REITs Executive Compensation Guide

Section 16(b) and Rule 16b-3 In general, Section 16(b) under the Exchange Act is intended to prevent the Section 16 reporting persons, each of whom is presumed to have access to inside information regarding the issuer, from profiting on such confidential information through short-term trading in an issuer’s equity securities. Unlike general insider trading prohibitions and unless an exemption applies, Section 16(b) subjects the Section 16 reporting persons to potential adverse monetary consequences regardless of whether the person possesses or misuses material non-public information. Under Section 16(b) of the Exchange Act, any profits realized by a Section 16 reporting person on any non-exempt purchase and sale, or any non-exempt sale and purchase, of the issuer’s equity securities within a period of less than six months are recoverable by the company as “short-swing profits.” Notably, the calculation of profits under Section 16(b) is complex, and insiders and issuers should consult with counsel regarding any potential Section 16(b) violation. Applicable law prohibits the issuer from waiving or releasing any claim that it may have under Section 16(b) and from indemnifying the insider for any Section 16(b) violations. An important, and frequently used, exemption to Section 16(b) short-swing trading liability is available for transactions between an issuer and its officers and directors under Rule 16b-3. Rule 16b-3 exempts any transactions between an officer or director of an issuer and the issuer if certain conditions are met. This exemption is often used in respect of (but is

not limited to) compensatory arrangements between the officer or director and the issuer, including acquisitions of securities pursuant to equity award grants, exercises of stock options (including cashless exercises), delivery of stock to pay withholding taxes, participation by the director or officer in a dividend reinvestment plan, contributions to, or diversifications in, the issuer’s 401(k) plan and acquisitions pursuant to a qualified employee stock purchase plan, in each case, so long as certain criteria are met. Notably, when relying on Rule 16b-3, an issuer and its directors and officers must take care to ensure all required actions are properly and timely taken and reflected in board or committee resolutions. If the requirements under Rule 16-3 are not met and no alternative exemption is available, then the Section 16 reporting person could be subject to short-swing trading liability and, armed with information gleaned from Section 16(a) reports and other public disclosures, the plaintiffs’ bar may target any deficiencies (often by means of sophisticated computer programs) in the applicability of Rule 16b-3 to cause an issuer to recover any amounts that may be payable under Section 16(b).

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