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The JCEB also asked the Staff whether a non-employee director can rely on the eligible sell-to-cover transaction exception even though a non-employee director is not subject to tax withholding obligations. The memorandum to the members of the ABA Subcommittee on Employee Benefits, Executive Compensation, and Section 16 posted in our “Rule 10b5-1” Practice Area notes:

Similarly, we understand that the SEC Staff will not object to a non-employee director establishing a similar contract, instruction, or plan as an “eligible sell-to-cover” transaction despite the fact that non-employee directors are not subject to tax withholding obligations. Again, if the non-employee director’s sale in this scenario is designed to cover the person’s withholding tax obligation arising exclusively from the vesting of a compensatory award, the same rationale would apply. Similar to employees, we believe the SEC Staff will not consider a non-employee director’s sale to qualify as an “eligible sell-to-cover” transaction if the sale is intended to also cover taxes that may be owed from sources of income other than the vesting event.

Question: May a non-employee director, for whom there is no tax withholding obligation, be permitted to sell shares on the same basis as an “eligible sell-to-cover” transaction applicable to employees?

Suggested Answer: A non-employee director’s contract, instruction, or plan providing only for the sale of shares in connection with the vesting of a compensatory award for the purpose of satisfying such individual’s expected effective tax rate arising from the vesting event will qualify as an “eligible sell-to-cover” transaction for purposes of Exchange Act Rule 10b5-1(c)(1)(ii)(D)(3).

This is also a helpful interpretation for utilizing the “eligible sell-to-cover” transaction exception going forward. You can find more on the numerous interpretive issues arising with the Rule 10b5-1 amendments in our “Rule 10b5-1” Practice Area and Q&A Forum.

– Dave Lynn