This Alert advises our readers that the Securities and Exchange Commission (the “Commission”) has proposed rulemaking to readopt without change certain beneficial ownership reporting requirements in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and that additional proposals are in front of the Commission to amend Rule/Schedule 13D to require more real-time reporting after a potentially hostile bidder acquires more than 5% of a public company’s stock. There are also proposals to require immediate reporting of certain derivative transactions. The effect of these additional proposals, if adopted by the Commission, will be to aid incumbent management and hurt raiders and activist shareholders who seek to acquire large positions surreptitiously.

Proposed Rule Regarding Beneficial Ownership Reporting Requirements and Security-Based Swaps

Recently, the Commission proposed new rules (the “Proposed Rules”) to preserve the application of existing beneficial ownership reporting rules to persons who purchase or sell security-based swaps after July 16, 2011, the effective date of new Section 13(o) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 13(o) was added to the Exchange Act by Section 766 of the Dodd-Frank Act. It provides that for purposes of reporting of beneficial ownership under Section 13 and, with respect to ten percent holders, Section 16 of the Exchange Act, a person shall be deemed to acquire beneficial ownership of an underlying equity security based on the purchase or sale of an security-based swap only to the extent that the Commission, after consultation with regulators and the Secretary of the Treasury, determines by rule that the purchase or sale of such swap or class of swap provides incidents of ownership comparable to direct ownership of the underlying equity security.

The Proposed Rules are designed to allay concerns that, absent rulemaking by the Commission, the language of Section 13(o) creates an ambiguity that could be interpreted as nullifying existing rules which require investors to report the purchases and sales of certain security-based swaps, which interpretation would give investors the ability to accumulate control positions through trading in such security-based swaps without having to disclose such accumulation.

The Proposed Rules would readopt without change the relevant portions of Rules 13d-3 and 16a-1 promulgated by the Commission under the Exchange Act, thus preserving the application of existing beneficial ownership rules to persons who purchase or sell security-based swaps after July 16, 2011.

The Proposed Rules are intended only to preserve the current application of existing beneficial ownership reporting requirements. Accordingly, they do not expand the definition of beneficial ownership to encompass classes of security-based swaps or other derivatives not covered by existing reporting requirements, such as security-based swaps that are settled exclusively in cash and other derivatives that give the holder a pecuniary interest in the underlying securities but not voting or investment power . However, the Commission indicates in the proposing release that its staff is engaged in a project to develop proposals to modernize reporting under Sections 13(d) and 13(g) of the Exchange Act. The proposing release does not contain details regarding the nature or scope of such proposals. However, we expect that any such proposals may address, among other things, some or all of the matters raised in a petition (the “Petition”) filed with the Commission by the New York-based law firm Wachtell, Lipton, Rosen & Katz (“WLRK”), which Petition is described in further detail below, especially the matters described under the heading “Proposed Expansion of Definition of Beneficial Ownership.”

WLRK Petition for Additional Rulemaking

On March 8, 2011, WLRK filed the Petition with the Commission. In the Petition, WLRK requests that the Commission propose amendments to shorten the reporting deadline and expand the definition of “beneficial ownership” under the beneficial ownership rules promulgated under Section 13 of the Exchange Act.

Proposed Shortened Reporting Deadline; Proposed Cooling-Off Period

Under the Commission’s current Exchange Act rules, investors (or groups of investors) who acquire beneficial ownership of more than 5% of a class of a public company’s equity securities are generally required to file a Schedule 13D with the Commission disclosing such acquisition within ten days and to disclose material amendments to such filing promptly. There are certain exceptions to such requirement for acquisitions not having the purpose or effect of influencing control of the subject issuer.

In the Petition, WLRK proposes shortening the Schedule 13D reporting deadline for acquisitions that cross the 5% threshold from ten days to as few as one business day. Investors would continue to be required to be report Material amendments to 13D filings promptly.

In addition to its proposal to shorten the reporting deadline, WLRK also proposes the imposition of a “cooling-off” period during the two business days immediately following the filing by an investor of its initial Schedule 13D disclosing its acquisition. During such cooling-off period, the investor would be prohibited from acquiring beneficial ownership of any additional securities of the subject issuer.

As WLRK points out in the Petition, the current ten day time frame, which has been in place since the inception of the beneficial ownership reporting regime that was adopted as part of the Williams Act in 1968, is obsolete. Under the current rules, investors, including potentially hostile bidders, have the ability to accumulate large positions—even control positions—in an issuer’s equity securities between the date on which they cross the 5% acquisition threshold and the date on which they are first required to report their acquisition of such securities. Adoption of a shortened reporting deadline and a cooling off period, as WLRK recommends, would limit the ability of investors to effectuate such acquisitions surreptitiously.

Proposed Expansion of Definition of Beneficial Ownership

The current definition of “beneficial ownership” under Rule 13d-3 promulgated under the Exchange Act encompasses those securities over which an investor (or group of investors) holds, directly or indirectly, either voting power or investment power, as well as other securities with respect to which such investor (or group of investors) has a right to acquire voting or investment power within 60 days.

In addition to its proposals to shorten the reporting deadline for filing a Schedule 13D following 5% acquisitions and to impose a two business day “cooling-off” period on investors immediately following the filing of Schedule 13D, WLRK also proposes in the Petition to expand the definition of “beneficial ownership” to encompass ownership of derivative securities that do not fall within the scope of the current definition. More specifically, WLRK proposed that the definition of beneficial ownership be expanded to encompass short positions in securities and to include derivative instruments which include the opportunity, directly or indirectly, to profit or share in any profit derived from any increase in the value of the subject equity security.

Under the current rules, hostile bidders and other investors have the ability, through the use of swaps and other sophisticated derivatives, to accumulate large positions in issuers, exert influence over them and, potentially, upon the exercise or conversion of such derivatives into the issuers’ equity securities, to obtain control over the issuers, all without having had to previously report the transactions under which such investors obtained such influence and control. Adopting an expanded definition of beneficial ownership consistent with WLRK’s proposed definition would limit investors’ ability to covertly exert influence and obtain control over issuers.

As noted above, we anticipate that the Commission will address some or all of the issues raised in the Petition in connection with its project to develop proposals to modernize reporting under Sections 13(d) and 13(g) of the Exchange Act. No timeline has been given in connection with the development of such proposals, however.

Comments to the Commission’s proposing release are due by April 15, 2011. The proposing release is available at http://www.sec.gov/rules/proposed/2011/34-64087.pdf.

The WLRK Petition is available at http://www.sec.gov/rules/petitions/2011/petn4-624.pdf.