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of the 6-month period which would give rise to a lawsuit under
section 16(b) of the Exchange Act.
It is well settled that it is the acquisition (grant) of a
stock option (as opposed to the exercise of a stock option) that
is deemed to be a purchase of a security for purposes of the 6-
month short-swing profit recovery provision under section 16(b)
of the Exchange Act.10 See Magma Power Co. v. Dow Chem. Co.,
supra at 321-322. The SEC made this point indelibly clear when
it adopted the regulatory framework governing insider
transactions involving derivative securities in 1991. The SEC
stated in pertinent part:
The functional equivalence of derivative securities and
their underlying equity securities for section 16
purposes requires that the acquisition of the
derivative security be deemed the significant event,
not the exercise. * * * The Rules correspondingly
recognize that, for purposes of the abuses addressed by
section 16, the exercise of a derivative security, much
like the conversion of a convertible security,
essentially changes the form of beneficial ownership
from indirect to direct. Since the exercise represents
neither the acquisition nor the disposition of a right
10 For the sake of completeness, we observe the exercise of
a stock option is treated as a purchase of the underlying
security for purposes of the insider reporting provisions under
section 16(a) of the Exchange Act. SEC rule 16a-1(b), 17 C.F.R.
sec. 240.16a-1(b) (2006) defines a “call equivalent position” as
“a derivative security position that increases in value as the
value of the underlying equity increases, including, but not
limited to, a long convertible security, a long call option, and
a short put option position.” SEC rule 16a-4(b), 17 C.F.R. sec.
240.16a-4(b) (2006), provides that the exercise of a call
equivalent position shall be reported on Form 4 and treated for
reporting purposes as (1) a purchase of the underlying security
and (2) a closing of the derivative security position.
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