SEC and DOL Adopt Final Rules On Insider Trades During Plan Blackout Periods and Accompanying Notice Requirements

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1 Client Publication January 26, 2003 SEC and DOL Adopt Final Rules On Insider Trades During Plan Blackout Periods and Accompanying Notice Requirements On January 23, 2003, the Securities and Exchange Commission (the SEC ) issued final rules under Section 306(a) of the Sarbanes-Oxley Act of 2002 (the Act ), which limits the ability of insiders to trade in an issuer s equity securities when rank-andfile employees are prohibited from doing so in their employer-sponsored retirement plan accounts. A day later, the Department of Labor (the DOL ) issued separate regulations under Section 306(b) of the Act requiring notice to individual account plan participants and beneficiaries of a blackout period. Both rules became effective on January 26, 2003 and address perceived abuses of blackout periods and insider stock trading at Enron and other corporations. Section 306(a) prohibits an issuer s directors and executive officers from directly or indirectly acquiring or transferring during an individual account plan blackout period any equity security of the issuer acquired in connection with the director s or executive officer s service or employment. Section 306(a) also requires each issuer to provide notice of impending individual account plan blackout periods to directors and executive officers and to the SEC. Section 306(a) equalizes the treatment of corporate executives and rank-and-file employees with respect to their opportunity, during an individual account plan blackout period, to engage in transactions in issuer equity securities that were acquired in connection with their service to, or employment with, the issuer. Section 306(b) of the Act amends the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), to require plan administrators to provide advance notice of blackout periods to all participants and beneficiaries whose rights under the plan will be temporarily suspended, limited or restricted by the blackout period (the Affected Participants ). The plan administrator is also required to notify the issuer of the impending blackout period so that the issuer may provide the notices required pursuant to Section 306(a). Part I of this memorandum details the key provisions of Section 306(a) and the new Regulation Blackout Trading Restrictions ( Regulation BTR ) under the Securities Exchange Act of 1934, as amended (the Exchange Act ). The text of the SEC s adopting release is available on the SEC s website at Part II discusses Section 306(b) of the Act and the final DOL regulations. The text of these final regulations is available on the DOL s website at 30.htm. These regulations will require plan sponsors to revise plan documents and implement new procedures as discussed in Part III of this memorandum. I. SECTION 306(a): INSIDER TRADING PROHIBITION AND NOTICE PROVISIONS Who is an issuer for purposes of Section 306(a)? Regulation BTR uses the broad definition of issuer adopted in the Act, which includes corporations that (i) have securities registered under Section 12 of the Exchange Act; (ii) are required to file reports under Section 15(d) of the Exchange Act; or (iii) file, or have filed, a registration statement that has not yet become effective under the Securities Act of 1933, as amended (the Securities Act ) and has not been withdrawn. Accordingly, the term issuer includes: foreign private issuers, banks and savings associations, small business issuers and certain registered investment companies. What is an equity security? Section 306(a) generally applies to all equity and derivative securities relating to an issuer, whether or not issued by the issuer. 1 Equity securities include stock, options, warrants, and other convertible securities; publicly traded options; stock appreciation rights, phantom stock or similar rights with an exercise or conversion privilege related to an equity security; American depositary receipts and similar instruments; and security futures. Who is subject to the trading prohibition? For US issuers, the trading prohibition applies to the same individuals who are subject to the reporting and liability provisions of Section 16 of the Exchange Act (other than greater than 10% shareholders). Covered persons include (i) all members of an issuer s board

2 2 of directors and individuals functioning as directors regardless of their titles, and (ii) the issuer s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function and any other individual who performs a policy-making function for the issuer. For foreign private issuers, only the principal executive, principal financial and principal accounting officer or officers and those members of the board of directors who are management employees of the issuer are subject to Section 306(a). Are all equity securities held by a director or executive officer subject to the trading prohibition? No. The Section 306(a) trading prohibition applies only to equity securities acquired in connection with an individual s service or employment as a director or executive officer of the issuer (we refer to these as Service Shares ). Service Shares are securities acquired at a time when an individual is serving as a director or executive officer: pursuant to a compensatory or benefit plan of the issuer or its affiliates; as a result of any transaction or business relationship described in Item 404 of Regulation S-K for US issuers or Item 7.B of Form 20-F for foreign private issuers; 2 and as director s qualifying shares or other securities required to be held to satisfy the issuer s minimum share ownership guidelines. The latter two categories could include equity securities acquired in arm s length open-market transactions while an individual is a director or executive officer. Equity securities acquired during an individual s service as an employee, but prior to becoming an officer or director, are generally not considered Service Shares. However, the following securities, whether acquired prior to or during an individual s service as a director or executive officer, will also be considered Service Shares: securities acquired as a direct or indirect inducement to serve as a director or executive officer; or securities acquired in connection with a merger, consolidation or other business combination: by an individual who was a director or executive officer of the target and is to become a director or executive officer of the acquiror, where the securities were received in exchange for securities of the target that were Service Shares with respect to the target prior to the transaction. If, prior to a corporation becoming an issuer covered by the Act, a director or executive officer acquires securities in a manner that would deem them to be Service Shares, those securities will become subject to the Section 306(a) trading prohibition once the corporation becomes subject to the Act. Rebuttable Presumption. Regulation BTR establishes a presumption that any securities transferred during a blackout period are Service Shares to the extent that the director or executive officer owned Service Shares at the time of the transaction, without regard to the actual source of the securities transferred. To rebut this presumption, the director or executive officer must specifically identify the actual source of the securities transferred to establish that they are not Service Shares. In particular, a director or executive officer must (i) specifically identify the origin of the equity securities in question and (ii) demonstrate that the identification is consistent for all other purposes, such as tracing of the securities for tax purposes and other reporting requirements. What is an individual account plan? The definition of individual account plan is based on the definition provided in Section 3(34) of ERISA. Individual account plans generally include 401(k), profit sharing and savings plans. Section 306(a) of the Act does not cover defined benefit plans, oneparticipant retirement plans and pension and deferred compensation plans in which only directors of the issuer participate. Also, Section 306(a) of the Act applies only to individual account plans that hold or are designed to hold securities of the issuer. What is a blackout period for purposes of Section 306(a)? A blackout period is a period of more than three consecutive business days during which the ability of at least 50% of the participants and beneficiaries in all individual account plans maintained by the issuer to purchase, sell or otherwise acquire or transfer an interest in any equity security of the issuer held in the plan is temporarily suspended (we refer to this as the 50% test ). Note that this is not the same definition used by the DOL for purposes of Section 306(b) that is discussed in Part II of this memorandum. What are some common reasons for blackout periods? Some of the most common reasons for imposing a blackout period include: changes in investment alternatives; changes in the frequency of portfolio valuations; changes in plan record keepers or other service providers;

3 3 changes in plan trustees; and corporate mergers, acquisitions and spin-offs that affect the pension coverage of participants. Does Section 306(a) apply to no-trade periods under an issuer s insider trading policy? Yes, if the issuer fails to take advantage of the procedures set forth in Regulation BTR to ensure that such periodic trading prohibitions are not treated as blackout periods. The primary concern of Section 306(a) and Regulation BTR is with nonrecurring, exceptional interruptions in the ability of plan participants to engage in transactions in the issuer s stock. Certain issuers impose regularly scheduled no-trade periods that prohibit some or all of its employees from trading in the issuer s securities during periods in which an insider is likely to possess material nonpublic information (e.g., prior to quarterly earnings releases), in order to ensure compliance with the prohibitions on insider trading imposed under the federal securities laws. Regulation BTR provides that a broad-based insider no-trade period will not be considered a blackout period under Section 306(a) as long as it is incorporated into the relevant plan document or described in the summary plan description for the plan and disclosed to plan participants and beneficiaries in compliance with the timing requirements described below. Which individual account plans should be considered in determining whether the 50% test is met? To determine whether the 50% test has been satisfied, an issuer should look at those plans that permit participants or beneficiaries located in the United States to acquire or hold equity securities of the issuer, including plans that: permit participants or beneficiaries to invest their plan contributions in issuer equity securities; include an open brokerage window that permits participants or beneficiaries to invest in the equity securities of any publicly traded company, including the issuer; match employee contributions with issuer equity securities; or reallocate forfeitures that include issuer equity securities to the remaining plan participants. An individual account plan that has one or more of these features would be included in the 50% test, whether or not the plan actually holds equity securities of the issuer at the time of the temporary trading suspension. Regulation BTR explicitly excludes from this determination individual account plans maintained outside the United States primarily for the benefit of nonresident aliens. How is the 50% test calculated? Once an issuer identifies the individual account plans subject to Regulation BTR, it must determine whether the temporary prohibition of trading in its equity securities affects 50% or more of the participants or beneficiaries under these plans. This requires a comparison of: the number of participants or beneficiaries located in the United States who are subject to the temporary trading prohibitions with the number of participants or beneficiaries located in the United States under all individual account plans maintained by the issuer. To determine the number of participants and beneficiaries in an individual account plan, issuers may use data as of any convenient date within the 12- month period preceding the commencement of the temporary trading prohibition. For most issuers, this will likely be the last date of the most recently completed plan year. If, however, there has been a significant change in participation in an individual account plan since the date selected (e.g., due to a merger or divestiture), an issuer is required to use plan census data as of the most recent practicable date that reflects such change. Issuers may aggregate participants or beneficiaries under their individual account plans without regard to overlapping plan participation. Thus, if an employee participates in more than one individual account plan maintained by the issuer, the employee may be counted multiple times (once for each plan in which he or she participates). Are there any special rules applicable to foreign private issuers? Yes. In enacting Section 306(a), Congress principally sought to protect individual account plan participants and beneficiaries located in the United States, leaving non-us regulators to address the interests of plan participants located outside the United States. This is consistent with the SEC s policy of focusing the protections of the federal securities laws on US-based investors. To strike an appropriate balance between protecting United States employees and accommodating the interests of foreign private issuers, Regulation BTR applies to directors and executive officers of a foreign private issuer only when: the 50% test is satisfied; and

4 4 the number of US participants subject to the trading prohibitions either (a) represents more than 15% of the worldwide workforce of the issuer and its consolidated subsidiaries or (b) exceeds 50,000. The second prong of the foreign private issuer test ensures that the statutory trading prohibition applies only to the directors and executive officers of foreign private issuers that have a significant portion of their plan participants or beneficiaries located in the United States. Are there any exceptions to the general definition of blackout period? Section 306(a) includes the following two exceptions to the definition of blackout period: Regularly Scheduled Trading Suspensions. As noted above, regularly scheduled trading suspensions that are incorporated into a plan document or summary plan description and timely disclosed to participants, are exempted from the definition of blackout period. Disclosure of regular trading suspensions is timely if participants are notified at any time prior to or within 30 days after enrolling in the plan or, in the case of a subsequent amendment to the plan, within 30 days after the adoption of the plan amendment. If an individual account plan that includes a regularly scheduled trading suspension is maintained by an issuer on January 26, 2003, the 30-day notice provision will be deemed satisfied if the issuer previously provided the required information in accordance with the time periods authorized by ERISA. Mergers and Similar Transactions. Temporary suspensions of trading imposed solely in connection with a merger, acquisition or similar event will not constitute blackout periods under Section 306(a) if the principal purpose of the suspension is to enable individuals to become participants, or terminate participation, in a plan on account of the transaction. This exception is only available when the persons becoming participants in or beneficiaries of the plan are not permitted to transact in the same class of equity securities following the transaction as preceding it. This effectively limits the scope of the exemption to suspensions affecting persons who are employed by or affiliated with the acquired or divested entity. What transactions by directors and executive officers are not prohibited under Section 306(a)? Regulation BTR provides limited exemptions for certain transactions that occur automatically, are made pursuant to an advance election or are otherwise out of the control of the director or executive officer. Dividend or Interest Reinvestment Plans. Transactions pursuant to dividend or interest reinvestment plans are exempt if made under a broad-based plan that (i) provides for the regular reinvestment of dividends or interest, (ii) does not discriminate in favor of employees of the issuer, and (iii) operates on substantially the same terms for all partic ipants. Transactions Pursuant to Rule 10b5-1 Trading Plans. Transactions pursuant to a trading plan or arrangement that satisfies the affirmative defense conditions under Rule 10b5-1(c) of the Exchange Act are exempt as long as the plan was not entered into or modified during the blackout period or at a time when the director or executive officer is aware of the actual or approximate beginning or ending dates of the blackout period. The adoption or modification of a trading plan at a time when a director or executive officer is merely aware of the potential for a blackout period, but is not aware of its actual or approximate beginning or ending dates, will not prevent the director or executive officer from relying on this exemption. Tax-Conditioned Plans. Non-discretionary transactions pursuant to certain tax-conditioned plans (e.g., qualified retirement plans, excess benefit plans and stock purchase plans) are exempt from Section 306(a). Non-discretionary transactions generally include purchases pursuant to standing investment elections, routine acquisitions or dispositions made in connection with death, disability, retirement or termination of employment or transactions involving a diversification or distribution required to be made available to participants under the Internal Revenue Code. In addition, transactions made pursuant to an employee benefit plan of a foreign private issuer that has either (i) been approved by the taxing authority of a foreign jurisdiction or (ii) is eligible for preferential treatment under the tax laws of a foreign jurisdiction because the plan provides for broad-based employee participation are also exempt from the trading prohibition. Discretionary transactions, such as intraplan transfers involving an issuer equity securities fund, are not exempt from the trading prohibition of Section 306(a). Stock Splits and Dividends. Increases or decreases in equity security holdings resulting from a stock split, stock dividend or pro rata rights distribution that apply equally to all equity securities of a class are exempt from Section 306(a). Formula Grants and Awards of Equity Securities. Formula grants and awards of equity securities (including options and SARs) made pursuant to a plan that (i) provides for grants or awards to occur automatically and (ii) specifies the terms and conditions of the grant or award are generally

5 5 exempt. Discretionary grants, however, are not exempt. Certain Exercises, Conversions or Terminations of Derivative Securities. An exercise, conversion or termination of a derivative security written or acquired by a director or executive officer before the commencement of a blackout period and while the insider is not aware of the actual or approximate beginning or ending dates of the blackout period is exempt if, by its terms, the derivative security (i) may be exercised, converted or terminated only on a fixed date or (ii) is exercised, converted or terminated by a counterparty as long as the director or executive officer does not exercise any influence on the counterparty s decision to exercise, convert or terminate the derivative security. This exemption does not apply to most compensatory options that do not have a fixed exercise date and are generally exercisable in the discretion of the director or executive officer. On the other hand, it should apply to settlements of stock units or performance units on a date fixed by the issuer that is outside the control of the participants (but not to elective withholding of shares to pay tax obligations arising upon settlement). Bona Fide Gifts; Domestic Relations Orders. Acquisitions or dispositions of equity securities (i) involving a bona fide gift, (ii) pursuant to a transfer by will or the laws of descent and distribution or (iii) pursuant to a domestic relations order are generally exempt from the Section 306(a) trading prohibition. These exemptions are modeled on similar exemptions under Section 16 of the Exchange Act and are intended to be construed accordingly. Transactions Compelled by Law. Sales or other dispositions of equity securities compelled by law or other regulations that do not provide the opportunity for improper self-dealing are exempt from the trading prohibition. Acquisitions or dispositions made in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law that affect substantially all of an issuer s equity security holders are similarly exempt. What is a direct or indirect purchase, sale or other acquisition or transfer of an equity security? The statutory trading prohibition of Section 306(a) apply to both indirect, as well as direct, purchases, sales or other acquisitions or transfers of Service Shares. The relevant transactions are those in which the director or executive officer has a direct or indirect pecuniary interest. The term pecuniary interest under Section 306(a) has the same meaning as under Section 16 of the Exchange Act. 3 Notice Requirements What are the applicable notice requirements? Section 306(a) of the Act requires an issuer to provide timely notice to its directors and executive officers and to the SEC of the imposition of a blackout period. The notice must include the following information: the reason or reasons for the blackout period; a description of the plan transactions to be suspended during, or otherwise affected by, the blackout period; a description of the class of equity securities subject to the blackout period; the name, address and telephone number of the person designated by the issuer to respond to inquiries about the blackout period, or, in the absence of such a designation, the issuer s human resources director or person performing equivalent functions; and the length of the blackout period by reference to either: the actual or expected beginning date and ending date of the blackout period; or the calendar weeks (defined as a sevenday period beginning on Sunday and ending on Saturday) during which the blackout period is expected to begin and end, provided that: o during that time information as to whether the blackout period has begun or ended is readily available, free of charge, to affected directors and executive officers and the notice to the directors and executive officers describes how to access that information; and o the notice to the SEC also describes how a security holder or other interested person may obtain, without charge, the actual beginning and ending dates of the blackout period. When must the notice be delivered to directors and executive officers? Notice to directors and executive officers will be considered timely if an issuer provides it: no later than five business days after the issuer receives notice of the blackout period from the individual account plan

6 6 administrator as required by Section 306(b) of the Act and the DOL regulations described in Part II of this memorandum; or if the issuer does not receive such notice, at least 15 calendar days before the actual or expected beginning date of the blackout period. Advance notice to affected directors and executive officers is not required, however, in any case where an unforeseeable event or circumstances beyond the issuer s reasonable control prevents the issuer from providing advance notice, provided that the issuer reasonably so determines in a writing that is dated and signed by an authorized representative of the issuer and provided to all affected directors and executive officers as soon as reasonably practicable. How and when must notice be delivered to the SEC? Notice to the SEC by US issuers must be made pursuant to new Item 11 of Form 8-K. A Form 8-K reporting on a blackout period will be considered timely if the issuer files a current report on Form 8-K on the same day that notice is transmitted to the directors and executive officers. Foreign private issuers should file a copy of the notice provided to directors and executive officers as an exhibit to their next annual report on Form 20-F or 40-F, to the extent not earlier filed on a Form 6-K. The SEC encourages foreign private issuers to make the required disclosure earlier on Form 6-K. What if there is a subsequent change in the blackout period? If there is a subsequent change in the beginning or ending dates of the blackout period as provided in the required notice, the issuer is required to provide directors and executive officers and the SEC, as soon as reasonably practicable, with an updated notice identifying the changed date or dates, explaining the reasons for the change and identifying all material changes in the information contained in the prior notice. Remedies What are the remedies for a violation of the trading prohibition of Section 306(a)? Section 306(a) of the Act contemplates both SEC enforcement actions for violations of the trading prohibition and recovery by the issuer of any profit realized in connection with a prohibited trade. SEC Enforcement Action. A director or executive officer who violates the statutory trading prohibition is subject to possible civil injunction, cease-anddesist proceedings, civil penalties and other remedies available to the SEC to redress violations of the Exchange Act. In addition, under certain circumstances, a director or executive officer could be subject to criminal penalties. Private Action to Recover Profits. An issuer may bring an action against a director or executive officer to recover profits realized by an insider during a blackout period, regardless of the insider s motive or intent. If the issuer fails to bring an action within 60 days following the receipt of written notice of a Section 306(a) violation from a shareholder, or to diligently prosecute the action thereafter, the shareholder may bring a derivative action. This is similar to the current process under Section 16 of the Exchange Act and should be construed accordingly. No suits to recover profits may be brought more than two years after the date on which the profits were realized. Regulation BTR provides that the amount of realized profit will generally be calculated as equal to the difference, if any, between (i) the actual amount paid or received by the insider as a result of a transaction during the blackout period and (ii) the market value of the securities on the first date after the end of the blackout period, calculated by taking the average stock price 4 over the three business days immediately following the last date of the blackout period in order to mitigate the effect of large price fluctuations. If the equity security traded by the insider is not registered pursuant to Section 12(b) or 12(g) of the Exchange Act and listed on a national securities exchange or the Nasdaq national market (such as certain derivative securities and transactions involving issuers that have filed a registration statement for an initial public offering that has not yet become effective), profits will be measured in a manner that is consistent with the objective of identifying the amount of any gain realized or loss avoided as a result of a transaction haven taken place during a blackout period. What are the consequences of failing to provide the required notice? An issuer s failure to provide notice, whether or not a director or executive officer subsequently violates the Section 306(a) trading prohibition, may result in an SEC enforcement action against the issuer for violating the Exchange Act. An issuer s failure to provide notice will not preclude an SEC enforcement action for a violation of the Act or a private action by the issuer, or a shareholder on the issuer s behalf, to recover profits. Effective Date When are Section 306(a) and Regulation BTR effective? Section 306(a) and Regulation BTR became effective on January 26, The prohibitions on trading apply to all blackout periods that are in effect as of, or that begin on or after, January 26, For blackout periods that begin

7 7 between January 26, 2003 and February 25, 2003, issuers should furnish notice to directors and executive officers as soon as reasonably practicable. The rules regarding notice to the SEC will not become effective until 60 days after publication of the final rules in the Federal Register to allow time for the addition of new Form 8-K, Item 11 to the EDGAR system. In the interim, an issuer may provide the required notice to the SEC by disclosing the information in the first quarterly report filed by the issuer after commencement of the blackout period. II. SECTION 306(b): NOTICE REQUIREMENTS TO PARTICIPANTS AND BENEFICIARIES UNDER ERISA Section 306(b) of the Act requires plan administrators to give participants notice of a blackout period regardless of whether the plan holds equity securities of the sponsor. The key provisions of Section 306(b) and the final DOL regulations are described below. To the extent that defined terms used in Section 306(b) are identical to those described Part I of this memorandum and used in Section 306(a), we have not separately described them below. Who is a plan administrator for purposes of Section 306(b)? The plan administrator, as defined in Section 3(16)(A) of ERISA, is generally the person designated as such by the plan document. Absent a specific designation, the plan administrator is the sponsor of the plan. What is a blackout period for purposes of Section 306(b)? Blackout period is more broadly defined under Section 306(b) than under Section 306(a) of the Act. For purposes of Section 306(b), blackout period means a period of more than three consecutive business days during which the ability of participants and beneficiaries of an individual account plan to direct or diversify assets credited to their accounts, obtain loans from the plan, or obtain distributions from the plan that are otherwise available under the plan s terms is temporarily suspended, limited or restricted. In its adopting release, the DOL states that the permanent elimination of a right will not give rise to Section 306(b) notice obligations unless, in connection with the implementation of such permanent restriction, some rights are temporarily suspended, limited or restricted. What if there is a subsequent change in the blackout period? If the length of the blackout period specified in a blackout notice changes, the plan administrator is required to provide all Affected Participants with an updated notice that explains the reasons for the change and identifies all material changes to the information contained in the prior notice. The updated notice must be provided as soon as reasonably possible, unless providing such notice in advance of the end of the blackout period is impracticable. To the extent that a plan administrator can provide notice to some Affected Participants earlier than others (i.e., via electronic means to those employees with ), the plan administrator must provide such notice, even though notifying other Affected Participants may be impracticable. Are there any exclusions to the definition of blackout period? Yes. Section 306(b) provides the following four exceptions: Securities Law Restrictions. A blackout period does not include a suspension that occurs by reason of certain enumerated federal securities laws. Regularly Scheduled Restrictions. A blackout period does not include a regularly scheduled suspension under an individual account plan that has been disclosed to Affected Participants in any document or instrument pursuant to which the plan is established or operated. This disclosure may be made through (i) a summary plan description, (ii) a summary of material modifications, (iii) participation or enrollment forms and (iv) materials describing specific investment alternatives under the plan and investment limitations. As was the case with Section 306(a), this exemption would include regularly scheduled no-trade periods pursuant to an issuer s insider trading policy. Qualified Domestic Relations Orders. Suspensions occurring by reason of a qualified domestic relations order or pending a determination of whether a domestic relations order is qualified under ERISA will not trigger the notice requirements under Section 306(b). 5 Individual Participant Actions. To ensure that Section 306(b) only applies to plan-imposed restrictions, suspensions that affect only the account of an individual participant and that occur by reason of (i) the participant s acts or failure to act or (ii) an action or claim by a party unrelated to the plan involving the account of the participant, are exempt from the definition of blackout period. This exclusion covers tax levies, disputes over deceased participant s accounts, failures to obtain personal identification numbers or allegations that a participant committed a fiduciary breach or crime involving the plan. What information must be included in the notice to Affected Participants? The notice must be written in a manner calculated to be understood by the average plan participant and must include: 1. the reasons for the blackout period;

8 8 2. a description of the rights otherwise available to participants and beneficiaries under the plan that will be temporarily restricted by the blackout period, including the identification of any investments subject to the blackout period; 3. the length of the blackout period by reference to either: a) the expected beginning date and ending date of the blackout period; or b) the calendar week (defined as a seven-day period beginning on Sunday and ending on Saturday) during which the blackout period is expected to begin and end, provided that (i) during such weeks information as to whether the blackout period has begun or ended is readily available to Affected Participants free of charge and (ii) the notice describes how they can access the information; 4. in the case of investments affected during a blackout period, a statement that the Affected Participant should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets in their accounts during the blackout period; 5. in any case in which the 30-day advance notice provision applies and such advance notice is not provided: a) a statement that Federal law generally requires that notice be provided to Affected Participants at least 30 days in advance of the last date on which participants and beneficiaries could exercise the affected rights immediately before the commencement of a blackout period; and b) an explanation of the reasons why 30 days advance notice could not be provided; and 6. the name, address and telephone number of the plan administrator or other contact responsible for answering questions about the blackout period. 6 The DOL has provided a model notice to assist plan administrators. Use of the model notice is not required but use of certain provisions from the model notice will be deemed to satisfy portions of the Section 306(b) notice requirements. The text of the model notice appears at the end of this memorandum. When must the Section 306(b) notice be delivered? The Section 306(b) notice must be delivered to all Affected Participants at least 30 days, but not more than 60 days, in advance of the last date on which the Affected Participants could exercise the affected rights immediately prior to the commencement of the blackout period. For purposes of this calculation, days refers to calendar days. For blackout periods that are described in the notice as beginning during a calendar week, the 30-day period must be calculated from the earliest possible beginning date identified in the notice. The 60-day maximum notice period is intended to ensure that notice is not furnished too far in advance of the blackout period commencement date. Conversely, the 30-day minimum notice period is intended to ensure that Affected Participants have sufficient time to consider both the effects of the blackout period on their investments and to take action, if appropriate, in anticipation of the blackout period. Are there special rules for calculating the notice period? The DOL notes that the ability of a participant to take action in anticipation of a blackout period is a key part of the Section 306(b) advance notice provisions. Plan administrators must take into account plan requirements, procedures and other factors that may affect an Affected Participant s instructions or requests in determining the last date on which an Affected Participant could exercise affected rights before the commencement of a blackout period. For instance, if a plan permits trading only during the first 15 days of a month and the plan administrator determines that trading under the plan will be suspended for the first 15 days of May, the last date on which an Affected Participant could trade under the plan before the commencement of the blackout period is April 15 th (as opposed to April 30 th ) and notice must be provided on March 16 th, the date that is 30 days prior to the last trading date. Are there any circumstances under which the advance notice requirements are waived? Yes. The DOL regulations substitute an as soon as reasonably possible standard for the 30-day advance notice requirement in the three instances described below. If, however, a plan fiduciary determines that notice could not be delivered in sufficient time in advance of the termination of the blackout period to alert Affected Participants, no notice is required at all. Exclusive Purpose and Prudence Requirements of ERISA. The 30-day minimum notice requirement will not apply if the deferral of the blackout period

9 9 would result in a plan fiduciary s violation of the exclusive purpose and prudence requirements under Section 404(a)(1)(A) or (B) of ERISA. 7 Unforeseeable Circumstances. If the commencement of the blackout period is due to events that were unforeseeable or circumstances beyond the reasonable control of the plan administrator, the 30- day advance notice provision does not apply. The DOL notes that this exception applies only in rare circumstances and that problems attendant to changes in record keepers will rarely be unforeseeable or beyond the control of the plan administrator. To rely on these two exceptions, a plan fiduciary must make a written determination as to the availability of the exception and sign and date such determination. Mergers and Similar Transactions. In the event that a blackout period occurs solely in connection with one or more individuals becoming or ceasing to be a participant or beneficiary under a plan by reason of a merger, acquisition, divestiture or similar transaction involving the plan or plan sponsor, the 30-day advance notice provision of Section 306(b) will not apply. May a plan administrator deliver one notice with respect to temporary suspensions of different rights lasting for different time periods? Yes, provided that the advance notice and other requirements are satisfied with respect to each blackout period described in the notice. Similarly, the notice may be furnished with other plan information, such as benefits statements and information relating to a change in service providers, as long as the plan administrator ensures that the blackout notice information is prominently identified in the furnished materials. Must notice be provided to an individual who becomes a plan participant after a blackout period notice has been delivered? Yes. Notice should be delivered to a new participant as soon as reasonably possible. In what manner may the notice be delivered to Affected Participants? The required notice must be in writing and provided to Affected Participants in any manner consistent with the requirements of DOL Regulation Section b-1, 8 including through the use of electronic media. A blackout notice will be considered furnished as of the date of (i) mailing, if mailed by first class mail, certified mail or express mail; (ii) transmission, if transmitted electronically; or (iii) delivery to a designated private delivery service such as United Parcel Service or Federal Express. Furnishing notice to the last known address of a participant or beneficiary is sufficient if the plan utilizes a permitted method of delivery and the fiduciaries of the plan have taken reasonable steps to update plan records and to locate missing participants. How and when must notice be delivered to the issuer? The plan administrator must deliver notice of the blackout to the issuer in the same manner as is required to be provided to the Affected Participants. The DOL regulations have narrower content requirements for notice to issuers but permit plan administrators to satisfy the notice requirement for issuers by providing the same notice required to provided to Affective Participants. Notice should be provided to the issuer s agent for service of legal process, unless the issuer has provided the plan administrator with the name of another person for service of notice. If the issuer designates the plan administrator as the person for service of notice, the issuer will be considered to have been provided notice on the same date as notice is provided to Affected Participants. What are the consequences of failing to provide the required notice? The Secretary of Labor may assess a civil penalty against a plan administrator of up to $100 a day for each participant or beneficiary from the date of the plan administrator s failure or refusal to provide notice in accordance with Section 306(b). The DOL issued a separate final rule on January 24, 2003 establishing procedures for assessment of civil penalties for failure or refusal to provide a blackout notice required by Section 306(b). The text of the adopting release regarding the civil penalty regulations can be found on the DOL s website at Effective Date When do the final DOL rules become effective? Section 306(b) and the DOL rules became effective on January 26, The notice requirements apply to blackout periods commencing on or after January 26, For blackout periods beginning between January 26, 2003 and February 25, 2003, notice must be provided as soon as reasonably possible, rather than 30 days prior to the commencement of the blackout period. When must plan amendments regarding Section 306(b) be made? To the extent that Section 306(b) requires an amendment to a plan, the amendment will not be required to be made before the first plan year beginning on or after January 26, 2003 as long as (i) during the period after January 26th and before the plan amendment is made the plan is operated in good faith compliance with Section 306(b) and (ii) the plan amendment applies retroactively to January 26, 2003.

10 10 III. NEXT STEPS Sections 306(a) and 306(b) of the Act impose complicated new requirements on issuers, plan sponsors and plan administrators. At a minimum, individuals responsible for the administration and maintenance of individual account plans will want to consider the following steps: incorporate, when appropriate, applicable restrictions into plan documents; review summary plan descriptions to verify that all permanent restrictions are carefully and clearly described; update insider trading policies to reflect the new notice requirements and restrictions; check the indemnification provisions in plan documents and contracts with administrative service organizations to be sure that the risk of non-compliance is allocated correctly; designate, where appropriate, the plan administrator as the recipient of the Section 306(b) notice; and notify insiders of the new rules. Each of these steps should be undertaken promptly and with the assistance of legal counsel to ensure comp liance with these new rules. FORM AND CONTENT OF MODEL NOTICE DOL Regulation Section provides a model notice to facilitate compliance with the blackout period notice requirements. Use of the model is not mandatory but will assist plan administrators in ensuring compliance with the content requirements of the notice. The following is the text of the model notice: * * * * Important Notice Concerning Your Rights Under The [Enter Name of Individual Account Plan] Enter date of notice] This notice is to inform you that the [enter name of plan] will be [enter reasons for blackout period, as appropriate: changing investment options, changing recordkeepers, etc.]. As a result of these changes, you temporarily will be unable to [enter as appropriate: direct or diversify investments in your individual accounts (if only specific investments are subject to the blackout, those investments should be specifically identified), obtain a loan from the plan, or obtain a distribution from the plan]. This period, during which you will be unable to exercise these rights otherwise available under the plan, is called a blackout period. Whether or not you are planning retirement in the near future, we encourage you to carefully consider how this blackout period may affect your retirement planning, as well as your overall financial plan. The blackout period for the plan [enter the following as appropriate: is expected to begin on [enter date] and end [enter date]/is expected to begin during the week of [enter date] and end during the week of [enter date]. During these weeks, you can determine whether the blackout period has started or ended by [enter instructions for using [sic] toll-free number or accessing web site]. [In the case of investments affected by the blackout period, add the following: During blackout period you will be unable to direct or diversify the assets held in your plan account. For this reason, it is very important that you review and consider the appropriateness of your current investments in light of your inability to direct or diversify those investments during the blackout period. For your long-term retirement security, you should give careful consideration to the importance of a well-balanced and diversified investment portfolio, taking into account all your assets, income and investments.] [If the plan permits investments in individual securities, add the following: You should be aware that there is a risk to holding substantial portions of your assets in the securities of any one comp any, as individual securities tend to have wider price swings, up and down, in short periods of time, than investments in diversified funds. Stocks that have wide price swings might have a large loss during the blackout period, and you would not be able to direct the sale of such stocks from your account during the blackout period.] [If timely notice cannot be provided enter: (A) Federal law generally requires that you be provided notice of a blackout period at least 30 days in advance of the last date on which you could exercise your affected rights immediately before the commencement of any blackout period in order to provide you with sufficient time to consider the effect of the blackout period on your retirement and financial plans. (B) [Enter explanation of reasons for inability to furnish 30 days advance notice.]] If you have any questions concerning this notice, you should contact [enter name, address and telephone number of the plan administrator or other contact responsible for answering questions about the blackout period].

11 11 ENDNOTES 1 Section 306(a) does not apply to exempt securities as defined in Section 3(a)(12) of the Exchange Act, such as (i) government and municipal securities, (ii) interests in certain common trusts, pooled income funds, collective trust funds, and collective investment funds and (iii) securities issued by or interests in certain church plans, companies and accounts. 2 Item 404 of Regulation S-K generally requires the issuer to disclose (i) transactions involving greater than $60,000 where the issuer is a party and in which an executive officer or director to the issuer has a direct or indirect material interest and (ii) indebtedness of a director or executive officer of the issuer exceeding $60,000. Item 7.B of Form 20-F generally requires disclosure of transactions or loans between the issuer and either its key management personnel, close family members of key management personnel or entities controlled by such persons. 3 Under Section 16 of the Exchange Act, a person is deemed to have a pecuniary interest in equity securities if that person has or shares the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the securities. For example, purchases of equity securities by immediate family members of an insider who share the same household or by entities in which the insider is a substantial owner could be attributable to the insider under the indirect pecuniary interest test under Section 16 of the Exchange Act. 4 The adopting release does not indicate the method by which the average stock price is to be determined (i.e., using closing price, average of high and low, weighted average trading price, etc.). 5 Section 206(d)(3)(B)(i) of ERISA generally defines a qualified domestic relations order as a settlement, divorce or custody judgment, decree or order under state law that creates or recognizes the existence of an alternate payee s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan and that meets certain form and content requirements specified by ERISA. 6 The contact may be an individual or a department (e.g., human resources). 7 Section 404(a)(1) of ERISA generally provides that a plan fiduciary must discharge his duties with respect to a plan solely in the interest of the plan participants and beneficiaries and (A) for the exclusive purposes of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan and (B) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use. 8 DOL Regulation Section b-1 requires the plan administrator to use distribution measures reasonably calculated to ensure actual receipt of the notice by a method or methods of delivery likely to result in full distribution. For example, hand-delivery to an Affected Participant at his or her worksite is acceptable, however, merely placing copies of the notice in a location frequented by Affected Participants is not. This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. For more information on the topics covered in this issue, please call your regular adviser at Shearman & Sterling or any of the following attorneys: Henry C. Blackiston, III (+1 212) hblackiston@shearman.com Kenneth J. Laverriere (+1 212) klaverriere@shearman.com John J. Cannon, III (+1 212) jcannon@shearman.com Doreen E. Lilienfeld (+1 212) dlilienfeld@shearman.com Linda E. Rappaport (+1 212) lrappaport@shearman.com Jeffrey P. Crandall (+1 212) jcrandall@shearman.com George Spera (+1 212) gspera@shearman.com SHEARMAN & STERLING 599 Lexington Avenue,, NY Under the regulations of some jurisdictions, this material may constitute advertising.