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 *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*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 *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
*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*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.
. An “insider,” as that expression is colloquially used, is defined as follows in section 16(a) of the Securities Exchange Act, 15 U.S.C.A. § 78p(a):
*691Ҥ 78p. Directors, officers, and principal stockholders
“(a) Every person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of any equity security (other than an exempted security) which is registered on a national securities exchange, or who is a director or an officer of the issuer of such security * * * ”
. Section 16(b), 15 U.S.C.A. § 78p(b), reads as follows:
“(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.”
. Rule X-36I5-3, with amendments effective as of November 3, 1952, see Securities Exchange Act Release No. 4754, Sept. 24, 1952; 17 C.F.R. § 240.3 6b-3, reads as follows:
“Any acquisitions of shares of stock or nontransferable options (other than convertible stock or stock acquired pursuant to a transferable option, warrant or right) by a director or officer of the issuer of such stock shall be exempt from the operation of section 36(b) of the Act if the stock or option was acquired pursuant to a bonus, profit-sharing, retirement or similar plan meeting all of the following conditions:
“(a) The plan has been approved specifically, or through the approval of a charter amendment authorizing stock for issuance pursuant to the plan, by the security holders of the issuer at a meeting for which proxies were solicited in accordance with such rules and regulations, if any, as were then in effect under section 14(a) of the Act.
“(b) If the selection of the persons who may receive funds or securities pursuant to the plan, or the determination of the amount of funds or securities which may be so received by any such person is subject to the discretion of any person such discretion shall be exercised by (3) a committee of three or more persons having full and final authority in the matter, or (2) the board of directors of the issuer, provided the members of such committee, or a majority of the directors acting in the matter, are not entitled to participate in such plan or in any other similar plan provided by the issuer or any of its affiliates.
“(e) The plan effectively limits the aggregate amount of funds or securities which may be allocated with respect to each fiscal year pursuant to the plan, either by limiting the maximum amount which may be allocated to each participant in the plan or by limiting the maximum amount which may be so allocated to all such participants.
“(d) The acquisition of the securities pursuant to the plan does not involve the payment of any cash (other than the application of funds currently received pursuant to the plan or payable pursuant to the option contract) directly or indirectly, to the issuer or any of its affiliates.”
. The validity of the plan and the options granted thereunder, as well as the procedure followed for its adoption, have been sustained in the Delaware Court of Chancery, Kaufman v. Shoenberg, 1952, 33 Del.Ch. 211, 91 A.2d 786, and in the United States District Court for the District of Delaware, 1954, 154 K.Supp. 64.
•5. Section 10(c), 15 U.S.C.A. § 78p(e), insofar as here relevant, provides:
“(c) It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer (other than an exempted security), if the person selling the security or his principal (1) does not own the security sold * * * ”
. The application of a six months’ retention requirement to a stock option plan *694sucli as that here in issue would not work a “hardship.” See Smolowe v. Delendo Corp., supra, 136 F.2d at page 240, 148 A.L.R. 300. To be sure, if under the terms of a stock bonus plan a participant received annual awards of stock, all profits from the sale of such stock would be recoverable under section 16(b) as long as the seller continued to participate in the plan because he would always have “purchased” securities within six months before or after his sale. See Truncale v. Blumberg, D.C.S.D.N.Y.1950, 88 F.Supp. 677, 678, affirmed sub nom. Truncale v. Scully, 2 Cir., 1950, 182 F.2d 1021; Loss, Securities Regulation, p. 591 (1951). But here no such hardship is compelled by the terms of the option plan because the options are not granted on a fixed periodic basis, and they are exercisable at any time within five years from the date of granting.
. Section 23(a), 15 Ü.S.C.A. § 78w(a), reads as follows:
“(a) The Commission and the Board of Governors of the Federal Reserve System shall each have power to make such rules and regulations as may be necessary for the execution of the functions vested in them by this chapter, and may for such purpose classify issuers, securities, exchanges, and other persons or matters within their respective jurisdictions. No provision of this chapter imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the Commission or the Board of Governors of the Federal Reserve System, notwithstanding that such rule or regulation may, after such act or omission, be amended or rescinded or be determined by judicial or other authority to be invalid for any reason.”
. See Loss, Securities Regulation, p. 1097 (1951), p. 379 (Supp.1955), and discussion therein.