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Extending the relief provided in its September 14 order giving registrants and their affiliates additional flexibility to purchase common stock and other equity securities, the Securities and Exchange Commission on September 21 announced that the emergency relief would be effective for an additional five business days, through September 28, in an effort to encourage activity that might serve to help stabilize and restore order to volatile markets. For the five business days ending on Friday, September 28, 2001: Rule 10b-18 “Time of Day” Restrictions Lifted: Registrants can obtain the safe harbor protections of Rule 10b-18 under the Exchange Act even if purchases do not comply with the “time of day” restrictions of the Rule. That is, a repurchase may constitute the opening transaction in the security and may occur in the final half hour of trading on the security’s primary market. Rule 10b-18 Daily Volume Limit Raised to 100 percent: Registrants can comply with Rule 10b-18 by limiting purchases on each day so that they do not exceed 100 percent of the average daily trading volume for the security. Normally, the limit is 25 percent. The four-week period for determining the average daily trading volume for purposes of Rule 10b-18 should continue to exclude the week starting September 10. Repurchases Will Not Affect Poolings: Repurchases of the issuer’s equity securities will not affect the availability of pooling-of-interests accounting for prior transactions, nor will a registrant’s financial statements be deemed misleading or inaccurate solely because of the impact such repurchases may otherwise have had on the availability of pooling. Therefore, registrants who have completed pooling transactions within the last 6 months or who have pending pooling transactions initiated before the June 30 cutoff date will be able to repurchase common stock during this period without those repurchases putting at risk the accounting treatment of the transactions. Purchases by Section 16 Persons Will Not be Matched with Prior Sales: Any purchase made during the period will be exempt from Section 16(b) of the Exchange Act with respect to, and will not be matched with, any sale by that person during the preceding six months. Such purchases must still be reported on Form 4, and purchases will continue to be matched against sales in the succeeding six months. All sales transactions during the period will remain subject to Section 16. As under the original emergency order, the fact that repurchases by a registrant during the extension period are outside of a registrant’s normal “window periods” will not be considered as an indication that the registrant has violated antifraud rules. Companies and affiliates intending to effect purchases of the company’s common stock and equity securities must continue to be aware of and comply with other relevant rules and regulations, including the other applicable provisions of Rule 10b-18; rules restricting repurchases during tender offers, distributions of the security and periods in which the purchaser is in possession of material nonpublic information; compliance with state corporate laws and corporate formalities; and any applicable regulatory or covenant restrictions. In addition to extending the relief granted in the September 14 SEC order, the SEC also issued an interpretation clarifying certain issues that have arisen under Rule 144 under the Securities Act and Rule 10b5-1 under the Exchange Act. The Week Beginning September 10, 2001 Should be Excluded in Calculating Average Trading Volume for Purposes of Determining Rule 144 Sales Limits: Rule 144 permits persons to sell securities without being deemed to be engaged in a distribution and therefore without being deemed an underwriter for purposes of the Securities Act of 1933, and is commonly employed by directors and officers of registrants as a means to sell their shares. Among other requirements, Rule 144 limits the volume of securities that may be sold to the greater of 1 percent of the shares outstanding or of the average weekly trading volume for the security, based on the most recent four calendar week period preceding the sale. Under the SEC’s interpretation, in determining the average weekly trading volume for this purpose, the week beginning September 10 is to be excluded and an additional prior week should be included for a total of four calendar weeks. Termination of Existing 10b5-1 Trading Plans During the Period From September 11 to September 28, 2001 Will Not Implicate Whether the Plan Was Entered Into in Good Faith: Rule 10b5-1(c)(1) provides an affirmative defense to allegations that an insider traded on the basis of material, nonpublic information for trades that are pursuant to a contract or written trading plan if the contract or plan was entered into at a time when the seller was not in possession of material, nonpublic information and specified the amount, timing and price of the trades or otherwise did not permit the seller to exercise any subsequent discretion over the trades covered by the plan, provided that the plan was entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. Because the essence of this affirmative defense is a plan, entered into when the insider is not in possession of material nonpublic information, that is then executed without further influence by the insider, questions have arisen over potential insider trading liability as a result of terminating such a plan before it has been fully executed. The SEC staff had previously indicated that termination of a trading plan, or the cancellation of one or more plan transactions, could affect the availability of the Rule 10b5-1(c) defense for prior plan transactions if the circumstances of the termination call into question whether the plan was entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. The September 21 SEC interpretation states the SEC’s view that termination of a written plan (which would include the cancellation of a transaction that had been scheduled pursuant to the plan) established prior to September 11, 2001 will not, by itself, call into question the “good faith” requirement of a valid Rule 10b5-1 trading plan if the termination occurs between September 11 and September 28, inclusive. Therefore, the availability of the Rule 10b5-1(c) defense for transactions under such a terminated trading plan would not be affected solely as a result of such a termination. Edward D. Herlihy, Craig M. Wasserman and David A. Katz are partners at the law firm Wachtell, Lipton, Rosen & Katz. Lawrence S. Makow is an associate at the firm.

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