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Broadly speaking, SEC Regulation BTR prohibits directors and executive officers of public companies from trading in the issuer’s securities which were acquired in connection with service to the issuer if a sufficient number of participants in the issuers’ benefit plans are also prohibited from trading in the issuer’s securities because of a plan blackout. It is sometimes hard to fathom what the rule is getting at.  It is meant to prevent a repeat of Enron, where officers and directors engaged in wide spread selling during a period of rapid price decline, but employees were prevented from selling Enron securities in their 401(k) plans because of a blackout imposed by the plan administrator.  The officers and directors made out good, the employees did not.

The SEC recently granted Pfizer no-action relief from Regulation BTR in connection with a planned exchange offer for Zoetis common stock of which Pfizer owns a significant interest.  In the planned exchange offer, Pfizer shareholders will be offered the opportunity to exchange their Pfizer shares for shares of Zoetis common stock.  The exchange offer is open to all holders of common stock, including executive officers and directors of Pfizer and Pfizer employees, including shares held though Pfizer’s 401(k) plan.  After inquiry of its plan administrators, Pfizer believes employees who elect to tender Pfizer shares in 401(k) plans will have their ability to engage in transactions regarding Pfizer stock suspended so that an accurate accounting can be made of the shares.  Hence the concern regarding Regulation BTR, although Pfizer does not know if the suspensions will include enough plan participants to trigger a blackout period.

Pfizer argued that a black-out period should not apply under Rule 101(c)(9) of Regulation BTR, which exempts ”any acquisition or disposition of equity securities in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law.”  It noted that it was between a rock and a hard place under the “all holders rule” (Rule 13e4(f)(8)(i)) as that rule requires the exchange offer to be open to all executive officers and directors, but Regulation BTR says they cannot participate.  Pfizer noted the exchange offer will be conducted in compliance with the SEC’s rules, which offers protection for participants.

In essence, Pfizer argued that the exchange offer would not result in inequitable treatment for those employees subject to a suspension, and hence Regulation BTR should not apply. In other words, this is not Enron. It’s why Regulation BTR includes an exception for mergers etc., which should apply here, even if Rule 101(c)(9) does not specifically refer to exchange offers.

The SEC granted the no-action request, subject to some conditions.  The most important condition is “Pfizer directors and executive officers would continue to be permitted to tender into the Exchange Offer during a blackout period, but would not otherwise be permitted to directly or indirectly purchase, sell or otherwise acquire or transfer Pfizer common stock during such blackout period if the shares involved were or would be acquired in connection with service or employment as a director or executive officer.”

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