WATERMAN, Circuit Judge.
The appellants, who are stockholders of the C. I. T. Financial Corporation, brought this action under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), to recover on behalf of that corporation profits alleged to have been realized in the purchase and sale of C. I. T. stock by the individual defendants, each of whom is a director and a regular salaried employee of C. I. T. The action was tried without a jury before Judge Dawson, who entered a judgment dismissing the complaint. D.C.S.D.N.Y.1956, 143 F.Supp. 464.
In order to eliminate profits resulting from the use of “inside” information,1 [691]*691section 16(b) of the Securities Exchange Act provides for the recovery by a listed corporation of all the profits realized by its directors, officers, or principal stockholders from the purchase and sale, or sale and purchase, within less than six months, of securities in that corporation.2 In September 1952, the Securities and Exchange Commission amended its own Rule X-16B-3 to exempt from the application of section 16(b) stock acquired pursuant to certain types of stock bonus and similar plans.3
In 1950 Congress enacted section 130A of the Internal Revenue Code of 1939, formerly 26 U.S.C.A. § 130A, which ma[692]*692íerially changed the tax consequences to the holders of certain types of stock options when those options are exercised and the stock so acquired is sold. On April 26, 1951, after the enactment of section 130A, the Board of Directors of C. I. T. authorized the appointment of a committee to consider a plan for granting restricted stock options to employees of C. I. T. and its subsidiaries. The proposed plan -was approved by the Board and recommended to the stockholders who voted overwhelmingly for its adoption on June 26, 1951.4
The terms of the plan and the provisions for its administration are set forth in detail in the District Court opinion. See 143 P.Supp. at page 467. We shall therefore mention only those features of the plan and the facts surrounding its administration that are necessary to our disposition of the appeal.
The plan provides that options for a limited amount of authorized but unissued common stock of C. I. T. could be granted from time to time prior to August 31, 1956, and that each option is exercisable at any time within five years from the date of granting. Options could be granted only to regular salaried employees of C. I. T. or its subsidiaries. The option price was to be not less than 95% of the fair market value of the stock on the date of the granting of the option.
Each of the individual defendants received an option on July 2, 1951. The option price was $19.10 a share, which was more than 95% of the market value of C. I. T. common stock on that date. The alleged profits involved in this litigation resulted from the exercise by the individual defendants of certain of these July 2, 1951 options in 1953 and 1954. The first shares sold were sold on March 20, 1953, the last ones on July 15, 1954. Within six months before or six months after the date upon which he exercised his option, each of the individual defendants sold shares of C. I. T. common stock at a price or prices higher than the option price. Except in one instance in which no profit resulted to one individual defendant, the individual defendants, within less than six months before or less than six months after the date of those sales, did not purchase any shares of C. I. T. common stock other than by the exercise of options granted under the plan.
Both at trial and on appeal the appellants urged three principal contentions: (1) that the C. I. T. Plan was not within the general type of stock bonus or similar plan encompassed by the exemptive provisions of SEC Rule X-16B-3; (2) that even if this plan be within the general type so encompassed it did not comply with all the conditions set forth in that Rule; and (3) that the promulgation of amended Rule X-16B-3 exceeds the power and authority of the SEC in that it conflicts with the purposes of section 16(b) of the Securities Exchange Act.
Judge Dawson adequately considered and disposed of the first two contentions, and we refer to his opinion for a complete answer to these two arguments-presented on appeal.
The trial judge also rejected the plaintiff’s third contention, expressly finding that “Regulation X-16B-3 of the Commission, as promulgated in September, 1952, was within the power of the Commission.” We do not find it necessary to adopt this portion of the opinion below in order to affirm the trial court. Indeed, although not essential to our opinion, we express doubt as to the power of the Commission to promulgate Rule X-16B-3 inasmuch as the Rule’s broad language may permit acts by insiders sought to be prevented by the Securities Exchange Act. Nor do we regard the promulgation of the Rule as a matter solely within the expertise of the SEC and therefore beyond the scope of judicial review. Rather, the question is one [693]*693of interpreting the Securities Exchange Act in order to ascertain whether the Rule was a proper exercise of the authority delegated to the Commission under that Act.
This Court said in Smolowe v. Delendo Corp., 2 Cir. 1943, 136 F.2d 231, 240, 148 A.L.R. 300, “Guiding the [Security and Exchange] Commission in the exercise of an actually limited authority is the quite adequate standard * * * that its regulations be consistent with the •expressed purpose of the statute. * * The delegation serves no other than the commendable functions of relieving the statute from imposing undue hardship and of giving it flexibility in administration.”
Is Rule X-16B-3 consistent with the expressed purpose of the statute?
The defendants-appellees argue that Rule X-16B-3 is not in conflict with section 16, which was enacted “for the purpose of preventing unfair use of [inside] information.” It is the appellees’ position that the Rule grants exemptions •only in circumstances that do not present the likelihood of misuse of inside information. They point out that, before removing the six months’ requirement of ■section 16(b) from stock acquired through the exercise of employee stock purchase options, the SEC undoubtedly took into account the effect of section 16 (c) of the Securities Exchange Act.5 That section makes it unlawful for an insider to sell any securities not owned by him in the corporation with which he has an insider relationship. The appellees then argue that section 16(c), by prohibiting “short” sales by insiders, ■eliminates the most common alleged .abuse incident to the issuance of stock ■purchase options to insiders that existed prior to the passage of the Securities Exchange Act.
Before the enactment of section 16(c), insiders who held options to buy stock in a corporation at a fixed price and who possessed information which would substantially affect the market price of that stock, but which had not yet been communicated to the public, could reap profits without investing any capital of their own through well-timed “short” sales of that stock. Although this particular technique of profit-taking from the manipulation of stock options by insiders is prohibited by section 16(c), we can still envision insider trading abuses made possible by the broad exemptions of employee stock purchase options granted by Rule X-16B-3.
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WATERMAN, Circuit Judge.
The appellants, who are stockholders of the C. I. T. Financial Corporation, brought this action under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), to recover on behalf of that corporation profits alleged to have been realized in the purchase and sale of C. I. T. stock by the individual defendants, each of whom is a director and a regular salaried employee of C. I. T. The action was tried without a jury before Judge Dawson, who entered a judgment dismissing the complaint. D.C.S.D.N.Y.1956, 143 F.Supp. 464.
In order to eliminate profits resulting from the use of “inside” information,1 [691]*691section 16(b) of the Securities Exchange Act provides for the recovery by a listed corporation of all the profits realized by its directors, officers, or principal stockholders from the purchase and sale, or sale and purchase, within less than six months, of securities in that corporation.2 In September 1952, the Securities and Exchange Commission amended its own Rule X-16B-3 to exempt from the application of section 16(b) stock acquired pursuant to certain types of stock bonus and similar plans.3
In 1950 Congress enacted section 130A of the Internal Revenue Code of 1939, formerly 26 U.S.C.A. § 130A, which ma[692]*692íerially changed the tax consequences to the holders of certain types of stock options when those options are exercised and the stock so acquired is sold. On April 26, 1951, after the enactment of section 130A, the Board of Directors of C. I. T. authorized the appointment of a committee to consider a plan for granting restricted stock options to employees of C. I. T. and its subsidiaries. The proposed plan -was approved by the Board and recommended to the stockholders who voted overwhelmingly for its adoption on June 26, 1951.4
The terms of the plan and the provisions for its administration are set forth in detail in the District Court opinion. See 143 P.Supp. at page 467. We shall therefore mention only those features of the plan and the facts surrounding its administration that are necessary to our disposition of the appeal.
The plan provides that options for a limited amount of authorized but unissued common stock of C. I. T. could be granted from time to time prior to August 31, 1956, and that each option is exercisable at any time within five years from the date of granting. Options could be granted only to regular salaried employees of C. I. T. or its subsidiaries. The option price was to be not less than 95% of the fair market value of the stock on the date of the granting of the option.
Each of the individual defendants received an option on July 2, 1951. The option price was $19.10 a share, which was more than 95% of the market value of C. I. T. common stock on that date. The alleged profits involved in this litigation resulted from the exercise by the individual defendants of certain of these July 2, 1951 options in 1953 and 1954. The first shares sold were sold on March 20, 1953, the last ones on July 15, 1954. Within six months before or six months after the date upon which he exercised his option, each of the individual defendants sold shares of C. I. T. common stock at a price or prices higher than the option price. Except in one instance in which no profit resulted to one individual defendant, the individual defendants, within less than six months before or less than six months after the date of those sales, did not purchase any shares of C. I. T. common stock other than by the exercise of options granted under the plan.
Both at trial and on appeal the appellants urged three principal contentions: (1) that the C. I. T. Plan was not within the general type of stock bonus or similar plan encompassed by the exemptive provisions of SEC Rule X-16B-3; (2) that even if this plan be within the general type so encompassed it did not comply with all the conditions set forth in that Rule; and (3) that the promulgation of amended Rule X-16B-3 exceeds the power and authority of the SEC in that it conflicts with the purposes of section 16(b) of the Securities Exchange Act.
Judge Dawson adequately considered and disposed of the first two contentions, and we refer to his opinion for a complete answer to these two arguments-presented on appeal.
The trial judge also rejected the plaintiff’s third contention, expressly finding that “Regulation X-16B-3 of the Commission, as promulgated in September, 1952, was within the power of the Commission.” We do not find it necessary to adopt this portion of the opinion below in order to affirm the trial court. Indeed, although not essential to our opinion, we express doubt as to the power of the Commission to promulgate Rule X-16B-3 inasmuch as the Rule’s broad language may permit acts by insiders sought to be prevented by the Securities Exchange Act. Nor do we regard the promulgation of the Rule as a matter solely within the expertise of the SEC and therefore beyond the scope of judicial review. Rather, the question is one [693]*693of interpreting the Securities Exchange Act in order to ascertain whether the Rule was a proper exercise of the authority delegated to the Commission under that Act.
This Court said in Smolowe v. Delendo Corp., 2 Cir. 1943, 136 F.2d 231, 240, 148 A.L.R. 300, “Guiding the [Security and Exchange] Commission in the exercise of an actually limited authority is the quite adequate standard * * * that its regulations be consistent with the •expressed purpose of the statute. * * The delegation serves no other than the commendable functions of relieving the statute from imposing undue hardship and of giving it flexibility in administration.”
Is Rule X-16B-3 consistent with the expressed purpose of the statute?
The defendants-appellees argue that Rule X-16B-3 is not in conflict with section 16, which was enacted “for the purpose of preventing unfair use of [inside] information.” It is the appellees’ position that the Rule grants exemptions •only in circumstances that do not present the likelihood of misuse of inside information. They point out that, before removing the six months’ requirement of ■section 16(b) from stock acquired through the exercise of employee stock purchase options, the SEC undoubtedly took into account the effect of section 16 (c) of the Securities Exchange Act.5 That section makes it unlawful for an insider to sell any securities not owned by him in the corporation with which he has an insider relationship. The appellees then argue that section 16(c), by prohibiting “short” sales by insiders, ■eliminates the most common alleged .abuse incident to the issuance of stock ■purchase options to insiders that existed prior to the passage of the Securities Exchange Act.
Before the enactment of section 16(c), insiders who held options to buy stock in a corporation at a fixed price and who possessed information which would substantially affect the market price of that stock, but which had not yet been communicated to the public, could reap profits without investing any capital of their own through well-timed “short” sales of that stock. Although this particular technique of profit-taking from the manipulation of stock options by insiders is prohibited by section 16(c), we can still envision insider trading abuses made possible by the broad exemptions of employee stock purchase options granted by Rule X-16B-3. To illustrate, Director Y of Company X has the right to exercise stock purchase options. Let us assume that Company X announces to the public an impending merger or the negotiation of a large government contract, the news of which stimulates a significant increase in the market price of X’s stock. Director Y, with no intention of defrauding the public or the corporation, immediately thereafter exercises his options and acquires a substantial amount of stock in X. Within a short time thereafter Director Y, through access to inside information, learns that the anticipated merger or contract has fallen through. Before this information is communicated to the public, Y sells his recently acquired stock at the market peak. The public is subsequently informed and the market price of X stock declines accordingly. It would seem to us that such an opportunity for profit-taking by insiders in a temporary and artificially stimulated market would be minimized, in accord with the purpose of section 16(b), by a requirement that insiders who acquire corporate stock by the exercise of employee options pursuant to a plan such as that at bar must retain their stock for at least six months after its acquisition or, in the event of their failure to do so, must account to the corporation for the profits resulting from the sale thereof.6
[694]*694The defendants argue that it is “improbable” that an option grantee would sell shares within six months after exercising his option because he would thereby lose the favorable tax treatment provided for him by section 130A of the Internal Revenue Code of 1939, now 26 U.S.C. § 421. But the improbability that individual benefits may flow from usurped authority does not make the usurpation any more permissible. The possible inhibiting effects of tax provisions upon the security transactions of insiders is a matter completely apart from that of defining the power of the Securities and Exchange Commission to promulgate a regulation that may permit an abuse sought to be eliminated by section 16(b) of the very Act of Congress that created the Commission for the purpose of enforcing that Act.
However, we believe that the following sequence of events justifies an affirmance of the judgment below, for the individual defendants relied on Rule X-16B-3 in good faith and thus are entitled to the protection for persons who so rely that is provided by section 23(a) of the Securities Exchange Act, 15 U.S.C.A. § 78w.7 Cf. Lockheed Aircraft Corp. v. Rathman, D.C.S.D.Cal.1952, 106 F.Supp. 810. On August 6, 1951, after the first grant of options under the plan, C. I. T. distributed a memorandum to the optionees, including, the .'individual defendants, concerning the applicability of section 16 and the rules and regulations of the Commission then in effect. That memorandum stated that the holder of an option issued under the C. I. T. • plan would be subject to liability under section 16(b) if he exercised his option within less than six months after he had sold shares of common stock, or if he exercised his option and within less than six months thereafter sold the same or other shares of common stock, provided that in either case his sales price exceeded the option price.
In September 1952, the Commission amended Rule X-16B-3 and the exemptions provided therein were broadened. Subsequently C. I. T. distributed a letter to all its officers and directors stating that in the opinion of the company’s counsel the acquisition of common stock upon the exercise of an option granted under the plan was, as a result of the amendment to the Rule, an exempt transaction for purposes of section 16(b). In addition, on November 2, 1953, counsel submitted to the Commission a statement of the relevant facts and requested a ruling thereon. In response, the Assistant Director, Division of Corporate Finance of the Commission, replied as follows by letter dated November 18, 1953:
“On the basis of the foregoing facts it would appear that the ac[695]*695quisition of common stock of the corporation pursuant to the Restricted Stock Option Plan for Key Employees comes within Rule X-16B-3. It should be noted, however, that the rule exempts only the acquisition of the securities involved and that sales of such securities are not exempted by the rule. Hence, such sales are within the purview of Section 16(b) of the Act if within six months before or after such sales the director or officer effects other acquisitions which can be matched against them.”
The individual defendants were advised of this reply. Not until after they had been so advised did they undertake any of the transactions referred to in the complaint. For each individual defendant those transactions included the partial exercise of his option and the sale of other shares of C. I. T. common stock within less than six months before or after the date of that purchase at a price or prices higher than the option price.
On these facts we hold that the transactions in issue “would never have occurred were it not for [the defendants’] good faith reliance on” Rule X-16B-3. See Lockheed Aircraft Corporation v. Rathman, supra, 106 F.Supp. at page 814. We emphasize that the defendants’ exculpatory reliance was on the rule itself, not merely on the interpretative opinion embodied in the letter from the Assistant Director of the SEC.8 That letter was only one link in a chain of circumstances evidencing the defendants’ good faith reliance on a valid construction of Rule X-16B-3.
Judgment affirmed.