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WASHINGTON, D.C.

December 16, 2002

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street
Washington D.C. 20549-0609

Insider Trades During Pension Fund Blackout Periods (Release No. 34-46778)
File No. S7-44-02

Dear Mr. Katz:

We are pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on proposed regulation BTR, 17 C.F.R. § 245.100-104, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Regulation BTR would clarify the application of Section 306(a) of the Sarbanes-Oxley Act of 2002 (the "Act"), P.L. 107-204, 116 Stat. 745.

Our comments are addressed to proposed Rule 100(b)(2), which is relevant to foreign private issuers.

For foreign private issuers, the Commission has proposed a two-prong test to determine whether the trading prohibition of Section 306(a) of the Act will apply to the issuer's executive officers and directors:

  • First, the issuer would compare (A) the number of individual account plan participants or beneficiaries located in the United States (including its territories and possessions) who will be subject to a temporary suspension of trading in the issuer's equity securities to (B) the overall number of participants or beneficiaries located in the United States under all individual account plans maintained by the issuer. If this percentage is less than 50%, Section 306(a) would not apply.

  • Second, if the percentage in the first test is at least 50%, a foreign private issuer would compare (A) the number of participants or beneficiaries located in the United States and subject to a temporary suspension of trading in the issuer's equity securities to (B) the number of participants or beneficiaries in all of the issuer's individual account plans worldwide that permit participants or beneficiaries to acquire or hold equity securities of the issuer. If this percentage is greater than 15% (and the concurrent 50% test is also met), the prohibitions of Section 306(a) would apply.

The 15% test is intended to accommodate the Commission's view that a foreign private issuer's executive officers and directors should be subject to Section 306(a) only if "the affected [United States] participants represent a significant portion of the issuer's plan participants." We strongly support the Commission's general view of the appropriate scope of Section 306(a). Principles of fairness, as well as practical considerations relating to plan administration, argue against subjecting a foreign private issuer's executive officers and directors to Section 306(a) when U.S. participants constitute only a relatively small percentage of the issuer's workforce. We are concerned nevertheless that the 15% test will not effectively accomplish the Commission's stated purpose.

Proposed Rule 100(j) would define "individual account plan" as follows (in relevant part):

... a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account ...

In our experience, many foreign private issuers will have relatively few or no individual account plans that meet this definition, other than plans they maintain for their United States employees. There are various reasons for this:

  • Many foreign private issuers operate in countries where State-supported social security retirement systems replace a significantly larger percentage of an employee's compensation than is typical in the United States. As a result, these issuers do not have the same tradition of private pension plans that prevails in the United States and may maintain no pension plans at all, or plans designed for only a relatively small percentage of their non-U.S. workforce.

  • Many pension plans maintained by foreign private issuers for the benefit of employees located outside of the United States would be characterized in the United States as "defined benefit plans" that clearly would not meet the proposed definition of "individual account plan."

  • Even those foreign private issuers who do maintain pension arrangements in which individual employees have accounts may find that their plans do not meet the proposed definition, as benefits may not be based solely upon the amount of contributions, income, expenses, gains, losses, and reallocated forfeitures. Several French issuers, for example, have adopted plans that include a guaranteed minimum return on employee investment in employer securities, irrespective of actual performance. It is not clear that such plans satisfy the proposed definition.

In our view, these considerations make it unlikely that any definition of "individual account plan" will be appropriately responsive to the variety of methods that foreign private issuers use to help ensure adequate retirement income for their employees. We believe that in the context of proposed Rule 100(b)(2), the appropriate balance between protecting U.S. plan participants and accommodating the interests of foreign issuers with only a small U.S. presence is best achieved by introducing a test that compares the number of United States employees of the foreign private issuer to the overall number of the issuer's employees worldwide. If United States employees represent less than 15% of the issuer's employees worldwide, we suggest that the foreign private issuer's connection to the United States should be considered sufficiently remote that its executive officers and directors should not be subject to Section 306(a). If this percentage is greater than 15%, and the concurrent 50% test that the Commission has proposed is satisfied, Section 306(a) of the Act would apply.1

We thank you for your attention to this matter. If you would like to discuss the issue raised in this letter, we invite you to contact either of us.

Sincerely,

John J. Cannon, III
(Tel: 212-848-8159)

George Spera
(Tel: 212-848-7636)

____________________________
1 Consistent with proposed Rule 100(b)(3), for purposes of determining the United States and worldwide employees of the issuer, the rules under Section 414(b), (c) and (m) of the Internal Revenue Code (25 U.S.C. §414(b), (c) and (m)) should apply.