Letter Says Insiders Can Collar Options
An SEC no-action letter indicates
that insiders can hedge their unexercised employee stock options
with collars on company stock even though they don’t own the
stock. Section 16(c)
of the Securities Exchange Act of 1934 prohibits insiders from
shorting company stock or establishing similar positions with
options on company stock unless they “own” the stock.
In a May 18, 2004 letter to Credit Suisse First Boston, the
SEC confirms that an executive with fully-vested options and no
shares can hedge company stock with a collar.
The collar in the
non-action letter was structured so that the executive could not
benefit from a fall in the price of the underlying stock.
To ensure this, the executive also granted a put to the
dealer at the employee option’s exercise price.
described in the letter: the collared employee options were
substantially in-the-money, the collar did not produce income, and
the employee posted collateral equal to the options’ exercise
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information purposes only. They are not intended to be
an offer to engage in any securities transactions or to
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may have been rendered partly inaccurate by events that have
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and are not suitable for all
investors. Before engaging in an options
transaction, investors must review the booklet "Characteristics
and Risks of Standardized Options".