On March 17, 2011, the Securities and Exchange Commission (the “SEC”) issued proposed rules to maintain the status quo under existing beneficial ownership reporting obligations.1 The SEC proposal would readopt relevant portions of Rules 13d-3 and 16a-1 in response to an ambiguity regarding their status created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Why Are the New Rules Being Proposed?
Section 766 of the Dodd-Frank Act amended the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by adding Section 13(o), and provides:
“For 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 purpose 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.” [Emphasis added.]
Section 13(o) of the Exchange Act will become effective on July 16, 2011.
Under current rules promulgated under Section 13 and Section 16 of the Exchange Act, individuals who are party to a security-based swap may, under certain circumstances, be required to report beneficial ownership of the underlying equity securities on Schedules 13D or G and on Forms 3, 4 or 5. In addition, under rules promulgated under Section 16(b) of the Exchange Act, certain holders of security-based swaps may be subject to short-swing profit recovery for certain transactions by Section 16 insiders. Of course, the current rules were not promulgated after the SEC consulted with the prudential regulators and the Secretary of the Treasury. Thus, there is ambiguity regarding whether or not the Dodd-Frank Act would repeal the SEC’s existing rules in this area as of July 16, 2011. The proposed rules address this concern by proposing to readopt the existing rules after the required consultation and determination by the SEC.
What Are the Rules the SEC Is Proposing to Adopt?
The SEC has proposed to readopt the relevant portions of Rules 13d-3 and 16a-1 following consultation with the prudential regulators and the Secretary of Treasury, as required by the Dodd-Frank Act. This will assure that these provisions continue to apply to a person who purchases or sells a security-based swap following the effectiveness of Section 13(o).
Is the SEC Planning on Substantively Amending the Beneficial Ownership Rules?
Yes. Section 929R of the Dodd-Frank Act provides the SEC with the authority to shorten the reporting periods under Exchange Act Sections 13(d) and 16. In addition, the release notes that the staff is engaged in a separate project to develop proposals to modernize reporting under Exchange Act Sections 13(d) and 13(g).