Fall 2004, Volume VII, Issue 4    


No-Action 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.

Other facts 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 price.  

This article and other articles are provided for information purposes only.  They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication.  Investors should consult their advisers before acting on any topics discussed herein.   

Options involve risk and are not suitable for all investors.  Before engaging in an options transaction, investors must review the booklet "Characteristics and Risks of Standardized Options".  



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