Congress adopted the Sarbanes-Oxley Act (the “Act”) last year in response to the Enron situation. Part of the Act requires a notice to plan participants when a “blackout” will affect the participants’ ability to direct the investment of their accounts or to receive distributions or loans from the plan. (For more information, see DOL Issues Blackout Period Regulations and Model Notice). The new rules go into effect January 26, 2003.

The Act also prohibits any director or executive officer of an issuer (i.e., the corporation for which the individual is an officer or director) from dealing in employer securities during a blackout period which prevents plan participants and beneficiaries from engaging in transactions involving employer securities held in their plan accounts. This prohibition applies only to issuers with securities registered under Exchange Act §12, which file reports under Exchange Act §15(d), or which have filed registration statements that have not yet become effective. In other words, the prohibition generally does not apply to small, privately held companies. The SEC recently issued regulations interpreting this prohibition.

The prohibition applies only to employer securities acquired “in connection with . . . service or employment as a director or executive officer.” While the regulation broadly defines this clause, it also states that all securities an officer or director sells during a blackout period are deemed to be in acquired in connection with such service unless the officer or director can demonstrate that the securities were acquired from another source.

The regulation prohibits both direct and indirect transactions. Accordingly, the SEC will treat acquisitions or dispositions of employer securities by family members, partnerships, corporations, LLCs, and trusts as transactions by a director or executive officer if he or she has an interest in the securities.

The regulation provides that the prohibition does not apply to prearranged transactions, or to transactions outside the officer’s control. Hence, the prohibition does not apply to automatic dividend reinvestment, stock splits, acquisitions via gifts, wills, or domestic relations orders, or similar transactions.

For purposes of the prohibition a blackout period is period of more than three consecutive business days during which there is a restriction of the ability of at least 50% of the participants or beneficiaries under all defined contribution plans the issuer maintains to purchase, sell or otherwise acquire or transfer an interest in employer securities under the plan.

An officer or director who violates the prohibition is subject to SEC enforcement. In addition, the issuer or its shareholders can sue the officer or director to recover, for the company, the difference between the amount involved on the date of the transaction and the amount which would have been paid or received after the blackout period.