SEC Proposes Readoption of Rules 13d-3 and 16a-1
Regarding Beneficial Ownership in Light of Dodd-Frank
March 24, 2011
On March 17, 2011, the Securities and Exchange Commission (the “SEC”) proposed to readopt,
without change, certain portions of Rules 13d-3 and 16a-1 (the “Rules”) under the Securities
Exchange Act of 1934 (the “Exchange Act”). 1 The proposed readoption of the Rules is intended
to preserve the existing application of the beneficial ownership rules promulgated underSections 13 and 16 of the Exchange Act (the “Beneficial Ownership Rules”) to security-based
swaps following the effectiveness of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”). The SEC is soliciting comments on the proposed
readoption through April 15, 2011.
A.

THE CONCERN DRIVING READOPTIONThe SEC proposes to readopt the Rules to prevent potential confusion regarding theapplicability of the existing Rules in light of Section 766 of the Dodd-Frank Act, which amends
the Exchange Act by adding new Section 13(o) (effective July 16, 2011). This new Section 13(o)provides that a person shall be deemed to acquire “beneficial ownership” of an equity security
based upon 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 thepurchase or sale of the security-based swap . . . provides incidents of ownershipcomparable to direct ownership of the equity security, and that it is necessary toachieve the purposes of this section that the purchase or sale of the securitybased swaps . . . be deemed the acquisition of beneficial ownership of the equity
security.”The Proposing Release notes the possibility that, absent further clarification, Section 766 “maybe interpreted to render the beneficial ownership determinations made under Rule 13d-3
inapplicable to a person who purchases or sells a security-based swap” and may also have
similar consequences in the determination of a 10% holder under Section 16 of the ExchangeAct. The readoption of the Rules is intended to preserve the status quo.

1

Beneficial Ownership Reporting Requirements and Security-Based Swaps, Release No. 34-64087,
available at http://www.sec.gov/rules/proposed/2011/34-64087.pdf (the “Proposing Release”).

Memorandum – March 24, 2011B.
APPLICABILITY OF EXISTING BENEFICIAL OWNERSHIP RULES TO
SECURITY-BASED SWAPSThe Proposing Release also discusses the Beneficial Ownership Rules’ existing applicability tosecurity-based swaps. Sections 13(d) and 13(g) of the Exchange Act require a person who
beneficially owns more than 5% of any class of equity securities registered pursuant to Section
12 of the Exchange Act to disclose information relating to such beneficial ownership. The
Proposing Release notes that, under the existing Beneficial Ownership Rules, the holder of asecurity-based swap may be subject to Section 13 beneficial ownership reporting to the extent
the swap “confers voting and/or investment power (or a person otherwise acquires such power
based on the purchase or sale of a security-based swap), grants a right to acquire an equity
security, or 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.”
A person who beneficially owns more than 10% of a class of equity securities as determined
pursuant to Rule 13d-3 is subject to the reporting requirements of Section 16(a) and to potential
short-swing profit liability under Section 16(b). Once a person is subject to Section 16, reporting
obligations and short-swing profit recovery are based on a different definition of beneficial
ownership, which includes any equity securities in which the person has or shares a direct orindirect pecuniary interest. Pecuniary interest is defined as “the opportunity, directly or
indirectly, to profit or share in any profit derived from a transaction in the subject securities.”
The Proposing Release notes that, under existing rules, fixed-price derivative securities,
including security-based swaps (whether settled in cash or stock), create a pecuniary interest in
the underlying securities.
Although its focus is security-based swaps, the Proposing Release also notes that other equitylinked rights, options, warrants, or conversion or certain revocation privileges that are acquiredor held independently of a security-based swap will remain subject to the Beneficial Ownership
Rules.
While the readoption of the Rules is intended to preserve the current interpretation,enforcement and applicability of the Beneficial Ownership Rules after the effectiveness ofSection 766 of the Dodd-Frank Act on July 16, 2011, the Proposing Release notes that the SEC
staff is engaged in a separate project to develop proposals to modernize beneficial ownership
reporting. Accordingly, additional rulemaking initiatives from the SEC in this area may beforthcoming.
***For more information about the SEC proposal, please contact a member of the Firm’s
Derivatives Group or Capital Markets and Securities Group.
This memorandum is for general informational purposes and should not be regarded as legal advice. Furthermore,
the information contained in this memorandum does not represent, and should not be regarded as, the view of any
particular client of Simpson Thacher & Bartlett LLP. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as
additional memoranda, can be obtained from our website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are
rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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Memorandum – March 24, 2011

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