SEC Adopts Rule on Beneficial Ownership
of Security-Based Swaps

June 9, 2011

The SEC has readopted portions of Rules 13d-3 and 16a-1 to ensure that its current beneficial ownership definition, which applies for purposes of disclosure and short-swing profit rules, will continue in effect with respect to persons who purchase or sell security-based swaps ("SBS") on and after July 16, 2011.

SBS include products such as credit default swaps on a single security or loan or a total return swap on one or a narrow-based index of securities, other than government securities.  Currently, under Rules 13d-3 and 16a-1, contracts that will become SBS on July 16 may involve beneficial ownership for purposes of Sections 13 and 16 of the Exchange Act as follows:

  • Under Rule 13d-3(a), a person who "has or shares voting power and/or investment power over securities" based on the purchase or sale of an SBS is a beneficial owner of the underlying security.

  • Under Rule 13d-3(b), a person who uses an SBS as part of a plan or scheme to evade beneficial ownership reporting requirements is a beneficial owner of the underlying security.
  • Under Rule 13d-3(d)(1) a person who, through SBS, has the right to acquire beneficial ownership of a security within 60 days, or at any time if the right is held for the purpose of changing or influencing control, is a beneficial owner of the underlying security.
  • Rule 16a-1(a)(1) incorporates the beneficial ownership tests in Rules 13d-3(a), 13d-3(b), and 13d-3(d)(1) and makes them applicable in the Section 16 beneficial ownership context.
  • Rule 16a-1(a)(2) includes holders of derivative securities in the definition of a "beneficial owner" for Section 16 purposes, including its short-swing profit provisions for insiders.

The SEC's reproposal was prompted by Dodd-Frank's addition of Section 13(o) to the Exchange Act, which states that beneficial ownership of an equity security may exist on the basis of the purchase or sale of an SBS, but only if the SEC issues a rule, after consulting with prudential regulators and the Secretary of the Treasury, that the purchase or sale provides incidents of ownership similar to direct ownership of the equity, and that including the purchase or sale of the SBS in the acquisition of beneficial ownership of the equity security is necessary to achieve the purposes of Section 13.  This section becomes effective on July 16, 2011. 

Without a new rule from the SEC, Section 13(o) excluded SBS from Section 13 and Section 16 calculations.  The SEC's final rule readopts portions of Rules 13d-3 and 16a-1(a) to ensure that SBS continue to be subject to those rules as of July 16.  The SEC's rule becomes effective on July 16, 2011.

The SEC did not give any guidance as to when SBS constitute beneficial ownership for Section 13.  Also, the SEC noted that its staff is engaged in a separate project to modernize reporting under Sections 13(d) and 13(g).


If you have questions regarding this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact.

Daniel N. Budofsky 212 450 4907
Robert L.D. Colby 202 962 7121
Annette L. Nazareth 202 962 7075
Linda A. Simpson 212 450 4332
Gabriel D. Rosenberg 212 450 4537
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