As John previously shared, Corp Fin recently released new CFIs addressing beneficial ownership reporting, the proxy rules, Regulation Crowdfunding & the tender offer rules. John provided a brief summary of each new CFI in his blog, and now I thought we’d do a bit of a deeper dive on some of the more interesting ones. Starting with the CFIs on Rule 13d-3, here’s more info from Alan Dye’s Section16.net Blog on Questions 105.08, 105.09 and 105.10, which “address the circumstances under which a holder of a total return swap (TRS) would (or would not) be deemed the beneficial owner of shares of the reference security held or acquired by the bank counterparty to hedge its position” and “address indirectly the more pressing concern whether ownership of a TRS could cause the holder to become subject to Section 16 as a ten percent owner.”

Consistent with the SEC’s 2023 guidance included in the release adopting amendments to the Section 13(d)/(g) rules, Question 105.08 confirms that a party does not acquire beneficial ownership of the reference securities, including any securities the counterparty may hold to hedge its risk, if it enters into a standard TRS that settles exclusively in cash, only refers to a class of equity securities (as described in Rule 13d-1(i)(1)) for purposes of identifying a reference security, and does not confer any voting or investment power with respect to, or any right to acquire, any securities. The CFI helpfully addresses an ambiguity noted in my blog about the recently issued BofA no-action letter (addressing whether a TRS holder and its counterparty are a “group”). Question 105.08 also confirms that:

– Entry into a TRS, absent any arrangement that confers such power or rights outside of the terms of the swap, is not, by itself, evidence of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g) for purposes of Rule 13d-3(b).

– Entry into a TRS solely for economic exposure to the reference security, without more, also does not prevent the vesting of, or create a false appearance regarding, beneficial ownership as part of a plan or scheme to evade.

Question 105.09 confirms that entry into a TRS would confer beneficial ownership pursuant to Rule 13d‑3(b) only if it was used in connection with an “arrangement” to prevent the vesting of beneficial ownership by the holder as part of a plan or scheme to evade the reporting requirements of Section 13(d)/(g). For example, the Staff said, if a person uses a TRS as a means to direct the counterparty how to vote its hedge securities or to pre-arrange the acquisition of hedge securities, the person may be deemed a beneficial owner under Rule 13d-3(b).

Finally, Question 105.10 confirms that the Staff remains committed to the position articulated in its “amicus letter” to the district court in the CSX case that the “mental state” contemplated by the term “plan or scheme to evade” is “generally the intent to enter into an arrangement that creates a false appearance or an illusion contrary to the actual facts.” In the context of a TRS, the analysis should focus on “whether the person knew or was reckless in not knowing that use of the total return equity swap would create a false appearance or illusion that the person’s interest is economic alone.” For example, the Staff said, entry into a TRS “for the purpose or effect of indirectly acquiring the power to vote or a future right to acquire the reference equity security may be viewed as part of” a scheme to evade.

– Meredith Ervine