Beneficial Ownership Reporting Requirements and Security-Based Swaps, 15874-15887 [2011-6685]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 55 (Tuesday, March 22, 2011)]
[Proposed Rules]
[Pages 15874-15887]
From the Federal Register Online via the Government Printing 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 (https://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-10-11 on the subject line; or
     Use the Federal Rulemaking Portal (https://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 (https://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

[[Page 15877]]

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