Effective May 1, 1991, the SEC revised its rules relating to “short swing” profits under Section 16 of the Securities Exchange Act. Section 16 generally provides that corporate insiders — officers, directors and principal shareholders — are liable to the corporation for any profits generated by the purchase and sale of corporation stock within any six month period. Thus, insiders must hold stock for at least six months.
Under the old rules, if stock was acquired under a corporate stock option plan, the six month period did not begin to run until exercise of the option. Under the new rules, the date the option is granted, and not the date of exercise, is considered the “purchase” date. Thus, insiders may not wait until just before they are ready to sell their stock before exercising an option, so long as the option was granted at least six months earlier.