[Federal Register Volume 76, Number 55 (Tuesday, March 22, 2011)]
[Proposed Rules]
[Pages 15874-15887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6685]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-64087; File No. S7-10-11]
RIN 3235-AK98
Beneficial Ownership Reporting Requirements and Security-Based
Swaps
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: To preserve the application of our existing beneficial
ownership rules to persons who purchase or sell security-based swaps
after the effective date of new Section 13(o) of the Securities
Exchange Act of 1934, we are proposing to readopt without change the
relevant portions of Rules 13d-3 and 16a-1. The proposals are intended
to clarify that following the July 16, 2011 statutory effective date of
Section 13(o), which was added by Section 766 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''), persons
who purchase or sell security-based swaps will remain within the scope
of these rules to the same extent as they are now.
DATES: Comments should be received on or before April 15, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an e-mail to [email protected]. Please include
File Number S7-10-11 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-10-11. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and
[[Page 15875]]
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Nicholas Panos, Senior Special
Counsel, at (202) 551-3440, or Anne Krauskopf, Senior Special Counsel,
at (202) 551-3500, Division of Corporation Finance, U.S. Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are proposing to readopt without change
portions of Rules 13d-3 \1\ and 16a-1 \2\ under the Securities Exchange
Act of 1934 (``Exchange Act'').\3\
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\1\ 17 CFR 240.13d-3.
\2\ 17 CFR 240.16a-1.
\3\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Overview and Background
A. Overview
B. Sections 13(d) and 13(g) and Rule 13d-3
C. Application of the Section 13 Beneficial Ownership Regulatory
Provisions to Persons Who Purchase or Sell Security-Based Swaps
D. Section 16 and Rules 16a-1(a)(1) and 16a-1(a)(2)
E. Application of the Section 16 Beneficial Ownership Regulatory
Provisions to Holdings and Transactions in Security-Based Swaps
II. Discussion of the Rule Proposals
A. Beneficial Ownership Determinations Under Section 13
1. Rule 13d-3(a)
2. Rule 13d-3(b)
3. Rule 13d-3(d)(1)
B. Section 16 Beneficial Ownership Rules
1. Rule 16a-1(a)(1)
2. Rule 16a-1(a)(2)
C. General Request for Comment
III. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to the Proposed Amendments
C. Request for Comment
IV. Economic Analysis
A. Introduction
B. Benefits, Including the Impact on Efficiency, Competition and
Capital Formation
1. When the Rules We Propose To Readopt Already Apply to Persons
Who Purchase or Sell Security-Based Swaps
2. If the Rules We Propose Did Not Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
a. Benefits, Including the Impact on Efficiency
b. Benefits, Including the Impact on Competition
c. Benefits, Including the Impact on Capital Formation
C. Costs, Including the Impact on Efficiency, Competition and
Capital Formation
1. When the Rules We Propose Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
2. If the Rules We Propose Did Not Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
D. Request for Comment
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority
I. Overview and Background
A. Overview
Section 766 of the Dodd-Frank Act amends the Exchange Act by adding
Section 13(o), which provides that ``[f]or purposes of this section and
section 16, a person shall be deemed to acquire beneficial ownership of
an equity security based on the purchase or sale of a security-based
swap, only to the extent that the Commission, by rule, determines after
consultation with the prudential regulators and the Secretary of the
Treasury, that the purchase or sale of the security-based swap, or
class of security-based swap, provides incidents of ownership
comparable to direct ownership of the equity security, and that it is
necessary to achieve the purposes of this section that the purchase or
sale of the security-based swaps, or class of security-based swap, be
deemed the acquisition of beneficial ownership of the equity
security.'' Section 766 and Section 13(o) \4\ become effective on July
16, 2011.\5\
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\4\ Pub. L. 111-203, 124 Stat. 1797.
\5\ See Section 774 of the Dodd-Frank Act, Pub. L. 111-203, 124
Stat 1376 (2010), which states that Section 766 becomes effective
``360 Days after the date of enactment.''
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The reason for this rulemaking, as discussed in more detail below,
is to preserve the existing scope of our rules relating to beneficial
ownership after Section 766 of the Dodd-Frank Act becomes effective.
Absent rulemaking under Section 13(o), Section 766 may be interpreted
to render the beneficial ownership determinations made under Rule 13d-3
inapplicable to a person who purchases or sells a security-based
swap.\6\ In that circumstance, it could become possible for an investor
to use a security-based swap to accumulate an influential or control
position in a public company without public disclosure. Similarly, a
person who holds a security-based swap that confers beneficial
ownership of the referenced equity securities under Section 13 and
existing Rule 13d-3, or otherwise conveys such beneficial ownership
through an understanding or relationship based upon the purchase or
sale of the security-based swap, may no longer be considered a ten
percent holder subject to Section 16 of the Exchange Act.\7\ Further,
an insider may no longer be subject to Section 16 reporting and short-
swing profit recovery through transactions in security-based swaps that
confer a right to receive either the underlying equity securities or
cash. In addition, private parties may have difficulty making, or
exercising private rights of action to seek to have made,
determinations of beneficial ownership arising from the purchase or
sale of a security-based swap.
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\6\ A ``security-based swap'' is defined in Section 3(a)(68) [15
U.S.C. 78c(a)(68), added by Section 761(a) of the Dodd-Frank Act].
Section 712(d) of the Dodd-Frank Act provides that the Commission
and the Commodity Futures Trading Commission (``CFTC''), in
consultation with the Board of Governors of the Federal Reserve
System (``Federal Reserve''), shall jointly further define, among
others, the terms ``swap,'' ``security-based swap,'' and ``security-
based swap agreement.'' These terms are defined in Sections 721 and
761 of the Dodd-Frank Act. The definitions of the terms ``swap,''
``security-based swap,'' and ``security-based swap agreement,'' and
regulations regarding mixed swaps also are expected to be the
subject of a separate rulemaking by the Commission and the CFTC. In
addition, Section 721(c) and 761(b) of the Dodd-Frank Act provide
the CFTC and the Commission with the authority to define the terms
``swap'' and ``security-based swap,'' among other terms, to include
transactions that have been structured to evade the requirements of
subtitles A and B of Title VII, respectively, of the Dodd-Frank Act.
To assist the Commission and CFTC in further defining the terms
specified above, the Commission and the CFTC sought comment from
interested parties. See Definitions Contained in Title VII of Dodd-
Frank Wall Street Reform and Consumer Protection Act, Release No.
34-62717 (Aug. 13, 2010) [75 FR 51429] (advance joint notice of
proposed rulemaking regarding definitions).
\7\ 15 U.S.C. 78p.
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To preserve the application of our existing beneficial ownership
rules to persons who purchase or sell security-based swaps after the
effective date of Section 13(o), we are proposing to readopt without
change the relevant portions of Rules 13d-3 and 16a-1. These proposals
are limited to the continued application of these rules by the
Commission on the same basis that they currently apply to persons who
use security-based swaps.\8\ While these proposals are only intended to
preserve the existing application of the beneficial ownership rules as
they relate to security-based swaps, our staff is engaged in a separate
project to develop proposals to modernize reporting under
[[Page 15876]]
Exchange Act Sections 13(d) \9\ and 13(g).\10\
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\8\ In addition, the proposed readoption of the relevant
portions of existing Rules 13d-3 and 16a-1(a) is neither intended
nor expected to change any existing administrative or judicial
application or interpretation of the rules.
\9\ 15 U.S.C. 78m(d).
\10\ 15 U.S.C. 78m(g).
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B. Sections 13(d) and 13(g) and Rule 13d-3
Sections 13(d) and 13(g) require a person who is the beneficial
owner of more than five percent of certain equity securities \11\ to
disclose information relating to such beneficial ownership. While these
statutory sections do not define the term ``beneficial owner,'' the
Commission has adopted rules that determine the circumstances under
which a person is or may be deemed to be a beneficial owner. In order
to provide objective standards for determining when a person is or may
be deemed to be a beneficial owner subject to Section 13(d), the
Commission adopted Exchange Act Rule 13d-3.\12\ Application of the
standards within Rule 13d-3 allows for case-by-case determinations as
to whether a person is or becomes a beneficial owner, including a
person who uses a security-based swap.
Under Rule 13d-3(a), a beneficial owner includes any person who
directly or indirectly has or shares voting power and/or investment
power over an equity security. Voting power includes ``the power to
vote, or to direct the voting of, such security'' and investment power
includes ``the power to dispose, or to direct the disposition, of such
security.'' Identifying each person who possesses voting or investment
power requires an analysis of all of the relevant facts and
circumstances. Rule 13d-3(a) provides that a beneficial owner
``includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or
shares'' voting power and/or investment power over an equity security.
The rule, by its terms, provides that a person may become a beneficial
owner through means other than an acquisition of securities or formal
agreement, and that a person may be a beneficial owner even if that
person shares voting or investment power with another person and is
only able to indirectly exercise such power by directing the voting or
disposition of the subject security.\13\
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\11\ Section 13(d)(1) applies to any equity security of a class
that is registered pursuant to Section 12 of the Exchange Act, any
equity security issued by a ``native corporation'' pursuant to
Section 37(d)(6) of the Alaska Native Claims Settlement Act, and any
equity security described in Exchange Act Rule 13d-1(i) [17 CFR
240.13d-1(i)]. Rule 13d-1(i) explains that for purposes of
Regulation 13D-G, ``the term `equity security' means any equity
security of a class which is registered pursuant to section 12 of
that Act, or any equity security of any insurance company which
would have been required to be so registered except for the
exemption contained in section 12(g)(2)(G) of the Act, or any equity
security issued by a closed-end investment company registered under
the Investment Company Act of 1940; Provided, Such term shall not
include securities of a class of non-voting securities.''
\12\ Adoption of Beneficial Ownership Disclosure Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342].
\13\ The Commission, in recognition of the breadth of this
provision, has emphasized its necessity in order ``to obtain
disclosure from all those persons who have the ability to change or
influence control.'' Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484].
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Rule 13d-3(b) provides that ``[a]ny person who, directly or
indirectly, creates or uses a trust, proxy, power of attorney, pooling
arrangement or any other contract, arrangement, or device with the
purpose [or] effect of divesting such person of beneficial ownership of
a security or preventing the vesting of such beneficial ownership as
part of a plan or scheme to evade the reporting requirements of section
13(d) or (g) of the Act shall be deemed for purposes of such sections
to be the beneficial owner of such security.'' In contrast to Rule 13d-
3(a), application of Rule 13d-3(b) may result in a beneficial ownership
determination even if a person does not hold voting and/or investment
power.\14\
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\14\ See Example 8 from Release No. 34-13291 for an illustration
of how Rule 13d-3(b) can apply to a grant of an irrevocable proxy.
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Under Rule 13d-3(d)(1), a person is deemed a beneficial owner if
the person has the right to acquire beneficial ownership, as defined in
Rule 13d-3(a), at any time within 60 days. The right includes, but is
not limited to, any right to acquire through the exercise of an option,
warrant or right, conversion of a convertible security, or power to
revoke a trust or similar agreement. Rule 13d-3(d)(1) further provides
that if a person acquires an option, warrant, right, convertible
security or power to revoke with the purpose or with the effect of
changing or influencing control of the issuer, or as a participant in a
transaction having such purpose or effect, then the person is deemed to
be a beneficial owner immediately, regardless of when the option,
right, convertible security or power to revoke is exercisable or
convertible.
If beneficial ownership, as determined in accordance with Rules
13d-3(a), 13d-3(b) and 13d-3(d)(1), exceeds the designated thresholds,
beneficial owners are required to provide specified disclosures. The
disclosures are intended to be required of persons who have the
potential to influence or gain control of the issuer.\15\ Specifically,
Section 13(d) and the rules thereunder require that a person file with
the Commission, within ten days after acquiring, directly or
indirectly, beneficial ownership of more than five percent of a class
of equity securities, a disclosure statement on Schedule 13D,\16\
subject to certain exceptions.\17\ Section 13(g) and the rules
thereunder enable certain persons who are the beneficial owners of more
than five percent of a class of certain equity securities to instead
file a short form Schedule 13G,\18\ assuming certain conditions have
been met.\19\ These statutory provisions and corresponding rules also
impose obligations on beneficial owners to report changes in the
information filed.
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\15\ S. Rep. No. 550, at 7 (1967); H.R. Rep. No. 1711, at 8
(1968); Full Disclosure of Corporate Equity Ownership and in
Corporate Takeover Bids, Hearings on S. 510 before the S. Banking
and Currency Comm., 90th Cong. 16 (1967) (``The bill now before you
has a much closer relationship to existing provisions of the
Exchange Act regulating solicitation of proxies, since acquisitions
of blocks of voting securities are typically alternatives to proxy
solicitations, as methods of capturing or preserving control.'');
Takeover Bids, Hearings on H.R. 14475 and S.510 before the Subcomm.
on Commerce and Fin. of the H. Comm. on Interstate and Foreign
Commerce, 90th Cong. (1968).
\16\ 17 CFR 240.13d-101.
\17\ See Section 13(d)(6) and Rule 13d-1(b)-(d).
\18\ 17 CFR 240.13d-102.
\19\ See Amendments to Beneficial Ownership Reporting
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854] for
a description of the types of persons eligible to file a Schedule
13G. The investors eligible to report beneficial ownership on
Schedule 13G are commonly referred to as qualified institutional
investors under Rule 13d-1(b), passive investors under Rule 13d-
1(c), and exempt investors under Rule 13d-1(d). Unlike Section
13(d), Section 13(g) applies regardless of whether beneficial
ownership has been ``acquir[ed]'' within the meaning of Section
13(d) or is viewed as not having been acquired for purposes of
Section 13(d). For example, persons who obtain all their securities
before the issuer registers the subject securities under the
Exchange Act are not subject to Section 13(d) and persons who
acquire not more than two percent of a class of subject securities
within a 12-month period are exempt from Section 13(d) by Section
13(d)(6)(B), but in both cases are subject to Section 13(g).
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The beneficial ownership disclosure requirements of Schedules 13D
and 13G were designed to provide disclosures to security holders
regarding persons holding significant positions in public companies,
such as the identity of the beneficial owners, the amount of beneficial
ownership, the existence of a beneficial owner group, and in the case
of persons who file a Schedule 13D, plans or proposals regarding the
issuer. The disclosures made in Schedules 13D and 13G have been viewed
as contributing to the information available to help investors make
fully informed investment decisions with respect to their
securities.\20\ An additional
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regulatory objective served by these disclosures is to provide
management of the issuer with information to ``appropriately protect
the interests of its security holders.'' \21\ In enacting the original
Section 13(d) legislation, Congress made clear that its new regulatory
initiative was intended to avoid ``tipping the balance of regulation
either in favor of management or in favor of the person [potentially]
making the takeover bid.'' \22\ In addition to providing information to
issuers and security holders, Section 13(d) was adopted with a view
toward alerting ``the marketplace to every large, rapid aggregation or
accumulation of securities, regardless of technique employed, which
might represent a potential shift in corporate control.'' \23\ On the
basis of the information disclosed, the market would ``value the shares
accordingly'' \24\ due to the increased prospects for price
discovery.\25\
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\20\ See Computer Network Corp. v. Spohler [1982 Transfer
Binder] Fed Sec. L. Rep (CCH) ] 98,623 at 93,087 (D.D.C. March 23,
1982). See also, San Francisco Real Estate Investors v. REIT of
America, [1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ] 98,874, at
94,557 (D. Mass. Nov. 19, 1982), aff'd in part, rev'd in part 701
F.2d 1000 (1st Cir. 1983). The Commission also has recognized that
Section 13(d) was enacted primarily to provide ``adequate disclosure
to stockholders in connection with any substantial acquisition of
securities within a relatively short time.'' Adoption of Beneficial
Ownership Disclosure Requirements, Release No. 34-13291, (Feb. 24,
1977) [42 FR 12342] citing S. Rep. No. 550, at 7 (1967).
\21\ H.R. Rep. No. 1655, at 3 (1970); see, e.g., Additional
Consumer Protection in Corporate Takeovers and Increasing the Sec.
Act Exemptions for Small Businessmen, Hearing Before the Sec.
Subcomm. of the S. Banking and Currency Comm. on S. 336 and S. 343,
91st Cong. (1970). See also Bath Indus. v. Blot, 427 F.2d 97, 113
(7th Cir. 1970). In addition, disclosures made in compliance with
Sections 13(d) and 13(g) also provide issuers that file registration
statements, annual reports, proxy statements and other disclosure
documents with the information they use to disclose all beneficial
owners of more than five percent of certain classes of the issuer's
equity securities as required by Item 403 of Regulation S-K. [17 CFR
229.403]. See generally H.R. Rep. No. 1655.
\22\ H.R. Rep. No. 1711, at 4 (1968); S. Rep. No. 550, at 3
(1968). Both the House and Senate reports emphasized that Section
13(d) was enacted ``to require full and fair disclosure for the
benefit of investors while at the same time providing the offeror
and management equal opportunity to fairly present their case.''
\23\ GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d. Cir. 1971),
cert. denied, 406 U.S. 910 (1972), cited by the Commission at
footnote 16 in the following administrative proceeding: In the
Matter of Harvey Katz, Release No. 34-20893 (April 25, 1984). A
measure of what Congress considered to be large and rapid
acquisitions is Section 13(d)(6)(B), which exempts acquisitions of
two percent or less in the preceding twelve months.
\24\ General Aircraft Corp. v. Lampert, 556 F.2d 90, 94 (1st
Cir. 1977); see also S. Rep. No. 550, at 3 (``But where no
information is available about the persons seeking control, or their
plans, the shareholder is forced to make a decision on the basis of
a market price which reflects an evaluation of the company based on
the assumption that the present management and its policies will
continue. The persons seeking control, however, have information
about themselves and about their plans which, if known to investors,
might substantially change the assumptions on which the market price
is based.'').
\25\ Takeover Bids, Hearings on 14475 and S. 510 before the
Subcomm. on Commerce and Fin. of the H. Comm. on Interstate and
Foreign Commerce, 90th Cong. 12 (1968) (statement of Hon. Manuel F.
Cohen, Chairman, U.S. Securities and Exchange Commission, ``But I
might ask, how can an investor evaluate the adequacy of the price if
he cannot assess the possible impact of a change in control?
Certainly without such information he cannot judge its adequacy by
the current or recent market price. That price presumably reflects
the assumption that the company's present business, control and
management will continue. If that assumption is changed, is it not
likely that the market price might change?'').
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C. Application of the Section 13 Beneficial Ownership Regulatory
Provisions to Persons Who Purchase or Sell Security-Based Swaps
As noted above, the term ``security-based swap'' is defined in
Section 3(a)(68) of the Exchange Act.\26\ Under our existing rules,
holders of security-based swaps may be subject to beneficial ownership
reporting. As explained in more detail below, in cases where a
security-based swap confers voting and/or investment power (or a person
otherwise acquires such power based on the purchase or sale of a
security-based swap), grants a right to acquire an equity security, or
is used with the purpose or effect of divesting or preventing the
vesting of beneficial ownership as part of a plan or scheme to evade
the reporting requirements, our existing regulatory regime may require
the reporting of beneficial ownership.\27\
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\26\ See note 6 above.
\27\ Except as provided below regarding Section 16, this release
does not address whether, or under what circumstances, an agreement,
contract, or transaction that is labeled a security-based swap
(including one which confers voting and/or investment power, grants
a right to acquire one or more equity securities, or is used with
the purpose or effect of divesting or preventing the vesting of
beneficial ownership as part of a plan or scheme to evade the
beneficial ownership reporting requirements) would be a purchase or
sale of the underlying securit(ies) and treated as such for purposes
of the federal securities laws, instead of a security-based swap. In
this regard, among other things, the definition of ``swap'' (and
therefore the definition of ``security-based swap'') specifically
excludes the purchase or sale of one or more securities on a fixed
or contingent basis, unless the agreement, contract, or transaction
predicates the purchase or sale on the occurrence of a bona fide
contingency that might reasonably be expected to affect or be
affected by the creditworthiness of a party other than a party to
the agreement, contract, or transaction. See Sections 1a(47)(B)(v)
and (vi) of the Commodity Exchange Act, 7 U.S.C. 1a(47)(B)(v) and
(vi).
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First, under existing Rule 13d-3(a), to the extent a security-based
swap provides a person, directly or indirectly, with exclusive or
shared voting and/or investment power over the equity security through
a contractual term of the security-based swap or otherwise, the person
becomes a beneficial owner of that equity security. Under Rule 13d-
3(a), a person may become a beneficial owner even though the person has
not acquired the equity security.\28\
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\28\ Exchange Act Section 13(d)(1) applies after a person
directly or indirectly acquires beneficial ownership, regardless of
whether the person has made an acquisition of the equity securities.
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Second, existing Rule 13d-3(b) generally provides that a person is
deemed to be a beneficial owner if that person uses any contract,
arrangement, or device as part of a plan or scheme to evade the
beneficial ownership reporting requirements. To the extent a security-
based swap is used with the purpose or effect of divesting a person of
beneficial ownership or preventing the vesting of beneficial ownership
as part of a plan or scheme to evade Sections 13(d) or 13(g), the
security-based swap may be viewed as a contract, arrangement or device
within the meaning of those terms as used in Rule 13d-3(b). A person
using a security-based swap, therefore, may be deemed a beneficial
owner under Rule 13d-3(b) in this context.
Finally, under existing Rule 13d-3(d)(1), a person is deemed a
beneficial owner of an equity security if the person has a right to
acquire the equity security within 60 days or holds the right with the
purpose or effect of changing or influencing control of the issuer of
the security for which the right is exercisable, regardless of whether
the right to acquire originates in a security-based swap or an
understanding in connection with a security-based swap. This type of
right to acquire an equity security, if obtained through a security-
based swap, is treated the same as any other right to acquire an equity
security. Acquisition of such a right, regardless of its origin,
results in a person being deemed a beneficial owner under Rule 13d-
3(d)(1).
D. Section 16 and Rules 16a-1(a)(1) and 16a-1(a)(2)
Section 16 was designed both to provide the public with information
about securities transactions and holdings of every person who is the
beneficial owner of more than ten percent of a class of equity security
registered under Exchange Act Section 12 \29\ (``ten percent holder''),
and each officer and director (collectively, ``insiders'') of the
issuer of such a security, and to deter such insiders from profiting
from short-term trading in issuer securities while in possession of
material, non-public information. Upon becoming an insider, or upon
Section 12
[[Page 15878]]
registration of the class of equity security, Section 16(a) \30\
requires an insider to file an initial report with the Commission
disclosing his or her beneficial ownership of all equity securities of
the issuer.\31\ Section 16(a) also requires insiders to report
subsequent changes in such ownership.\32\ To prevent misuse of inside
information by insiders, Section 16(b) \33\ provides the issuer (or
shareholders suing on the issuer's behalf) a strict liability private
right of action to recover any profit realized by an insider from any
purchase and sale (or sale and purchase) of any equity security of the
issuer within a period of less than six months.\34\
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\29\ 15 U.S.C. 78l.
\30\ 15 U.S.C. 78p(a).
\31\ Insiders file these reports on Form 3 [17 CFR 249.103].
\32\ Insiders file transaction reports on Form 4 [17 CFR
249.104] and Form 5 [17 CFR 249.105].
\33\ 15 U.S.C. 78p(b).
\34\ In addition, insiders are subject to the short sale
prohibitions of Section 16(c) [15 U.S.C. 78p(c)].
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As applied to ten percent holders, Congress intended Section 16 to
reach persons presumed to have access to information because they can
influence or control the issuer as a result of their equity
ownership.\35\ Because Section 13(d) specifically addresses these
relationships, the Commission adopted Rule 16a-1(a)(1) to define ten
percent holders under Section 16 as persons deemed ten percent
beneficial owners under Section 13(d) and the rules thereunder.\36\ The
Section 13(d) analysis, such as counting beneficial ownership of those
derivative securities exercisable or convertible within 60 days,\37\ is
imported into the ten percent holder determination for Section 16
purposes. The application of Rule 16a-1(a)(1) is straightforward; if a
person is a ten percent beneficial owner as determined pursuant to
Section 13(d) and the rules thereunder, the person is deemed a ten
percent holder under Section 16.\38\
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\35\ See S. Rep. No. 1455, at 55, 68 (1934); See also S. Rep.
No. 792, at 20-1 (1934); S. Rep. No. 379, at 21-2 (1963).
\36\ Ownership Reports and Trading By Officers, Directors and
Principal Security Holders, Release No. 34-28869 (Feb. 21, 1991) [56
FR 7242].
\37\ Rule 13d-3(d).
\38\ For example, the Commission applied an analysis derived
from Rule 13d-3(d)(1) in publishing its views regarding when equity
securities underlying a security future that requires physical
settlement should be counted for purposes of determining whether the
purchaser of the security future is subject to Section 16 as a ten
percent holder by operation of Rule 16a-1(a)(1). Commission Guidance
on the Application Certain Provisions of the Securities Exchange Act
of 1934, and Rules Thereunder to Trading in Security Futures
Products, Release No. 34-46101 (June 21, 2002) [67 FR 43234]
(``Futures Interpretive Release'') at Q 7.
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For purposes of Section 16(a) reporting obligations and Section
16(b) short-swing profit recovery, Rule 16a-1(a)(2) uses a different
definition of ``beneficial owner.'' Once a person is subject to Section
16, for reporting and profit recovery purposes, Rule 16a-1(a)(2)
defines ``beneficial owner'' based on whether the person has or shares
a direct or indirect pecuniary interest in the securities. A
``pecuniary interest'' in any class of equity securities means ``the
opportunity, directly or indirectly, to profit or share in any profit
derived from a transaction in the subject securities.'' \39\ An
``indirect pecuniary interest'' in any class of equity securities
includes, but is not limited to ``a person's right to acquire equity
securities through the exercise or conversion of any derivative
security, whether or not presently exercisable.'' \40\ ``Derivative
securities'' are ``any option, warrant, convertible security, stock
appreciation right, or similar right with an exercise or conversion
privilege at a price related to an equity security, or similar
securities with a value derived from the value of an equity security,
but shall not include [* * *] rights with an exercise or conversion
privilege at a price that is not fixed.'' \41\ Equity securities of an
issuer are ``any equity security or derivative security relating to an
issuer, whether or not issued by that issuer.'' \42\
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\39\ Rule 16a-1(a)(2)(i).
\40\ Rule 16a-1(a)(2)(ii)(F).
\41\ Rule 16a-1(c)(6).
\42\ Rule 16a-1(d). Further, Rule 16a-4(a) [17 CFR 240.16a-4(a)]
provides that for purposes of Section 16, both derivative securities
and the underlying securities to which they relate are deemed to the
be the same class of equity securities, except that the acquisition
or disposition of any derivative security must be separately
reported.
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This framework recognizes that holding derivative securities is
functionally equivalent to holding the underlying equity securities for
Section 16 purposes because the value of the derivative securities is a
function of or related to the value of the underlying equity
security.\43\ Just as an insider's opportunity to profit begins upon
purchasing or selling issuer common stock, the opportunity to profit
begins when an insider engages in transactions in derivative securities
that provide an opportunity to obtain or dispose of the stock at a
fixed price.\44\ Establishing or increasing a call equivalent position
\45\ (or liquidating or decreasing a put equivalent position) \46\ is
deemed a purchase of the underlying security, and establishing or
increasing a put equivalent position (or liquidating or decreasing a
call equivalent position) is deemed a sale of the underlying
security.\47\
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\43\ For example, the Futures Interpretive Release, at Q&A Nos.
8-13, explains the status of a security future as a derivative
security for purposes of Section 16(a) reporting and Section 16(b)
short-swing profit recovery.
\44\ Ownership Reports and Trading By Officers, Directors and
Principal Security Holders, Release No. 34-28869, at Section III.A
(Feb. 21, 1991) [56 FR 7242].
\45\ Rule 16a-1(b) provides that a ``call equivalent position''
is ``a derivative security position that increases in value as the
value of the underlying equity security increases, including, but
not limited to, a long convertible security, a long call option, and
a short put option position.''
\46\ Rule 16a-1(h) provides that a ``put equivalent position''
is ``a derivative security position that increases in value as the
value of the underlying equity decreases, including, but not limited
to, a long put option and a short call option.''
\47\ Rule 16b-6(a).
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Rule 16a-1(a)(2) and the related rules described above recognize
the functional equivalence of derivative securities and the underlying
equity securities by providing that transactions in derivative
securities are reportable, and matchable with transactions in other
derivative securities and in the underlying equity.\48\ For example,
short-swing profits obtained by buying call options and selling the
underlying stock, or buying the underlying stock and buying put
options, are recoverable. This functional equivalence extends to all
fixed-price derivative securities, whether issued by the issuer or a
third party, and whether the form of settlement is cash or stock.\49\
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\48\ Rule 16b-6(b) generally exempts from Section 16(b) short-
swing profit recovery the exercise or conversion of a fixed-price
derivative security, provided that it is not out-of-the-money. Rule
16b-6(c) provides guidance for determining short-swing profit
recoverable from transactions involving the purchase and sale or
sale and purchase of derivative and other securities.
\49\ Former Rule 16a-1(c)(3), adopted in Release No. 34-28869,
excluded from the definition of ``derivative securities''
``securities that may be redeemed or exercised only for cash and do
not permit the receipt of equity securities in lieu of cash, if the
securities either: (i) Are awarded pursuant to an employee benefit
plan satisfying the provisions of [former] Sec. 240.16b-3(c); or
(ii) may be redeemed or exercised only upon a fixed date or dates at
least six months after award, or upon death, retirement, disability
or termination of employment.'' As a corollary to adopting a broader
Rule 16b-3 exemption, the Commission rescinded former Rule 16a-
1(c)(3) in 1996, stating that ``because the opportunity for profit
based on price movement in the underlying stock embodied in a cash-
only instrument is the same as for an instrument settled in stock,
cash-only instruments should be subject to Section 16 to the same
extent as other issuer equity securities.'' Ownership Reports and
Trading by Officers, Directors and Principal Security Holders,
Release No. 34-37260, at Section III.A (May 31, 1996) [61 FR 30376].
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[[Page 15879]]
E. Application of the Section 16 Beneficial Ownership Regulatory
Provisions to Holdings and Transactions in Security-Based Swaps
As described above, solely for purposes of determining who is
subject to Section 16 as a ten percent holder, Rule 16a-1(a)(1) uses
the beneficial ownership tests applied under Section 13(d) and its
implementing rules, including Rules 13d-3(a), 13d-3(b), and Rule 13d-
3(d)(1). As a result, for example, a person who has the right to
acquire securities that would cause the person to own more than ten
percent of a class of equity securities through a security-based swap
that confers a right to receive equity at settlement or otherwise would
be subject to Section 16 as a ten percent holder under existing Rule
16a-1(a)(1). Once a person is subject to Section 16, in order to
determine what securities are subject to Section 16(a) reporting and
Section 16(b) short-swing profit recovery for any insider (whether an
officer, director or ten percent holder), existing Rule 16a-1(a)(2)
looks to the insider's pecuniary interest (i.e., opportunity to profit)
in the securities. Under existing rules, this concept includes an
indirect pecuniary interest in securities underlying fixed-price
derivative securities, including security-based swaps, whether settled
in cash or stock. Consistent with the derivative securities analysis,
the Commission has stated that Section 16 consequences would arise from
an equity swap transaction where either party to the transaction is a
Section 16 insider with respect to a security to which the swap
agreement relates.\50\ The Commission has provided interpretive
guidance regarding how equity swap transactions should be reported,\51\
and adopted transaction code ``K'' to be used in addition to any other
applicable code in reporting equity swap and similar transactions so
that they can be easily identified.\52\ An equity swap involving a
single security, or a narrow-based security index, is a security-based
swap as defined in Section 3(a)(68).
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\50\ Ownership Reports and Trading by Officers, Directors and
Principal Security Holders, Release No. 34-34514, at Section III.G
(Aug. 10, 1994) [59 FR 42449]; Ownership Reports and Trading by
Officers, Directors and Principal Security Holders, Release No. 34-
37260, at Section IV.H (May 31, 1996) [61 FR 30376].
\51\ Each report must provide the following information: (1) The
date of the transaction; (2) the term; (3) the number of underlying
shares; (4) the exercise price (i.e., the dollar value locked in);
(5) the non-exempt disposition (acquisition) of shares at the outset
of the term; (6) the non-exempt acquisition (disposition) of shares
at the end of the term (and at such earlier dates, if any, where
events under the equity swap cause a change in a call or put
equivalent position); (7) the total number of shares held after the
transaction; and (8) any other material terms. Release No. 34-37260,
at Section IV.H.
\52\ General Instruction 8 to Form 4 [17 CFR 249.104] (U.S. SEC
1475 (08-07)) and Form 5 [17 CFR 249.105] (U.S. SEC 2270 (1-05)), as
amended in Release No. 34-37260, at Section IV.I.
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II. Discussion of the Rule Proposals
New Section 13(o) provides that a person shall be deemed a
beneficial owner of an equity security based on the purchase or sale of
a security-based swap only to the extent we adopt rules after making
certain determinations and consulting with the prudential regulators
and the Secretary of the Treasury. The regulatory provisions under
which beneficial ownership determinations are currently made with
respect to security-based swaps were enacted or adopted before Section
13(o). Accordingly, we are proposing to readopt the relevant portions
of Rules 13d-3 and 16a-1 following consultation with the prudential
regulators and the Secretary of Treasury to assure that these
provisions continue to apply to a person who purchases or sells a
security-based swap upon effectiveness of Section 13(o).
The purpose of the proposed rulemaking is solely to preserve the
regulatory status quo and provide the certainty and protection that
market participants have come to expect with the existing disclosures
required by the rules promulgated under Sections 13(d), 13(g) and
16(a). While the use of security-based swaps has not been frequently
disclosed in Schedule 13D and 13G filings, we are proposing to readopt
Rules 13d-3(a), (b) and (d)(1) and the relevant portions of Rules 16a-
1(a)(1) and (a)(2) to further the policy objectives of and foster
compliance with these rules upon the effectiveness of Section 13(o).
Given the language in Section 13(o), as well as the newly amended
Sections 13(d) and 13(g),\53\ we are proposing to readopt these rules
to remove any doubt that they will continue to allow for the same
determinations of beneficial ownership that they do today. Readoption
of these rule provisions is intended to ensure that persons who use
security-based swaps remain subject to the Section 13(d), Section 13(g)
and Section 16 regulatory regimes to the same extent such persons are
now. Moreover, the proposed rulemaking is designed to preserve the
private right of action provided by Section 16(b) and not disturb any
other existing right of action.
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\53\ See Section 766(b) of the Dodd-Frank Act, which amends
Sections 13(d) and 13(g) to provide that a person ``becomes or is
deemed to become a beneficial owner * * * upon the purchase or sale
of a security-based swap that the Commission may define by rule * *
*.''
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Section 13(o) will not render the existing beneficial ownership
regulatory provisions inapplicable to persons who obtain beneficial
ownership independently from a security-based swap. For example, Rule
13d-3(d)(1) will continue to apply to persons who obtain a right to
acquire equity securities if the right does not arise from the purchase
or sale of a security-based swap. Rights, options, warrants, or
conversion or certain revocation privileges, if acquired or held by
persons under circumstances that do not arise from the purchase or sale
of a security-based swap, will remain subject to Sections 13(d), 13(g)
and 16 and may continue to be treated under Rule 13d-3(d)(1) as the
acquisition of beneficial ownership,\54\ and Rules 16a-1(a)(1) and 16a-
1(a)(2) will continue to apply. Furthermore, Schedule 13D will continue
to require certain disclosures relating to the purchase or sale of
security-based swaps notwithstanding Section 13(o).\55\
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\54\ These rights to acquire beneficial ownership are not
security-based swaps within the meaning of Section 13(o) because
they are purchases and sales of securities. In this regard, the
definition of ``swap'' in Section 721 of the Dodd-Frank Act (and
therefore the definition of ``security-based swap'') excludes
purchases and sales of securities, whether on a fixed or contingent
basis. Under the Dodd-Frank Act, the term ``security'' is as defined
in the Securities Act and the Exchange Act, which includes options,
warrants, and rights to subscribe to or purchase a security and any
convertible securities as well as the securities issuable upon
exercise or conversion of such securities. In addition, Section 721
of the Dodd-Frank Act excludes from the definition of ``swap'' any
put, call, straddle, option or privilege on any security,
certificate of deposit, or group or index of securities, including
any interest therein or based on the value thereof, that is subject
to the Securities Act of 1933 and the Exchange Act. Furthermore,
Section 13(o) does not affect the treatment of ``security-based swap
agreements'' as defined in the Dodd-Frank Act. For example, Section
762(d)(5) of the Dodd-Frank Act clarifies that Section 16 continues
to apply to security-based swap agreements.
\55\ For example, beneficial owners who file a Schedule 13D and
use a security-based swap will remain subject to the obligation to
comply with Items 6 (``Contracts, Arrangements, Understandings or
Relationships With Respect to Securities of the Issuer'') and 7
(``Material to be Filed as Exhibits'') and provide disclosures
relating to the security-based swap depending upon the security-
based swap's terms. In addition, beneficial owners who file a
Schedule 13G pursuant to Rule 13d-1(b) or otherwise rely upon Rule
13d-1(b) to govern a future reporting obligation may be required to
make disclosures on Schedule 13D instead based upon their purchase
or sale of a security-based swap. See In the Matter of Perry Corp.,
Release No. 34-60351 (July 21, 2009).
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[[Page 15880]]
A. Beneficial Ownership Determinations under Section 13
Section 13(o) provides that a person shall be deemed to acquire
beneficial ownership of an equity security based on the purchase or
sale of a security-based swap only to the extent that the Commission
meets certain conditions and adopts a rule. Although the proposal to
readopt Rule 13d-3(a), Rule 13d-3(b), and Rule 13d-3(d)(1) is being
made in part pursuant to Section 13(o), we are not proposing any
revision to the existing rule text. The proposed rules are the same as
the existing rules in all respects.
1. Rule 13d-3(a)
We are proposing to readopt without change Rule 13d-3(a) to address
any uncertainty with regard to the application of Rule 13d-3(a) to a
person who purchases or sells a security-based swap. If readopted, a
determination could continue to be made that a beneficial owner of
equity securities includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power and/or investment power over the
securities based on the purchase or sale of a security-based swap.
Following initial consultation with the prudential regulators \56\ and
the Secretary of the Treasury, we preliminarily believe that:
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\56\ Our staff has consulted with the Federal Reserve, the
Office of the Comptroller of the Currency, the Farm Credit
Administration, the Federal Housing Finance Agency, and the Federal
Deposit Insurance Corporation. Our staff also consulted with the
CFTC.
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A person's possession of voting and/or investment power in
an equity security based on the purchase or sale of a security-based
swap is no different from voting or investment power in an equity
security that exists independently from a security-based swap when (1)
a security-based swap confers, or (2) an arrangement, understanding or
relationship based on the purchase or sale of the security-based swap
conveys, voting and/or investment power in an equity security.
Security-based swaps therefore can provide incidents of ownership
comparable to direct ownership of the underlying equity security within
the meaning of Section 13(o) to the extent that the security-based swap
confers, or an arrangement, understanding or relationship based upon
the purchase or sale of the security-based swap conveys, voting and/or
investment power in an equity security; and
Retaining the existing regulatory treatment of security-
based swaps in Rule 13d-3(a) is necessary to achieve the purpose of
Section 13 so that Sections 13(d) and 13(g) continue to require the
filing of beneficial ownership reports that produce disclosure by
persons who have the ability or potential to change or influence
control of the issuer. In addition, these persons may have the means to
acquire significant amounts of equity securities wholly or partly based
upon the purchase or sale of a security-based swap. As a result, these
persons may have the potential to effect a change of control
transaction or preserve or influence control of an issuer. In the case
of Schedule 13D filers, these persons would be required to disclose
their plans or proposals. Disclosures made in beneficial ownership
reports are in the public interest and necessary for the protection of
investors because they provide information about certain transactions
and related acquisitions of beneficial ownership that: could disclose a
potential shift in corporate control; impact the transparency and
efficiency of our capital markets; and contribute to price discovery.
2. Rule 13d-3(b)
We are proposing to readopt without change Rule 13d-3(b) to address
any uncertainty with regard to the continued application of Rule 13d-
3(b) to a person who purchases or sells a security-based swap. Rule
13d-3(b) provides that a person is deemed to be a beneficial owner if
that person uses any contract, arrangement, or device as a means to
divest or prevent the vesting of beneficial ownership as part of a plan
or scheme to evade the beneficial ownership reporting requirements. If
readopted, Rule 13d-3(b) would continue to apply to any person that
uses a security-based swap as part of a plan or scheme to evade
reporting beneficial ownership and thereby accumulate influential or
control positions in public issuers without disclosure.
Following initial consultation with the prudential regulators and
the Secretary of the Treasury, we preliminarily believe that:
A person's use of a security-based swap to divest or
prevent the vesting of beneficial ownership as part of a plan or scheme
to evade the application of Sections 13(d) or 13(g) is no different
from a plan or scheme that uses a contract, arrangement or device that
exists independently from a security-based swap. In this context, a
person would be deemed to have beneficial ownership, and thus incidents
of ownership comparable to direct ownership, but for the plan or scheme
based in whole or in part upon the purchase or sale of a security-based
swap; and
Retaining the existing regulatory treatment of security-
based swaps in Rule 13d-3(b) is necessary to achieve the purpose of
Section 13 so that Sections 13(d) and 13(g) continue to require the
filing of beneficial ownership reports that produce disclosure by
persons who have the ability or potential to change or influence
control of the issuer. In addition, these persons may have the means to
acquire significant amounts of equity securities based in whole or in
part upon the purchase or sale of a security-based swap, and therefore
the potential to effect a change of control transaction or preserve or
influence control of an issuer. In the case of Schedule 13D filers,
these persons would be required to disclose their plans or proposals.
Disclosures made in beneficial ownership reports are in the public
interest and necessary for the protection of investors because they
provide information about certain transactions and related acquisitions
of beneficial ownership that: could disclose a potential shift in
corporate control; impact the transparency and efficiency of our
capital markets; and contribute to price discovery.
3. Rule 13d-3(d)(1)
We are proposing to readopt without change Rule 13d-3(d)(1) to
address any uncertainty with regard to the continued application of
Rule 13d-3(d)(1) to a person who purchases or sells a security-based
swap. Rule 13d-3(d)(1) provides that a person will be deemed to be a
beneficial owner of equity securities if the person has the right to
acquire beneficial ownership of the securities within 60 days, or at
any time if the right is held for the purpose of changing or
influencing control. If readopted, Rule 13d-3(d)(1) would continue to
apply to any person that obtains such a right based on the purchase or
sale of a security-based swap.
The Commission has long recognized the importance of having the
beneficial ownership reporting regime account for contingent interests
in equity securities arising from investor use of derivatives, such as
options, warrants or rights. The Commission adopted Rule 13d-3, the
predecessor to Rule 13d-3(d)(1), on August 30, 1968,\57\ approximately
one month after Congress enacted Section
[[Page 15881]]
13(d).\58\ The Commission also has treated futures contracts for equity
securities the same as options, warrants, or rights for purposes of
determining beneficial ownership.\59\ When 60 days or less are left
until the right to acquire may be exercised, or if a right has been
acquired for the purpose or with the effect of changing or influencing
control of the issuer of securities, we believe that treating the
holder of the right as if the person is a beneficial owner under Rule
13d-3(d)(1) is necessary to achieve the purpose of Section 13 given the
person's potential to influence or change control of the issuer.\60\
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\57\ Acquisitions, Tender Offers, and Solicitations, Release No.
34-8392 (Aug. 30, 1968) [33 FR 14109].
\58\ See Act of July 29, 1968, Pub. L. 90-439, 82 Stat. 454.
\59\ The Futures Interpretive Release provides two examples at Q
& A No. 17 that explain when equity securities underlying a security
future that requires physical settlement should be counted for
purposes of determining whether the purchaser of the security future
is subject to Regulation 13D-G by operation of Rule 13d-3(d)(1).
\60\ See Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484].
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Following initial consultation with the prudential regulators and
the Secretary of the Treasury, we preliminarily believe that:
A person's right to acquire an equity security within 60
days based on the purchase or sale of a security-based swap is no
different from a right to acquire the underlying equity security that
exists independently from a security-based swap. A right to acquire an
equity security within 60 days is comparable to direct ownership of the
equity security because direct ownership is contingent, in some cases,
only upon the exercise of that right and may result in the potential to
change or influence control of the issuer upon acquisition of the
equity security for which the right is exercisable. Security-based
swaps, therefore, can provide incidents of ownership comparable to
direct ownership of the underlying equity security within the meaning
of Section 13(o) to the extent that the security-based swap confers a
right to acquire an equity security within 60 days;
A person who acquires or holds, with the purpose or effect
of changing or influencing control of an issuer, a right to acquire an
equity security based on the purchase or sale of a security-based swap
is no different from a person who acquires or holds a right to acquire
an equity security with the purpose of changing or influencing control
of the issuer that exists independently from a security-based swap.
Rights acquired or held in this context may be used in furtherance of a
plan or proposal to change control of the issuer, and such rights to
acquire equity securities may otherwise influence an issuer if held by
a person intending to effect a change of control transaction or
preserve or influence control of an issuer. Security-based swaps,
therefore, can provide incidents of ownership comparable to direct
ownership of the underlying equity security within the meaning of
Section 13(o) to the extent that the security-based swap confers a
right to acquire an equity security to a person that holds the right
with the purpose or with the effect of changing or influencing control
of the issuer or otherwise in connection with or as a participant in
any transaction having such purpose or effect; and
Retaining the existing regulatory treatment of security-
based swaps under Rule 13d-3(d)(1) is necessary to achieve the purpose
of Section 13 so that Sections 13(d) and 13(g) continue to require the
filing of beneficial ownership reports that disclose certain
transactions by persons who have the ability or potential to change or
influence control of the issuer. These persons may have the means to
acquire significant amounts of equity securities based in whole or in
part upon the purchase or sale of a security-based swap, and therefore
the potential to effect a change of control transaction or preserve or
influence control of an issuer. In the case of Schedule 13D filers,
these persons would be required to disclose their plans or proposals.
Disclosures made in beneficial ownership reports are in the public
interest and necessary for the protection of investors because they
provide information about certain transactions and related acquisitions
of beneficial ownership that: could disclose a potential shift in
corporate control; impact the transparency and efficiency of our
capital markets; and contribute to price discovery.
Request for Comment
1. In lieu of readopting the existing language of Rules 13d-3(a),
13d-3(b), and 13d-3(d)(1), should we instead adopt a new rule or amend
the existing rules to specify the circumstances in which a purchase or
sale of a security-based swap may confer a contingent or other interest
in an equity security that, if held, could result in a person being
deemed a beneficial owner for purposes of Sections 13(d) and 13(g)?
2. Are there any other rules or disclosure requirements that should
be readopted or amended, such as Item 403 of Regulation S-K,\61\ to
preserve their existing application following effectiveness of Section
13(o)?
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\61\ Item 403 of Regulation S-K requires an issuer to disclose
in certain filings the name and amount of beneficial ownership held
by any person known to be the beneficial owner of more than five
percent of a class of its voting securities. Item 403 also requires
the issuer to identify the name and amount of beneficial ownership
held by each of its directors, director nominees and executive
officers, regardless of whether the person's beneficial ownership
exceeds five percent. We have not proposed to readopt Item 403 of
Regulation S-K because Item 403 provides that the disclosures
required are to be determined in accordance with the beneficial
ownership determinations made under Rule 13d-3.
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3. Should the Commission and/or staff provide interpretive guidance
regarding how to provide disclosure with regard to security-based swaps
in Schedules 13D or 13G? If so, what type of interpretive guidance
would be appropriate?
4. How common is the use of security-based swaps to obtain
incidents of ownership, such as voting or investment power, comparable
to direct ownership in an issuer?
5. Are there other factors or features of security-based swaps we
should consider for purposes of making the determinations required
under Section 13(o) with regard to the relevant provisions of Rule 13d-
3?
6. Does voting or investment power, a scheme to evade beneficial
ownership reporting, or a right to acquire an equity security, when
each arises from the purchase or sale of a security-based swap, differ
materially from when each exists independently from a security-based
swap?
B. Section 16 Beneficial Ownership Rules
1. Rule 16a-1(a)(1)
We are proposing to readopt without change a portion of Rule 16a-
1(a)(1) \62\ to preserve, solely for purposes of determining whether a
person is a ten percent holder, the application of the relevant
provisions within Rule 13d-3 to a person who uses a security-based
swap. The proposed readoption of Rule 16a-1(a)(1) would not change the
rule's provision that shares held by institutions eligible to file
beneficial ownership reports on Schedule 13G that are held for clients
in a fiduciary capacity in the ordinary course of
[[Page 15882]]
business are not counted for purposes of determining ten percent holder
status.\63\
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\62\ We propose to readopt the portion of Rule 16a-1(a)(1) that
precedes the proviso applicable to qualified institutions. The
relevant portion of Rule 16a-1(a)(1) proposed for readoption reads
as follows: ``(a) The term beneficial owner shall have the following
applications: (1) Solely for purposes of determining whether a
person is a beneficial owner of more than ten percent of any class
of equity securities registered pursuant to section 12 of the Act,
the term ``beneficial owner'' shall mean any person who is deemed a
beneficial owner pursuant to section 13(d) of the Act and the rules
thereunder * * *.''
\63\ Securities not held in such a fiduciary capacity, however,
must be counted in determining whether a Schedule 13G qualified
institutional investor is a ten percent holder. This exclusion
applies only to qualified institutions who acquire or hold
securities of the issuer in the ordinary course of business without
the purpose or effect of influencing or changing control, and
thereby qualify to use Schedule 13G pursuant to Rule 13d-1(b)(1)(i).
The exclusion does not apply to persons who qualify to use Schedule
13G as passive investors pursuant to Rule 13d-1(c), or as exempt
investors pursuant to Rule 13d-1(d).
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Following initial consultation with the prudential regulators and
the Secretary of the Treasury, we preliminarily believe that:
For the same reasons and in the same circumstances as
described above for Rule 13d-3(a), Rule 13d-3(b) and Rule 13d-3(d)(1),
solely for purposes of determining whether a person is a ten percent
holder subject to Section 16, the purchase or sale of a security-based
swap, or class of security-based swap, can provide incidents of
ownership comparable to direct ownership of the equity security within
the meaning of Section 16; and
The inclusion of equity securities based on the purchase
or sale of a security-based swap, or class of security-based swap, for
purposes of calculating ten percent holder status is necessary to
achieve the purpose of Section 16, so that Section 16 continues to
reach all persons that, under the Section 16 regime, are presumptively
deemed to have access to inside information based on influence or
control of the issuer through ownership of equity securities.
2. Rule 16a-1(a)(2)
The proposal to readopt without change a portion of Rule 16a-
1(a)(2) \64\ is intended solely to preserve the existing Section 16(a)
reporting of security-based swap holdings and transactions and
correspondingly to prevent the potential use of security-based swaps to
engage in short-swing trading outside the scope of Section 16(b) short-
swing profit recovery. The proposal to readopt would not change or
otherwise affect any aspect of the pecuniary interest analysis and
treatment of derivative securities under Section 16.
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\64\ We propose to readopt the portion of Rule 16a-1(a)(2) that
precedes subparagraph (ii). The relevant portion of Rule 16a-1(a)(2)
proposed for readoption reads as follows: ``(2) Other than for
purposes of determining whether a person is a beneficial owner of
more than ten percent of any class of equity securities registered
under Section 12 of the Act, the term beneficial owner shall mean
any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares
a direct or indirect pecuniary interest in the equity securities,
subject to the following: (i) The term pecuniary interest in any
class of equity securities shall mean the opportunity, directly or
indirectly, to profit or share in any profit derived from a
transaction in the subject securities.''
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Following initial consultation with the prudential regulators and
the Secretary of the Treasury, we preliminarily believe that:
Because an insider's opportunity to profit through a
security-based swap is no different from the opportunity to profit
through transactions in any other fixed-price derivative security, and
hence no different from the opportunity to profit through transactions
in the underlying equity security, holdings and transactions in
security-based swaps that are fixed-price derivative securities can
provide incidents of ownership comparable to direct ownership of the
underlying equity security within the meaning of Section 13(o); and
Retaining the existing treatment of security-based swaps
is necessary to achieve the purpose of Section 16 so that Section 16
continues to reach holdings and transactions that insiders can
potentially use to profit based on misuse of inside information.
Request for Comment
7. In lieu of readopting the existing language of Rule 16a-1(a)(1),
should the rule instead be amended to specifically reference security-
based swaps? If so, in what manner?
8. In lieu of readopting the existing language of Rule 16a-1(a)(2),
should the rule or any related rule that governs the treatment of
derivative securities under Section 16 instead be amended to
specifically reference security-based swaps? If so, in what manner?
9. Are there other factors that we should consider for purposes of
making the determinations required under Section 13(o) with regard to
Rule 16a-1(a)(1)?
10. Are there other factors that we should consider for purposes of
making the determinations required under Section 13(o) with regard to
Rule 16a-1(a)(2)?
C. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the proposals, and any other suggestions for changes. We solicit
comments particularly from the point of view of issuers, shareholders,
prospective investors, financial analysts, and market participants.
With respect to any comments, we note that they are of greatest
assistance to our rulemaking initiative if accompanied by supporting
data and analysis of the issues addressed in those comments and by
alternatives to our proposals where appropriate.
III. Paperwork Reduction Act
The rule proposals affect ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995,
the PRA.\65\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number. We already have control numbers
for Schedules 13D (OMB Control No. 3235-0145) and 13G (OMB Control No.
3235-0145) and Forms 3 (OMB Control No. 3235-0104) and 4 (OMB Control
No. 3235-0287) and 5 (OMB Control No. 3235-0362). These schedules and
forms contain item requirements that outline the information a
reporting person must disclose.
---------------------------------------------------------------------------
\65\ 44 U.S.C. 3501 et seq.
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A. Background
We are proposing to readopt without change portions of the rules
enabling determinations of beneficial ownership to be made for purposes
of Sections 13(d), 13(g) and 16 of the Exchange Act. The proposals are
intended to clarify that following the effective date of Section 13(o),
security-based swaps will remain within the scope of these rules to the
same extent as they are now.
B. Burden and Cost Estimates Related to the Proposed Amendments
Preparing and filing a report on any of these schedules or forms is
a collection of information. The hours and costs associated with
preparing the disclosure, filing the schedules or forms and retaining
records required by these rules constitute reporting and cost burdens
imposed by each collection of information. If the rules we propose are
readopted, reporting persons will remain obligated to disclose the same
information that they were previously required to report on these
schedules or forms. We therefore believe that if the rules are
readopted, the overall information collection burden will remain
approximately the same because beneficial ownership will remain
reportable on the same basis as it is now.
C. Request for Comment
We request comment on this Paperwork Reduction Act Analysis.
Pursuant to 44 U.S.C. 3506(c)(2)(B), we solicit comments to:
Evaluate whether the proposed collection of information is
necessary
[[Page 15883]]
for the proper performance of the functions of the agency, including
whether the information will have practical utility;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
Evaluate whether there are ways to minimize the burden of
the collection of information on those persons who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. S7-10-11. Requests for materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-10-11, and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Advocacy, 100 F Street, NE., Washington, DC 20549-0123.
IV. Economic Analysis
A. Introduction
Section 23(a)(2) of the Exchange Act requires us, when adopting
rules under the Exchange Act, to consider the impact on competition
that the rules we adopt would have, and prohibits us from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of that Act.\66\ Further, Section 3(f) of
the Exchange Act \67\ and Section 2(c) of the Investment Company Act
\68\ require us, when engaging in rulemaking where we are required to
consider or determine whether an action is necessary or appropriate in
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition and
capital formation. We have considered and discussed below the effects
of the rules proposed for readoption on efficiency, competition, and
capital formation, as well as the benefits and costs associated with
the proposed rulemaking.
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\66\ 15 U.S.C. 78w(a)(2).
\67\ 15 U.S.C. 78c(f).
\68\ 15 U.S.C. 80a-2(c).
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In order to more fully analyze the potential effects of readopting
rules that are designed to preserve the regulatory status quo upon the
effectiveness of Section 13(o), we have performed the analysis below in
two separate ways. First, we analyze the impact of the proposed
readoption compared to the status quo, in which the rules already apply
to a person who purchases or sells a security-based swap. Second, we
analyze the impact as if our rules did not already apply to persons who
purchase or sell security-based swaps.
B. Benefits, Including the Impact on Efficiency, Competition and
Capital Formation
1. When the Rules We Propose To Readopt Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
The proposal to readopt certain provisions of Rule 13d-3 and Rule
16a-1 would preserve the continued administration of existing rules
adopted to improve the transparency of information available to
investors, issuers and the marketplace. The proposal is intended to
preserve that transparency regarding beneficial ownership positions and
the intentions of persons who hold such positions, as well as the
holdings of and transactions by Section 16 insiders. We are proposing
to readopt, without change, rules that, when applied, may result in
disclosure of beneficial ownership and insiders' holdings and
transactions in equity securities. In addition, one of the rules
proposed for readoption, Rule 16a-1(a)(2), also identifies transactions
that may be subject to the private right of action to recover short-
swing profit for the issuer provided by Section 16(b).
The proposal is being made solely to preserve the regulatory status
quo regarding beneficial ownership reporting under Sections 13(d) and
(g), Section 16 insider status as a ten percent holder, insider holding
and transaction reporting under Section 16(a), and insider short-swing
profit liability under Section 16(b). Application of the rules also
will provide certainty regarding the Section 16(b) private right of
action to recover insiders' short-swing profits for the issuer. Because
the rules we propose are already in place and will remain unchanged,
readoption and effectiveness of these rules should have minimal
benefits, and little, if any, new effect on efficiency, competition, or
capital formation or on the persons required to make the disclosures as
a result of the application of the rules. Beneficial owners who use
security-based swaps are already subject to these rules and are
required to make any applicable disclosures. Because only a limited
number of beneficial ownership reports contain disclosure that relates
to security-based swaps, the potential effect of this rulemaking should
be minimal. Shareholders, issuers, market participants and any other
persons who rely upon the disclosures being made as a result of
application of the rules similarly will receive little, if any, new
benefit and are unlikely to experience any new impact on efficiency,
competition or capital formation because the regulatory environment
will remain the same as it is today.
2. If the Rules We Propose Did Not Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
If one were to analyze the effect of readopting the rules we
propose as if they did not already apply to a person who purchases or
sells a security-based swap, there would be new benefits, as well as a
beneficial effect on efficiency, competition and capital formation.
These benefits could extend to beneficial owners required to comply
with disclosure requirements as a result of the application of the
rules we propose to readopt. These benefits also may extend to persons
relying upon these disclosures, including prospective investors,
shareholders, issuers, and other market participants. Any such
benefits, if realized, would be attributable both to the removal of any
regulatory uncertainty and to the resulting preservation of
transparency.
a. Benefits, Including the Impact on Efficiency
Applying the rules to a person who purchases or sells a security-
based swap confers a benefit to market participants by providing market
transparency and removing, in some cases, information asymmetry.
Prospective investors, shareholders, issuers and other market
participants benefit from the transparency provided through disclosure
made available by persons subject to Sections 13 and 16. For example, a
Schedule 13D filing may disclose a potential change of control
transaction and assist a shareholder in making an investment decision
that would maximize the return on an investment. Disclosures made on
Schedule 13G may identify for the marketplace important investment
decisions made by institutional investors and other large shareholders
or may provide notice to investors, issuers and the market regarding
voting blocks of securities that have the potential to affect or
influence control of an issuer.
[[Page 15884]]
Applying the rules to a person who purchases or sells a security-
based swap assures that Section 16 will reach a person that, under the
Section 16 regime, is presumptively deemed to have access to inside
information based on influence or control of the issuer through equity
ownership. In addition, applying the rules to a person who purchases or
sells a security-based swap means that an insider (whether an officer,
director, or ten percent holder) is required to report beneficial
ownership with respect to transactions and holdings in a security-based
swap that confers an indirect pecuniary interest in issuer equity
securities. These reports, like other Section 16(a) reports, may
provide shareholders and other market participants with useful
information regarding insiders' views of the performance or prospects
of the issuer.
Transparency of trading by persons covered by Sections 13 and 16,
and transparency of accumulations of material ownership blocks or
voting power based on the purchase or sale of a security-based swap,
would increase informational efficiency in securities markets in
particularly important areas, especially where a Schedule 13D filing
may be the first required disclosure of an intended change of control
of an issuer. Transparency confers a benefit by assuring the
availability of information upon which investors may rely to make
informed investment and voting decisions. The level of transparency
provided by Rules 13d-1(a) and 16a-1 also may contribute to market
efficiency because it could help facilitate the accurate pricing of
securities. If the rules did not apply to a person who purchases or
sells a security-based swap, investors and market participants, such as
financial analysts and broker dealers, would not have information
regarding the use of security-based swaps by persons subject to
Sections 13 and 16, including major investors. The transparency
provided by the application of our rules should help the market
accurately price securities and may enable purchasers and sellers of
securities to receive a benefit by avoiding costs, if any, associated
with participation in transactions based on mispriced securities. For
example, market efficiency should increase because the market will have
readily available information about acquisitions of securities that
involve the potential to change or influence control of an issuer in
connection with the purchase or sale of a security-based swap. If
persons who purchase or sell security-based swaps were excluded from
this regulatory scheme, an incentive could arise to use security-based
swaps to effect or influence the outcome of a change of control
transaction. In addition, the pricing of a security would not readily
reflect, if at all, ownership interests in the issuer derived from
security-based swaps. In such circumstances, the application of the
rules we propose for readoption would have the benefit of eliminating
this incentive while increasing the quality of information available to
price securities.
b. Benefits, Including the Impact on Competition
Public availability of information about the existence of persons
who use security-based swaps and have the potential to change or
influence control of the issuer affects competition in the market for
corporate control. If bidders that use securities-based swaps comply
with the beneficial ownership disclosure requirements, the balance
Congress sought to strike between issuers and prospective bidders will
not tip away from issuers.\69\ Providing equal access to information
regarding persons who use security-based swaps and have the ability to
change or influence control of an issuer reinforces a legislative
objective of Section 13(d) by assuring that a person will not be able
to implement a change of control transaction by means of a large,
undisclosed position. Applying our rules to persons who purchase or
sell security-based swaps enables issuers to consider information about
competitors in the market for corporate control, including those who
may be able to offer a new or competing strategic alternative. Schedule
13D and 13G filings also may deliver greater certainty to market
participants who make strategic, voting, or investment decisions wholly
or partly based upon the information disclosed, and could reduce
speculation about future plans or proposals relating to an issuer. For
example, market participants may not be discouraged from introducing
strategic plans or proposals to an issuer out of concern that an
undisclosed interest in the issuer derived from a security-based swap
could interrupt execution of their plan or proposal.
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\69\ See note 22 above.
---------------------------------------------------------------------------
Section 16 is intended to provide the public with information about
the securities transactions and holdings of officers, directors, and
ten percent holders, and to mitigate informational advantages they may
have in trading issuer securities. Applying Rule 16a-1(a)(1) to
beneficial ownership based on the purchase or sale of a security-based
swap discourages persons from unfairly profiting in trades based on the
ability to become a ten percent holder partly or wholly based on the
use of security-based swaps without becoming subject to Section 16.
Applying Rule 16a-1(a)(2), which defines ``beneficial ownership'' based
on pecuniary interest in issuer equity securities, to persons who
purchase or sell security-based swaps prevents the development of a
trading market potentially favoring any insider (whether an officer,
director, or ten percent holder) to the extent that:
Holdings and transactions involving security-based swaps
may not be reported, thereby depriving investors of potentially useful
information; and
Insiders have the opportunity to misuse their potential
informational advantages in trading without regard to potential short-
swing profit liability.
c. Benefits, Including the Impact on Capital Formation
Making information publicly available generally lowers an issuer's
cost of capital and facilitates capital formation, in comparison to
what the cost of capital otherwise might be if the rules did not
already apply to a person who purchases or sells a security-based swap.
If the rules apply to a person who purchases or sells a security-based
swap, the resulting transparency could favorably affect investor
confidence in the capital markets and thereby not compromise capital
formation.\70\ If our rules require persons who use security-based
swaps to provide disclosures in Schedules 13D and 13G and Forms 3, 4
and 5, investors will not insist on a higher risk premium in publicly-
traded equity securities and consequently reduce capital formation.
Informed investor decisions generally promote capital formation.\71\
---------------------------------------------------------------------------
\70\ See Luigi Guiso et al., Trusting the Stock Market, 63 J.
Fin. 2557 (2008) (finding that trust in the fairness of the
financial system is correlated with higher levels of stock market
participation).
\71\ See Merritt B. Fox, Randall Morck, Bernard Yeung & Artyom
Durnev, Law, Share Price Accuracy, and Economic Performance: the New
Evidence, 102 Mich L. Rev. 331 (2003) (empirical study of the value
of disclosure requirements in enhancing investment efficiency); see
also Studies in Resource Allocation Processes at p. 413 (Kenneth J.
Arrow & Leonid Hurwicz eds., 2007) (explaining the relationship
between informational efficiency and Pareto efficiency of resource
allocation).
---------------------------------------------------------------------------
In addition, market participants would benefit from the
predictability associated with a regulatory environment in which all
persons who have the potential to influence or change control of an
issuer are definitively subject to the same beneficial ownership
reporting rules. If there were questions as to whether our
[[Page 15885]]
rules applied to persons who purchase or sell security-based swaps,
market participants would have to accept more operational and legal
risk because of the potentially unregulated treatment of persons who
use security-based swaps with incidents of ownership comparable to
direct ownership, as well as persons who have arrangements,
understandings, or relationships concerning voting and/or investment
power, the opportunity to acquire equity securities, or a plan or
scheme to evade Sections 13(d) and 13(g) in connection with the
purchase or sale of a security-based swap. By applying our rules to all
persons who have the potential to influence or change control of the
issuer, market participants would have assurance that securities
pricing may reflect information derived from security-based swaps when
Sections 13(d), 13(g), and 16 require reporting. The certainty provided
by this consistent regulatory treatment could foster investor
confidence and participation in the capital markets generally, and
should not impair capital formation.
The rules we propose for readoption also would provide the SEC
access to ownership and transaction information that would not be
available if the rules did not already apply to a person who purchases
or sells a security-based swap. The availability of this data should
enhance the ability of the Commission and its staff to study and
address issues that relate to this information. Ready access to this
information also will continue to enable the Commission to exercise
efficiently its enforcement mandate in this market segment, and thereby
confer a benefit to all market participants by offering assurance that
the integrity of security pricing is protected, and is otherwise
consistent with the legislative purpose of Sections 13(d), 13(g),
13(o), and 16.
C. Costs, Including the Impact on Efficiency, Competition and Capital
Formation
1. When the Rules We Propose Already Apply to Persons Who Purchase or
Sell Security-Based Swaps
We preliminarily believe that the rules we propose would not, as a
practical matter, impose any new costs on market participants, given
that the proposed rulemaking is intended only to preserve the
regulatory status quo. Although it is difficult to determine the number
of entities and the costs to entities that are required to comply with
the rules we propose to readopt, we believe that readoption of the
rules would result in minimal, if any, costs to any person or entity
(either small or large) and would have little, if any, burden on
efficiency, competition or capital formation because the regulatory
environment will remain the same as it is today.
Regulation 13D-G currently applies to any person that acquires or
is deemed to acquire or hold beneficial ownership of more than five
percent of certain classes of equity securities. The proposed
readoption of the relevant provisions of Rule 13d-3 would not result in
any change to the beneficial ownership reporting obligations of the
persons now subject to the beneficial ownership regulatory provisions.
Similarly, Section 16 applies to any person that acquires or is deemed
to acquire more than ten percent of certain classes of equity
securities, and the proposed readoption of Rule 16a-1(a)(1) would not
result in any change in determining whether a person is subject to
Section 16 as a ten percent holder. Further, for all insiders, the
requirements for Section 16(a) reporting and Section 16(b) liability
are based on whether the insider has a pecuniary interest in the
securities, including indirectly through ownership of and transactions
in fixed-price derivative securities, such as security-based swaps,
whether settled in cash or stock. Accordingly, the proposed readoption
of Rule 16a-1(a)(2) would not result in any change in determining
reportable holdings and transactions, or transactions subject to short-
swing profit recovery.
Because the rules proposed for readoption are applied today in
determining whether a person is required to report beneficial ownership
and insiders' holdings and transactions on Schedules 13D and 13G and
Forms 3, 4 and 5, we do not believe the proposed rules will alter the
costs associated with compliance. These schedules and forms already
prescribe beneficial ownership information that a reporting person must
disclose, and the proposed rulemaking does not broaden the scope of the
information required to be reported on the respective schedules and
forms. The compliance burden associated with completion of the relevant
schedule or form may be greater or lesser depending on the relative
simplicity of the beneficial ownership interest. We recognize that the
cost of complying with the beneficial ownership reporting regime can
include the cost of analyzing whether the particular interest requires
reporting. If it is determined that the interest held constitutes
beneficial ownership, and the amount of the beneficial ownership
interest exceeds the relevant threshold, the owner must complete and
file a schedule and/or form. The compliance burden associated with the
readopted rules, however, including costs associated with legal and
other professional fees, may decrease because of the regulatory
certainty that this rulemaking is providing. Furthermore, the persons
incurring this compliance burden may already be subject to a reporting
obligation based on an earlier application of these rules, and may not
be reporting beneficial ownership for the first time as a direct result
of the purchase or sale of security-based swaps.
If the rules we propose are readopted, reporting persons will
remain obligated to disclose the information currently required to be
reported on these schedules or forms. We therefore believe that the
overall compliance burden of the rules we propose to readopt will
remain the same. In addition, we do not believe that compliance costs,
or the disclosure provided to effect compliance, will affect
competition among filers.
We also believe that shareholders, issuers, market participants and
any other persons who rely upon the disclosures being made as a result
of application of the rules we propose similarly will not be subjected
to any new cost, or experience any new impact on efficiency,
competition or capital formation because the rules we propose to
readopt are already in place and will remain unchanged.
2. If the Rules We Propose Did Not Already Apply to Persons Who
Purchase or Sell Security-Based Swaps
Costs could increase for a person who purchases or sells a
security-based swap and immediately or eventually incurs the cost of
filing or amending a beneficial ownership report if the person did not
already determine that a reporting obligation existed based on his or
her purchase or sale of a security-based swap. Further, an insider
could incur costs from potential short-swing profit recovery arising
out of a transaction in a security-based swap.
Application of our rules to a person who purchases or sells a
security-based swap may affect competition. For example, a person who
becomes a ten percent holder partly or wholly based on the use of a
security-based swap would not be in a position to profit in trades
prompted by a statutorily presumed informational advantage accentuated
by the absence of a reporting requirement. In addition, beneficial
owners who compete in the market for corporate control would lose
[[Page 15886]]
a competitive advantage upon the required disclosure of their
beneficial ownership positions and any plans or proposals.
Upon application of the rules we propose to readopt, beneficial
owners may accomplish their objectives with less efficiency, and the
completion of change of control transactions may be delayed, due to
potential interruptions that may arise or alternatives that might
emerge as a result of public disclosures. If our rules did not already
apply to a person who purchases or sells a security-based swap, that
person could accumulate a large beneficial ownership position through
the use of a security-based swap without public disclosure. This
beneficial ownership position otherwise could have been used to
implement or influence the outcome of a change of control transaction
without alerting an issuer or the marketplace of these intentions. We
believe, however, that the benefits of our rules would justify these
costs.
The impact, if any, of the readoption of the rules we propose on
capital formation should be insignificant. Compliance costs arising
under the beneficial ownership reporting regime based on the purchase
or sale of a security-based swap are not expected to redirect capital
that otherwise could have been allocated to capital formation. Capital
formation should not be affected by a possible decline in the use of
security-based swaps resulting from the application of our rules to a
person who purchases or sells a security-based swap, given that capital
formation ordinarily is not dependent upon the proceeds from
transactions in security-based swaps.
D. Request for Comment
We request comment on the costs and benefits associated with the
individual rules, including identification and assessments of any costs
and benefits not discussed in this analysis. In addition to the
specific inquiries made throughout this release, we solicit comments on
the usefulness of the rule proposals to reporting persons, registrants,
and the marketplace at large. We encourage commentators to identify,
discuss, analyze, and supply relevant data, information, or statistics
regarding any such costs or benefits, as well as any costs and benefits
not already defined. We also request qualitative feedback on the nature
of the benefits and costs described above. Finally, we also request
comment on the following:
Would readoption of the rules promote efficiency,
competition and capital formation?
Would the proposed rules, if readopted, have an adverse
effect on competition or impose a burden on competition that is neither
necessary nor appropriate in furthering the purposes of the Exchange
Act?
Commentators are requested to provide empirical data and other factual
support for their views if possible.
V. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\72\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\72\ Pub. L. 104-121, Title II, 110 Stat. 847, 873.
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An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request that commentators provide empirical data on (a) the
annual effect on the economy; (b) any increase in costs or prices for
consumers or individual industries; and (c) any effect on competition,
investment or innovation.
VI. Regulatory Flexibility Act Certification
We hereby certify pursuant to 5 U.S.C. 605(b) that this proposal,
if adopted, would not have a significant economic impact on a
substantial number of small entities. This proposal relates to
beneficial ownership reporting and reporting by insiders of their
transactions and holdings. The proposal would not amend existing rules
or introduce new rules, and relates only to the readoption of existing
rules. For this reason, it would not change the regulatory status quo
and therefore the proposal should not have a significant economic
impact on a substantial number of small entities.
In proposing to readopt these rules, we have considered their
potential impact on the small entities that might be required to
complete the schedules and forms. We do not collect information to
estimate the number of small entities that would be subject to the
rules we propose, if readopted, because the beneficial ownership
schedules and forms do not capture specific information about the size
of the reporting entity. We also do not collect information about small
entities that might obtain beneficial ownership based on the purchase
or sale of a security-based swap, or whether such beneficial ownership
is directly responsible for triggering a reporting obligation.
Nevertheless, the staff has not noted that there are a significant
number of entities of any size making beneficial ownership reports
based on the purchase or sale of security based swaps. The incidence of
small entities who report beneficial ownership based on the purchase or
sale of a security-based swap appears to be rare. Moreover, due to
their size, small businesses or small organizations would not
ordinarily be expected to make beneficial ownership reports because
they are less likely to have funds to make purchases exceeding the
sizable thresholds that trigger a reporting obligation.
Finally, in most cases, the existing disclosure obligations are
generally not likely to be burdensome for small entities. To the extent
a small entity would be required to report beneficial ownership based
on the purchase or sale of a security-based swap, it is likely that it
could fulfill its reporting obligation by filing an abbreviated
Schedule 13G so long as it does not hold beneficial ownership with the
purpose or with the effect of changing or influencing control of an
issuer. Schedule 13G is commonly referred to as a ``short form''
because less detailed disclosure is required by comparison to Schedule
13D. Accordingly, we do not believe the proposals, if adopted, would
have a significant economic impact on small entities.
We encourage written comments regarding this certification. We
request in particular that commenters describe the nature of any impact
on small entities and provide empirical data to support the extent of
the impact.
VII. Statutory Authority
The proposed readoptions contained in this release are made under
the authority set forth in Sections 3(a)(11), 3(b), 13, 16, 23(a) of
the Exchange Act, Sections 30 and 38 of the Investment Company Act of
1940.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Amendments
For the reasons set out in the preamble, the Commission proposes to
amend Title 17, chapter II, of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The general authority citation for Part 240 is revised and the
following
[[Page 15887]]
citations are added in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; and 12
U.S.C. 5221(e)(3), unless otherwise noted.
* * * * *
Section 240.13d-3 is also issued under Pub. L. 111-203 Sec.
766, 124 Stat. 1799 (2010).
Section 240.16a-1(a) is also issued under Pub. L. 111-203 Sec.
766, 124 Stat. 1799 (2010).
* * * * *
Dated: March 17, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-6685 Filed 3-21-11; 8:45 am]
BILLING CODE 8011-01-P