In a speech last week addressing the SEC’s “reform agenda,” SEC Chair Gary Gensler said the Commission may consider updating “various rules relating to transparency.” The first two items on his list were Section 13(d) beneficial ownership reporting and security-based swaps.
Regarding Section 13(d), Gensler said that the 10-day deadline for filing a Schedule 13D hasn’t been updated in over 50 years and that current markets and technologies may warrant a shorter deadline. He therefore has asked the staff “how we might update these rules, including possibly shortening reporting deadlines.”
Gensler followed that statement by saying “Another area is around security-based swaps – essentially, derivatives on individual companies that provide exposure to the company without traditional equity ownership. The disclosures there aren’t as robust as they are in the rest of the market….”
I don’t think the sequencing of these two statements necessarily means that, if the SEC were to mandate greater disclosure of swaps, it would do so by amending the definition of “beneficial ownership” to include notional shares underlying a swap (and therefore “count” the notional shares in determining ten percent ownership for purpose of Section 16). The SEC could instead require disclosure of swaps outside the context of Section 13(d). Even if the SEC were to amend the definition of beneficial ownership, it could, as requested in a rulemaking petition submitted to the Commission over ten years ago, treat swap shares as beneficially owned only for purposes of Section 13(d), and not Section 16.
In any case, if the Commission decides to treat shares underlying swaps as beneficially owned for purposes of Section 13(d), it will need to comply with Section 13(o) to the Exchange Act, added by Dodd-Frank, which provides that security-based swaps may be deemed to represent beneficial ownership of the notional securities only to the extent that the Commission so provides by rule after determining, in consultation with other regulatory agencies, that the swaps provide incidents of ownership comparable to direct ownership of the subject securities and that attribution of beneficial ownership is necessary to achieve the purposes of Section 13(d).
-Alan Dye, Section16.net June 29, 2021
