Blackout Periods.  Defined contribution plans, such as 401(k) plans, profit sharing plans and TSAs, sometimes impose "blackout periods", during which participants are temporarily suspended, limited or restricted from directing the investments of their accounts or obtaining plan loans or distributions.  These blackout periods commonly are imposed when plan service providers are being replaced and there is a need to freeze temporarily plan activities in order to facilitate the transition.

Under the Act, before any blackout period lasting more than three consecutive business days may be imposed, plan administrators must first provide participants with at least 30 days advance written notice of the blackout period, so the participants have time to take actions with respect to their plan accounts in advance of the blackout period.

In addition, if the plan is sponsored by a publicly traded company, and if company stock is among the investments available under the plan, the Act generally prohibits directors and executive officers (as those terms are defined under the federal securities laws) from trading during the blackout period any company stock acquired in connection with their service to the company.

The effective date of these blackout period provisions is January 26, 2003, although it should be noted that the current fiduciary rules applicable in these situations continue to apply in the interim.

         Loans to Directors and Executive Officers.  The Act prohibits publicly traded companies from directly or indirectly extending credit in the form of personal loans to their directors and executive officers (again, as those terms are defined under the federal securities laws).

The breadth of these provisions of the Act, and the fact that they are effective immediately, suggest that all publicly traded companies should immediately identify all current or contemplated transactions with their senior personnel that arguably could be viewed as loans, and should suspend those transactions, at least until further guidance is issued as to what will and will not be covered by this loan prohibition.  Among the types of conventional transactions that very well could be covered are loans (or loan guarantees) in connection with stock option exercises and non-option stock acquisitions, loans under a 401(k) plan, relocation loans, and premiums paid under split dollar life insurance arrangements.

It is unclear at this point to what extent certain arrangements in place before the Act will be exempted, and what types of modifications can be made to in-place arrangements without causing them to lose their exempted status.  For example, even if a split dollar arrangement had been entered into years ago, post-July 2002 premium payments may not be permitted because they may be characterized as "loans" under the Act.  We urge our publicly traded clients to contact us before making any further premium payments into a split dollar life insurance policy for a director or executive officer, before arranging a "cashless exercise" by a director or executive officer of his or her stock options, or before modifying the terms of any outstanding loan made to a director or executive officer.

·                     Section 16 Reporting by Insiders. Before Sarbanes-Oxley, Section 16(a) of the Securities Exchange Act of 1934 required "insiders" (i.e., generally officers and directors) to report changes in beneficial ownership in the employer's securities after the close of the calendar month in which the change occurred, on a Form 4.  Some transactions needed to be reported only on an annual basis (Form 5) rather than on a monthly basis (Form 4).  In a  qualified or non-qualified plan of a public company in which participants who are insiders 401(k) direct investments in and out of employer stock, these reportable transactions include:

1. Contributions to a non-qualified plan which are invested in part in company stock because of a standing company stock election (technically, a "purchase");

2.  A participant direction within a qualified or non-qualified plan to switch investments from a non-company stock investment to a company stock investment (technically, a "purchase");

3.  A participant direction within a qualified or non-qualified plan to switch investments from a company stock investment to a non-company stock investment (technically, a "sale");

4. Distributions from a non-qualified plan to a participant who is an "insider" from an account that is invested in company stock in whole or in part (technically, a "sale").

Under Sarbanes-Oxley, Section 16(a) accelerates reporting on changes in beneficial ownership in these types of transactions (and others traditionally reportable on a Form 4-such as option exercises) from after the close of the calendar month (or after the calendar year) to 2 days following the transaction.  The SEC has indicated that it will revise Rule 16a-3(f) to provide that, generally, all reportable transactions exempted by Rule 16b-3 (like most every non-qualified plan transaction) must be reported on Form 4 on this basis rather than annually on Form 5.

When the SEC releases the revised Rule 16a-3(f), we will be able to know for certain what, if any, exceptions the SEC will make.  For example, in its August 6th release, the SEC indicated that it might allow later reporting for (a) single market orders executed over more than a day; (b) transactions pursuant to a pre-existing arrangement, the timing of which is outside the insider's knowledge--in which case reporting may be delayed until the insider receives a confirmation or notice of the transaction; or (c) discretionary transactions involving employee plans--in which case reporting may be delayed, again, until the insider receives notice of the transaction.

The wisest course of action for public companies would be to begin filing Forms 4 for the above company stock qualified or deferred compensation plan transactions by insiders on or after August 29th (whether or not the SEC actually releases the promised revised Rule 16a-3(f) before August 29th).   Third-party administrators for these plans also should become equipped to deliver to their clients the information needed to assist with this rather onerous compliance responsibility on an extremely fast tracked basis.

As you might imagine, the above is only a very general description of the more significant employee benefits/executive compensation provisions of the Act.  The legislation is complex and very detailed (e.g., providing express requirements for what the blackout notice may contain, etc.), and it leaves unresolved many important issues.  We strongly urge you to contact us before acting on any of the above.

Finally, you should be aware that we are tracking several other, highly significant legislative initiatives in the employee benefits/executive compensation area, including Enron-related bills that would, among other things, add employee protections and diversification rights to plans under which employer stock is an investment option, as well as bills that could profoundly impact executive-level deferred compensation plans.  The Internal Revenue Service has also been very active of late, particularly with respect to executive benefits (e.g., the recent split dollar guidance, the recent 457 Regulations, etc.).  Well-publicized abuses have caused the public and the legislators and regulators to become hyper-focused on this area, with the unfortunate result that Sarbanes-Oxley may be only the tip of the iceberg.  Therefore, we urge you to monitor developments in this area very carefully.

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