Respondent, a personal holding company contemplating
liquidation, sold assets to petitioner corporation. Respondent
received from petitioner as part of the purchase price convertible
debentures which, if converted into petitioner's common stock,
would make respondent a holder of more than 10% of petitioner's
outstanding common stock. A few days later, pursuant to an
underwriting agreement, one of the debentures was sold to a group
of underwriters for cash in an amount exceeding its face value.
After making debenture and cash distributions to its stockholders,
respondent dissolved. Under § 16(b) of the Securities Exchange Act
of 1934 (Act) a corporation may recover for itself the profits
realized by an officer, director, or beneficial owner of more than
10% of its shares from a purchase and sale of its stock within a
six-month period. An exemptive provision specifies, however, that §
16(b) shall not be construed to cover any transaction where the
beneficial owner was not such both "at the time of" the purchase
and sale of the securities involved. Since the amount of
petitioner's debentures received by respondent was large enough to
make respondent a beneficial owner of petitioner within the meaning
of § 16, and its disposal of the securities within the six-month
period exposed respondent to a suit by petitioner to recover
profits realized by respondent on the sale to the underwriters,
respondent sought a declaratory judgment of its nonliability under
§ 16(b). The District Court granted summary judgment to respondent,
and the Court of Appeals affirmed, though for different
reasons.
Held: By virtue of the exemptive provision, a
beneficial owner is accountable under § 16(b) in a purchase-sale
sequence such as was involved here only if he was such an owner
"before the purchase." Thus, the fact that respondent was not a
beneficial owner before the purchase removed the transaction from
the operation of § 16(b). Pp.
423 U. S.
239-259.
(a) The legislative history of the exemptive provision reveals a
legislative intent to deter beneficial owners from making both
Page 423 U. S. 233
a purchase and a sale on the basis of inside information, which
is presumptively available only after the purchase. Pp.
423 U. S.
243-250.
(b) Had it been Congress' design when it enacted § 16(b) to
impose liability in cases such as this, it should have done so
expressly or by unmistakable inference. Pp.
423 U. S.
251-252.
(c) Congress may have sought to distinguish between purchases by
persons who have not yet acquired inside status through stock
ownership of at least 10% and purchases by directors and officers
because the latter are more intimately involved in corporate
affairs. Pp.
423 U. S.
253-254.
(d) Other sanctions remain available against fraudulent use of
inside information in transactions not covered by § 16(b). Pp.
423 U. S.
254-256.
(e) Other provisions exempting certain transactions from § 16(b)
are not inconsistent with the "before the purchase" construction
reached here. Pp.
423 U. S.
256-259.
506 F.2d 601, affirmed.
POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and BRENNAN, STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ.,
joined, and in all but Part IV-C of which WHITE, J., joined.
STEVENS, J., took no part in the consideration or decision of the
case.
MR. JUSTICE POWELL delivered the opinion of the Court.
This case presents an unresolved issue under § 16(b)
Page 423 U. S. 234
of the Securities Exchange Act of 1934 (At), 48 Stat. 896, 15
U.S.C. § 78p(b). That section of the Act was designed to prevent a
corporate director or officer or "the beneficial owner of more than
10 per centum" of a corporation [
Footnote 1] from profiteering through short-swing
securities transactions on the basis of inside information. It
provides that a corporation may capture for itself the profits
realized on a purchase and sale, or sale and purchase, of its
securities within six months by a director, officer, or beneficial
owner. [
Footnote 2] Section
16(b)'s last sentence,
Page 423 U. S. 235
however, provides that it
"shall not be construed to cover any transaction where such
beneficial owner was not such both at the time of the purchase and
sale, or the sale and purchase, of the security involved. . .
."
The question presented here is whether a person purchasing
securities that put his holdings above the 10% level is a
beneficial owner "at the time of the purchase" so that he must
account for profits realized on a sale of those securities within
six months. The United States Court of Appeals for the Ninth
Circuit answered this question in the negative. 506 F.2d 601
(1974). We affirm.
I
Respondent, Provident Securities Co., was a personal holding
company. In 1968, Provident decided tentatively to liquidate and
dissolve, and it engaged an agent to find a purchaser for its
assets. Petitioner, Foremost-McKesson, Inc., emerged as a potential
purchaser, but extensive negotiations were required to resolve a
disagreement over the nature of the consideration Foremost would
pay. Provident wanted cash in order to facilitate its dissolution,
while Foremost wanted to pay with its own securities.
Eventually a compromise was reached, and Provident and Foremost
executed a purchase agreement embodying their deal on September 25,
1969. The agreement provided that Foremost would buy two-thirds of
Provident's assets for $4.25 million in cash and $49.75 million in
Foremost convertible subordinated debentures. [
Footnote 3] The agreement further provided that
Foremost would register under the Securities Act of 1933 $25
million in
Page 423 U. S. 236
principal amount of the debentures and would participate in an
underwriting agreement by which those debentures would be sold to
the public. At the closing on October 15, 1969, Foremost delivered
to Provident the cash and a $40 million debenture which was
subsequently exchanged for two debentures in the principal amounts
of $25 million and $15 million. Foremost also delivered a $2.5
million debenture to an escrow agent on the closing date. On
October 20, Foremost delivered to Provident a $7.25 million
debenture representing the balance of the purchase price. These
debentures were immediately convertible into more than 10% of
Foremost's outstanding common stock.
On October 21, Provident, Foremost, and a group of underwriters
executed an underwriting agreement to be closed on October 28. The
agreement provided for sale to the underwriters of the $25 million
debenture. On October 24, Provident distributed the $15 million and
$7.25 million debentures to its stockholders, reducing the amount
of Foremost common into which the company's holdings were
convertible to less than 10%. On October 28 the closing under the
underwriting agreement was accomplished. [
Footnote 4] Provident thereafter distributed the cash
proceeds of the debenture sale to its stockholders and
dissolved.
Provident's holdings in Foremost debentures as of October 20
were large enough to make it a beneficial owner of Foremost within
the meaning of § 16. [
Footnote
5] Having
Page 423 U. S. 237
acquired and disposed of these securities within six months,
Provident faced the prospect of a suit by Foremost to recover any
profits realized on the sale of the debenture to the underwriters.
Provident therefore sued for a declaration that it was not liable
to Foremost under § 16(b). The District Court granted summary
judgment for Provident, and the Court of Appeals affirmed.
Provident's principal argument below for nonliability was based
on
Kern County Land Co. v. Occidental Corp., 411 U.
S. 582 (1973). There, we held that an "unorthodox
transaction" in securities that did not present the possibility of
speculative abuse of inside information was not a "sale" within the
meaning of § 16(b). Provident contended that its reluctant
acceptance of Foremost debentures in exchange for its assets was an
"unorthodox transaction" not presenting the possibility of
speculative abuse, and therefore was not a "purchase" within the
meaning of § 16(b). Although the District Court's pre-
Kern
County opinion had adopted this type of analysis,
331 F.
Supp. 787 (ND Cal.1971), the Court of Appeals rejected it,
reasoning that Provident's acquisition of the debentures was not
"unorthodox," and that the circumstances did not preclude the
possibility of speculative abuse. 506 F.2d at 604-605.
The Court of Appeals then considered two theories of
nonliability based on § 16(b)'s exemptive provision:
"This subsection shall not be construed to cover any transaction
where such beneficial owner was not such both at the time of the
purchase and sale, or the sale
Page 423 U. S. 238
and purchase. . . ."
The first was Provident's argument that it was not a beneficial
owner "at the time of . . . sale." After the October 24
distribution of some debentures to stockholders, the debentures
held by Provident were convertible into less than 10% of Foremost's
outstanding common stock. Provident contended that its sale to the
underwriters did not occur until the underwriting agreement was
closed on October 28. If this were the case, the sale would not
have been covered by § 16(b), since Provident would not have been a
beneficial owner "at the time of . . . sale." [
Footnote 6] The Court of Appeals rejected this
argument because it found that the sale occurred on October 21 upon
execution of the underwriting agreement. [
Footnote 7]
Page 423 U. S. 239
The Court of Appeals then turned to the theory of nonliability
based on the exemptive provision that we consider here. [
Footnote 8] It held that, in a
purchase-sale sequence, the phrase "a the time of the purchase"
"must be construed to mean prior to the time when the decision to
purchase is made." 506 F.2d at 614. Thus, although Provident became
a beneficial owner of Foremost by acquiring the debentures, it was
not a beneficial owner "at the time of the purchase." Accordingly,
the exemptive provision prevented any § 16(b) liability on
Provident's part.
II
The meaning of the exemptive provision has been disputed since §
16(b) was first enacted. The discussion has focused on the
application of the provision to
Page 423 U. S. 240
a purchase-sale sequence, the principal disagreement being
whether "at the time of the purchase" means "before the purchase"
or "immediately after the purchase." [
Footnote 9] The difference in construction is
determinative of a beneficial owner's liability in cases such as
Provident's where such owner sells within six months of purchase
the securities the acquisition of which made him a beneficial
owner. The commentators divided immediately over which construction
Congress intended, [
Footnote
10] and they remain divided. [
Footnote 11] The Courts of Appeals also are in
disagreement over the issue.
The question of what Congress intended to accomplish by the
exemptive provision in a purchase-sale sequence came to a Court of
Appeals for the first time in
Stella v. Graham-Paige Motors
Corp.,232 F.2d 299 (CA2),
cert. denied, 352 U.S. 831
(1956). There, the Court of Appeals for the Second Circuit, without
discussion but over a dissent, affirmed the District Court's
Page 423 U. S. 241
adoption of the "immediately after the purchase" construction.
That court had been impelled to this construction at least in part
by concern over what the phrase "at the time of . . . purchase"
means in a sale-repurchase sequence, reasoning:
"If the ['before the purchase'] construction urged by
[Graham-Paige] is placed upon the exemption provision, it would be
possible for a person to purchase a large block of stock, sell it
out until his ownership was reduced to less than 10%, and then
repeat the process,
ad infinitum."
104 F.
Supp. 957, 959 (SDNY 1952). The District Court may have thought
that "before the purchase" seemed an unlikely construction of the
exemptive provision in a sale-repurchase sequence, so it could not
be the proper construction in a purchase-sale sequence. [
Footnote 12] The
Stella
construction of the exemptive provision has been adhered to in the
Second Circuit,
Newmark v. RKO General, Inc., 425 F.2d
348, 355-356,
cert. denied, 400 U.S. 854 (1970); [
Footnote 13]
Perne v.
Page 423 U. S. 242
William Norton & Co., 509 F.2d 114, 118 (1974), and
adopted by the Court of Appeals for the Eighth Circuit.
Emerson
Electric Co. v. Reliance Electric Co., 434 F.2d 918, 923-924
(1970),
aff'd on other grounds, 404 U.
S. 418 (1972). [
Footnote 14] But in none of the foregoing cases did the
court examine critically the legislative history of § 16(b).
The Court of Appeals considered this case against the
background, sketched above, of ambiguity in the pertinent statutory
language, continued disagreement among the commentators, and a
perceived absence in the relatively few decided cases of a full
consideration of the purpose and legislative history of § 16(b).
The court found unpersuasive the rationales offered in Stella and
its progeny for the "immediately after the purchase" construction.
It noted that construing the provision to require that beneficial
ownership status exist before the purchase in a purchase-sale
sequence would not foreclose an "immediately after the purchase"
construction in a sale-repurchase sequence. [
Footnote 15] 506 F.2d at 614-615. More
significantly, the Court of Appeals challenged directly the premise
of the earlier cases that a "before the purchase" construction in a
purchase-sale sequence would allow abuses Congress intended to
abate. The court reasoned that, in § 16(b), Congress intended to
reach only those beneficial owners who both bought and sold on the
basis of inside information, which was presumptively
Page 423 U. S. 243
available to them only after they became statutory "insiders."
506 F.2d at 608-614. [
Footnote
16]
III
A
The general purpose of Congress in enacting § 16(b) is well
known.
See Kern County Land Co., 411 U.S. at
411 U. S.
591-592;
Reliance Electric Co., 404 U.S. at
404 U. S. 422,
and the authorities cited therein. Congress recognized that
insiders may have access to information about their corporations
not available to the rest of the investing public. By trading on
this information, these persons could reap profits at the expense
of less well informed investors. In § 16(b), Congress sought to
"curb the evils of insider trading [by] . . . taking the profits
out of a class of transactions in which the possibility of abuse
was believed to be intolerably great."
Reliance Electric Co., supra, at
404 U. S. 422.
It accomplished this by defining directors, officers, and
beneficial owners as those presumed to have access to inside
information, [
Footnote 17]
and enacting a flat rule
Page 423 U. S. 244
that a corporation could recover the profits these insiders made
on a pair of security transactions within six months. [
Footnote 18]
Foremost points to this purpose, and invokes the observation in
Reliance Electric Co. that,
"where alternative constructions of the terms of § 16(b) are
possible, those terms are to be given the construction that best
serves the congressional purpose of curbing short-swing speculation
by corporate insiders."
404 U.S. at
404 U. S. 424
(footnote omitted). From these premises, Foremost argues that the
Court of Appeals' construction of the exemptive provision must be
rejected [
Footnote 19]
because it makes § 16(b) inapplicable to some possible abuses of
inside information that the statute would reach under the
Stella construction. [
Footnote 20] We find this approach unsatisfactory in its
focus on situations that § 16(b) may not reach, rather than on the
language and purpose of the exemptive provision itself. Foremost's
approach also invites an imposition of § 16(b)'s liability without
fault that is not consistent with the premises upon which Congress
enacted the section.
Page 423 U. S. 245
B
The exemptive provision, which applies only to beneficial owners
and not to other statutory insiders, must have been included in §
16(b) for a purpose. Although the extensive legislative history of
the Act is bereft of any explicit explanation of Congress' intent,
see Reliance Electric Co., supra at
404 U. S. 424,
the evolution of § 16(b) from its initial proposal through passage
does shed significant light on the purpose of the exemptive
provision.
The original version of what would develop into the Act was S.
2693, 73d Cong., 2d Sess. (1934). It provided in § 15(b):
"It shall be unlawful for any director, officer, or owner of
securities, owning as of record and/or beneficially more than 5 per
centum of any class of stock of any issuer, any security of which
is registered on a national securities exchange --"
"(1) To purchase any such registered security with the intention
or expectation of selling the same security within six months; and
any profit made by such person on any transaction in such a
registered security extending over a period of less than six months
shall inure to and be recoverable by the issuer, irrespective of
any intention or expectation on his part in entering into such
transaction of holding the security purchased for a period
exceeding six months."
In the next version of the legislation, H.R. 8720, 73d Cong., 2d
Sess. (1934), § 15(b) read almost identically to § 16(b) as it was
eventually enacted: [
Footnote
21]
"Any profit realized by such beneficial owner,
Page 423 U. S. 246
director, or officer from any purchase and sale or sale and
purchase of any such registered equity security within a period of
less than six months, unless such security was acquired in good
faith in connection with a debt previously contracted, shall inure
to and be recoverable by the issuer, irrespective of any intention
on the part of such beneficial owner, director, or officer in
entering into such transaction of holding the security purchased or
of not repurchasing the security sold for a period exceeding six
months. . . . This subsection shall not be construed to cover any
transaction where such beneficial owner was not such both at the
time of the purchase and sale or sale and purchase of the security
involved, nor any transaction or transactions which the Commission
by rules and regulations may exempt as not comprehended within the
purpose of this subsection of preventing the unfair use of
information which may have been obtained by such beneficial owner,
director, or officer by reason of his relationship to the
issuer."
Thomas G. Corcoran, a spokesman for S. 2693's drafters,
explained § 15(b) as forbidding an insider "to carry on any
short-term specu[la]tions in the stock. He cannot, with his inside
information, get in and out of stock within six months." Hearings
on H.R. 7852 and H.R. 8720 before the House Committee on Interstate
and Foreign Commerce, 73d Cong., 2d Sess., 133 (1934). The Court of
Appeals concluded that § 15(b) of S. 2693
Page 423 U. S. 247
would have applied only to a beneficial owner who had that
status before a purchase-sale sequence was initiated, 506 F.2d at
609, and we agree. Foremost appears not to contest this point.
Brief for Petitioner 29. The question thus becomes whether H.R.
8720's change in the language imposing liability and its addition
of the exemptive provision were intended to change S. 2693's result
in a purchase-sale sequence by a beneficial owner. We think the
legislative history shows no such intent.
S. 2693 and its House counterpart, H.R. 7852, 73d Cong., 2d
Sess. (1934), met substantial criticism on a number of scores,
including various provisions of § 15.
See Hearings on
Stock Exchange Practices before the Senate Committee on Banking and
Currency, 73d Cong., 2d Sess., pt. 15 (1934); Hearings on H.R. 7852
and H.R. 8720,
supra at 1-623. [
Footnote 22] S. 2693 was recast into H.R. 8720 to take
account of the criticisms that the bill's drafters thought valid.
Hearings on H.R. 7852 and H.R. 8720,
supra at 625, 674.
The primary substantive criticism directed at § 15(b) of S. 2693
was that it did not prevent the use of inside information to reap a
short-term profit in a sale-repurchase situation.
See
Hearings on Stock Exchange Practices,
supra at 6557-6558.
Criticism was also directed at making liability for short-term
profits turn on ownership "as of record and/or beneficially."
See id. at 6914. H.R. 8720 remedied these perceived
shortcomings by providing in § 15(b):
"Any profit realized by such beneficial
Page 423 U. S. 248
owner, director, or officer from any purchase and sale or sale
and purchase . . . shall inure to and be recoverable by the issuer.
[
Footnote 23]"
The term "such beneficial owner" was defined in § 15(a) to mean
one "who is directly or indirectly the beneficial owner of more
than 5 per centum of any class" of a registered security.
The structure of the clause imposing liability in the revised §
15(b) did not unambiguously retain S. 2693's requirement that
beneficial ownership precede a purchase-sale sequence. But we
cannot assume easily that Congress intended to eliminate the
requirement in the revised bill. The legislative history reveals
that the requirement was made clear in the hearings, yet no
complaint was made about it.
The testimony on S. 2693 demonstrates that the drafters were
emphatic about the requirement. In explaining the bill, Corcoran
pointed out a technical flaw in S. 2693's language:
"It shall be unlawful for any director, officer, or owner of
securities, owning as of record and/or beneficially more than 5 per
centum of any class of stock. . . ."
It was possible to construe the phrase "owning . . . 5 per
centum" to apply to directors and officers as well as to mere
stockholders, so that trading by directors and officers would not
be subject to § 15(b) if their previous holdings did not exceed 5.
But Corcoran made clear that the requirement of preexisting
Page 423 U. S. 249
ownership of the specified percentage applied only to beneficial
owners.
"Mr. CORCORAN. . . . The bill is not very well drawn there. It
ought to read to cover every director, every officer, and every
stockholder who owns more than 5 percent of the stock. That is the
way it was intended to read."
"Mr. MAPES. It ought to read 'and/or beneficially more than 5
percent' followed by 'is a director, or officer.'"
"Mr. CORCORAN. It is badly drawn. We slipped on that. It ought
to read 'every director and every officer' and then 'every big
stockholder.'"
Hearings on H.R. 7852 and H.R. 8720,
supra at 133.
See Hearings on Stock Exchange Practices,
supra,
at 6555.
The legislative record thus, reveals that the drafters focused
directly on the fact that S. 2693 covered a short-term
purchase-sale sequence by a beneficial owner only if his status
existed before the purchase, and no concern was expressed about the
wisdom of this requirement. But the explicit requirement was
omitted from the operative language of the section when it was
restructured to cover sale-repurchase sequences. In the same draft,
however, the exemptive provision was added to the section. On this
record, we are persuaded that the exemptive provision was intended
to preserve the requirement of beneficial ownership before the
purchase. Later discussions of the present § 16(b) in the hearings
are consistent with this interpretation. [
Footnote 24] We hold that,
Page 423 U. S. 250
in a purchase-sale sequence, a beneficial owner must account for
profits only if he was a beneficial owner "before the purchase."
[
Footnote 25]
Page 423 U. S. 251
IV
Additional considerations support our reading of the legislative
history.
A
Section 16(b) imposes a strict prophylactic rule with respect to
insider, short-swing trading. In
Kern County Land Co., 411
U.S. at
411 U. S. 595,
we noted:
"The statute requires the [statutorily defined] inside,
short-swing trader to disgorge all profits realized on all
'purchases' and 'sales' within the specified time period, without
proof of actual abuse of insider information, and without proof of
intent to profit on the basis of such information."
In short, this statute imposes liability without fault within
its narrowly drawn limits. [
Footnote 26]
As noted earlier, Foremost recognizes the ambiguity of the
exemptive provision, but argues that, where "alternative
Page 423 U. S. 252
constructions" of § 16(b)'s terms are available, we should
choose the construction that best serves the statute's purposes.
Foremost relies on statements generally to this effect in
Kern
County Land Co., supra at
411 U. S. 595,
and
Reliance Electric Co., 404 U.S. at
404 U. S. 424.
In neither of those cases, however, did the Court adopt the
construction that would have imposed liability, thus, recognizing
that serving the congressional purpose does not require resolving
every ambiguity in favor of liability under § 16(b). We reiterate
that nothing suggests that the construction urged by Foremost would
serve better to further congressional purposes. Indeed, the
legislative history of § 16(b) indicates that, by adding the
exemptive provision, Congress deliberately expressed a contrary
choice. But even if the legislative record were more ambiguous, we
would hesitate to adopt Foremost's construction. It is
inappropriate to reach the harsh result of imposing § 16(b)'s
liability without fault on the basis of unclear language. If
Congress wishes to impose such liability, we must assume it will do
so expressly or by unmistakable inference.
It is not irrelevant that Congress itself limited carefully the
liability imposed by § 16(b).
See Reliance Electric Co.,
supra, at
404 U. S.
422-425. Even an insider may trade freely without
incurring the statutory liability if, for example, he spaces his
transactions at intervals greater than six months. When Congress
has so recognized the need to limit carefully the "arbitrary and
sweeping coverage" of § 16(b),
Bershad v. McDonough, 428
F.2d 693, 696 (CA7 1970),
cert. denied, 400 U.S. 992
(1971), courts should not be quick to determine that, despite an
acknowledged ambiguity, Congress intended the section to cover a
particular transaction.
Page 423 U. S. 253
B
Our construction of § 16(b) also is supported by the distinction
Congress recognized between short-term trading by mere stockholders
and such trading by directors and officers. The legislative
discourse revealed that Congress thought that all short-swing
trading by directors and officers was vulnerable to abuse because
of their intimate involvement in corporate affairs. But trading by
mere stockholders was viewed as being subject to abuse only when
the size of their holdings afforded the potential for access to
corporate information. [
Footnote
27] These
Page 423 U. S. 254
different perceptions simply reflect the realities of corporate
life.
It would not be consistent with this perceived distinction to
impose liability on the basis of a purchase made when the
percentage of stock ownership requisite to insider status had not
been acquired. To be sure, the possibility does exist that one who
becomes a beneficial owner by a purchase will sell on the basis of
information attained by virtue of his newly acquired holdings. But
the purchase itself was not one posing dangers that Congress
considered intolerable, since it was made when the purchaser owned
no shares or less than the percentage deemed necessary to make one
an insider. [
Footnote 28]
Such a stockholder is more analogous to the stockholder who never
owns more than 10%, and thereby is excluded entirely from the
operation of § 16(b), than to a director or officer whose every
purchase and sale is covered by the statute. While this reasoning
might not compel our construction of the exemptive provision, it
explains why Congress may have seen fit to draw the line it did.
Cf. Adler v. Klawans, 267 F.2d 840, 845 (CA2 1959).
Page 423 U. S. 255
C
Section 16(b)'s scope, of course, is not affected by whether
alternative sanctions might inhibit the abuse of inside
information. Congress, however, has left some problems of the abuse
of inside information to other remedies. These sanctions alleviate
concern that ordinary investors are unprotected against actual
abuses of inside information in transactions not covered by §
16(b). For example, Congress has passed general antifraud statutes
that proscribe fraudulent practices by insiders.
See
Securities Act of 1933, § 17(a), 48 Stat. 84, 15 U.S.C. § 77q(a);
Securities Exchange Act of 134, § 10(b), 15 U.S.C. § 78j(b); 3
Loss,
supra, n 11,
at 1423-1429, 1442-1445. Today an investor who can show harm from
the misuse of material inside information may have recourse, in
particular, to § 10(b) and Rule 10b-5, 17 CFR § 240.10b-5 (1975).
[
Footnote 29] It also was
thought that § 16(a)'s publicity requirements [
Footnote 30]
Page 423 U. S. 256
would afford indirect protection against some potential misuses
of inside information. [
Footnote
31]
See Hearings on H.R. 7852 and H.R. 8720,
supra at 134-135; H.R.Rep. No. 1383, 73d Cong., 2d Sess.,
13 (to accompany H.R. 9323, 73d Cong., 2d Sess., passed by the
House, May 4, 1934, without the present § 16(b)).
Page 423 U. S. 257
V
We must still consider briefly Foremost's contention that the
"before the purchase" construction renders other enactments of
Congress unnecessary and conflicts with the interpretation of §
16(b) by the Securities and Exchange Commission.
Foremost and
amicus Allis-Chalmers Manufacturing Co.
point to §§ 16(d) and (e) of the Act, 15 U.S.C. §§ 78p(d) and (e),
as congressional actions that would not have been necessary unless
one selling the securities the acquisition of which made him a
beneficial owner is liable under § 16(b). Section 16(d), in part,
exempts from § 16(b) certain transactions by a securities "dealer
in the ordinary course of his business and incident to the
establishment or maintenance by him of a primary or secondary
market." [
Footnote 32]
Section 16(e) provides an exemption for certain "foreign or
domestic arbitrage transactions." [
Footnote 33] They argue similarly that the SEC's
Page 423 U. S. 258
Rule 16b-2, 17 CFR § 240.16b-2 (1975), is unnecessary if our
construction of § 16(b) is correct. Rule 16b-2 exempts from § 16(b)
specified transactions in connection with the distribution of a
"substantial block of securities." [
Footnote 34]
Page 423 U. S. 259
We do not consider these provisions to be inconsistent with our
holding. Nothing on their faces would make them applicable to one
selling the securities the purchase of which made him a beneficial
owner. But the exemptions would be necessary to protect
stockholders already qualifying as beneficial owners when they
purchased, [
Footnote 35] and
they would, of course, apply to transactions by directors and
officers as well.
Foremost and the
amicus also remind us that the
interpretation of the exemptive provision for which they contend
has been adopted by the SEC in the past.
See Brief for SEC
as
Amicus Curiae in
Reliance Electric Co. v. Emerson
Electric Co., O.T. 1971, No. 779, pp. 22-27. But the
Commission has not appeared as an
amicus in this case. In
any event, even if the Commission's views have not changed, we
would not afford them the deference to which the views of the
agency administering a statute are usually entitled, for in
Reliance Electric Co., 404 U.S. at
404 U. S.
425-427, the Court rejected the basic theory on which
the SEC based its interpretation
Page 423 U. S. 260
of the exemptive provision. Our reexamination of the exemptive
provision confirms the view that the SEC's theory did not reflect
the intent of Congress.
The judgment is
Affirmed.
MR. JUSTICE WHITE joins in the judgment of the Court, and in all
but Part IV-C of the Court's opinion.
MR. JUSTICE STEVENS took no part in the consideration or
decision of this case.
[
Footnote 1]
The corporate "insiders" whose trading is regulated by § 16(b)
are defined in § 16(a) of the Act, 15 U.S.C. § 78p(a), as
"[e]very person who is directly or indirectly the beneficial
owner of more than 10 per centum of any class of any equity
security (other than an exempted security) which is registered
pursuant to section 781 of this title, or who is a director or an
officer of the issuer of such security."
[
Footnote 2]
Section 16(b), 15 U.S.C. § 78p(b), reads in full:
"For the purpose of preventing the unfair use of information
which may have been obtained by such beneficial owner, director, or
officer by reason of his relationship to the issuer, any profit
realized by him from any purchase and sale, or any sale and
purchase, of any equity security of such issuer (other than an
exempted security) within any period of less than six months,
unless such security was acquired in good faith in connection with
a debt previously contracted, shall inure to and be recoverable by
the issuer, irrespective of any intention on the part of such
beneficial owner, director, or officer in entering into such
transaction of holding the security purchased or of not
repurchasing the security sold for a period exceeding six months.
Suit to recover such profit may be instituted at law or in equity
in any court of competent jurisdiction by the issuer, or by the
owner of any security of the issuer in the name and in behalf of
the issuer if the issuer shall fail or refuse to bring such suit
within sixty days after request or shall fail diligently to
prosecute the same thereafter; but no such suit shall be brought
more than two years after the date such profit was realized. This
subsection shall not be construed to cover any transaction where
such beneficial owner was not such both at the time of the purchase
and sale, or the sale and purchase, of the security involved, or
any transaction or transactions which the Commission by rules and
regulations may exempt as not comprehended within the purpose of
this subsection."
[
Footnote 3]
The debentures were issued expressly to acquire Provident's
assets, and all of them were used for that purpose.
[
Footnote 4]
The underwriters delivered $25,366,666.66 in cash to Provident.
That amount represented a purchase price of 101 1/4% of the
principal amount of the debenture ($25,312,500) plus interest
accrued from October 15 to the date of closing ($54,166.66). The
amount of profit realized by Provident has never been
established.
[
Footnote 5]
A beneficial owner is one who owns more than 10% of an "equity
security" registered pursuant to § 12 of the Act, 15 U.S.C. § 781.
See n 1,
supra. The owner of debentures convertible into more than
10% of a corporation's registered common stock is a beneficial
owner within the meaning of the Act. §§ 3(a)(10), (11) of the Act,
15 U.S.C. §§ 78c(a)(10), (11); Rule 16a-2(b), 17 CFR § 240.16a-2(b)
(1975). Foremost's common stock was registered; thus, Provident's
holdings made it a beneficial owner.
[
Footnote 6]
This contention was based on
Reliance Electric Co. v.
Emerson Electric Co., 404 U. S. 418
(1972). There, the Court held that a sale made after a former
beneficial owner had already reduced its holdings below 10% was
exempted from § 16(b) by the phrase "at the time of . . . sale" in
the exemptive provision.
See n 25,
infra.
[
Footnote 7]
Section 3(a)(14) of the Act, 15 U.S.C. § 78c(a)(14), defines
"sale" and "sell" to include "any contract to sell or otherwise
dispose of." But Provident argued that the October 28 closing date
was the day of sale because contractual conditions prevented the
contract from becoming binding until closing. The underwriting
agreement provided in paragraph 7:
"7. Termination of Agreement: This agreement may be terminated,
prior to the time the Registration Statement becomes effective, by
you or by any group of Underwriters which has agreed hereunder to
purchase in the aggregate at least 50% of the Debentures, if, in
your judgment or in the judgment of any such group of Underwriters,
there shall have occurred a material unfavorable change in
political, financial or economic conditions generally."
App. A134. And in paragraph 5, the agreement provided:
"The several obligations of the Underwriters hereunder are
subject to the following conditions:"
"(h) That, between the time of execution of this agreement and
the time of purchase, there shall occur no material and unfavorable
change, financial or otherwise (other than as referred to in the
Registration Statement and the Prospectus), in the condition of the
Company and its consolidated subsidiaries as a whole; and the
Company will, at the time of purchase, deliver to you a certificate
of two of its executive officers to the foregoing effect."
App. A134.
The Court of Appeals agreed that conditions to performance might
prevent a contract from being a "sale" prior to closing. But it
ruled that all significant conditions here were satisfied when the
registration statement required by paragraph 7 became effective on
October 21, the day the underwriting agreement was executed. The
court also found that, after October 21, Provident was no longer
subject to the risk of a decline in the market for Foremost's
stock. 506 F.2d at 607. For reasons not apparent from its opinion,
the court did not address the possibility that paragraph 5(h) left
Provident subject to market risks.
See n 8,
infra.
[
Footnote 8]
Our holding on this issue disposes of this case by precluding
any liability on Provident's part. We therefore do not consider
whether the Court of Appeals properly rejected Provident's
arguments based on
Kern County Land Co. v. Occidental
Corp., 411 U. S. 582
(1973), and on the sale's not having occurred until October 28.
[
Footnote 9]
The alternative construction to "before the purchase" is
sometimes denominated "simultaneously with the purchase," as it was
by the Court of Appeals. 506 F.2d at 608.
[
Footnote 10]
Compare C. Meyer, The Securities Exchange Act of 1934,
p. 112 (1934) (adopting a "before" construction),
with
Seligman, Problems Under the Securities Exchange Act, 21 Va.L.Rev.
1, 19-20 (1934) (adopting an "immediately after" construction).
[
Footnote 11]
Compare, e.g., Munter, Section 16(b) of the Securities
Exchange Act of 1934: An Alternative to "Burning Down the Barn in
Order to Kill the Rats," 52 Cornell L.Q. 69, 74-75 (1966); Note,
Insider Liability for Short-Swing Profits: The Substance and
Function of the Pragmatic Approach, 72 Mich.L.Rev. 592, 616-619
(1974); Comment, 9 Stan.L.Rev. 582 (1957) (adopting a "before"
construction),
with, e.g., 2 L. Loss, Securities
Regulation 1060 (2d ed 1961) (favoring an "immediately after"
construction). The weight of the commentary appears to be with the
"before the purchase" construction. The ALI Federal Securities Code
(Tentative Draft No. 2, 1973), § 1413(d) and Comment (6), considers
the "immediately after The purchase" construction "questionable" on
the statutory language, and proposes an amendment to codify the
result.
[
Footnote 12]
Stella was decided before § 10(b) of the Act, 15 U.S.C.
§ 78j(b), as implemented by Rule 10b-5, 17 CFR § 240.10b-5 (1975),
developed fully as a private remedy for actual abuses of inside
information.
See 6 L. Loss,
supra, n 11, at 3559. The sale-repurchase abuse
that worried the
Stella court would now invite § 10(b)
liability,
see n
29,
infra, as well as possible liability under §
16(b).
[
Footnote 13]
To rationalize its view as applied to the purchase-sale
sequence, the court in
Newmark wrote:
"[T]he presumed access to [inside] information resulting from
[the] purchase [that makes one a beneficial owner] provides him
with an opportunity, not available to the investing public, to sell
his shares at the moment most advantageous to him. Thus, a purchase
of shares which makes the buyer an insider creates an opportunity
for the type of speculative abuse the statute was enacted to
prevent."
425 F.2d at 356.
[
Footnote 14]
When this Court decided
Reliance Electric Co. v. Emerson
Electric Co., 404 U. S. 418
(1972), the question presented here was no longer in the case.
See n 25,
infra.
[
Footnote 15]
The view of the Court of Appeals that "at the time of" may mean
different things in different contexts is not unique.
See
Allis-Chalmers Mfg. Co. v. Gulf & Western Industries, 527
F.2d 335 (CA7 1975),
cert. pending, No. 75-580. We express
no opinion here on this view.
[
Footnote 16]
Shortly before this case was argued, the Court of Appeals for
the Seventh Circuit reached the same conclusion on somewhat
different analysis.
Allis-Chalmers Mfg. Co., supra at
347-349. The court apparently would have reached its result even in
the absence of the exemptive provision, reasoning that § 16(b)
covers no transactions by any § 16(b) insiders who were not
insiders before their initial transaction.
Id. at 347-348.
Since we rely on the exemptive provision, we intimate no view on
the proper analysis of a case where a director or officer makes an
initial transaction before obtaining insider status.
See, e.g.,
Adler v. Klawans, 267 F.2d 840 (CA2 1959). Nor do we have
occasion here to assess the approach taken by the Court of Appeals
for the Seventh Circuit to the exemptive provision. 527 F.2d at
348-349 and n. 13.
See n 25,
infra.
[
Footnote 17]
The purpose of § 16(b) is stated explicitly to be
"preventing the unfair use of information which may have been
obtained by such beneficial owner, director, or officer by reason
of his relationship to the issuer."
15 U.S.C. § 78p(b).
[
Footnote 18]
Section 16(b) states that any short-swing profits
"shall inure to and be recoverable by the issuer, irrespective
of any intention on the part of such beneficial owner, director, or
officer in entering into such transaction of holding the security
purchased or of not repurchasing the security sold for a period
exceeding six months."
15 U.S.C. § 78p(b).
[
Footnote 19]
In lieu of the Court of Appeals' construction, Foremost offers a
construction whereby any purchases prior to the purchase making one
a beneficial owner are exempted from the operation of § 16(b).
See 2 Loss,
supra, n 11, at 1060.
[
Footnote 20]
Newmark describes a possible abuse of inside
information covered only under the
Stella construction.
See n.
423 U. S. 13,
supra.
[
Footnote 21]
As can be seen by comparing H.R. 8720's version of § 15(b) with
§ 16(b),
supra, n 2,
the differences are relatively minor. Formally, the statement of
purpose was moved to the front of the statute and various
grammatical changes were made. A significant substantive change not
apparent from the faces of the two sections is that § 16(b)
beneficial owners are those owning more than 10% of a registered
security, while H.R. 8720 retained S. 2693's 5% requirement.
Compare § 16(a) of the Act, 15 U.S.C. § 78p(a),
with H.R. 8720, 73d Cong., 2d Sess., § 15(a) (1934).
[
Footnote 22]
Corcoran termed § 15 "one of the most important provisions in
[S. 2693]." Hearings on Stock Exchange Practices before the Senate
Committee on Banking and Currency, 73d Cong., 2d Sess., 6555
(1934). But most of the proposed legislation was directed at
regulation of the stock exchanges themselves and certain trading
practices that were considered undesirable regardless of who
performed them.
See id. at 6465-6466. Most of the
hearings, therefore, dealt with other problems.
[
Footnote 23]
The other major substantive change effected in § 15(b) by H.R.
8720 was the elimination of the potential criminal liability. The
criminal liability aspect of S. 2693's version of § 15(b) received
almost no attention in hearings.
But cf. Hearings on Stock
Exchange Practices,
supra, at 6966. It may have been
thought, however, that a criminal case could never be made out. The
difficulties of proving the mental elements on which criminal
liability turned had already led the drafters to eliminate those
questions of fact in civil suits to recover profits.
See
n 26,
infra.
[
Footnote 24]
"Mr. PECORA. The theory was that the ownership of 5 percent of
the stock would practically constitute him an insider, and, by
virtue of that position, he could acquire confidential information
which he might use for his own enrichment by trading in the open
market, against the interests of the general body of the
stockholders. That is the main purpose sought to be served."
Hearings on Stock Exchange Practices,
supra, at 7741.
Ferdinand Pecora was counsel to the subcommittee of the Senate
Committee on Banking and Currency that conducted extensive hearings
on stock exchange operations prior to the enactment of the Act. He
was also one of the draftsmen of S. 2693. Hearings on H.R. 7852 and
H.R. 8720 before the House Committee on Interstate and Foreign
Commerce, 73d Cong., 2d Sess., 83 (1934).
[
Footnote 25]
In
Reliance Electric Co. v. Emerson Electric Co.,
404 U. S. 418
(1972), the Court also had occasion to consider the application of
the exemptive provision in a purchase-sale sequence. There, Emerson
acquired 13.2% of the shares of Reliance's predecessor pursuant to
a tender offer, and, within six months, disposed of its holdings in
two sales of 3.24% and 9.96%. The Court of Appeals for the Eighth
Circuit held that the purchase, by which Emerson became a
beneficial owner, was covered by § 16(b). But it ruled that Emerson
was liable for the profits on only its first sale, because, "at the
time of . . . sale" of the 9.96%, it was not a beneficial
owner.
The Court granted certiorari on Reliance's petition to review
this construction of "at the time of . . . sale," and affirmed. The
construction of "at the time of the purchase," however, was not
before the Court. 404 U.S. at
404 U. S.
420-422. Emerson thus remained liable for the 3.24%
sale, although it would have had no liability under our holding
today. The Court of Appeals for the Seventh Circuit has noted
correctly that the construction of "at the time of . . . sale" in
Reliance Electric Co. is superfluous in light of the
construction of "at the time of the purchase" adopted by the Court
of Appeals for the Ninth Circuit, which we affirm here.
See
Allis-Chalmers Mfg. Co., 527 F.2d at 348 n. 12. But the
procedural posture of
Reliance Electric Co. prevented a
full consideration of the meaning of the exemptive provision.
See ibid. We express no opinion on the interpretation of
the provision by which the Court of Appeals for the Seventh Circuit
sought to avoid the apparent superfluity of the "at the time of . .
. sale" language.
Id. at 348;
supra, n 16.
[
Footnote 26]
"Mr. CORCORAN. . . . You hold the director, irrespective of any
intention or expectation to sell the security within 6 months
after, because it will be absolutely impossible to prove the
existence of such intention or expectation, and you have to have
this crude rule of thumb, because you cannot undertake the burden
of having to prove that the director intended, at the time he
bought, to get out on a short swing."
"Senator GORE. You infer the intent from the fact."
"Mr. CORCORAN. From the fact."
"Senator KEAN. Suppose he got stuck in something else, and he
had to sell?"
"Senator BARKEY. All he would get would be what he put into it.
He would get his original investment."
"Mr. CORCORN. He would get his money out, but the profit goes to
the corporation."
"Senator KEAN. Suppose he had to sell."
"Mr. CORCORAN. Let him get out what he put in, but give the
corporation the profit."
Hearings on Stock Exchange Practices,
supra, n 22, at 6556-6557.
[
Footnote 27]
This distinction is especially evident in the following
exchange, directed to the reporting requirements imposed by § 15(a)
of S. 2693 on beneficial owners:
"Senator KEAN. Suppose a man is not a director at all, and does
not want to be a director, and he happens to own 5 percent or buy 5
percent. Do you think you are going to get him to file with the
exchange all the time just the number of shares he has?"
"Mr. CORCORAN. I think so, sir."
"
* * * *"
"Senator KEAN. I think it is all right to apply it to a director
or officer, but I think to require the ordinary investor . . ."
"Mr. CORCORAN. Five percent is a lot in a modern corporation.
Many corporations are controlled by 5 percent or 10 percent."
"Senator KEAN. They may own it or they may sell it. This applies
to all corporations, and you are getting down to the point where
you are interfering with the individual a good deal there. I agree
with you with respect to the officers and directors."
"Mr. CORCORAN. A stockholder owning 5 percent is as much an
insider as an officer or director. Whether he is a titular director
or not, he normally is, as a practical matter of fact, a
director."
"Senator KEAN. He might not be."
Hearings on Stock Exchange Practices,
supra, n 22, at 6556. The distinction also
is reflected in the discussion of the technical flaw in S. 2693.
See id. at 6555; Hearings on H.R. 7852 and H.R. 8720,
supra, n 24, at
133.
See also Hearings on Stock Exchange Practices,
supra, n 22, at
7741-7743.
[
Footnote 28]
Thus, according to the presumption of the statute, the purchaser
did not have access to inside information in making the purchase.
It should be noted further that, as a matter of practicalities, the
crucial point in the acquisition of securities is not the technical
"purchase,", but rather the decision to make an acquisition. In the
case of an acquisition of a large block of a corporation's stock,
that decision may precede the "purchase" by a considerable period
of time. A prudent investor will want to investigate all available
information on the corporation. Such an investor also may need time
to finance the purchase, and may wish to effectuate purchases
without influencing the market price. These realities emphasize
that the acquisition decision by a beneficial owner normally will
occur well in advance of the event that is presumed to afford
access to inside information.
[
Footnote 29]
Rule 10b-5 has been held to embrace evils that Foremost urges
its construction of § 16(b) is necessary to prevent. The Rule has
been applied to trading by one who acquired inside information in
the course of negotiations with a corporation, such as the
negotiations for Provident's purchase of the Foremost debentures.
Van Alstyne, Noel & Co., 43 S.E.C. 1080 (1969); 3
Loss,
supra, n 11,
at 1451-1452. And a stockholder trading on information not
generally known has been held subject to the sanctions of the Rule.
Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 495 F.2d 228 (CA2 1974);
SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833 (CA2 1968),
cert. denied sub nom. Coates
v. SEC, 394 U.S. 976 (1969). The liability of insiders who
improperly "tip" others,
SEC v. Texas Gulf Sulphur Co.,
446 F.2d 1301 (CA2),
cert. denied, 404 U.S. 1005 (1971),
may reduce the threat that beneficial owners not themselves
represented on the board of directors will be able to acquire
inside information from officers and directors. We cite these cases
for illustrative purposes, without necessarily implying
approval.
[
Footnote 30]
Section 16(a), 15 U.S.C. § 78p(a), provides:
"Every person who is directly or indirectly the beneficial owner
of more than 10 per centum of any class of any equity security
(other than an exempted security) which is registered pursuant to
section 781 of this title, or who is a director or an officer of
the issuer of such security, shall file, at the time of the
registration of such security on a national securities exchange or
by the effective date of a registration statement filed pursuant to
section 781(g) of this title, or within ten days after he becomes
such beneficial owner, director, or officer, a statement with the
Commission (and, if such security is registered on a national
securities exchange, also with the exchange) of the amount of all
equity securities of such issuer of which he is the beneficial
owner, and within ten days after the close of each calendar month
thereafter, if there has been a change in such ownership during
such month, shall file with the Commission (and if such security is
registered on a national securities exchange, shall also file with
the exchange), a statement indicating his ownership at the close of
the calendar month and such changes in his ownership as have
occurred during such calendar month."
[
Footnote 31]
The drafters clearly thought that § 16(a) would help deter
abuses not covered by § 16(b).
"[Mr. Corcoran.] [S]ection 15(a), requires every director,
officer, or principal holder of any securities listed on an
exchange to file with the exchange and with the commission a
statement of how many shares he owns and to file that statement at
the end of each month to show whether there has been any change in
his position during the month. That is to prevent the insider from
taking advantage of information to sell or buy shares ahead of the
release of information to the public about the company."
These remarks were addressed to S. 2693. Hearings on H.R. 7852
and H.R. 8720,
supra, n 24, at 132.
[
Footnote 32]
Section 16(d), 15 U.S.C. § 78p(d), provides:
"The provisions of subsection (b) of this section shall not
apply to any purchase and sale, or sale and purchase, and the
provisions of subsection (c) of this section shall not apply to any
sale, of an equity security not then or theretofore held by him in
an investment account, by a dealer in the ordinary course of his
business and incident to the establishment or maintenance by him of
a primary or secondary market (otherwise than on a national
securities exchange or an exchange exempted from registration under
section 78e of this title) for such security. The Commission may,
by such rules and regulations as it deems necessary or appropriate
in the public interest, define and prescribe terms and conditions
with respect to securities held in an investment account and
transactions made in the ordinary course of business and incident
to the establishment or maintenance of a primary or secondary
market."
"Dealer" is defined in § 3(a)(5) of the Act, 15 U.S.C. §
78c(a)(5).
[
Footnote 33]
Section 16(e), 15 U.S.C. § 78p(e), provides:
"The provisions of this section shall not apply to foreign or
domestic arbitrage transactions unless made in contravention of
such rules and regulations as the Commission may adopt in order to
carry out the purposes of this section."
[
Footnote 34]
Section 16(b) provides in its final clause that it shall not
cover
"any transaction or transactions which the Commission by rules
and regulations may exempt as not comprehended within the purpose
of this subsection."
15 U.S.C. § 78p(b). Rule 16b-2, 17 CFR § 240.16b-2 (1975),
provides:
"(a) Any transaction of purchase and sale, or sale and purchase,
of a security which is effected in connection with the distribution
of a substantial block of securities shall be exempt from the
provisions of section 16(b) of the Act, to the extent specified in
this § 240.16b-2, as not comprehended within the purpose of said
section, upon the following conditions:"
"(1) The person effecting the transaction is engaged in the
business of distributing securities and is participating in good
faith, in the ordinary course of such business, in the distribution
of such block of securities;"
"(2) The security involved in the transaction is (i) a part of
such block of securities and is acquired by the person effecting
the transaction, with a view to the distribution thereof, from the
issuer or other person on whose behalf such securities are being
distributed or from a person who is participating in good faith in
the distribution of such block of securities, or (ii) a security
purchased in good faith by or for the account of the person
effecting the transaction for the purpose of stabilizing the market
price of securities of the class being distributed or to cover an
over-allotment or other short position created in connection with
such distribution; and"
"(3) Other persons not within the purview of section 16(b) of
the Act are participating in the distribution of such block of
securities on terms at least as favorable as those on which such
person is participating and to an extent at least equal to the
aggregate participation of all persons exempted from the provisions
of section 16(b) of the Act by this § 240.16b-2. However, the
performance of the functions of manager of a distributing group and
the receipt of a
bona fide payment for performing such
functions shall not preclude an exemption which would otherwise be
available under this § 240.16b-2."
"(b) The exemption of a transaction pursuant to this § 240.16b-2
with respect to the participation therein of one party thereto
shall not render such transaction exempt with respect to
participation of any other party therein unless such other party
also meets the conditions of this § 240.16b-2."
[
Footnote 35]
The press release accompanying the SEC's initial promulgation of
Rule 16b-2 demonstrates this point. It explained:
"The new Rule [16b-2] affords an exemption for certain cases by
providing that, underwriters who happen to have a member of their
firm also an officer or director of the issuer or one of its
principal stockholders who are regularly engaged in the business of
buying and selling securities need not account to the company for
profits realized from purchases and sales made in the distribution
of a security for the company. . . ."
SEC Release No. 34-264 (June 8, 1935).