Brokaw Act

To require the Securities and Exchange Commission to amend certain regulations, and for other purposes. 1. Short title This Act may be cited as the Brokaw Act 2. Beneficial ownership and short interests (a) Amendments to rule 13d–1 (1) In general Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission shall amend section 240.13d–1 of title 17, Code of Federal Regulations, by striking subsection (a) and inserting the following: (a) Any person who— (1) after directly or indirectly acquiring the beneficial ownership of any equity security of a class described in subsection (i), is directly or indirectly the beneficial owner of more than 5 percent of the class shall, not later than 4 business days after the acquisition, file with the Commission a statement containing the information required by Schedule 13D, as described in section 240.13d–101; and (2) after acquiring a direct or indirect short interest in an equity security of a class described in subsection (i), has a direct or indirect short interest representing more than 5 percent of the class shall, not later than 4 business days after the acquisition, file with the Commission a statement containing information that is substantially similar to the information required by Schedule 13D, as described in section 240.13d–101. . (2) Promulgation of regulation Not later than the date on which the Securities and Exchange Commission makes the amendments required by paragraph (1), the Commission shall promulgate a regulation detailing the information that shall be submitted to the Commission under section 240.13d–1(a)(2) of title 17, Code of Federal Regulations, as added by paragraph (1). (b) Amendments to rule 13d–3 Not later than 1 year after the date of enactment of this Act, the Securities and Exchange Commission shall amend section 240.13d–3 of title 17, Code of Federal Regulations— (1) in subsection (a)— (A) in the undesignated matter preceding paragraph (1), by striking and 13(g) , 13(g), and 13(s) (B) in paragraph (1), by striking and/or, (C) in paragraph (2), by striking the period at the end and inserting ; or (D) by adding at the end the following: (3) A pecuniary or indirect pecuniary interest in such security. ; and (2) by adding at the end the following: (e) For the purposes of calculating, with respect to a derivative instrument, the 5 per centum figure described in sections 13(d)(1), 13(g)(1), and 13(s)(1) of the Act, a person— (1) may use— (A) the number of shares that may be delivered to the person or by the person on the exercise of the rights under the derivative instrument; (B) the number of shares by reference to which the amount payable under the derivative instrument is derived or determined; (C) in the case of stock futures contracts, the product obtained by multiplying the contract multiplier by the number of contracts held; (D) in the case of a cash settled derivative the number of shares in the contract if the contract allows for a cash equivalent of the closing price of the share; or (E) when determining the number of outstanding shares of a class of equity securities, the guidance provided under section 13d–1(j); (2) shall, with respect to a derivative instrument that does not have a delta that is equal to one (including cash-settled options), use the number of shares that the person could purchase with the cash that would result from the product that is obtained by multiplying the delta by the number of exposed shares; (3) (A) may not take the difference between the percentage of a class of equity security in which the person has a short interest (as described in section 13(s)(3) of the Act) and the percentage of that class of equity security in which the person has a long interest; and (B) shall use the greater percentage of which the person has— (i) a short interest (as described in section 13(s)(3) of the Act) in a class of equity security; or (ii) a long interest in a class of equity security; and (4) shall calculate beneficial ownership in accordance with subsection (d)(1). (f) For the purposes of this section— (1) the term delta (2) the term derivative instrument (A) means any— (i) option, warrant, convertible security, stock appreciation right, or similar right— (I) whether or not the right or instrument shall be subjected to settlement in the underlying equity security; and (II) with an exercise, exchange, or conversion privilege, or right to a settlement payment at a price related to an equity security; or (ii) similar instrument with a value derived in whole or in part from the value of an equity security; and (B) does not include— (i) rights of a bona fide pledgee of securities to sell the pledged securities; (ii) rights of all holders of a class of securities of an issuer to receive securities pro rata, or obligations to dispose of securities, as a result of a merger, exchange offer, or consolidation involving the issuer of the securities; (iii) rights or obligations to surrender a security, or to have a security withheld, upon the receipt or exercise of a derivative security or the receipt or vesting of equity securities, in order to satisfy the exercise price or the tax withholding consequences of receipt, exercise, or vesting; (iv) interests in broad-based index options, broad-based index futures, and broad-based publicly traded market baskets of stocks approved for trading by the appropriate authority of the Federal Government; (v) interests or rights to participate in employee benefit plans of the issuer held by employees or former employees of the issuer; or (vi) options granted to an underwriter in a registered public offering for the purpose of satisfying over-allotments in the offering; (3) the term immediate family (A) means a person’s— (i) brother-in-law; (ii) child; (iii) daughter-in-law; (iv) father-in-law; (v) grandchild; (vi) grandparent; (vii) mother-in-law; (viii) parent; (ix) sibling; (x) sister-in-law; (xi) son-in-law; (xii) spouse; (xiii) stepchild; or (xiv) stepparent; and (B) includes adoptive relationships; (4) the term indirect pecuniary interest (A) includes— (i) ownership of any derivative instrument that contains the direct or indirect opportunity to profit from, or share in any profit derived from, an increase in the value of the subject security, including the right to acquire the subject security through the exercise or conversion of a derivative instrument, whether or not the right is exercisable on the date the right is obtained; (ii) securities held by immediate family members of an individual who share the same household of the individual, except that the presumption of beneficial ownership in this circumstance shall be rebuttable; (iii) the proportionate interest of a general partner in the portfolio securities held by a general or limited partnership, where the proportionate interest, as evidenced by the partnership agreement in effect at the time of the transaction and the most recent financial statements of the partnership, shall be the greater of— (I) the share of the profits of the general partner, including— (aa) (AA) profits attributed to any limited partnership interests held by the general partner; and (BB) any other interests in profits that arise from the purchase and sale of the sale of the portfolio securities of the partnership; or (II) the share of the partnership capital account belonging to the general partner, including the share attributable to any limited partnership held by the general partner; (iv) subject to subparagraph (B)(ii), a performance-based fee received by any— (I) broker; (II) dealer; (III) bank; (IV) insurance company; (V) investment company; (VI) investment adviser; (VII) investment manager; or (VIII) trustee or person performing a similar function; (v) a right to dividends only if the right is separated or separable from the underlying security or securities; and (vi) interest in securities held by a trust, to the extent that— (I) with respect to a trustee of the trust— (aa) the trustee receives a performance-based fee that is not of the kind described in subparagraph (B)(ii); or (bb) an immediate family member of the trustee is a beneficiary of the trust; (II) with respect to a beneficiary of the trust, the beneficiary— (aa) has investment control over trust assets; or (bb) shares investment control over trust assets with the trustee of the trust; and (III) with respect to a settlor of the trust, the settlor— (aa) reserves the right to revoke the trust without the consent of another person; and (bb) exercises or shares investment control over securities held by the trust; and (B) does not include— (i) an asset-based fee; (ii) a performance-based fee, regardless of when payable, that is calculated based upon net capital gains or net capital appreciation generated from— (I) a portfolio; or (II) from the overall performance of a fiduciary over a period of not less than 1 year; and (iii) a situation in which equity securities of an issuer do not account for more than 10 percent of the market value of a portfolio; (5) the term pecuniary interest (6) the term person (A) two or more persons acting as a partnership, limited partnership, syndicate, or other group, or otherwise coordinating the actions of the persons, for the purpose of— (i) acquiring, holding, or disposing of securities of an issuer; (ii) seeking to control or influence the board, management, or policies of an issuer; or (iii) evading, or assisting others in evading, the designation as a person (B) a hedge fund (as that term is defined in section 13(h) of the Bank Holding Company Act of 1956 ( 12 U.S.C. 1851(h) . (c) Short interests Section 13 of the Securities Exchange Act of 1934 ( 15 U.S.C. 78m (s) Disclosure of short interests (1) In general A person who, after acquiring a direct or indirect short interest in an equity security of a class described in paragraph (2), has a direct or indirect short interest representing more than 5 per centum of the class, shall, not later than 4 business days after the acquisition, file with the Commission a statement containing information that is substantially similar to the statement required under subsection (d)(1). (2) Covered classes (A) In general The requirements of paragraph (1) shall apply to the following classes of securities: (i) Any equity security of a class which is registered pursuant to section 12. (ii) Any equity security of an insurance company which would have been required to be registered in accordance with section 12 except for the exemption contained in section 12(g)(2)(G). (iii) Any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940 ( 15 U.S.C. 80a–1 (B) Exception The requirements of paragraph (1) shall not apply to an equity security that belongs to a nonvoting class. (3) Short interest For purposes of this section, a person shall be deemed to have a short interest in a security if the person, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has the opportunity to profit from, or share in any profit derived from, any decrease in the value of the security, including— (A) an interest resulting from transactions in the security, including the sale of the security by the person when the person does not own the security; (B) a derivative instrument (as defined in section 240.13d–3(f)(2) of title 17, Code of Federal Regulations); (C) an interest resulting from a securities transaction by members of the immediate family (as defined in section 240.13d–3(f)(3) of title 17, Code of Federal Regulations) sharing the same household as the person, except that the presumption of the short interest in that circumstance is rebuttable; (D) the proportionate interest of a general partner in the securities transaction by a general or limited partnership, which, as evidenced by the partnership agreement in effect at the time of the transaction and the most recent financial statements of the partnership, shall be the greater of— (i) the share of the profits of the partnership of the general partner, including— (I) (aa) profits attributed to any limited partnership interests held by the general partner; and (bb) any other interests in profits that arise from the purchase and sale of the portfolio securities of the partnership; or (ii) the share of the partnership capital account of the general partner, including the share attributable to any limited partnership interest held by the general partner; (E) a performance-related fee, other than an asset-based fee, received by any— (i) broker; (ii) dealer; (iii) bank; (iv) insurance company; (v) investment company; (vi) investment adviser; (vii) investment manager; or (viii) trustee or person performing a similar function; and (F) an interest of a person in securities transactions by a trust. (4) Exception to performance-related fee A person shall not be deemed to have a short interest in a security because of a performance-related fee described in paragraph (3)(E) if— (A) the performance-related fee, regardless of when payable, is calculated based upon net capital gains or net capital appreciation generated from— (i) a portfolio; or (ii) the overall performance of the fiduciary over a period of not less than 1 year; (B) interests resulting from transactions in the securities of the issuer do not account for more than 10 percent of the market value of a portfolio; and (C) the fee is only a right to a non performance-related fee. (5) Use of contract or other device to evade requirements A person shall be deemed to have a short interest in the security if the person, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement, or any other contract, arrangement, or device to divest the person of a short interest in a security or to prevent the vesting of the short interest in a security as part of a plan to evade the reporting requirements of this section. (6) Aggregation All securities of the same class in which a person has a short interest, regardless of the form of the short interest, shall be aggregated in calculating the number of shares in which the person has a short interest. (7) Exceptions Notwithstanding paragraphs (3) and (6)— (A) a person shall be deemed to have a short interest in a security if the person has the right to acquire, not later than 60 days after the date on which the right is obtained, a short interest in the security— (i) through the exercise of any— (I) option; (II) warrant; or (III) right; (ii) in accordance with the power to revoke a— (I) trust; (II) discretionary account; or (III) similar arrangement; or (iii) in accordance with the automatic termination of a— (I) trust; (II) discretionary account; or (III) similar arrangement; (B) a person shall be deemed to have a short interest in a security immediately upon acquisition of the security if the person acquires the security— (i) by the means described in subparagraph (A); and (ii) (I) with the purpose of changing or influencing the control of the issuer; or (II) in connection with, or as a participant in, a transaction having the purpose of changing or influencing the control of the issuer; (C) any securities not outstanding which are subject to a provision described in subparagraph (A)(i)— (i) shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class shorted by a person; and (ii) shall not be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class by any other person; and (D) subparagraphs (A) through (C) shall remain applicable for the purpose of determining the obligation to file with respect to the underlying security even though the option, warrant, or right is— (i) of a class of equity security, as defined in section 240.13d–1(i) of title 17, Code of Federal Regulations, or any successor thereto; and (ii) may give rise to a separate obligation to file. . (d) Effective date The amendments made by subsections (b) and (c) shall take effect on the date on which the Securities and Exchange Commission makes the amendments required under subsection (a).

Summary: Brokaw Act This bill directs the Securities and Exchange Commission to heighten disclosure requirements with respect to certain acquisitions of short interest in equity securities.