Beneficial Ownership Reporting Requirements and Security-Based Swaps, 34579-34590 [2011-14572]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 114 (Tuesday, June 14, 2011)]
[Rules and Regulations]
[Pages 34579-34590]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14572]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64628; File No. S7-10-11]
RIN 3235-AK98


Beneficial Ownership Reporting Requirements and Security-Based 
Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; confirmation.

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SUMMARY: We are readopting without change the relevant portions of 
Rules 13d-3 and 16a-1. Readoption of these provisions will preserve the 
application of our existing beneficial ownership rules to persons who 
purchase or sell security-based swaps after the effective

[[Page 34580]]

date of new Section 13(o) of the Securities Exchange Act of 1934. 
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 with respect to the purchase or sale of security-based 
swaps. After making the necessary determinations, we are readopting the 
relevant portions of Rules 13d-3 and 16a-1 to confirm that, following 
the July 16, 2011 statutory effective date of Section 13(o), 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: Effective Date: The effective date of this confirmation is July 
16, 2011.

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 readopting 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-36
    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 Readopted Rules and Commission Confirmation
    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)
III. Paperwork Reduction Act
    A. Background
    B. Burden and Cost Estimates Related to the Readoption
IV. Economic Analysis
    A. Introduction
    B. Benefits and the Impact on Efficiency, Competition and 
Capital Formation
    1. When the Rules We Readopt Already Apply to Persons Who 
Purchase or Sell Security-Based Swaps
    2. If the Rules We Readopt Did Not Already Apply to Persons Who 
Purchase or Sell Security-Based Swaps
    C. Costs and the Impact on Efficiency, Competition and Capital 
Formation
    1. When the Rules We Readopt Already Apply to Persons Who 
Purchase or Sell Security-Based Swaps
    2. If the Rules We Readopt Did Not Already Apply to Persons Who 
Purchase or Sell Security-Based Swaps
V. Regulatory Flexibility Act Certification
VI. 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\ Public Law 111-203, 124 Stat. 1797.
    \5\ See Section 774 of the Dodd-Frank Act, Public Law 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 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 the CFTC in further defining the terms 
specified above, the Commission and the CFTC have 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); See also Further 
Definition of ``Swap,'' ``Security-Based Swap,'' and ``Security-
Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement 
Recordkeeping, Release No. 34-64372 (Apr. 29, 2011) [76 FR 29818] 
(proposing product definitions for swaps).
    \7\ 15 U.S.C. 78p.
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    On March 17, 2011, we proposed to readopt the portions of Rules 
13d-3 and 16a-1(a) that relate to determinations of beneficial 
ownership as they pertain to persons who use security-based swaps.\8\ 
To preserve the application of our beneficial ownership rules to 
persons who purchase or sell security-based swaps after the effective 
date of Section 13(o), we proposed to readopt without change the 
relevant portions of Rules 13d-3 and 16a-1. Readoption of the existing 
rules was proposed in order to ensure their continued application by 
the Commission on the same basis that they currently apply to persons 
who use security-based swaps.\9\ While this

[[Page 34581]]

rulemaking is 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 Exchange Act Sections 13(d) \10\ and 
13(g).\11\
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    \8\ See Release No. 34-64087 (March 17, 2011) [76 FR 15874] (the 
``Proposing Release'').
    \9\ In addition, the readoption of the relevant portions of 
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.
    \10\ 15 U.S.C. 78m(d).
    \11\ 15 U.S.C. 78m(g).
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    We received five comment letters, all of which supported the 
proposal to readopt the relevant provisions of our rules. The 
commentators believed that the proposal, if adopted, would meet our 
objective of preserving the regulatory status quo.\12\ Consistent with 
the proposal, we are readopting without change the relevant portions of 
Rules 13d-3 and 16a-1.
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    \12\ The comment letters were submitted by the Business Law 
Section of the American Bar Association (Federal Regulation of 
Securities Committee), the American Business Conference, the Managed 
Funds Association, Chris Barnard, and the law firm of Wachtell, 
Lipton, Rosen & Katz, which described this action as ``both timely 
and necessary.'' The commentators also provided their views on 
possible future rulemaking to modernize reporting under Exchange Act 
Sections 13(d) and 13(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 \13\ 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.\14\ 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.
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    \13\ 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.''
    \14\ Adoption of Beneficial Ownership Disclosure Requirements, 
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342].
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    If beneficial ownership, as determined in accordance with Rule 13d-
3, 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) and (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 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 it 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\

[[Page 34582]]

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). 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 note 
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\ 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 with respect to the discussion of Section 16 (text 
accompanying notes 45-47), and the statements contained in note 54, 
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 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, 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 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 the purchase or sale of 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 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 the 
equity securities underlying 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)

[[Page 34583]]

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 of Certain Provisions of the Securities Act of 
1933, 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 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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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 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), Rule 16a-1(a)(2) looks to the 
insider's pecuniary interest (i.e., opportunity to profit) in the 
securities. 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

[[Page 34584]]

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 Readopted Rules and Commission Confirmation

    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 with respect to security-based swaps and 
consulting with the prudential regulators and the Secretary of the 
Treasury. The regulatory provisions under which beneficial ownership 
determinations have been made to date with respect to security-based 
swaps were enacted or adopted before Section 13(o). Accordingly, we are 
readopting 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 this 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 readopting 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 readopting 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 confirm 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 were prior to 
readoption. Moreover, the 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), once effective, 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); rather, 
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 of 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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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 readoption of 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 making any revision to the 
existing rule text. The rules we are readopting are the same as the 
existing rules in all respects.
1. Rule 13d-3(a)
    We are readopting 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. Under readopted Rule 13d-
3(a), a determination may 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 consultation with the prudential regulators \56\ and the 
Secretary of the Treasury, we 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

[[Page 34585]]

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 readopting 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. Under 
readopted Rule 13d-3(b), any person that uses a security-based swap as 
part of a plan or scheme to evade reporting beneficial ownership 
continues to be subject to the requirement to disclose the accumulation 
of an influential or control position in a public issuer.
    Following consultation with the prudential regulators and the 
Secretary of the Treasury, we 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 within the meaning of 
Section 13(o), 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 readopting 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. Readopted Rule 13d-3(d)(1) continues 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 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 a right to acquire may be exercised within 60 days 
or less, 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 
regulatory 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 Williams Act, Public Law 90-439, 82 Stat. 454 (July 29, 
1968).
    \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 consultation with the prudential regulators and the 
Secretary of the Treasury, we 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

[[Page 34586]]

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.

B. Section 16 Beneficial Ownership Rules

1. Rule 16a-1(a)(1)
    We are readopting without change a portion of Rule 16a-1(a)(1) \61\ 
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. Readoption of 
Rule 16a-1(a)(1) does 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 business are not counted for purposes of determining 
ten percent holder status.\62\
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    \61\ We are readopting 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) that we are readopting 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. * * *''
    \62\ 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 consultation with the prudential regulators and the 
Secretary of the Treasury, we 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 13(o); 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)
    We are readopting without change a portion of Rule 16a-1(a)(2) \63\ 
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. 
Readoption does not change or otherwise affect any aspect of the 
pecuniary interest analysis and treatment of derivative securities 
under Section 16.
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    \63\ We are readopting the portion of Rule 16a-1(a)(2) that 
precedes subparagraph (ii). The relevant portion of Rule 16a-1(a)(2) 
we are readopting 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 consultation with the prudential regulators and the 
Secretary of the Treasury, we 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.

III. Paperwork Reduction Act

    The readopted rules affect ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 
1995.\64\ 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), 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.
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    \64\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Background

    We are readopting without change portions of the rules enabling 
determinations of beneficial ownership to be made for purposes of 
Sections

[[Page 34587]]

13(d), 13(g) and 16 of the Exchange Act. Readoption is intended to 
confirm that following the effective date of Section 13(o), persons who 
use security-based swaps will remain within the scope of these rules to 
the same extent as they were before the readoption. We did not receive 
any comments concerning our Paperwork Reduction Act Reduction Analysis 
in the proposing release.

B. Burden and Cost Estimates Related to the Readoption

    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 require