To preserve the application of the SEC's existing beneficial ownership rules to persons who purchase or sell security-based swaps, on June 8, 2011, the SEC readopted without change the relevant portions of Rules 13d-3 and 16a-1. The readoption clarifies that following the July 16, 2011 statutory effective date of Section 13(o), which was added by Section 766 of the 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. The SEC was concerned that absent this rulemaking, Section 13(o) may be interpreted to reverse the current treatment of security-based swaps under Sections 13(d), 13(g) and 16 of the Exchange Act.

Section 13(o) provides that a person is deemed a beneficial owner of an equity security based on the purchase or sale of a security-based swap only to the extent that the SEC adopts rules after making certain determinations and consulting with other regulators and the Secretary of the Treasury.  

Rule 13d-3

The SEC stated that under existing rules, holders of security-based swaps may be subject to beneficial ownership reporting where the security-based swap:

  • confers voting and/or investment power over an equity security through a contractual term of the security-based swap
  • grants a right to acquire an equity security within 60 days, or holds the right with the purpose or effect of changing or influencing control of the issuer
  • 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

While currently most security-based swaps are settled in cash and do not confer beneficial ownership of the underlying security, the readopting release sets forth the SEC's position as to the circumstances when security-based swaps would confer beneficial ownership under the current rules.

Rule 16a-1

For purposes of determining whether a 10% stockholder is subject to Section 16, the existing rules apply the beneficial ownership test in Section 13(d). As a result, a person who has the right to acquire securities through security-based swaps that are settled in equity would be subject to Section 16 as a 10% holder under existing rules. Once a person is subject to Section 16, in order to determine the securities subject to Section 16 reporting and short-swing profit recovery, existing rules require that the insider has a pecuniary interest (i.e., an opportunity to profit) in the securities. This concept includes an indirect pecuniary interest in security-based swaps, whether settled in cash or stock.

The SEC also noted that the staff is engaged in a separate project to develop proposals to modernize reporting under Exchange Act Sections 13(d) and 13(g).