be the earlier of the date the insider is notified by the broker or plan administrator, or the third business day after the actual trade date.
Form 5. A few types of transactions that the SEC deems less important need not be reported immediately on Form 4, but may instead be reported annually on Form 5. Such transactions include gifts, inheritances and bequests and certain small acquisitions. Form 5 is also used for late reporting of holdings and transactions that should have been reported earlier on Form 3 or Form 4. A required Form 5 must be filed on or before the 45th day after the end of the issuer’s fiscal year by any person who was an insider at any time during the fiscal year (even if the person is no longer an insider). However, an insider who has reported all required holdings and transactions during the year on Forms 3 or 4 and who had no transactions requiring deferred reporting is not required to file Form 5, as long as such an insider submits a written representation to the Company (such as in the annual D&O Questionnaire) stating that no Form 5 was required.
There are certain minor transactions which the SEC does not require to be reported at all, although the insider must footnote or otherwise reconcile his or her total holdings on the next form otherwise filed. These include transactions under a tax-qualified plan such as a 401(k) plan (other than fund-switching), ESOP, employee stock purchase or stock bonus plan, excess benefit plan, dividend reinvestment under a DRP, and intra-family transfers.
Filing. Three copies of Forms 3, 4 and 5 must be
filed with the SEC by the date due, with copies sent to the Company’s
exchange. These forms may also be filed
electronically via the EDGAR system, with electronic filing becoming mandatory
by at least (b) Beneficial Ownership
Beneficial ownership is a key concept under Section 16 in two regards. First, besides officers and directors, the statute applies to persons who beneficially own more than ten percent of a class of equity securities. Second, the reporting and liability obligations are triggered by changes in an insider’s beneficial ownership of such securities.
A person is deemed a ten-percent holder for purposes of Section 16 if that person would be deemed a ten-percent beneficial owner pursuant to the rules under Section 13(d) of the Exchange Act. The Section 13(d) rules generally attribute beneficial ownership to any person who has or shares voting or investment power over the issuer’s securities.
Once it is determined that a person is an officer, director, or a ten-percent holder using the Section 13(d) rules referred to above, a "pecuniary interest" test of beneficial ownership determines which securities holdings and transactions must be reported and are subject to short-swing profit liability. "Pecuniary interest" is defined to mean the opportunity to profit, directly or indirectly, from a transaction in the Company’s common stock or through "derivative" securities such as options, warrants or convertibles. Indirect pecuniary interest is determined by the insider’s ability to profit from purchases and sales of securities held by family members, or through partnerships, corporations, trusts, or other arrangements.
Generally, Section 16 reports should include all shares of which an insider is presumptively considered to have a pecuniary interest. The insider may, however, disclaim beneficial ownership of any such securities listed in the report. It is recommended that insiders disclaim beneficial ownership of shares held by family members, since courts have considered the failure to make such a disclaimer relevant in establishing liability for purchases or sales made by family members.
The application of Section 16(a) reporting requirements as well as liability under Section 16(b) for changes in beneficial ownership is also subject to certain exceptions for employee benefit plans such as stock option plans, pledges, gifts, inheritances, small acquisitions, stock splits and dividends. These rules and exceptions are further discussed below.
(c) Section 16(b) Recapture of Short-Swing Profits
Section 16(b) imposes liability on officers, directors and ten-percent holders for any profit derived by them as the result of a purchase and sale occurring within any six-month period. Any excess of the sale price over the purchase price is considered to be "profit," and is recoverable by the Company. It does not matter whether the purchase or the sale occurs first and it is not necessary for the same shares to be involved in each of the matched transactions. Transactions are paired so as to extract the maximum profit by matching the lowest purchase price and the highest sale price within a six-month period; losses cannot be offset against gains. The result is that liability may exist under Section 16(b) even though an insider’s overall trading in the stock resulted in a loss.
If officers or directors of the Company engage in transactions after they are no longer officers or directors, such transactions can be matched for Section 16(b) purposes if they occur within six months of an opposite-way transaction which occurred while they were still an officer or director of the Company.
Good faith or inadvertence on the part of an insider is no defense to liability under Section 16(b) and no knowledge of inside information need be involved. If the Company itself does not press a claim for recovery of the short-swing profit, any stockholder may do so on behalf of the Company (and may be awarded attorneys’ fees as well). There is a small but diligent group of Section 16(b) plaintiffs’ attorneys who monitor insiders’ Section 16 reports and notify companies of short-swing violations in the hopes of collecting a fee.
(d) Changes in Beneficial Ownership – Types of "Purchases" and "Sales"
The terms "purchase" or "sale" for purposes of Section 16 include transactions other than ordinary cash purchases or sales of securities. The following are some examples of what constitute a "purchase" or "sale."
Stock Options and Other Derivative Securities. The grant or acquisition of a derivative security, such as a stock option or convertible preferred, is deemed to be a "purchase" of the underlying security for purposes of Section 16. However, assuming the Company’s stock option plan (the "Plan") continues to meet the technical requirements of Rule 16b-3 under the Exchange Act, the grant of a stock option under the Plan will be exempt from short-swing liability under Section 16(b). Similarly, the exercise of a stock option granted under the Plan is also exempt from Section 16(b). Since both the grant and exercise of the option will be exempt from Section 16(b) liability, an optionee who has held an option for more than six months and has not made any other purchase at a lower price in the preceding six months could exercise a stock option and then immediately sell the stock so acquired, provided that he or she refrains from making subsequent purchases at a lower price for the following six months. As noted, above, both grants and exercises of options and other derivatives must be reported on Form 4 by the second business day.
Pledges. A pledge of stock is not a "sale" for purposes of Section 16 and need not be reported under Section 16(a) on Form 4. However, a sale of the pledged stock by the pledgee in satisfaction of an existing debt is considered a sale by the pledgor and must be reported by the second business day. If the sale of the pledged stock by the pledgee occurs within six months of any purchase at a lower price by the pledgor, the pledgor will be liable under Section 16(b) for any realized profit even if he or she had no control over the timing of the sale.
Gifts and Inheritances. All gifts and inheritances of the Company’s stock involving Section 16 insiders must be reported under Section 16(a) on the annual Form 5 (or on a voluntary Form 4). Nevertheless, gifts, inheritances and bequests are specifically exempt from the "short-swing" profit provisions of Section 16(b).
Small Acquisitions. An acquisition of securities or the right to acquire securities with a market value of $10,000 or less may be reported on the annual Form 5 if the acquiror (i) has not acquired more than $10,000 in securities of the same class (including securities underlying derivative securities) within the prior six months and (ii) engages only in dispositions exempt from Section 16(b) within the succeeding six months. Such acquisitions, however, are treated as purchases for Section 16(b) liability purposes and are thus subject to the short-swing liability provisions.
ESOP, ESPP and 401(k) Plans. Most routine transactions under the Company’s Employee Stock Ownership Plan, Employee Stock Purchase Plan and 401(k) plan will be exempt from purchase or sale treatment under Section 16(b) pursuant to a blanket exemption under Rule 16b‑3. These transactions are not required to be reported on any Section 16(a) form, with the exception of fund-switching elections under the 401(k) plan, which must be reported on Form 4 as noted in (a) above.
Stock Splits and Dividends. Stock splits and dividends are exempt from both the reporting and short-swing liability provisions of Section 16. In the event of a change in the insider’s total securities ownership due to a stock split or dividend, the insider may note the reason in a footnote to his or her next Form 4 or Form 5.
Dividend Reinvestment Plan ("DRP"). Shares acquired pursuant to automatic dividend reinvestment under the DRP are exempt purchases under Section 16(b) and are not required to be reported. However, shares acquired pursuant to the optional cash purchase feature of the DRP do count as purchases and must be reported on Form 4 by the second business day.
(e) Section 16(c) Trading Restrictions
Section 16(c) of the Exchange Act prohibits insiders from selling shares of the Company’s stock which they either (i) do not own or (ii) fail to deliver within twenty days after the sale has been made. The practices prohibited under Section 16(c) are commonly referred to as "naked short sales." Whether naked or "against the box," however, short sales would violate the Company’s insider trading policy, and are not generally considered appropriate due to their speculative nature.
M E M O R A N D U M
TO: Directors, Executive Officers and 10% Stockholders of ABC Corporation
FR: [CEO or CFO]
RE: Compliance with Section 16 Reporting Rules and Insider Trading Policy
DATE: [_______________]
[if !vml]
1. General. As a director, executive officer or 10% stockholder of the Company, you are subject to the rules of the U.S. Securities and Exchange Commission (the "SEC") governing the reporting of insider transactions (Forms 3, 4 and 5) and the imposition of short-swing profit liability under Section 16 of the Securities Exchange Act of 1934, as well as potential liability for insider trading under that Act.
As you may know, federal legislation enacted in July 2002 now requires you to file a Form 4 to report any Company stock purchase, sale, option grant or option exercise by the second business day following the trade date. With your assistance, as detailed below, we will attempt to assist you in complying with this stringent new requirement.
Further, we are required to disclose any late Forms 3, 4 or 5 filed by you or on your behalf during the prior fiscal year, as well as any missing reports of which we are aware. This includes even filings that are as little as one day late. In order to avoid late or missing filings, as well as to avoid insider trading violations, the Company’s insider trading policy requires that you contact [______________] in advance when you intend to engage in any transaction involving the Company’s securities. This includes not only purchases and sales, but also gifts, transfers to trusts and option exercises. This way, any short-swing liability or insider trading issues can be addressed, and any required SEC reports (such as a Form 4 or Form 144) can be prepared, signed and timely filed with the SEC.
2. Power of Attorney. For your convenience and in order to foster timely compliance with the Section 16 reporting obligations, attached to this memorandum are three copies of a Limited Power of Attorney. This Power of Attorney authorizes myself and [_______________] to complete and sign Forms 3, 4 and 5 on your behalf, using information which you have provided, and to file such Forms with the SEC. The Power of Attorney does not grant any discretion to engage in stock transactions on your behalf -- it is intended only to facilitate the timely filing of the Forms. You should sign and date each copy of the Power of Attorney and return two copies to me. One of these copies will then be filed with the SEC.
3. Broker Notification Form. While we have always attempted to work closely with our insiders’ brokers, the new two-day Form 4 filing requirement makes it imperative that we include your brokers in our compliance efforts. Therefore, we request that you sign a copy of the attached Broker Notification Form for each broker that you use, and ask the broker to countersign and return the form to me. This form requests the broker to notify the Company prior to and immediately following the execution of any Company stock transaction in your account.
You can also assist the Company in its compliance obligations, as well as save money on commissions, by directing your transactions in the Company’s securities through XYZ Brokerage Firm, with which we have negotiated a special institutional rate. (XYZ has agreed not to use this as an opportunity to solicit other business from you.) [NOTE: Some companies may make the use of a single, designated broker mandatory for all insiders.]
4. Insider Trading Policy. We are also enclosing another copy of the Company’s insider trading policy for your information (see "Policy Regarding Insider Trading Procedures"). This is the policy which requires you to pre-clear your Company stock transactions and imposes blackout periods. With today’s renewed focus on corporate responsibility, compliance with this policy is more important than ever.
Please do not hesitate to raise any questions which you have about transactions in the Company’s securities or the SEC’s reporting rules. Thank you in advance for your cooperation.
LIMITED POWER OF ATTORNEY FOR ABC CORPORATION SECTION 16(a) FILINGS
Know all by these presents, that the undersigned hereby constitutes and appoints each of [_______________] and [_______________], signing singly, the undersigned’s true and lawful attorney-in-fact to:
(1) Execute for and on behalf of the undersigned, in the undersigned’s capacity as an officer, director and/or stockholder of ABC Corporation (the "Company"), Forms 3, 4, and 5 and amendments thereto in accordance with Section 16(a) of the Securities Exchange Act of 1934 and the rules thereunder;
(2) Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 3, 4, or 5 or amendment thereto and timely file such form with the United States Securities and Exchange Commission (the "SEC") and any stock exchange or similar authority; and
(3) Take any other action of any type whatsoever which, in the opinion of such attorney-in-fact, may be necessary or desirable in connection with the foregoing authority, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve.
The undersigned hereby grants to each such attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever requisite, necessary, or proper to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, with full power of substitution or revocation, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact’s substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. The undersigned acknowledges that the foregoing attorneys-in-fact, in serving in such capacity at the request of the undersigned, are not assuming, nor is the Company assuming, any of the undersigned’s responsibilities to comply with Section 16 of the Securities Exchange Act of 1934. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to file Forms 3, 4, and 5 with respect to the undersigned’s holdings of and transaction in securities of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. This Power of Attorney may be filed with the SEC as a confirming statement of the authority granted herein.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this day of , 20__.
________________________________ Print Name of Reporting Person or Entity
________________________________ Signature
[NOTE: One of the Attorneys-In-Fact should be the compliance officer or stock administrator who will have the day-to-day responsibility for Section 16.]
[ABC CORPORATION]
Broker Notification Form
[Date] ______________________
To: [XYZ Brokerage Firm] ("Broker")
Financial Consultant: _______________________________________________
Re: Transactions in the Common Stock of ABC Corporation (the "Company")
This is to confirm my advice to Broker that I am required to report to the Securities and Exchange Commission on Form 4 any transactions in the Company’s Common Stock or other equity securities involving the accounts listed below that are executed by Broker.
In order to facilitate my compliance with the Company’s policies for its directors, officers and ten percent shareholders, I instruct Broker to provide the Company’s designated contact person whose name I have provided below with the details of my transactions in the Company’s equity securities. Please provide such information (1) prior to execution of the transaction, to confirm that it has been pre-cleared by the Company, and (2) after execution. You shall provide such information as promptly as reasonably practicable by telephone at the telephone number listed below and [check one of the following]:
_____ - By e-mail, at the following address: _________________________________________
_____ - By fax, at the following number: _________________________________________
Telephone Number: ___________________________________________________________
The name of the Company’s designated contact person is: ______________________________
Respectfully,
_________________________________________ [Client’s Signature] _________________________________________ [Print Client’s Name] _________________________________________ [Client’s Account Number(s)] Accepted and Agreed to:______________________________[Brokerage Firm]
_____________________________ _________________________________________ [Branch Manager’s Signature] [Financial Consultant’s Signature] _____________________________ _________________________________________ [Print Branch Manager’s Name] [Print Financial Consultant’s Name]
[NOTE: We thank our friends at Salomon Smith Barney for sharing their firm procedures with us.] [ABC CORPORATION]
STATEMENT OF COMPANY POLICY
ON
INSIDER TRADING [if !supportFootnotes][1][endif]
Introduction
It is illegal for any person, either personally or on behalf of others, to trade in securities on the basis of material, nonpublic information. It is also illegal to communicate (or "tip") material, nonpublic information to others who may trade in securities on the basis of that information. These illegal activities are commonly referred to as "insider trading."
Potential penalties for insider trading violations include imprisonment for up to 10 years (25 years if it constitutes fraud), civil fines of up to three times the profit gained or loss avoided through the trade, and criminal fines of up to $1 million. In addition, a company whose employee violates the insider trading prohibitions may be liable for a civil fine of up to the greater of $1 million or three times the profit gained or loss avoided as a result of the employee’s insider trading violations.
This memorandum sets forth [ABC Corporation’s] policy against insider trading. The objective of this policy is to protect both you and [ABC Corporation] from securities law violations. All directors, officers and employees of [ABC Corporation] or its affiliates or subsidiaries must comply with this policy.
Employees are encouraged to ask questions and seek any follow-up information that they may require with respect to the matters set forth in this policy. Please direct all questions to _________________________________________________. [Insert name and telephone extension of compliance officer.]
General Statement
[ABC Corporation’s] policy, applicable to all directors, officers and employees, prohibits trading, and tipping others who may trade, when you are in possession of material, nonpublic information.
What information is material? All information that an investor might consider important in deciding whether to buy, sell, or hold securities is considered material. Information that is likely to affect the price of a company’s securities is almost always material. Examples of some types of material information are:
· financial results or expectations for the quarter or the year · financial forecasts · changes in dividends · possible mergers, acquisitions, joint ventures and other purchases and sales of companies and investments in companies · changes in customer relationships with significant customers · obtaining or losing important contracts · important product developments · major financing developments · major personnel changes · major litigation developments
What is nonpublic information? Information is considered to be nonpublic unless it has been effectively disclosed to the public. Examples of public disclosure include public filings with the Securities and Exchange Commission and company press releases. Not only must the information have been publicly disclosed, but there must also have been adequate time for the market as a whole to digest the information. Although timing may vary depending upon the circumstances, a good rule of thumb is that information is considered nonpublic until the second business day after public disclosure.
What transactions are prohibited? When you know material, nonpublic information about [ABC Corporation], you, your spouse and members of your immediate family living in your household are prohibited from the following activities:
· trading in our company’s securities (including trading in puts and calls for our securities) · having others trade for you in our securities · disclosing the information to anyone else who might then trade · exercising stock options if the option shares are to be immediately sold
Neither you nor anyone acting on your behalf nor anyone who learns the information from you (including your spouse and family members) can trade. This prohibition continues whenever and for as long as you know material, nonpublic information.
Although it is most likely that any material, nonpublic information you might learn would be about [ABC Corporation] or its subsidiaries, these prohibitions also apply to trading in the securities of any company (such as a potential merger partner) about which you learn material, nonpublic information through your employment with [ABC Corporation].
Unauthorized Disclosure
As discussed above, the disclosure of material, nonpublic information to others can lead to significant legal difficulties. Therefore, you should not discuss material, nonpublic information about [ABC Corporation] or its affiliates or subsidiaries with anyone, including other employees, family or friends, except as required in the performance of your regular duties.
Also, it is important that only specifically designated representatives of [ABC Corporation] discuss [ABC Corporation] and its affiliates and subsidiaries and with the news media, securities analysts, and investors. Inquiries of this type received by any employee should be referred to ________________. In his/her absence, inquiries should be referred to __________________.
For similar reasons, no employee of [ABC Corporation] is permitted to discuss confidential financial or business information regarding [ABC], either in his or her own name or anonymously, and whether from the office or outside the office, on any Internet "chat" site or message board.
Questions About this Policy
Compliance by all employees with this policy is of the utmost importance both for you and for [ABC Corporation]. If you have any questions about the application of this policy to any particular case, please contact Mr./Ms. _________ or Mr./Ms. _________ immediately.
Your failure to observe this policy could lead to significant legal problems for you and the company, as well as other serious consequences, including termination of your employment.
[ABC CORPORATION]
POLICY REGARDING INSIDER TRADING PROCEDURES[if !supportFootnotes][2][endif]
Two copies of this Policy Regarding Insider Trading Procedures are being provided to directors, officers and certain other employees with access to sensitive financial and business information. You should read this Policy, ask questions of the officers listed below, if desired, and return one signed copy by ______________________, 20___, to: ____________________.
Policy Statement on Insider Trading.
[ABC Corporation] has adopted a policy on insider trading that applies to each officer, director and employee of [ABC]. A statement regarding such policy has been distributed to all employees. Under [ABC’s] insider trading policy, each officer, director and employee of ABC is forbidden from:
(i) trading in securities of [ABC] (or in puts and calls for [ABC’s] securities) on the basis of material, nonpublic information;
(ii) having others trade for such person in such securities while he or she is in possession of material, nonpublic information; or
(iii) communicating (or "tipping") to others confidential or nonpublic information concerning [ABC] or other companies.
While the general [ABC] insider trading policy outlined above also applies to you, as a director, officer or employee with access to sensitive information, the Board of Directors believes it is appropriate that your transactions in [ABC’s] securities be subject to certain additional restrictions in order to reduce the risk of securities law violations. This Policy Regarding Insider Trading Procedures contains a discussion of insider trading and describes the special trading restrictions applicable to you. You must read, sign and retain this policy statement and, upon request by [ABC], re-acknowledge it on an annual basis.
Discussion: What is "Insider Trading?"
Insider trading is, in addition to being a violation of [ABC’s] policy, a violation of the federal securities laws. The penalties for insider trading are discussed below.
The term "insider trading" generally is used to refer to the use of material nonpublic information to trade in securities, or the communication of material nonpublic information to others who may trade on the basis of such information.
While the law concerning insider trading is not static, it is generally understood that the law prohibits insiders of [ABC] from doing the following:
(1) Trading in ABC’s securities while in possession of material, nonpublic information concerning [ABC].
(2) Having others trade on the insider’s behalf while the insider is in possession of material, nonpublic information.
(3) Communicating nonpublic information concerning [ABC] to others who may then trade in [ABC’s] stock or pass on the information to others who may trade in [ABC’s] stock. Such conduct, also known as "tipping," results in liability for the insider of [ABC] who communicates the information, even if the insider does not actually trade, and for the person who receives and trades on such information.
The elements of insider trading and the potential penalties for such unlawful conduct are discussed below.
1. Who is an Insider?
The concept of "insider" is broad and generally includes any person who possesses nonpublic information about [ABC] and who has a duty to [ABC] to keep this information confidential. In the case of [ABC], "insiders" include officers and directors of [ABC Corporation] and may include officers and directors of [ABC Corporation’s] subsidiaries, as well as employees of any of such entities who routinely have access to material information that is not publicly available or who are working on significant corporate transactions or projects. In addition, a person can be a "temporary insider" if he or she enters into a relationship to serve [ABC] and as a result gains access to inside information. Outsiders who routinely become temporary insiders include, among others, [ABC’s] attorneys, accountants, consultants, bankers and the employees of their organizations.
2. What is Material Information?
Trading while in the possession of inside information is not a basis for liability unless the information is "material." Information is generally defined as material if there is a substantial likelihood that a reasonable investor would consider such information important in making his or her investment decisions, or information that is reasonably certain to affect the price of a company’s securities. It is important to remember that materiality will always be judged with the benefit of hindsight.
Although there is no precise, quantitative definition of materiality, information is likely to be "material" if it relates to:
· Earnings or sales results, or expectations for the quarter or the year
· Financial forecasts
· Changes in dividends
· Proposals or agreements involving a merger, acquisition, joint venture, divestiture or leveraged buy-out
· Changes in relationships with major customers, or obtaining or losing important contracts
· Important product developments
· Major financing developments
· Major personnel changes
· Criminal indictments or material civil litigation or government investigations
· Labor disputes including strikes or lockouts
· Substantial changes in accounting methods
· Debt service or liquidity problems
· Bankruptcy or insolvency
· Public offerings or private sales of debt or equity securities · Stock splits, calls, redemptions or repurchases of [ABC’s] securities
"Inside" information could be material because of its expected effect on the price of [ABC’s] securities, the securities of another company, or the securities of several companies. Moreover, the resulting prohibition against the misuse of "inside" information includes not only restrictions on trading in [ABC’s] securities but restrictions on trading in the securities of other companies affected by the inside information.
3. What is Nonpublic Information?
In order for information to qualify as "inside" information it must not only be "material," it must be "nonpublic." "Nonpublic" information is information which has not been made available to investors generally. This includes information received from sources or in circumstances indicating that the information has not yet been generally circulated.
At such time as material, nonpublic information has been released to the investing public, it loses its status as "inside" information. However, for "nonpublic" information to become public information it must be disseminated through recognized channels of distribution designed to reach the securities marketplace, and sufficient time must pass for the information to become available in the market.
To show that "material" information is public, it is generally necessary to point to some fact verifying that the information has become generally available, such as disclosure by filing of a Form 10‑Q, Form 10‑K, Form 8-K or other report with the SEC, or disclosure by release to a national business and financial wire service (such as BusinessWire, Reuters or Bloomberg), a national news service, or a national newspaper (such as The Wall Street Journal). The circulation of rumors, Internet chat or "talk on the street," even if accurate, widespread and reported in the media, does not constitute the requisite public disclosure, nor does the mere posting of the information on an Internet web site (other than the SEC’s).
Material, nonpublic information is not made public by selective dissemination. Material information improperly disclosed only to institutional investors or to a favored analyst or a group of analysts retains its status as "nonpublic" information the use of which is subject to insider trading laws, as well as constituting a violation of the SEC’s prohibition against selective disclosure. Similarly, partial disclosure does not constitute public dissemination. So long as any material component of the "inside" information has yet to be publicly disclosed, the information is deemed "nonpublic" and may not be misused.
It is the policy of [ABC] to consider quarterly and annual earnings results public on the second business day after a press release regarding such earnings. Similarly, other material information will be considered public on the second business day after public disclosure in the manner described in the preceding paragraphs. 4. Penalties for Insider Trading
Penalties for trading on or communicating material nonpublic information are severe, both for the individuals involved in such unlawful conduct and, potentially, for their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation (i.e., if the violation was one for tipping information). Penalties include:
· jail sentences of up to 10 years (25 years if the conduct constitutes fraud)
· disgorgement of profits
· fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited
· fines for the employer or other controlling person, such as a supervisor, of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided
In addition, a violation of this policy statement can be expected to result in serious sanctions by [ABC], which may include dismissal of the person involved.
Insider Trading Procedures
The following Insider Trading Procedures are applicable to you because you are a director or an officer of [ABC] or an employee of [ABC] who may, by virtue of your duties or work conditions, have regular access to material, nonpublic information concerning [ABC].
1. Trading Windows/Blackouts and Pre-Clearance
There are times when [ABC] may be engaged in a material, nonpublic development. Although you may not know the specifics of the development, if you engaged in a trade before such development was disclosed to the public you might expose yourself and [ABC] to a charge of insider trading that could be costly and difficult to refute. In addition, a trade by you during such a development could result in significant adverse publicity for [ABC].
Therefore, you, your spouse and members of your immediate family sharing the same household may only purchase or sell securities of [ABC] during four 30-day "trading windows" that occur each year and only after pre-clearing your intent to trade with ___________________ [Compliance Officer.]
The four trading windows consist of the 30-day periods that begin on the second business day after issuance of a press release by [ABC] disclosing quarterly or annual earnings. The periods when the trading window is closed are referred to as "blackout" periods. A blackout period will also be imposed during certain temporary trading halts in [ABC’s] broad-based stock benefit plans. In accordance with the procedure for waivers described below, in rare circumstances a waiver may be given to allow a trade to occur during a blackout period.
If you do intend to engage in a trade during a trading window you must first receive permission to engage in a trade from Mr./Ms. ___________. Mr./Ms. __________ may refuse to permit any transaction if he/she determines that there are pending corporate developments that could give rise to a charge of insider trading. Mr./Ms. __________ may decide to consult with [ABC’s] outside legal counsel before responding to your request.
After receiving permission to engage in a trade, you should either complete your trade within one week or make a new trading request.
You may be advised by a broker or other source that it may be possible for [ABC] insiders to limit their insider trading exposure by entering into certain written plans or arrangements providing for a formula for stock transactions or for third-party control over such transactions. The establishment of these arrangements is subject to the policies set forth herein, and you should consult with Mr./Ms. _______ and [ABC’s] counsel prior to entering into such arrangements.
The exercise of options to purchase and hold common stock of [ABC] is not subject to the Insider Trading Procedures outlined above, but the shares so acquired may not be sold except during a trading window, after authorization from Mr./Ms. _______ has been received, and after all other requirements of this policy have been satisfied. Accordingly, the exercise of options and immediate sale of some or all of the shares through a broker is covered by these Insider Trading Procedures.
2. Post-Trade Reporting
You or your broker is required to confirm to Mr./Ms. ______ the details of any transaction in securities of [ABC] by you, your spouse or any immediate family member sharing your household not later than the close of business on the day the transaction occurs. Each report you or your broker makes to Mr./Ms. ________ should include the date, quantity and price at which the transaction was effected. We will provide a form which you may use to instruct your broker to release this information to us. Copies of any Form 144 filings and any representation letters signed for the broker should also be provided.
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