\83\ Once transmitted, a Schedule 13D or 13G submission will be
automatically processed by EDGAR and, if accepted by EDGAR,
immediately disseminated to the public. While filings will receive
an accession number upon transmission, the accession number only
confirms receipt of the submission, not that it was actually
accepted by EDGAR. Transmission without acceptance does not
constitute an official filing. Under 17 CFR 232.11, an ``official
filing'' means any filing that is received and accepted by the
Commission. At present, a transmission that has commenced on a given
business day will only receive that business day's filing date if
``accepted'' at or before 5:30 p.m., meaning that it has
successfully passed an acceptance review. An official filing has not
been made unless and until the filer receives an acceptance message
that includes a filing date. Accordingly, the filer is responsible
for ensuring a transmission commences early enough in the business
day to correct any errors in the transmittal process so that time-
sensitive filings can be accepted by the applicable deadline.
---------------------------------------------------------------------------

    We also propose to amend Rule 201(a) of Regulation S-T to remove
the opportunity for a Schedule 13D or 13G filer to pursue a temporary
hardship exemption under that rule. This proposed treatment is
consistent with our treatment of Forms 3, 4, and 5, each of which has a
10 p.m. ``cut-off'' time under Rule 13(a)(4) of Regulation S-T and is
ineligible for a temporary hardship exemption under Rule 201(a) of
Regulation S-T. We are proposing to amend Rule 201(a) of Regulation S-T
to make temporary hardship exemptions unavailable to filers of
Schedules 13D and 13G because of: The relative ease of using the EDGAR
on-line filing system; the proposed extended 10 p.m. eastern

time filing deadline; the limited value to the public of paper filings;
and the availability of a filing date adjustment under the same
circumstances as a temporary hardship exemption would have been
available but for the proposed amendment.\84\
---------------------------------------------------------------------------

    \84\ Filing date adjustments, as would have been true of
temporary hardship exemptions, should be few in number given the
relative ease with which filings are now made through EDGAR and the
strong public interest in timely and readily available disclosures
provided by Schedules 13D and 13G. As is also the case with other
forms required to be filed on EDGAR, our filing desk would not
accept in paper format any Schedule 13D or 13G filings except in the
highly unlikely event that the filing satisfies the requirements for
a continuing hardship exemption under Rule 202 of Regulation S-T.
Filing date adjustments may, however, be made if a filer is unable
to submit its Schedule 13D or 13G as a result of an EDGAR outage. In
such circumstances, if a filer attempts in good faith to file its
Schedule 13D or 13G in a timely manner but is delayed because of an
EDGAR outage, that filer may request a filing date adjustment under
Rule 13(b) of Regulation S-T on the grounds that such outage
constitutes technical difficulties beyond the filer's control. 17
CFR 232.13(b). Alternatively, the Commission may, under 17 CFR
232.15(a)(3), correct the filing date of a Schedule 13D or 13G
filing if it determines that such filing has not been processed by
EDGAR or was processed incorrectly by EDGAR.
---------------------------------------------------------------------------

Request for Comment
    35. Should we amend Rule 13(a)(4) of Regulation S-T as proposed to
extend the ``cut-off'' times for Schedule 13D or 13G filings, including
any amendments thereto, to 10 p.m. eastern time?
    36. If we amend Rule 13(a)(4) of Regulation S-T as proposed, should
we also extend EDGAR filer support hours beyond 6 p.m. eastern time?
    37. Would the proposed amendment to Rule 13(a)(4) of Regulation S-T
be appropriate in light of the proposed accelerated filing deadlines
applicable to persons who are required to make Schedule 13D and 13G
filings, or do reasons exist to distinguish these filers from those who
file Section 16 reports or Schedule 14N?
    38. Does the importance of the information required to be reported
within a Schedule 13D or 13G justify a continuation of the requirement
that these forms be filed by 5:30 p.m. on the due date, the same
deadline as almost all other Commission filings?
    39. Should we amend Rule 201 of Regulation S-T as proposed?
    40. Are there reasons to permit filers of Schedules 13D and 13G to
continue to petition the Commission for a temporary hardship exemption
under Rule 201 of Regulation S-T, especially if we were to adopt the
proposed amendment to Rule 13(a)(4) of Regulation S-T to extend the
``cut-off'' times for Schedules 13D and 13G?
    41. If we do not adopt some or all of our proposed amendments to
the filing deadlines applicable to beneficial owners who make Schedule
13D and Schedule 13G filings, should we still adopt the proposed
amendments to Rules 13 and 201 of Regulation S-T?

B. Proposed Amendment to Rule 13d-3 To Regulate the Use of Cash-Settled
Derivative Securities

    We are proposing to amend Rule 13d-3 to deem holders of certain
cash-settled derivative securities to be the beneficial owners of the
reference covered class. Specifically, we are proposing to add new
paragraph (e) to Rule 13d-3. As discussed in more detail below, in
addition to setting forth the circumstances under which a holder of a
cash-settled derivative security will be deemed the beneficial owner of
the reference equity securities, proposed Rule 13d-3(e) also includes
provisions describing how to calculate the number of reference equity
securities that a holder of a cash-settled derivative will be deemed to
beneficially own.
1. Background
    Neither Section 3(a) nor Section 13(d) of the Exchange Act define
the term ``beneficial owner'' or ``beneficial ownership.'' Regulation
13D-G similarly does not expressly define those terms. To provide
clarity, the Commission adopted Rule 13d-3, which provides standards
for the purpose of determining whether a person is a beneficial owner
subject to Section 13(d).\85\ For example, Rule 13d-3(a) provides that
a person who directly or indirectly has or shares voting or investment
power is a beneficial owner. The Commission also recognized the
importance of accounting for contingent interests in equity securities
arising from investor use of derivatives, such as options, warrants or
rights. The Commission therefore chose to include holders of certain
derivatives as beneficial owners under Rule 13d-3: Those derivatives
that would be settled ``in-kind'' or otherwise convey a right to
acquire a covered class.\86\ Specifically, under Rule 13d-3(d)(1), a
person is ``deemed'' a beneficial owner of a covered class if that
person holds a right to acquire the covered class--for example, through
the exercise of an option or warrant or conversion of a security--that
is exercisable or convertible within 60 days. Similarly, under Rule
13d-3(d)(1), if a right has been acquired for the purpose or with the
effect of changing or influencing control of the issuer of securities,
that person is treated as a beneficial owner of the underlying class of
equity securities regardless of when that right may be exercisable,
exchangeable or convertible. At the same time, however, holding
derivatives that, by their terms, entitle the holder to nothing more
than economic exposure to a covered class historically has not been
considered sufficient to constitute beneficial ownership.\87\
---------------------------------------------------------------------------

    \85\ Adoption of Beneficial Ownership Disclosure Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
The Commission emphasized that ``[a]n analysis of all relevant facts
and circumstances in a particular situation is essential in order to
identify each person possessing the requisite voting power or
investment power.'' Id. at 12344.
    \86\ Acquisitions, Tender Offers, and Solicitations, Release No.
34-8392 (Aug. 30, 1968) [33 FR 14109 (Sept. 18, 1968)].
    \87\ Commission Guidance on the Application of Certain
Provisions of the Securities Act of 1933, the Securities Exchange
Act of 1934, and Rules thereunder to Trading in Security Futures
Products, Release No. 34-46101 (June 21, 2002) [67 FR 43234 (June
27, 2002)] (stating the interpretive view that economic exposure
through cash-settled securities futures does not confer beneficial
ownership); Adoption of Beneficial Ownership Disclosure
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at
12348 (Mar. 3, 1977)] (indicating that amended Rule 13d-3 ``does not
expressly encompass those proposals relative to economic interests--
such as the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of securities'');
Filing and Disclosure Requirements Relating to Beneficial Ownership,
Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 18493 (Apr. 28,
1978)] (stating that ``traditional economic benefits--i.e., the
right to receive dividends or sale proceeds--are not included as
criteria for defining beneficial ownership'').
---------------------------------------------------------------------------

    Over the years, commenters have raised concerns about the fact that
current Rule 13d-3 fails to explicitly address the circumstances in
which an investor in a cash-settled derivative may influence or control
an issuer by pressuring a counterparty to make certain decisions
regarding the voting and disposition of substantial blocks of
securities.\88\ An investor in a cash-settled derivative may be
positioned, by virtue of its commercial relationship with a
counterparty, to acquire any reference securities that the

counterparty may acquire to hedge the economic risk of that
transaction, including any obligations that may arise in connection
with settlement.\89\ Entry into the agreement governing the derivative
may, therefore, result in a rapid accumulation of a covered class by a
counterparty similar to the types of accumulations that prompted
Congress to enact Section 13(d). In addition, if institutional
counterparties hold sizable positions of reference securities with a
view toward future sales to holders of cash-settled derivative
securities, a regulatory concern arises under Rule 13d-3(b).\90\ For
example, if an arrangement or understanding exists outside of the terms
of a derivative instrument that enables an investor to acquire the
reference securities from a counterparty, the reference securities
could be viewed as having been impermissibly ``parked'' with the
counterparty on behalf of the derivative holder.\91\
---------------------------------------------------------------------------

    \88\ See, e.g., Maria Lucia Passador, The Woeful Inadequacy of
Section 13(d): Time for a Paradigm Shift,  13 Va. L. & Bus. Rev.
279, 296-99 (2019) (``[I]n the recent past, cash-settled equity
derivatives--mainly call and security-based options--were frequently
used not only with a speculative and hedging purpose, but also with
the immediate, explicit, and specific aim of silently accumulating a
leading (or even control) position in public companies.''); Wachtell
Petition, supra note 17, at 8 (``Even in the absence of voting or
dispositive power, participants in large hedging transactions gain
influence in a number of ways. . . . [V]oting of the shares may be
subject to counterparty influence or control, either directly or
because the counterparty is motivated to vote the hedged shares in a
way that will please the investor and induce them to continue to
transact with such counterparty. . . . Even those derivatives that
are characterized as `cash-settled' may ultimately be settled in
kind, creating further market pressure as the participants need to
acquire shares for such settlement.'').
    \89\ See infra Section III.C.2.a.
    \90\ Rule 13d-3(b) deems persons to be the beneficial owners of
a covered class if they have used an arrangement that otherwise
prevented the vesting of beneficial ownership as part of a plan or
scheme to evade Section 13(d) or 13(g). 17 CFR 240.13d-3(b).
    \91\ The Commission has pursued beneficial ownership reporting
violations at least twice based on the unreported ``parking'' of
equity securities with another party where such securities are
essentially held in reserve for the benefit of the party with the
intention to control or ultimately acquire them. See SEC v. First
City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). In that case,
the Commission charged First City Financial Corp. with using a
parking arrangement with Bear, Stearns Cos. to avoid filing a
Schedule 13D. After First City had acquired 4.9 percent of the stock
of Ashland Oil, Inc., Bear Stearns agreed to acquire stock on behalf
of First City and to sell the stock to First City once a sizable
position was obtained. The district court concluded that First City
deliberately attempted to circumvent the law. See SEC v. First City
Fin. Corp., 688 F. Supp. 705 (D.D.C. 1988); see also SEC v. Boyd L.
Jefferies, Lit. Rel. No. 11370 (Mar. 19, 1987).
---------------------------------------------------------------------------

    The use of cash-settled derivative securities in the change of
control context also may serve as a catalyst for related acquisitions
of beneficial ownership by institutional counterparties that ultimately
could contribute to a shift in corporate control.\92\ The Commission
previously determined that the ``concentration of voting power in a
single block and its transferability are material information to the
market.'' \93\ Holders of cash-settled derivatives also may have
incentives to influence or control outcomes at the issuer of the
reference security just as they would if they directly owned the
reference security outright. Although holders of derivatives settled
exclusively in cash ordinarily would lack the express legal power under
the terms of such instruments to direct the voting or disposition of a
covered class, such holders may possess economic power that can be used
to produce desired outcomes through engagement with a counterparty or
the issuer of the reference security and potentially could impact the
stock price.\94\ An unwinding of agreements governing cash-settled
derivatives also could adversely impact the stock price of an issuer,
just as if the holder of the cash-settled derivative held the stock
directly, instead of the counterparty, and sold sizable blocks of such
shares. Consequently, counterparty dispositions of reference securities
at the conclusion of a cash-settled derivative agreement, should they
occur all together or involve high concentrations of beneficial
ownership, may impair the orderly operation and efficiency of our
capital markets. In the event of a default, these derivative positions
could not only adversely impact counterparties, but also issuers of
reference securities, the markets and other market participants. At a
minimum, greater transparency could influence counterparties' risk
management decisions. Proposed Rule 13d-3(e) is thus designed to make
information available about any large positions in cash-settled
derivative securities and, by implication, the related reference
securities. Under specified conditions, if holders of cash-settled
derivatives were deemed beneficial owners of the reference securities
in combination with the other amendments proposed in this release, the
resulting disclosures could alert issuers and the market to the
possibility of rapid accumulations of, and high concentrations in, a
covered class.\95\
---------------------------------------------------------------------------

    \92\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at
18486 (Apr. 28, 1978)] (explaining that the need for disclosure had
been recently underscored by the pivotal role played by investment
managers holding large blocks of stock in surprise tender offers).
    \93\ See Reporting of Beneficial Ownership in Publicly-Held
Companies, Release No. 34-26598 (Mar. 6, 1989) [54 FR 10552 (Mar. 6,
1989)].
    \94\ See supra note 88; see also Theodore N. Mirvis et al.,
Beneficial Ownership of Equity Derivatives and Short Positions--A
Modest Proposal to Bring the 13D Reporting System into the 21st
Century, Wachtell, Lipton, Rosen & Katz (Mar. 3, 2008) at 2-3,
available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.15395.08.pdf (noting that derivative securities ``often have
substantial effects on the securities and issuers involved'' and
that ``[t]he counterparties to these arrangements will often hedge
their positions by buying or selling the underlying securities,
which may have material effects in the trading of the relevant
security'').
    \95\ Section 13(d) was intended to ``alert the market place to
every large, rapid aggregation or accumulation of securities,
regardless of technique employed, which might represent a potential
shift in corporate control.'' GAF Corp. v. Milstein, 453 F.2d 709,
717 (2d. Cir. 1971), cert denied, 406 U.S. 910 (1972).
---------------------------------------------------------------------------

    By extending Rule 13d-3 to include certain persons who purchase
cash-settled equity-based derivatives, investors, issuers and other
market participants should have greater transparency regarding persons
with significant interests in an issuer's equity securities and
potential control intent. In particular, the proposed amendment to Rule
13d-3 could address concerns that financial product innovation has
outpaced the reach of a rule provision first adopted by the Commission
in 1968. Cash-settled derivatives imitate the economic performance of a
direct investment in an issuer's equity securities and, in turn, may
economically empower the holders of such derivatives to influence the
issuer or the price of its securities.\96\ Under current Rule 13d-3,
however, the holder of the cash-settled derivative generally is not
subject to beneficial ownership reporting obligations. Given such
person's potential to influence or change control of the issuer, we are
proposing an amendment that would, in specified circumstances, deem the
holder of a cash-settled derivative security to be the beneficial owner
of the reference security. For the reasons set forth above and as
explained more fully below, we believe such an amendment is necessary
for the protection of investors and appropriate in order to achieve the
purpose of Section 13(d). We also believe that requiring reporting
based wholly or partly upon the holding of such positions would be in
the public interest.
---------------------------------------------------------------------------

    \96\ See supra note 88.
---------------------------------------------------------------------------

2. Proposed Amendment
    As noted above, we are proposing to amend Rule 13d-3 to add new
paragraph (e). Like Rules 13d-3(b) and (d)(1), proposed Rule 13d-3(e)
would provide that holders of certain cash-settled derivative
securities will be ``deemed'' a beneficial owner of the reference
securities in a covered class.\97\

Specifically, proposed Rule 13d-3(e)(1) would provide that a holder of
a cash-settled derivative security \98\ shall be deemed the beneficial
owner of equity securities in the covered class referenced by the
derivative security if such person holds the derivative security with
the purpose or effect of changing or influencing the control of the
issuer of such class of equity securities, or in connection with or as
a participant in any transaction having such purpose or effect.\99\ As
discussed in more detail below, the concept ``purpose or effect of
changing or influencing the control of the issuer'' is a familiar one
under Regulation 13D-G,\100\ both in the context of determining whether
a person is a beneficial owner under Rule 13d-3 \101\ and for purposes
of determining whether a beneficial owner is eligible to report on
Schedule 13G in lieu of Schedule 13D under Rule 13d-1.\102\ As such, we
believe that use of this phrase in proposed Rule 13d-3(e) would ease
the administrative burdens associated with application of this proposed
provision.
---------------------------------------------------------------------------

    \97\ It is possible under our current regulatory framework that
a holder of a cash-settled derivative security could be deemed the
beneficial owner of the reference securities under Rule 13d-3(b) by
virtue of their counterparty relationships if such relationships
constitute ``a plan or scheme to evade the reporting requirements of
section 13(d) or (g).'' 17 CFR 240.13d-3(b). Application of that
rule, however, would require an examination of the facts and
circumstances surrounding the relationship between the holder of a
cash-settled derivative security and its counterparty, the
intentions of the parties with respect to such relationship and the
effect of such relationship on the holder's beneficial ownership of
the reference securities. Id. By contrast, proposed Rule 13d-3(e)
would require a comparatively less extensive and more streamlined
inquiry in order for a holder of a cash-settled derivative security
to be deemed the beneficial owner of the reference securities,
focusing predominantly on whether the derivative security is held
with the purpose or effect of changing or influencing the control of
the issuer of the reference securities.
    \98\ For purposes of proposed Rule 13d-3(e), the term
``derivative security'' would have the meaning set forth in 17 CFR
240.16a-1(c) (``Rule 16a-1(c)''). See Rule 16a-1(c) (defining
``derivative securities'' as including certain rights, such as
options, warrants, convertible securities, stock appreciation rights
or similar rights ``with an exercise or conversion privilege at a
price related to an equity security, or similar securities with a
value derived from the value of an equity security,'' excluding
certain enumerated rights, obligations, interests and options). As
discussed infra notes 110-114 and the accompanying text, however,
for purposes of proposed Rule 13d-3(e), the term ``derivative
security'' does not include security-based swaps, as defined in
Section 3(a)(68) of the Exchange Act and the rules and regulations
thereunder.
    \99\ The provision at 17 CFR 240.12b-2 (``Rule 12b-2 of
Regulation 12B'') defines the term ``control'' to mean ``the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or
otherwise.'' The provision at 17 CFR 240.12b-1 sets forth the scope
of Regulation 12B, and provides that all rules contained in
Regulation 12B ``shall govern . . . all reports filed pursuant to
section[ ] 13.''
    \100\ See, e.g., 17 CFR 240.13d-102. Under Item 10 of Schedule
13G, QIIs and Passive Investors must certify that the ``securities .
. . were not acquired and are not held for the purpose of or with
the effect of changing or influencing the control of the issuer.''
Id.
    \101\ See 17 CFR 240.13d-3(d)(1)(i) (providing that ``any person
who acquires a security or power specified in paragraph[ ] (d)(1)(i)
. . . with the purpose or effect of changing or influencing the
control of the issuer, or in connection with or as a participant in
any transaction having such purpose or effect'' shall be deemed a
beneficial owner immediately upon such acquisition).
    \102\ See 17 CFR 240.13d-1(b)(1)(i), (c)(1) and (e)(1)(i). In
addition to these provisions, Rules 13d-3(b) and 13d-5(b)(2)(ii)
also incorporate a ``purpose or effect'' standard.
---------------------------------------------------------------------------

    Persons who acquire and hold cash-settled derivative securities
with the purpose or effect of changing or influencing control of the
issuer may seek to use their position to influence the voting,
acquisition or disposition of any shares the counterparty may have
acquired in a hedge, proprietary investment or otherwise. Moreover, the
economic realities of the counterparty relationship mean that, even
absent an express right to direct the voting, acquisition or
disposition of such shares, the holders of cash-settled derivative
securities could be well-positioned to pursue a change in control. The
derivative holder's counterparty may have a business relationship to
develop and protect, and thus may ultimately cast votes in accordance
with the preference of the derivative holder. Even if any counterparty
shares are not voted, the derivative holder's probability of success in
exerting influence or control over the issuer of the reference security
may increase given that any voting power the derivative holder held
would be magnified by minimizing the number of shares that potentially
could be voted against its plans or proposals. Similarly, while the
terms of the derivative instrument may only provide for settlement in
cash, these types of derivative holders could remain in a position to
acquire any reference securities that the counterparty may acquire to
hedge the economic risk of that transaction. In recognition that an
investment in a cash-settled derivative instrument could be converted
into direct holdings of the reference security via an amendment to the
instrument or otherwise, persons who use cash-settled derivatives also
may present these economic positions to an issuer or its shareholders
as a basis on which they should engage with them.\103\ These persons,
therefore, hold their cash-settled derivative securities in a manner
that implicates the policies underlying Section 13(d).\104\
---------------------------------------------------------------------------

    \103\ See infra note 263 and accompanying text.
    \104\ See Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 at 18484 (Apr. 28, 1978)] (noting that Section 13(d)'s
legislative history indicates that the purpose of that section is
``to provide information to the public and the affected issuer about
rapid accumulations of its equity securities'' by ``persons who
would then have the potential to change or influence control of the
issuer'').
---------------------------------------------------------------------------

    Proposing that application of Rule 13d-3(e) be conditioned on a
person holding the derivative security with the purpose or effect of
changing or influencing the control of the issuer of such class of
equity securities, or in connection with or as a participant in any
transaction having such purpose or effect is consistent with other
provisions of our beneficial ownership rules. Rule 13d-3(d)(1) contains
this same condition. Specifically, Rule 13d-3(d)(1) provides that if a
right has been acquired for the purpose or with the effect of changing
or influencing control of the issuer of securities, the holder of that
right is immediately treated as a beneficial owner of the underlying
class of equity securities regardless of when that right may be
exercisable, exchangeable or convertible. In such instances, the holder
of such a right would not be entitled to voting or investment power
over the underlying security for a substantial period of time that may
extend far beyond 60 days. Nonetheless, the Commission believed it
appropriate to immediately deem these persons to be the beneficial
owners of such underlying securities because it recognized that such a
right, when acquired for the purpose or with the effect of changing or
influencing control, can be used to influence the control of the issuer
even before the right is exercisable.\105\ We recognize that cash-
settled derivative securities differ from the rights covered under Rule
13d-3(d)(1) in that they ordinarily do not entitle their holders to
acquire the reference securities. To the extent such derivative
security is held with the purpose or effect of changing or influencing
the control of the issuer, however, we believe that the potential for a
holder of a cash-settled derivative security to exert influence on a
counterparty that may directly hold the reference securities implicates
the same concerns that the Commission articulated in adopting Rule 13d-
3(d)(1). Thus, we believe that deeming such holders to be beneficial
owners of the reference securities would be consistent with the
Commission's longstanding view of the right to acquire beneficial
ownership as described in Rule 13d-3(d)(1).
---------------------------------------------------------------------------

    \105\ Id. at 18490 (stating that ``the acquisition of [such a
right] offers a distinct possibility for actions which are for the
purpose or with the effect of changing or influencing control''
including, for example, ``obtaining an interest in a block of
securities large enough to influence control, or in coupling an
option with an agreement concerning the composition of the board of
directors'').
---------------------------------------------------------------------------

    In addition, as with the treatment of in-kind-settled derivative
securities under Rule 13d-3(d)(1)(i), proposed paragraph (e)(1) also
would include a provision stating that any securities that are not
outstanding but are referenced by the relevant cash-settled derivative
security will be deemed to be

outstanding for the purpose of calculating the percentage of the
relevant covered class beneficially owned by the holder of the
derivative security. Those reference securities, however, will not be
deemed to be outstanding for the purpose of any other person's
calculation of the percentage of the covered class it beneficially
owns.
    The disclosures that would be made in a Schedule 13D as a result of
treating holders of cash-settled derivative securities as beneficial
owners would provide needed transparency regarding the potential to
influence or control the issuer of the reference security. If cash-
settled derivative holders with an intent to influence or control the
issuer become Schedule 13D filers based on their economic exposure to
the reference security as a result of the proposed amendment to Rule
13d-3, then their plans or proposals would become publicly available.
At present, such intentions remain undisclosed unless the person is
determined to be a beneficial owner under Rule 13d-3 on other grounds.
    Proposed paragraph (e)(2) of Rule 13d-3 would set forth the formula
for calculating the number of equity securities that a holder of a
cash-settled derivative will be deemed to beneficially own pursuant to
paragraph (e)(1). This provision is necessary because derivatives may
not always have a perfect ``one-to-one'' relationship to the reference
security. Instead, the value of the derivative security, although based
on the value of a reference security, may change at a multiple or
fraction to any change in value of the reference security, particularly
in the case of a security option. This difference in the amount by
which the value of a derivative security changes as compared to the
amount by which the value of the reference security changes is referred
to as the ``delta.'' For example, a $1 change in the value of the
reference security may result in a $2 change in the value of the
derivative security. In that case, the delta of the derivative security
would be equal to two. If the delta of a derivative security is equal
to one, then the value of the derivative security perfectly tracks the
changes in value of the reference security. Calculation of beneficial
ownership pursuant to a derivative security is easier in these
circumstances because of the perfect one-to-one relationship between
the derivative security and the reference security.
    Proposed paragraph (e)(2) applies these concepts for purposes of
determining the number of securities that a holder of a cash-settled
derivative will be deemed to beneficially own pursuant to paragraph
(e)(1). Proposed paragraph (e)(2)(ii) of Rule 13d-3 defines ``delta''
to mean, with respect to a derivative security, the ratio that that is
obtained by comparing (x) the change in the value of the derivative
security to (y) the change in the value of the reference equity
security. Proposed paragraph (e)(2)(i) provides that the number of
securities that a holder of such derivative security will be deemed to
beneficially own pursuant to paragraph (e)(1) will be the larger of two
calculations, set forth in proposed paragraphs (e)(2)(i)(A) and (B), in
each case as applicable. If applicable, proposed paragraph (e)(2)(i)(A)
would calculate the number of securities as the product of (x) the
number of securities by reference to which the amount payable under the
derivative security is determined multiplied by (y) the delta of the
derivative security.\106\ Proposed paragraph (e)(2)(i)(B), if
applicable, would calculate the number of securities by (x) dividing
the notional amount of the derivative security by the most recent
closing market price of the reference equity security, and then (y)
multiplying such quotient by the delta of the derivative security.\107\
---------------------------------------------------------------------------

    \106\ As an illustration of the application of this proposed
rule, a holder of a derivative security with a delta equal to one
that references 100 shares of a covered class of common stock would
be deemed to beneficially own 100 shares of such covered class. If,
however, that derivative security had a delta equal to two, then
such holder would be deemed to beneficially own 200 shares of such
covered class, calculated as (x) the 100 shares of common stock
referenced by the derivative security multiplied by (y) the
derivative security's delta of two.
    \107\ As an illustration of the application of this proposed
rule, if a person holds a derivative security with a notional amount
of $100 and a delta equal to one that references a covered class of
common stock with a most recent closing market price of $10 per
share, then that person would be deemed to beneficially own 10
shares of such covered class. If, however, that same derivative
security had a delta equal to two, then such person would be deemed
to beneficially own 20 shares of such covered class, calculated as
(x) the quotient obtained by dividing the $100 notional amount of
the derivative security by the $10 per share most recent closing
market price, (y) multiplied by the derivative security's delta of
two.
---------------------------------------------------------------------------

    Proposed paragraph (e)(2)(i)(A) would be applicable if the
agreement governing the terms of the derivative security provides a way
to calculate the number of reference securities on which the amount
payable pursuant to that security is based. Proposed paragraph
(e)(2)(i)(B) would be applicable if the agreement governing the terms
of the derivative security does not provide such a methodology for
determining the applicable number of reference securities. Thus, there
will be some derivative securities to which proposed paragraph
(e)(2)(i)(A) will be inapplicable (i.e., those derivative securities
for which the agreement does not provide a way to calculate the number
of reference securities on which the amount payable pursuant to that
security is based). On the other hand, proposed paragraph (e)(2)(i)(B)
will be applicable to all derivative securities (i.e., because the
calculation set forth in that paragraph can be performed regardless of
whether the agreement governing the terms of the derivative security
provides a methodology for determining the applicable number of
reference securities). As such, to address those scenarios in which
both paragraphs (e)(2)(i)(A) and (B) apply, paragraph (e)(2)(i)
provides that the number of securities that a holder of a derivative
security will be deemed to beneficially own pursuant to paragraph
(e)(1) will be the larger of the two amounts yielded by those
paragraphs.
    The proposed amendment to Rule 13d-3 also includes three notes to
paragraph (e)(2). The first note provides that, for purposes of
determining the number of equity securities that a holder of a cash-
settled derivative security will be deemed to beneficially own, only
long positions in derivative securities should be counted. Short
positions, whether held directly against a covered class or
synthetically through a cash-settled derivative security, should not be
netted against long positions or otherwise taken into account.\108\ The
second note provides that, when calculating the number of securities
that a holder of such derivative security will be deemed to
beneficially own pursuant

to paragraph (e)(1), the calculation in paragraph (e)(2)(i)(B) should
be performed on a daily basis. Similarly, the third note provides that
if a derivative security does not have a fixed delta (i.e., if the
delta is variable and changes over the term of the derivative
security), then a person who holds such derivative security should
calculate the delta on a daily basis, for purposes of determining the
number of equity securities that such person will be deemed to
beneficially own, based on the closing market price of the reference
equity security on that day. Although we recognize that such daily
calculations may impose administrative burdens on holders of derivative
securities, this approach will help to ensure the accuracy of
beneficial ownership reporting and is consistent with the approach
taken by at least one foreign jurisdiction.\109\
---------------------------------------------------------------------------

    \108\ ``Short positions,'' such as those within the meaning of
the term as defined in 17 CFR 240. 14e-4(a)(1)(ii) (``Rule 14e-
4(a)(1)(ii)''), are not treated as beneficial ownership under
current Rule 13d-3. In addition, Section 13(d)(1) applies to persons
who ``acquire'' beneficial ownership, and the aggregate amount of
beneficial ownership held, as determined under Rule 13d-3(c),
including certain contingent interests in a covered class, is
required to be reported. As such, a beneficial owner subject to
Section 13(d) or 13(g) reports its capacity to vote or dispose of a
covered class whether through power it directly or indirectly holds
or is deemed to hold under Rule 13d-3(d) by virtue of its contingent
interest. The regulatory framework, therefore, only applies to
persons who hold the equivalent of a ``long position'' within the
meaning of the term as defined in Rule 14e-4(a)(1)(i). Persons who
hold ``short positions'' have no such capacity to vote or dispose of
a covered class and thus are beyond the scope of Sections 13(d) and
13(g) and Regulation 13D-G with the exception that a beneficial
owner that otherwise must report on Schedule 13D may incur
disclosure obligations with respect to any short sale activity, such
as those arising under Item 6 of Schedule 13D. See 17 CFR 240.13d-
101 (requiring disclosure of ``any contracts . . . with respect to .
. . any securities of the issuer''). A beneficial owner is not
required to report its ``net long position'' within the meaning of
such term as defined in Rule 14e-4(a)(1), and we are not currently
proposing any changes in this regard.
    \109\ See DTR 5.3.3C, Recital 7 (Jan. 1, 2021), available at
https://www.handbook.fca.org.uk/handbook/DTR/5/?view=chapter (``In
order to ensure that information about the total number of voting
rights accessible to the investor is as accurate as possible, delta
should be calculated daily taking into account the last closing
price of the underlying share.'').
---------------------------------------------------------------------------

    Finally, proposed Rule 13d-3(e) would exclude from its purview
security-based swaps, as defined in Section 3(a)(68) of the Exchange
Act and the rules and regulations thereunder.\110\ In a separate
rulemaking, the Commission has proposed to require disclosure of
security-based swap positions.\111\ Specifically, proposed 17 CFR
240.10B-1 (``Rule 10B-1'') would require public reporting on Schedule
10B of, among other things: (1) Certain large positions in security-
based swaps; (2) positions in any security or loan underlying the
security-based swap position; and (3) any other instrument relating to
the underlying security or loan or group or index of securities or
loans.\112\ As described in more detail in the related proposing
release, proposed Rule 10B-1 would include specific quantitative
thresholds for when public reporting is required and include a schedule
of all of the information that must be reported.\113\ We believe that
the position disclosures with respect to cash-settled security-based
swaps required under our proposed Rule 10B-1, if adopted, would provide
sufficient information regarding holdings of security-based swaps such
that additional regulation under Regulation 13D-G at this time would be
unnecessarily duplicative.\114\ Further, to the extent that investors
seek to use cash-settled derivatives other than security-based swaps in
order to bypass the disclosures that Rule 10B-1 would require, Rule
13d-3(e), if adopted, would help prevent the exploitation of any
regulatory gap between Schedule 10B and Schedule 13D that might
otherwise exist.
---------------------------------------------------------------------------

    \110\ Proposed Rule 13d-3(e) is not subject to Exchange Act
Section 13(o). Section 13(o) provides that a person shall be
``deemed'' a beneficial owner of an equity security based on the
purchase or sale of a security-based swap ``only to the extent that
the Commission 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
purposes 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.''
Section 13(o) applies to security-based swaps and does not apply to
other types of derivative securities. Because proposed Rule 13d-3(e)
does not cover security-based swaps, Section 13(o) is inapplicable
to the proposed requirement.
    \111\ Prohibition Against Fraud, Manipulation, or Deception in
Connection with Security-Based Swaps; Prohibition against Undue
Influence over Chief Compliance Officers; Position Reporting of
Large Security-Based Swap Positions, Release No. 34-93784 (Dec. 15,
2021) [87 FR 6652 (Feb. 4, 2022)].
    \112\ Id. at 6657.
    \113\ Id. For example, a person would be required to file a
Schedule 10B once the ``Security-Based Swap Equivalent Position''
(as described in the proposing release for Rule 10B-1 [87 FR 6652
(Feb. 4, 2022)]) represents more than 5% of a class of equity
securities. Id. at n.138 and accompanying text.
    \114\ But see Beneficial Ownership Reporting Requirements and
Security-Based Swaps, Release No. 34-64628 (June 8, 2011) [76 FR
34579 (June 14, 2011)] (readopting without change the relevant
portions of Rules 13d-3 and 16a-1 to preserve the application of
those rules to persons who purchased or sold security-based swaps
after the effective date of Section 13(o) by making the
determinations required by Section 13(o) after consultation with
prudential regulators and the Secretary of the Treasury).
---------------------------------------------------------------------------

Request for Comment
    42. Should we amend Rule 13d-3 as proposed to deem persons who
acquire or hold cash-settled derivative securities with the purpose or
effect of changing or influencing the control of the issuer, or in
connection with or as a participant in any transaction having such
purpose or effect, as beneficial owners? Would the proposed rule
sufficiently reduce the opportunities for persons to utilize cash-
settled derivative securities to evade reporting under Section 13(d)?
    43. Would the circumstances in which a holder acquires or holds a
cash-settled derivative security with the purpose or effect of changing
or influencing the control of the issuer be reasonably determinable?
Should we provide further guidance on this point? Rather than amending
Rule 13d-3 to deem as beneficial owners persons who acquire or hold
cash-settled derivative securities with the purpose or effect of
changing or influencing the control of the issuer, should we
incorporate standards for establishing when a person becomes a
beneficial owner that are more objectively determinable? For example,
should we identify more specific indicia such as any of the plans
described in Item 4 of Schedule 13D?
    44. Can a cash-settled derivative be used to influence or change
the control of an issuer? If so, please explain how the terms of the
derivative security or the derivative investor's relationship with a
counterparty can effectuate that influence or change in control. For
example, are cash-settled derivative contracts executed on a scale
large enough to impact the voting by counterparties and thus the
margins of victory on proposals put forth by the issuer of a covered
class for shareholder approval?
    45. Instead of treating holders of cash-settled derivative
securities as beneficial owners, should we instead amend Schedule 13D
and Schedule 13G to expressly include more comprehensive line item
disclosure requirements concerning the use of cash-settled derivative
securities? For example, should Item 6 of Schedule 13D be further
revised to ask for a full description of any cash-settled derivative's
material terms, and Item 7 of Schedule 13D be revised to explicitly
require the filing of cash-settled derivative instruments as an
exhibit?
    46. Regardless of whether proposed Rule 13d-3(e) is adopted, should
the Commission increase the 60-day time period specified in Rule 13d-
3(d)(1) so that persons who hold contingent interests in a covered
class will be deemed beneficial owners earlier? If so, would 90, 120,
180 or some greater number of days serve as the optimal date by which
to deem persons who hold such interests, such as derivative holders, as
beneficial owners?
    47. For purposes of proposed Rule 13d-3(e), the term ``derivative
security'' would have the meaning set forth in Rule 16a-1(c), excluding
security-based swaps. Are there other types of derivatives (other than
security-based swaps) that should be included within the purview of
proposed Rule 13d-3(e) that are not included in the scope of the term
``derivative securities,'' as defined in Rule 16a-1(c)? For purposes of
Rule 13d-3(e), should rights with an exercise or conversion privilege
at a price that is not fixed, which Rule 16a-1(c)(6) excludes from the
term ``derivative securities'' in Rule 16a-1(c), be included?
    48. Is our proposed inclusion of the concept of ``delta'' in Rule
13d-3(e) appropriate? If so, are the proposed

application and definition of ``delta'' in Rules 13d-3(e)(2)(i) and
(ii), respectively, appropriate for purposes of determining the number
of equity securities that a holder of a cash-settled derivative
security is deemed to beneficially own?
    49. For securities where the ``delta,'' as we propose to define it,
is not equal to 1, is our proposed calculation of the number of
securities beneficially owned appropriate? Should the calculation be
performed in another way? For example, should the calculation be
limited to the number of reference securities contemplated by the
instrument?
    50. Should we include the three proposed notes to Rule 13d-3(e)(2)?
Should only long positions in derivative securities be counted for
purposes of determining the number of equity securities that a holder
of a cash-settled derivative security will be deemed to beneficially
own, as proposed? As an alternative to proposed Note 1 to Rule 13d-
3(e)(2), should short positions in cash-settled derivative securities
be netted against long positions or otherwise taken into account for
purposes of determining the number of equity securities that a holder
of a cash-settled derivative security will be deemed to beneficially
own? If not, how should they be taken into account? For purposes of
Notes 2 and 3 to Rule 13d-3(e)(2), is ``daily,'' as proposed, the
appropriate frequency, or should those calculations be performed with a
different frequency (e.g., on a weekly or monthly basis)? Is the
proposed daily frequency of these calculations unduly burdensome on
holders of cash-settled derivative securities? Other than the frequency
with which the calculation must be performed, are there other
difficulties associated with these calculations that would also make
them burdensome?
    51. For purposes of the calculations in Rule 13d-3(e)(2)(i)(B) and
Note 3 to Rule 13d-3(e)(2), is the closing market price of the
reference equity security, as proposed, the appropriate basis for those
calculations, or is there a different basis that is more appropriate
(e.g., the volume-weighted average trading price of the reference
equity security throughout a given day)?
    52. Could the daily calculation requirements in proposed Notes 2
and 3 to Rule 13d-3(e)(2) result in situations in which a person's
beneficial ownership does not exceed 5% of a covered class at the time
that person acquires a derivative security, but then exceeds 5% at a
later time solely by virtue of the fact that the closing market price
of the reference equity security or the delta of the derivative
security, as applicable, has changed (i.e., not as a result of any
further acquisitions)? If so, would it be appropriate to subject that
person to the obligations of the beneficial ownership reporting regime
under such circumstances?
    53. Would proposed Rule 10B-1 provide sufficient information
regarding holdings of cash-settled security-based swaps such that
beneficial ownership reporting of cash-settled security-based swaps
under Regulation 13D-G is unnecessary, or should beneficial ownership
derived from cash-settled security-based swaps be included under
Regulation 13D-G? If the information regarding holdings of cash-settled
security-based swaps that would be required pursuant to proposed Rule
10B-1 were not available, would there be a need for the beneficial
ownership derived from cash-settled security-based swaps to be included
under Regulation 13D-G?

C. Proposed Amendments to Rule 13d-5 to Affirm Its Application and
Operation

    We are proposing a series of amendments to Rule 13d-5 to clarify
and affirm its application to two or more persons who ``act as'' a
group under Sections 13(d)(3) and (g)(3) of the Exchange Act.
Specifically, we are proposing to amend Rule 13d-5 to:
     Change the title of the rule from ``Acquisition of
securities'' to ``Acquisition of beneficial ownership'' to more
accurately reflect the purpose, application and operation of the rule
and ensure its consistency with Section 13(d)(1);
     Revise Rule 13d-5(a) to conform the text to the new title
and Section 13(d);
     Redesignate paragraph (b)(1) as paragraph (b)(1)(i) and
revise it to remove the potential implication that it sets forth the
exclusive legal standard for group formation under Section 13(d)(3) or
13(g)(3);
     Add new paragraph (b)(1)(ii) to specify that if a person,
in advance of filing a Schedule 13D, discloses to any other person that
such filing will be made and such other person acquires securities in
the covered class for which the Schedule 13D will be filed, those
persons shall be deemed to have formed a group within the meaning of
Section 13(d)(3);
     Add new paragraph (b)(1)(iii) to specify that a group
subject to reporting obligations under Section 13(d) shall be deemed to
acquire any additional equity securities acquired by a member of the
group after the date of the group's formation;
     Add new paragraph (b)(1)(iv) to carve out from paragraph
(b)(1)(iii) any intra-group transfers of equity securities;
     Add new paragraph (b)(2)(i) to specify that when two or
more persons ``act as'' a group under Section 13(g)(3) of the Act, the
group shall be deemed to have become the beneficial owner, for purposes
of Sections 13(g)(1) and (2) of the Act, of the beneficial ownership
held by its members;
     Add new paragraph (b)(2)(ii) to specify that a group
regulated under Section 13(g) shall be deemed to acquire any additional
equity securities acquired by a member of the group after the date of
the group's formation; and
     Add new paragraph (b)(2)(iii) to carve out from paragraph
(b)(2)(ii) any intra-group transfers of equity securities.
    In addition, the proposed amendments would redesignate current Rule
13d-5(b)(2) as new Rule 13d-6(b). This change is discussed both in this
section and in Section II.D, which describes our proposed amendments to
Rule 13d-6.
1. Background
    Sections 13(d)(3) and 13(g)(3) are identical, and each of these two
provisions provides that ``[w]hen two or more persons act as a . . .
group for the purpose of acquiring, holding, or disposing of securities
of an issuer, such syndicate or group shall be deemed a `person.' ''
Neither of these two provisions defines the term ``group.'' The
determination of whether coordinated efforts among two or more persons
constitutes a group subject to regulation as a single ``person'' under
these two statutory provisions is a question of fact. Congress enacted
these provisions based on two practical considerations. First, Sections
13(d)(1) and 13(g)(1), by their terms, apply to, and impose filing
obligations upon, a single ``person.'' Second, Congress recognized the
need to protect against the evasion of disclosure requirements by
persons who collectively sought to change or influence control of an
issuer yet who each acquired and held an amount of beneficial ownership
at or just below the reporting threshold.\115\
---------------------------------------------------------------------------

    \115\ Section 13(d)(3) was enacted to prevent ``easy avoidance
of section 13(d)'s disclosure requirements by a group of investors
acting together in their acquisition or holding of securities.''
Senate Report No. 550, 90th Congress, 1st Session 8 (1967); House
Report No. 1711, 90th Congress, 2d Session 8-9 (1968); see also 113
Cong. Record Proceedings and Debates of the 90th Congress; Bill-S.
510 (Jan. 18, 1967) (noting that the specific provision applicable
to groups was added to ``close the loophole that now exists which
allows a syndicate, where no member owns more than 10 percent, to
escape the reporting requirements of the Securities Exchange Act'').

---------------------------------------------------------------------------

    Congress sought to address this problem of coordinated
circumvention by ``deeming'' two or more persons to be one person for
purposes of Sections 13(d) and 13(g). Based on the statutory treatment
of two or more persons as if they were one person when they ``act as''
a group for at least one of the three purposes specified in the
statutory provisions (i.e., acquiring, holding or disposing of
securities of an issuer), the beneficial ownership collectively held by
the group members is imputed to the group. To the extent the aggregate
amount of beneficial ownership exceeds 5% of a covered class, the group
may be required to file a beneficial ownership report.
    In these situations, a fundamental question arises as to whether
the group is subject to Section 13(d) or Section 13(g). The
determination of which statutory provision applies to a group depends
on whether a non-exempt acquisition of beneficial ownership has been
made that can be imputed to the group, and, when on its own or added to
any other beneficial ownership held by the group, results in beneficial
ownership exceeding 5% of the covered class. If such an acquisition
occurs, the group is subject to regulation under Section 13(d).\116\ To
the extent no such acquisition attributable to the group has occurred,
but the collective amount of beneficial ownership held by the group
members exceeds 5% of a covered class at the end of a calendar year,
the group is subject to Section 13(g).
---------------------------------------------------------------------------

    \116\ The operative term ``after acquiring'' in Section 13(d)(1)
makes the application of Section 13(d) contingent upon the existence
of an acquisition. Determining that an acquisition has occurred is
thus necessary to establish the application of Section 13(d).
---------------------------------------------------------------------------

    Congress did not define the term ``acquisition.'' When the
Commission proposed the predecessor to the current Rule 13d-5(a),\117\
it made clear that purchases would not be the exclusive means of making
an acquisition and deemed ``certain persons who become beneficial
owners of securities to have acquired such securities,'' even if such
person ``had not intended, and had taken no action, to become a
beneficial owner.'' \118\ The Commission also adopted Rule 13d-5(b) to
address situations in which the factual record does not establish the
existence of an acquisition attributable to a group. Following Rule
13d-5(b)'s adoption, an acquisition by a group could thus be ``deemed''
to occur even in the absence of an associated market-based purchase or
other transaction, as could be the case when a group is formed for the
exclusive purpose of voting.\119\ Given that the acquisition which
triggers the reporting obligation must be made by a single person,
acquisitions occurring before the date of group formation are not
considered ``acquisitions'' of beneficial ownership that could trigger
a filing obligation. The requisite acquisition needed to satisfy the
statutory element ``after acquiring,'' therefore, must occur
contemporaneously with, or subsequent to, group formation. Without
evidence that an acquisition attributable to the group has occurred,
the filing deadline for a Schedule 13D also cannot be established under
Section 13(d)(1) and corresponding Rule 13d-1(a). To address this
concern, the Commission proposed that an acquisition was ``deemed'' to
occur if two or more persons agreed to act together for purposes of
acquiring, holding or disposing of any securities of the issuer. In
adopting Rule 13d-5, the Commission explained it was ``defining
acquisition'' and that the new provision ``deems the formation of
certain groups of persons for the purpose of acquiring, holding or
disposing of securities to be an acquisition which may trigger the
reporting requirements of section 13(d), even though the group has not
made any purchase or other acquisition subsequent to its formation.''
\120\ The new rule therefore provided the Commission with a mechanism
by which it could attribute an acquisition to the group for purposes of
not only satisfying the ``after acquiring'' element of Section
13(d)(1), but also designating a date of ``acquisition'' needed to
commence the 10-day filing deadline for the initial Schedule 13D.\121\
---------------------------------------------------------------------------

    \117\ The predecessor rule, Rule 13d-6, was redesignated Rule
13d-5 in 1978. Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 (Apr. 28, 1978)]. Unless otherwise noted, references to Rule
13d-5 in this section of the release also refer to the predecessor
Rule 13d-6.
    \118\ Various Proposals Relating to Beneficial Owners and
Holders of Record of Voting Securities, Release No. 34-11616 (Aug.
25, 1975) [40 FR 42212 (Sept. 11, 1975)]; see also Adoption of
Beneficial Ownership Disclosure Requirements, Release No. 34-13291
(Feb. 24, 1977) [42 FR 12342 at 12345 (Mar. 3, 1977)] (explaining
that ``[d]onees, executors, trustees and legatees who become
beneficial owners will be `deemed' to have acquired such securities,
even though such persons had not so intended and had taken no action
to become beneficial owners'').
    \119\ See Adoption of Beneficial Ownership Disclosure
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342
(Mar. 3, 1977)] (adopting Rule 13d-6(b), the predecessor to current
Rule 13d-5(b)); Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 (Apr. 28, 1978)] (redesignating Rule 13d-6(b) as current Rule
13d-5(b)). In proposing Rule 13d-6(b), the Commission was acting
partly in response to an appellate court ruling issued in connection
with private litigation. The appellate court found that it was
unnecessary ``for a group to acquire additional securities if their
combined holdings, upon formation of the group, were more than five
percent of the class'' for purpose of Section 13(d). See GAF Corp.
v. Milstein, 453 F. 2d 709 (2d Cir. 1971), cert. denied 400 U.S. 910
(1972). The Milstein group was an informal arrangement in which the
individual members were not bound to vote their shares as would be
the case if participating in a stock pool. The alleged group also
never had an enforceable right to vote. GAF Corporation asserted
that certain acts should be considered evidence of a conspiracy, but
the evidence did not show any additional purchases. The Second
Circuit Court of Appeals held that formation of a group of
shareholders alone, where their aggregate holdings exceed 10% of a
particular class of securities, and where no further acquisitions
are intended by the membership of the group, still required
compliance with Section 13(d). In so holding, the Second Circuit
refused to follow the ruling in Bath Industries, Inc. v. Blot, 427
F.2d 97 (7th Cir. 1970) where the Seventh Circuit held that a group
owning in excess of 10% of a class of securities must file only when
further acquisitions were contemplated. Recognizing that informal
associations could be subjected to reporting obligations upon mere
formation, the Seventh Circuit adopted an ``additional purchase''
rule. Even identification of the precise date of the alleged group
formation as the Second Circuit instructed the district court to
find upon remand, however, would not then have determined whether an
acquisition occurred that subjected the group to regulation under
Section 13(d) or the latest date by which the Schedule 13D could
have been timely filed.
    \120\ Adoption of Beneficial Ownership Reporting Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
    \121\ While the adopting release for Rule 13d-6(b) acknowledges
the Commission was providing ``more objective standards'' to help
determine the reporting obligation of groups under Section 13(d), it
qualified such statement by indicating that the standards were being
provided only for ``certain purposes'' rather than in every
instance. Adoption of Beneficial Ownership Reporting Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at 12342 (Mar. 3,
1977)]. The Commission's regulatory objective should be read in the
context of the overall impetus for the initial 1975 rule proposal,
which did not propose to define the term ``group.'' The Commission
further explained at adoption of Rule 13d-6(b) in 1977 that it had
previously published, on August 25, 1975, its ``Proposals Relating
to Disclosure of Beneficial Owners and Holders of Record of Voting
Securities.'' As set forth therein, the Commission's 1975 ownership
proposals, if adopted, would have ``deemed certain persons,
including members of a group, who become beneficial owners of
securities through non-purchase transactions to have `acquired' such
securities.'' Id. at 12343.
---------------------------------------------------------------------------

    Given that the term ``group'' is not defined under Sections
13(d)(3) and 13(g)(3), investors, issuers and courts historically have
considered the circumstances under which two or more persons must
operate in order to be found to have formed agroup.\122\

Notwithstanding that the regulatory framework does not require proof of
an agreement between two or more persons as a prerequisite to
establishing the existence of a group, some courts, in assessing group
formation, consider an agreement among group members to be a necessary
element.\123\
---------------------------------------------------------------------------

    \122\ In Sections 13(d)(3) and 13(g)(3), Congress identified,
but did not define, four associations through which collective
action may be taken by two or more persons that potentially could
subject them to regulation under Sections 13(d) and 13(g) as a
single person. In specifying ``partnership, limited partnership,
syndicate,'' Congress expressly referenced three types of groupings
of persons that, like the term ``group,'' are similarly undefined.
To the extent two or more persons could not be found to have
``act[ed] as a partnership, limited partnership [or] syndicate,''
such persons still could be found under the statutes to be jointly
operating as any ``other group.'' The reference to ``group,''
therefore, is simply designed to serve as a general classification
inclusive of the three specific, named types of associations, and
when combined with the term ``other,'' renders the term ``other
group'' but one of four types of associations identified by Congress
which are susceptible to being regulated as a single person under
Section 13(d) or 13(g).
    \123\ For example, in CSX Corporation v. Children's Inv. Fund
Mgmt. (UK) LLP, 562 F. Supp. 2d 511 (S.D.N.Y. 2008), the district
court referred to a ``requisite agreement'' when offering an
analytical framework to be applied in assessing whether or not a
group had been formed, and cited to Hallwood Realty Partners, L.P.
v. Gotham Partners, L.P., 95 F. Supp. 2d 169, 176 (S.D.N.Y 2000),
aff'd, 286 F.3d 613 in support of this proposition.
---------------------------------------------------------------------------

    In rendering opinions regarding group formation, some courts have
suggested that a group can only be formed if an agreement exists among
its purported members.\124\ These cases appear to reflect such courts'
attempts to find a workable means of administering the Section 13(d)
regulatory framework and making related determinations about when a
group may be found to exist under the statute. In addition, some courts
have construed the language of Rule 13d-5(b)(1), which provides that a
group is formed if an agreement to act together has been reached for
one of four purposes, as governing group formation in every instance as
opposed to discrete instances.\125\ These decisions suggest that a
plaintiff must prove, and by extension, a court must affirm, the
presence of an agreement for purposes of satisfying the legal standards
in Rule 13d-5(b)(1).
---------------------------------------------------------------------------

    \124\ One early court decision that predates the adoption of
Rule 13d-5(b) found that a group had been formed earlier than
reported and opined that ``absent an agreement between [the
defendants] a `group' would not exist.'' Corenco Corp. v. Schiavone
& Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973). Similarly, another
court decision cited the necessity of ``sift[ing] through the record
to determine whether there [was] sufficient direct or circumstantial
evidence to support the inference of a formal or informal
understanding.'' Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir.
1979), cert. denied sub. nom. Dickinson v. SEC, 460 U.S. 1069
(1983). The court ultimately determined that ``direct and
circumstantial evidence supports [its] finding of an agreement
between'' the alleged group members. Id. In another decision, the
court reasoned that it was ``not compelled to play ostrich in the
face of the strong circumstantial evidence demonstrating the
existence of an agreement among [the defendants] . . . . It would
require a degree of naivete unbecoming to this Court to believe that
the various activities of defendants were not the product of an
agreement among the group but, rather, were merely coincidences.''
Champion Parts Rebuilders, Inc. v. Cormier Corp., 661 F. Supp. 825,
850 (N.D.Ill. 1987) (citations omitted). The court based its factual
finding that an agreement existed on evidence indicating: (a) A
common plan and goal; (b) a pattern of parallel and continued
purchases over a relatively short and essentially concurrent time
period; (c) correlation of defendants' activities and
intercommunications, largely through their common agent; and (d)
claims of shareholder support at the meeting with the corporation.
Id.
    \125\ For example, the Second Circuit, finding that the district
court in the above mentioned CSX Corporation matter did not make
sufficient findings to permit appellate review of a group violation
of Section 13(d), stated: ``on remand the District Court will have
to make findings as to whether the Defendants formed a group for the
purpose of `acquiring, holding, voting or disposing,' 17 CFR
240.13d-5(b)(1) of [an issuer's] shares owned outright.'' CSX Corp.
v. Children's Inv. Fund Mgmt., 2011 WL 2750913, at *4 (2d Cir. July
18, 2011). An earlier Second Circuit opinion stated, ``the key
inquiry in the present case is whether [the defendants] `agreed to
act together for the purpose of acquiring, holding, voting or
disposing of' [an issuer's] common stock. 17 CFR 240.13d-5(b)(1).''
Morales v. Quintel Ent., Inc., 249 F.3d I 15 (2d Cir. 2001). In a
ruling that concluded the evidence did not establish the existence
of a group, a district court, which acknowledged Rule 13d-5(b) when
outlining the applicable regulatory framework, found that the
plaintiff's complaint ``d[id] not sufficiently allege an agreed-upon
common purpose.'' Roth v. Jennings, 2006 U.S. Dist. LEXIS 4266, 2006
WL 278135 at *5 (S.D.N.Y. Feb. 2, 2006). On appeal, however, the
Second Circuit criticized the district court for ascribing undue
weight to the defendants' use of a disclaimer in public filings that
they were not a group and found that the district court consequently
``gave no recognition to the terms of Sec.  13(d)(3) and Rule 13d-
5(b)(1).'' Roth v. Jennings, 489 F.3d 499, 512 (2d Cir. 2007).
---------------------------------------------------------------------------

2. The Commission's View of Group Formation
    Under a plain reading of Sections 13(d)(3) and 13(g)(3), an
agreement is not a necessary element of group formation. The text of
Rule 13d-5(b), along with the title of Rule 13d-5, also does not
indicate that Rule 13d-5(b) was intended to serve as the exclusive
definition of the term ``group.'' Rule 13d-5(b) provides a standard
applicable only for purposes of deeming an acquisition to have occurred
where none otherwise exists. Therefore, the Commission is not required
to invoke Rule 13d-5, and by extension, first establish that group
members have an agreement to act together as a precondition to
asserting that a group exists. Accordingly, the Commission is not
precluded from imputing acquisitions to the group through other means,
such as physical evidence or reliance upon Rule 13d-5(a), which
provides that a person (including a group) is deemed to have acquired
beneficial ownership when it becomes a beneficial owner by purchase or
otherwise. The existence of an agreement between two or more persons to
act together for at least one of the four purposes specified in the
rule text is thus a sufficient, but not a necessary, condition for
group formation.
    Interpreting Rule 13d-5(b) as the exclusive definition of a group
also would run counter to the purpose and otherwise impede application
of Sections 13(d) and 13(g).\126\ Rule 13d-5(b) applies only when the
aggregate amount of beneficial ownership held by group members exceeds
5% of a covered class on the date on which the group members enter into
an agreement. If the beneficial ownership is 5% or less of a covered
class on that date, or the ownership held is not in a covered class
because Section 12 registration is not yet effective or otherwise, no
statutory coverage exists and Regulation 13D-G does not apply.
Consequently, if Rule 13d-5(b) were administered as the exclusive
definition of group, there would be no requirement for such groups to
report their holdings after their beneficial ownership exceeded 5% of a
covered class, even if such groups were to make considerable post-
formation acquisitions and ultimately take control of an issuer. Such a
reading of Rule 13d-5(b) would produce the equivalent of an exemption
from Section 13(d) for a person (i.e., the group) that otherwise may
make future non-exempt acquisitions that would result in the beneficial
ownership attributable to the group exceeding 5% of a covered class.
There is no indication that this was the Commission's intention when it
adopted Rule 13d-5(b).\127\
---------------------------------------------------------------------------

    \126\ For example, if the Commission were to construe Rule 13d-
5(b)(1) as the exclusive definition of the term ``group,'' and thus
make an ``agreement'' a necessary element, that would directly
conflict with the statutory language and narrow the circumstances in
which Sections 13(d) and 13(g) could apply.
    \127\ When proposing Rule 13d-5(b), the Commission neither
framed the rule as a proposed definition of ``group'' nor solicited
comment on the sufficiency or any limitations of any such
definition. Moreover, the proposed rule text was devoid of any
reference to the term ``group.'' See Disclosure of Corporate
Ownership, Release No. 34-11616 (Aug. 25, 1975) [40 FR 42212 (Sept.
11, 1975)].
---------------------------------------------------------------------------

    Furthermore, there is no indication that Congress intended for the
analysis of whether or not a group had formed to be dependent upon the
existence of an express or implied agreement among two or more
persons.\128\ Sections

13(d)(3) and 13(g)(3) are devoid of any reference to the term ``agree''
or ``agreement.'' The use of ``any,'' ``understanding,''
``relationship'' and ``arrangement'' in the associated regulatory text
of Rule 13d-3(a) also points to a recognition that concerted action
need not be formalized in an agreement or otherwise expressed.\129\
Section 13(d)(3), given the operative ``act as'' standard, encompasses
not only agreements in the classic contractual ``offer'' and
``acceptance'' sense of the term \130\ but also pooling arrangements,
whether formal or informal, written or unwritten.\131\ Congress neither
added a state of mind element into Sections 13(d)(3) and 13(g)(3) nor
specified that two or more persons must ``act as'' a group pursuant to
an agreement. If the term ``agreement'' were read into Sections
13(d)(3) and 13(g)(3) as if it were an unintentionally omitted term,
application of Section 13(d) or 13(g) also would be limited to only a
subset of persons who otherwise ``act as a group'' within the meaning
of Sections 13(d)(3) and 13(g)(3) instead of all persons who act as a
group as expressly mandated.
---------------------------------------------------------------------------

    \128\ According to the legislative history, members of Congress
contemplated that the beneficial ownership reporting threshold--
which was first enacted as more than 10% of a covered class, but
currently is 5% of a covered class--could be bypassed by two or more
persons acting in concert in furtherance of a common purpose or goal
with each person individually holding an unreportable level of
beneficial ownership. Both the House and Senate Reports accompanying
the bill reflect an effort to prevent circumvention of the reporting
threshold in this situation with the inclusion of the provision that
became Section 13(d)(3). Those reports stated that Section 13(d)(3)
``would prevent a group of persons [w]ho seek to pool their voting
or other interests in the securities of an issuer from evading the
provisions of the statute because no one individual owns more than
10 percent of the securities.'' S. Rep. No. 550, 90th Cong., 1st
Sess. 8 (1967); H.R. Rep. No. 1711, 90th Cong. 2d Sess. 8-9 (1968),
Reprinted in (1968) U.S. Code Cong. & Admin. News. 2811, 2818. The
reports further stated that ``[t]he group would be deemed to have
become the beneficial owner, directly or indirectly, of more than 10
percent of a class of securities at the time [t]hey agreed to act in
concert.'' Id. As such, the reports noted that Section 13(d)(3) ``is
designed to obtain full disclosure of the identity of any person or
group obtaining the benefits of ownership [b]y reason of any
contract, understanding, relationship, agreement or other
arrangement.'' Id.
    \129\ Congress sought to make visible surreptitious purchases
executed by persons or entities that were not only not incorporated,
but also operating without a formal alliance. The legislation was
thus drafted to capture ``informal associations'' that otherwise
were not subject to having their joint activities disclosed. See
Full Disclosure of Corporate Equity Ownership and in Corporate
Takeover Bids: Hearing on S. 510 Before the Subcomm. on Securities
of the S. Comm. on Banking and Currency, 90th Cong. 1 (1967).
Because a group is deemed a single ``person'' once the standards of
Section 13(d)(3) or 13(g)(3) have been met, that ``person'' may be
considered a beneficial owner under Rule 13d-3(a) regardless of the
absence of any contract or agreement.
    \130\ Section 13(d)(3) was ``designed to obtain full disclosure
of the identity of any . . . group obtaining the benefits of
ownership of securities by reason of any contract, understanding,
relationship, agreement or other arrangement.'' S. Rep. No. 550,
90th Cong., 1st Sess. 8 (1967); H.R. Rep. No. 1711, 90th Cong. 2d
Sess. 8-9 (1968), Reprinted in (1968) U.S. Code Cong. & Admin. News.
2811, 2818. During a hearing, an individual testifying before the
Senate (who was a member of a corporation's management) observed
that in the then-unregulated market of takeovers for corporate
control, ``it [was] possible . . . for a group of people who [were]
informally associated to each acquire less than 10 percent of the
stock without having to report their acquisitions even though they
have more than 10 percent as a group.'' Full Disclosure of Corporate
Equity Ownership and in Corporate Takeover Bids: Hearing on S. 510
Before the Subcomm. on Securities of the S. Comm. on Banking and
Currency, 90th Cong. 1 (1967) (statement of Herbert F. Kahler,
Secretary and General Counsel, International Silver Co.).
    \131\ Some courts and the Commission have not superimposed the
term ``agreement'' into the legal standards governing the reporting
of beneficial ownership by groups. See SEC v. Levy, 706 F. Supp. 61
(D.D.C. 1989) (``In order to find that a `group' exists under
Section 13(d)(3), a court must find that two or more people have
formed a combination in support of a common objective.''); see also
In the Matter of John A. Carley, Release No. 34-50695 (Nov. 18,
2004) (``A group need not be formally organized, nor memorialize its
intentions in writing. . . . All that is required is that its
members combine in furtherance of a common objective.'').
---------------------------------------------------------------------------

    Whether or not a group exists is dependent upon the facts and
circumstances.\132\ Recognizing that two or more persons may take
concerted action informally and without memorializing their intentions
in writing, the Commission has relied upon circumstantial evidence
instead of an agreement to establish that two or more persons combined
in furtherance of a common objective.\133\ A contrary approach or
interpretation would elevate form over substance and make the
regulation of groups in the beneficial ownership context wholly
dependent upon evidence proving the existence of an agreement. The
purpose of the statute would be frustrated, and a burden not intended
by Congress would be placed upon any party alleging the existence of a
group, including the Commission.\134\
---------------------------------------------------------------------------

    \132\ Group activity may be demonstrated by circumstantial
evidence, SEC v. Savoy, 587 F.2d 1149 at 1162, such as: (1) The
presence of a common plan or goal, Fin. Gen. Bankshares, Inc. v.
Lance, 1978 WL 1082, at *9 (D.D.C. 1978); (2) ``considerable
dissatisfaction'' with certain officers and a ``desire to reduce''
those officers' role in company management, Id. at *10; (3) strategy
meetings with, among others, attorneys, Levy, 706 F. Supp. at 70;
(4) a pattern of coordinated stock purchases, Hallwood Realty
Partners, LP v. Gotham Partners, LP, 286 F.3d 613, 618 (2d Cir.
2002); (5) the solicitation of others to join the group, Wellman,
682 F.2d at 363-364; and (6) the existence of communications between
and among group members. Gen. Aircraft Corp. v. Lampert, 556 F.2d
90, 95 (1st Cir. 1977).
    \133\ SEC v. Levy, 706 F. Supp. 61, 69 (D.D.C. 1989); see also
In the Matter of John Joslyn, Joseph Marsh, P. David Lucas, Steven
Sybesma, Stanley Thomas and Jon Thompson, Release No. 34-50588 (Oct.
26, 2004).
    \134\ See Bath Industries, Inc. v. Blot, 427 F.2d 97, 110 (7th
Cir. 1970).
---------------------------------------------------------------------------

    The absence of a need to prove that a group made an acquisition for
purposes of reporting under Section 13(g), in itself, supports our view
that the existence of a group is not dependent upon application of Rule
13d-5(b), and by extension, whether such persons had an agreement. The
absence of the ``after acquiring'' element in Section 13(g)(1) supports
the view that groups may be subject to reporting obligations under
Section 13(d), just as they are under Section 13(g), without reference
to Rule 13d-5(b). No regulatory purpose would be served by concluding
that an agreement among members is a prerequisite to the imposition of
a reporting obligation under Section 13(d)(1) but not Section 13(g)(1).
Under the current regulatory framework, if an agreement does not exist
or cannot be proven, and no acquisitions can otherwise be imputed to
the group, Section 13(g) will still apply to require reporting by the
group if the collective amount of beneficial ownership held by the
group members exceeds 5% at the end of the calendar year.
3. Proposed Amendments
a. Proposed Rules 13d-5(b)(1)(i) and (b)(2)(i)
    Our proposal would amend Rule 13d-5 to track the statutory text of
Sections 13(d)(3) and (g)(3) and specify that two or more persons who
``act as'' a group for purposes of acquiring, holding or disposing
securities are treated as a group. Specifically, Rule 13d-5(b)(1) would
be redesignated as Rule 13d-5(b)(1)(i) and would be revised to, among
other things, remove the reference to an agreement between two or more
persons and instead indicate that when two or more persons act as a
group under Section 13(d)(3), the group will be deemed to have acquired
beneficial ownership of all of the equity securities of a covered class
beneficially owned by each of the group's members as of the date on
which the group is formed. In addition, proposed new Rule 13d-
5(b)(2)(i) would contain nearly identical language, with conforming
changes to address circumstances in which two or more persons act as a
group under Section 13(g)(3) and the group is deemed to become the
beneficial owner of all of the equity securities of a covered class
beneficially owned by each of the group's members as of the date on
which the group is formed.
    These amendments would make clear that the determination as to
whether two or more persons are acting as a group does not depend
solely on the presence of an express agreement and that, depending on
the particular facts and circumstances, concerted actions by two or
more persons for the purpose of acquiring, holding or disposing of
securities of an issuer are sufficient to

constitute the formation of a group.\135\ By revising Rule 13d-5(b) as
we propose, we intend to eliminate any potential for the rule to be
misconstrued and consequently used as a basis to narrow the application
of Sections 13(d)(3) and 13(g)(3) to: (1) Two or more persons who first
``agree'' to act as a group, instead of two or more persons who ``act
as'' a group as expressly codified in these statutory provisions; and
then (2) only an additional subset of those such groups whose
beneficial ownership exceeds 5% on the date of an agreement.
---------------------------------------------------------------------------

    \135\ The Commission, in adopting Rule 13d-5(b)(1), indicated
that it viewed the term ``holding'' as subsuming the term
``voting,'' but nevertheless expressly referenced the term
``voting'' for the avoidance of doubt. See Filing and Disclosure
Requirements Relating to Beneficial Ownership, Release No. 34-14692
(Apr. 21, 1978) [43 FR 18484 at 18492 (Apr. 28, 1978)].
---------------------------------------------------------------------------

b. Proposed Rule 13d-5(b)(1)(ii)
    In addition, given that a Schedule 13D filing may affect the market
for an issuer's securities, information that a person will make a
Schedule 13D filing in the near future can be material.\136\ Under
certain circumstances, the person that incurs or will incur such a
filing obligation may be incentivized to share that information with
other investors. For example, a large blockholder may be planning to
commence a future campaign to challenge or unseat directors serving on
the board of the issuer of the covered class and seek support of its
still undisclosed plan.\137\ By privately sharing this material
information (i.e., the fact that the blockholder is or will be required
to make a Schedule 13D filing) in advance of the public filing deadline
with a goal of inducing a change in the voting electorate or
strengthening a relationship, the blockholder may engender support of,
and improve the likelihood of success regarding, any future changes
proposed to the issuer. Similarly, by sharing such material information
with other investors positioned to act on the information, the
blockholder may incentivize those investors to acquire shares in the
covered class before such filing is made.\138\ Such incentive would be
based on the other investors' expectation of an increase in the price
of the covered class once the market reacts to the Schedule 13D filing.
---------------------------------------------------------------------------

    \136\ See Alon Brav, Wei Jiang, Frank Partnoy and Randall S.
Thomas, Hedge Fund Activism, Corporate Governance and Firm
Performance, 61 J. Fin. 1729 (2008) (finding on average an abnormal
short-term return of 7% over the window surrounding a Schedule 13D
filing); Marco Brecht, Julian Franks, Jeremy Grant and Hammes F.
Wagner, The Returns to Hedge Fund Activism: An International Study,
Center for Economic Policy Research Discussion Paper No. 10507 (Mar.
15, 2015).
    \137\ See, e.g., Susan Pulliam, Juliet Chung, David Benoit and
Rob Barry, Activist Investors Often Leak Their Plans to a Favored
Few, The Wall Street Journal (Mar. 26, 2014), https://www.wsj.com/articles/SB10001424052702304888404579381250791474792 (``Activists,
who push for broad changes at companies or try to move prices with
their arguments, sometimes provide word of their campaigns to a
favored few fellow investors days or weeks before they announce a
big trade, which typically jolts the stock higher or lower.'').
    \138\ The Commission expresses no opinion as to whether or not
such a blockholder owes a fiduciary duty to other shareholders in
the covered class.
---------------------------------------------------------------------------

    These activities raise a question as to whether those investors
``act as'' a ``group for the purpose of acquiring'' the covered class
within the meaning of Section 13(d)(3).\139\ They also raise investor
protection concerns. For example, any near-term gains made by these
other investors attributable to this asymmetric information may come at
the expense of uninformed shareholders who sell at prices reflective of
the status quo.\140\ Even though the demand to acquire shares in the
covered class may increase as a direct result of the blockholder's
communications, and in turn increase the prices at which such selling
shareholders exit, such prices may be discounted in comparison to the
price selling shareholders would have achieved had the information
about the impending Schedule 13D filing been public. Consequently, this
informational imbalance may result in opportunistic purchases
benefitting a favored few.\141\
---------------------------------------------------------------------------

    \139\ This question arises regardless of whether such other
investors would be independently subject to, and thus incur a stand-
alone reporting obligation under, Section 13(d)(1). Under Section
13(d)(3), however, two or more persons may be treated as a single
person only if the beneficial ownership collectively held exceeds 5%
of the covered class.
    \140\ See infra Sections III.A and III.C.3.
    \141\ See Lucian Bebchuk, Alon Brav, and Wei Jiang, The Long-
Term Effects of Hedge Fund Activism, 115 Colum. L. Rev. 1085 (2015).
The authors find an approximately 6% average abnormal return during
the 20-day window before and after a Schedule 13D filing.
---------------------------------------------------------------------------

    To provide clarity on this issue, enhance investor confidence and
promote accurate price discovery in the capital markets, we are
proposing to amend Rule 13d-5 to include a provision, which would be
codified in paragraph (b)(1)(ii), that states that a person who shares
information about an upcoming Schedule 13D filing that such person will
be required to make, to the extent this information is not yet public
and communicated with the purpose of causing others to make purchases,
and a person who subsequently purchases the issuer's securities based
on this information will be deemed to have a formed a group within the
meaning of Section 13(d)(3). Proposed Rule 13d-5(b)(1)(ii) further
provides that the group formed on the basis of such concerted action
will be deemed to acquire beneficial ownership in the covered class.
This acquisition by the group, which occurs by operation of Rule 13d-
5(b)(1)(ii), would trigger application of Section 13(d)(1), and in
turn, establish the filing deadline for the group's disclosure
statement on Schedule 13D. The proposed amendment would thus help
ensure that appropriate disclosures under Section 13(d) are made in
these and similar circumstances.\142\
---------------------------------------------------------------------------

    \142\ Proposed Rule 13d-5(b)(1)(ii), if adopted, would provide
that the conduct specified in the rule is sufficient to find that a
group had been formed under Section 13(d)(3) and, at the same time,
deem that group to have made the acquisition necessary to trigger
application of Section 13(d)(1). The proposed rule would serve as an
additional, not exclusive, means of establishing that the tipper and
tippee formed a group that made an acquisition subject to Section
13(d). The proposed rule would not supersede or replace the existing
regulatory provisions under which the tipper-tippee could become
subject to Section 13(d). Thus, the Commission would not need to
invoke Rule 13d-5(b)(1)(ii) when seeking to enforce violations in
the context of every tipper-tippee relationship, but instead could
assert other bases for finding that two or more such persons acted
as a group for the purpose of acquiring a covered class.
---------------------------------------------------------------------------

    We believe this proposed rule change is consistent with the purpose
of Section 13(d). Section 13(d)(3) was designed to prevent
circumvention of Section 13(d). As noted above, under Section 13(d)(3),
a group may become subject to regulation even in the absence of any
express or implied agreement to act together for the purpose of
acquiring a covered class. For example, if a large blockholder shares
non-public information about its anticipated obligation to file a
Schedule 13D, as would be the case if a tipper were to share its
intention to accumulate a stake that would trigger such a filing
obligation, and the person who receives such information subsequently
makes a purchase based on that information, such information-sharing
and purchasing activity is sufficient to satisfy the statutory
standards within Section 13(d)(3) to the extent the information was
shared with the purpose of causing such additional purchases to be
made. While the final determination as to whether two or more persons
``act as'' a group for this purpose ultimately will depend upon the
specific facts and circumstances, the advantages inherent to this
mutually beneficial relationship between the tipper and the tippee are
self-evident. The large blockholder would have shared non-public,
potentially market-moving information concerning an impending Schedule
13D filing

obligation. The blockholder benefits by virtue of the subsequent
acquisition of shares by the other investors, which may support or
contribute to an increase in the value of the blockholder's investment
in the covered class. In addition, the blockholder meaningfully
contributes to a relationship, and creates the potential for reciprocal
behavior. Such reciprocity could, in turn, prompt additional concerted
action that will further implicate the statute.\143\ Those investors,
acting on the information shared by the blockholder, also benefit by
capitalizing on an opportunity to acquire the covered class at a
comparative ``discount'' relative to the price they presumably would
have paid had more timely public disclosure of the sensitive
information in their possession been made. Consequently, in our view,
the tipping arrangement described above falls within the scope of
activity Congress sought to regulate when it enacted Section 13(d)(3).
---------------------------------------------------------------------------

    \143\ See John C. Coffee, Jr. and Darius Palia, supra note 19,
at 596 and n.173 (explaining that ``norms of reciprocity
characterize many areas of commercial life'' and ``[f]or prudential
reasons, hedge funds may prefer to share the gains among themselves
by using an organizational structure that unites a number of funds
into a loosely knit organization (i.e., the `wolf pack') that may
acquire 25% or more of the target'' and noting that ``[a]lthough the
lead hedge fund does not fully capture all the gains obtainable in
the transaction it leads, it reduces its risk and may receive
reciprocal treatment from other hedge funds that later invite it to
join it to their `wolf packs' '').
---------------------------------------------------------------------------

    Under proposed Rule 13d-5(b)(1)(ii), the group will be deemed to
have acquired beneficial ownership of the securities of any market
participant with whom the large blockholder has communicated material
information regarding its impending filing obligation on the earliest
date on which the acquisition by the recipient (or recipients, as the
case may be) of the material information occurs.\144\ The existence of
this acquisition will not alter the blockholder's initial filing
obligation in respect of its acquisition of beneficial ownership in
excess of 5% of the covered class. Rather, that person will now be
obligated to acknowledge the existence of the group under Item 2 of the
cover page of Schedule 13D, and provide any other required disclosures
as a group member. If other group members make purchases later than the
first date on which the blockholder is deemed to have formed a group
with another person, proposed Rule 13d-5(b)(1)(iii), discussed below,
would operate to deem the group to have acquired any additional shares
acquired by any such persons who are considered group members after the
date of group formation. Under Rule 13d-1(k), group members have the
option of jointly filing a single Schedule 13D or, alternatively,
independently filing a Schedule 13D that identifies all members of the
group.
---------------------------------------------------------------------------

    \144\ The term ``market participant'' is used in this release to
refer to any investor in or trader of a covered class, as determined
in this release. The term has been used in order to account for the
foreseeable possibility that a large blockholder may need to consult
with persons who are not investors or traders, such as outside
counsel, broker dealers, filing agents and others in connection with
having to make its initial Schedule 13D filing.
---------------------------------------------------------------------------

    No term within proposed Rule 13d-5(b)(1)(ii) prohibits the
blockholder from making additional purchases in the covered class or
communicating the existence of the filing obligation to other
shareholders. As such, the large blockholder and the other investors
are free to acquire a larger position in the covered class during the
period that remains before the required beneficial ownership report
discloses the existence of the group. While the impact of the proposed
rule may reduce the number of members within, and beneficial ownership
initially held by, a group formed under the described tipping
arrangement, or eliminate the practice altogether, we believe the
proposed rule is appropriate in light of the possibility for
coordinated acquisitions without compliance with Section 13(d). We
believe that adding a provision directly addressing the tipping
arrangement described above would advance the policy purposes of
Section 13(d).
c. Proposed Rules 13d-5(b)(1)(iii) and (b)(2)(ii)
    Groups may form at a time when a class of equity securities is not
yet registered under Section 12 or the aggregate beneficial ownership
held by the membership in the group on the date of its formation is 5%
or below of a covered class. Expressly capturing post-formation
acquisitions of beneficial ownership by group members therefore can
become important for purposes of: Assessing whether a group
intentionally tried to evade the reporting process; determining whether
an amendment was due for a pre-existing Schedule 13D filing; and
evaluating the availability of the Section 13(d)(6)(B) exemption. For
example, imputing post-formation acquisitions to a group by rule would
make clear that acquisitions by group members that collectively exceed
the 2% exemptive threshold over a 12-month period are attributable to
the group, thereby resulting in the group becoming ineligible to report
pursuant to Section 13(g) and triggering a filing obligation under
Section 13(d).\145\ The 12-month measurement period therefore extends
into the time period where a beneficial owner, including a group, held
an amount of beneficial ownership below the statutory threshold or
where the group formed on a date when the class of equity was not
registered under Section 12.\146\
---------------------------------------------------------------------------

    \145\ Section 13(d)(6)(B) takes into account all acquisitions
that occurred during the preceding twelve months.
    \146\ The Commission has indicated that the 2% exemption
operates on ``a rolling twelve-month basis.'' Filing and Disclosure
Requirements Relating to Beneficial Ownership, Release No. 34-17353
(Dec. 4, 1980) [45 FR 81556 at 81557 (Dec. 11, 1980)]. In other
words, for an acquisition to be exempt under Section 13(d)(6)(B),
``it must, when taken together with all other acquisitions of
beneficial ownership by the same person of securities of the same
class during the preceding twelve months, not exceed two percent of
the class.'' Id.
---------------------------------------------------------------------------

    Absent an express provision that would treat post-formation
acquisitions of beneficial ownership by group members as acquisitions
by the group, the Commission or other affected parties must prove the
acquisition is attributable to the group. For example, if the
Commission invoked Rule 13d-5(a), it would have to establish that the
group ``became'' a beneficial owner of more shares and thus made an
acquisition within the meaning of that rule. To help ensure that
acquisitions made by a group member after the date of group formation
are attributed to the group once the collective beneficial ownership
among group members exceeds 5% of a covered class, and reduce the
Commission's evidentiary burden, we propose to amend Rule 13d-5 to
expressly impute such acquisitions to the group. Proposed new Rule 13d-
5(b)(1)(iii) would provide that a group under Section 13(d)(3) will be
deemed to have acquired beneficial ownership of equity securities of a
covered class if any member of the group becomes the beneficial owner
of additional equity securities of such covered class after the date of
the group's formation. Proposed new Rule 13d-5(b)(2)(ii) would contain
nearly identical language, with conforming changes to address
circumstances in which a member of a group under Section 13(g)(3)
becomes the beneficial owner of additional equity securities of a
covered class after the date of the group's formation.
d. Proposed Rules 13d-5(b)(1)(iv) and (b)(2)(iii)
    We also are proposing amendments to Rule 13d-5 to carve out from
the purview of proposed Rules 13d-5(b)(1)(iii) and (b)(2)(ii) intra-
group transfers of equity securities of a covered class. Specifically,
proposed

Rule 13d-5(b)(1)(iv) would provide that a group under Section 13(d)(3)
will not be deemed to have acquired beneficial ownership in a covered
class if a member of the group becomes the beneficial owner of
additional equity securities in such covered class through a sale by,
or transfer from, another member of the group. Proposed new Rule 13d-
5(b)(2)(iii) would contain nearly identical language, with conforming
changes to address circumstances in which a member of a group under
Section 13(g)(3) becomes the beneficial owner of additional equity
securities in a covered class through a sale by, or transfer from,
another member of the group.
e. Proposed Amendment to the Title of Rule 13d-5
    To further align Rule 13d-5 with Section 13(d)(1), we also propose
to amend the title of the rule to ``Acquisitions of beneficial
ownership'' to remove the potential implication that Section 13(d) and
Rule 13d-1(a) could only apply if a person made an actual acquisition
of securities. Under Section 13(d)(1), a person becomes subject to a
reporting obligation ``after acquiring'' beneficial ownership, which
determination may or may not include an actual acquisition of
securities based on whether a person is a beneficial owner under Rule
13d-3. We also are proposing conforming amendments to Rule 13d-5(a) to
replace the references to an ``acqui[sition] of securities'' with
references to an ``acqui[sition] of beneficial ownership.''
f. Proposed Redesignation of Current Rule 13d-5(b)(2)
    Finally, for the avoidance of doubt or confusion as to the
regulatory purpose Rule 13d-5 is intended to serve, and to reinforce
its operation as a provision that governs acquisitions of beneficial
ownership, we propose to relocate Rule 13d-5(b)(2) to neighboring Rule
13d-6, titled ``Exemption of certain acquisitions,'' and redesignate it
as new Rule 13d-6(b). No substantive changes would be made to the text
of the rule. That amendment is discussed in more detail in Section II.D
below.
Request for Comment
    54. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(i) and
(b)(2)(i), as proposed? Rather than amending the rule as proposed to
affirm that an express or implied agreement is not needed to subject a
group to reporting under Section 13(d) or 13(g), should we instead
issue a Commission interpretation that reiterates this point?
    55. Should we amend Rule 13d-5 to add new Rule 13d-5(b)(1)(ii), as
proposed? Does the current regulatory framework sufficiently address
such activity? Would the possible imposition of a Schedule 13D filing
obligation adequately remediate the behavior we are seeking to address?
Are there any changes to proposed Rule 13d-5(b)(1)(ii) that we should
consider, such as further clarification to address situations where the
non-public information about the Schedule 13D filing is shared by an
employee who is not authorized to do so?
    56. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(iii)
and (b)(2)(ii), as proposed? Alternatively, should additional
acquisitions made by group members after the date of group formation
under Section 13(d) be exempted, or should additional persons under
Section 13(g) be exempted from regulation as a group, and if so, what
would be the grounds upon which such exemptions could be granted?
    57. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(iv) and
(b)(2)(iii), as proposed?
    58. Instead of amending Rule 13d-5 as proposed, should we propose a
definition of the term ``group'' and, if so, how should the term be
defined?
    59. Should we propose a rule or amendments to existing rules that
would require groups to report exclusively on Schedule 13D, and if so,
why should groups not be able to avail themselves of reporting on
Schedule 13G in lieu of Schedule 13D as they do today? For example,
Rule 13d-1(b)(1)(ii)(K) identifies a group as being among the qualified
institutions eligible to report on Schedule 13G in lieu of Schedule 13D
provided that every member of the group is a qualified institution.
Should this provision be rescinded and other revisions be made to
ensure that groups would be ineligible to qualify as QIIs or Passive
Investors that report beneficial ownership on Schedule 13G?
    60. Have shareholders suffered quantifiable harm as a result of any
weakness in the current regulatory framework as applied to groups, and
if so, would new rules or amendments beyond what we have already
proposed prevent such harm caused by undisclosed group activity from
recurring?
    61. Is certain group activity going unreported under the current
regulatory framework because it does not involve acquiring, holding or
disposing of a covered class, and if so, what additional rule proposals
or modifications could be made to address such activity?
    62. Do instances exist in which shareholders in a covered class
were harmed as a result of the tipping arrangements described above,
and if so, could such harm be quantified? To the extent any such
shareholder harm has occurred, please explain how such harm occurred.
    63. Would Rule 13d-5(b)(1)(ii) unduly chill communications between
shareholders and market participants, such as investment advisers? If
so, what modifications to the proposed rule should we consider? For
example, should application of the rule be conditioned on the recipient
of the tip intending to coordinate with the tipper or making its
purchases in reliance on the non-public information that the tipper
provided so as to avoid a scenario in which such recipient is
unwittingly deemed a member of a group simply by virtue of the tipper's
independent communications or actions?
    64. Given that Rule 13d-5(b)(1)(ii) would operate and apply in
addition to, and not to the exclusion of, Section 13(d)(3),\147\ should
the Commission issue guidance about the facts and circumstances under
which it would find that two or more persons ``act as a group'' under
Section 13(d)(3) in the context of a tipper-tippee relationship or
otherwise?
---------------------------------------------------------------------------

    \147\ See supra note 142.
---------------------------------------------------------------------------

    65. Should the scope of proposed Rule 13d-5(b)(1)(ii) be expanded
to include the group formation standards under Section 13(g)(3) as
well, and if so, why? Would other investors be incentivized to take a
position in a covered class upon learning that a Schedule 13G filing
was expected to be made by an Exempt Investor? For example, have any
individual investors or groups filed a Schedule 13G as an Exempt
Investor while also advocating for change without disclosure given the
absence of an analogue to Item 4 of Schedule 13D or requirement under
Item 10 of Schedule 13G for an Exempt Investor to certify as to its
passivity? Similarly, should the scope of proposed Rule 13d-5(b)(1)(ii)
be expanded to cover Schedule 13G filings made by a group of QIIs or
Passive Investors given that such groups--like Schedule 13D filers--
still will have made an acquisition subject to Section 13(d)?
    66. For purposes of this release, ``market participant'' means any
investor in or trader of a covered class.\148\ Should any modifications
be made to our interpretation of the term ``market participant''?
Alternatively, should we adopt a definition of the term ``market
participant'' in Regulation

13D-G? If so, should Regulation 13D-G be amended to include a provision
dedicated to providing defined terms used throughout the regulation?
---------------------------------------------------------------------------

    \148\ See supra note 144.
---------------------------------------------------------------------------

D. Proposed Amendments to Rule 13d-6 To Create Certain Exemptions

    We are proposing a series of amendments to Rule 13d-6 to reorganize
the rule and exempt certain circumstances from resulting in a person
being deemed to have acquired beneficial ownership of, or otherwise to
beneficially own, equity securities of a covered class for purposes of
Sections 13(d) and 13(g). Specifically, we are proposing to amend Rule
13d-6 to:
     Redesignate the current text of Rule 13d-6 as Rule 13d-
6(a);
     Redesignate the current text of Rule 13d-5(b)(2) as Rule
13d-6(b);
     Add new paragraph (c) to create an exemption from Sections
13(d)(3) and 13(g)(3) for certain circumstances in which two or more
persons take concerted actions with respect to an issuer or a covered
class; and
     Add new paragraph (d) to create an exemption from Sections
13(d)(3) and 13(g)(3) for certain circumstances in which two or more
persons enter into an agreement setting forth the terms of a derivative
security.
    These proposed amendments are discussed in further detail below.
1. Background
    Congress granted the Commission the authority to issue exemptions
from the application of Sections 13(d) and 13(g). The Commission can,
under Section 13(d)(6)(D), exempt, by rule, acquisitions ``as not
entered into for the purpose of, and not having the effect of, changing
or influencing the control of the issuer or otherwise as not
comprehended within the purposes of [Section 13(d)].'' Congress
similarly granted the Commission authority under Section 13(g)(6) to
exempt any person or class of persons from Section 13(g) ``as it deems
necessary or appropriate in the public interest or for the protection
of investors.'' The Commission exercised this authority when it adopted
Rule 13d-6, which exempts certain acquisitions. Currently, it sets
forth one exemption from Section 13(d) for the acquisition of
securities of an issuer by a person who, prior to such acquisition, was
a beneficial owner of more than 5% of the outstanding securities of the
same class as those acquired, provided that certain conditions are met.
    We recognize that our proposal to amend Rule 13d-5, as discussed
above, may raise concerns among investors as to whether their
communications and other activities with other investors would
constitute the formation of a group. We also recognize the possibility
that additional exemptions may be warranted to address situations in
which beneficial ownership reporting under Section 13(d) or 13(g) by a
group would be unnecessary from an investor protection standpoint or
even contrary to the public interest. Specifically, we are aware that
activity exists among shareholders, investors, holders of derivatives
and other market participants that may, absent an exemption, implicate
Sections 13(d)(3) and 13(g)(3). For example, institutional investors or
shareholder proponents may wish to communicate and consult with one
another regarding an issuer's performance or certain corporate policy
matters involving one or more issuers. Subsequently, those investors
and proponents may take similar action with respect to the issuer or
its securities, such as engaging directly with the issuer's management
or coordinating their voting of shares at the issuer's annual meeting
with respect to one or more company or shareholder proposals.
    The beneficial ownership reporting system is not intended to impede
communications among shareholders or between proponents and issuers
that are not undertaken with the purpose or effect of changing or
influencing control of an issuer. Accordingly, the regulatory purposes
of Sections 13(d) and 13(g) would not be served by treating investors
and proponents under those circumstances as a single person that
``act[s] as'' a group by virtue of its ``holding'' of a covered class
within the meaning of Sections 13(d)(3) and 13(g)(3).
    Similarly, investors in an equity-based derivative security may
need to, in order to acquire the derivative security, enter into an
agreement governing the terms of such instrument with a financial
institution that, in the ordinary course of its business, acts as a
counterparty to such investors. To offset any risk exposure to that
derivative security, including any obligations that may arise at
settlement, the financial institution may accumulate the reference
equity security in a covered class and hold such reference security for
the duration of the agreement. But for the joint actions of the parties
in entering into the agreement, that specific acquisition of beneficial
ownership in the covered class by the financial institution would not
have occurred. As such, entry into such an agreement may implicate
Sections 13(d)(3) and (g)(3) because two persons may be viewed as
``act[ing] as'' a group given the financial institution's foreseeable
acquisition of a covered class. Assuming that the investor and the
financial institution did not enter into the agreement with the purpose
or effect of changing or influencing control of the issuer, the
regulatory purposes of Sections 13(d) and 13(g) would not be furthered
by treating the investor and the financial institution as members of a
group under Sections 13(d)(3) and 13(g)(3) solely by virtue of their
entrance--for strictly commercial purposes and not for purposes of
acquiring, holding or disposing of a covered class--into that
agreement.
2. Proposed Amendments
    We are proposing amendments to Rule 13d-6 to exempt certain actions
taken by two or more persons from the scope of Sections 13(d)(3) and
13(g)(3) if those actions do not have the purpose or effect of changing
or influencing the control of an issuer and thus are not within the
purpose of Section 13(d).
    As an initial matter, we are proposing to redesignate current Rule
13d-6 as Rule 13d-6(a) to allow for new exemptions to be added as
subsequent paragraphs of Rule 13d-6. The text of current Rule 13d-6
would not be changed in any way.
    In light of our proposed amendments to Rule 13d-5, we also are
proposing to add new paragraph (c) to Rule 13d-6 to avoid chilling
communications among shareholders or impeding shareholders' engagement
with issuers where those activities are undertaken without the purpose
or effect of changing or influencing control of the issuer (and are not
made in connection with or as a participant in any transaction having
such purpose or effect).\149\ Proposed

Rule 13d-6(c) would provide that two or more persons will not be deemed
to have acquired beneficial ownership of, or otherwise beneficially
own, an issuer's equity securities as a group solely because of their
concerted actions related to an issuer or its equity securities,
including engagement with one another or the issuer, provided they meet
certain conditions. Such interactions, depending upon the level of
coordination and degree to which the persons advocate in furtherance of
a common purpose or goal, could be found to satisfy the ``act as'' a
group standard under Section 13(d)(3) or 13(g)(3) for the purpose of
``holding'' a covered class. To help ensure that the exemption is
available only where such persons independently determine to take
concerted actions, the proposed exemption would be available only if
such persons are not directly or indirectly obligated to take such
actions (e.g., pursuant to the terms of a cooperation agreement or
joint voting agreement).
---------------------------------------------------------------------------

    \149\ The Commission has previously articulated policy concerns
similar to those that underlie this proposed exemption. For example,
in a rulemaking effort in the late 1990s, the Commission took steps
to ensure that ``the Section 13(d) reporting obligations [do not]
restrict a shareholder's ability to engage in proxy related
activities,'' including their ``ability to use the proxy rule
exemptions that were adopted in 1992 to facilitate communications
among shareholders.'' Amendments to Beneficial Ownership Reporting
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 at
2858 (Jan. 16, 1998)]. In adopting those proxy rule exemptions, the
Commission noted that ``[t]he purposes of the proxy rules themselves
are better served by promoting free discussion, debate and learning
among shareholders and interested persons.'' Regulation of
Communications Among Shareholders, Release No. 34-31326 (Oct. 16,
1992) [57 FR 48276 at 48279 (Oct. 22, 1992)]. Finally, as discussed
supra note 47, our proposal, if adopted, would not change the
existing standards for determining whether a person is engaging in
an activity that would have the purpose or effect of changing or
influencing the control of the issuer. For example, our proposal
would not change the Commission's existing view that most proxy
solicitations in support of a proposal specifically calling for a
change of control of an issuer (e.g., a contested election of
directors, a sale of the issuer or the restructuring of the issuer)
would clearly have the purpose and effect of changing or influencing
control. See Amendments to Beneficial Ownership Reporting
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 at
2859 (Jan. 16, 1998)]. See also supra note 99 for the definition of
``control'' under Rule 12b-2 of Regulation 12B.
---------------------------------------------------------------------------

    In addition, we are proposing to add new paragraph (d) to Rule 13d-
6, in light of proposed new Rule 13d-3(e), to avoid impediments to
certain financial institutions' ability to conduct their business in
the ordinary course. Proposed Rule 13d-6(d) would provide that two or
more persons will not be deemed to have formed a group under Section
13(d)(3) or 13(g)(3) solely by virtue of their entrance into an
agreement governing the terms of a derivative security. This exemption
would only be available if the agreement is a bona fide purchase and
sale agreement entered into in the ordinary course of business.
Further, the exemption would only be available if such persons do not
enter into the agreement with the purpose or effect of changing or
influencing control of the issuer, or in connection with or as a
participant in any transaction having such purpose or effect.
    Finally, as noted above, we are proposing to redesignate current
Rule 13d-5(b)(2) as new Rule 13d-6(b). Current Rule 13d-5(b)(2) was
first adopted in 1978 as a means to effectively exempt acquisitions
from being attributed to a group within the meaning of Section 13(d)(3)
solely by virtue of concerted actions by QIIs relating to the purchase
of equity securities in a private offering.\150\ As such, our proposed
placement of this provision, which operates to exempt an actual
purchase transaction by a group from otherwise being treated as an
acquisition under Rule 13d-5(b)(1), into Rule 13d-6, should add to
administrative convenience as the provision would appear alongside
another acquisition transaction already so exempted.
---------------------------------------------------------------------------

    \150\ Current Rule 13d-5(b), by its terms, acknowledges that the
joint, concerted action by institutional investors specified in Rule
13d-1(b) to purchase an issuer's equity securities pursuant to an
agreement among QIIs would constitute an acquisition by a group
subject to Section 13(d) absent a regulatory accommodation. The
Commission therefore adopted the equivalent of an exemption by
codifying its view within Rule 13d-5(b)(2) that the ``group shall be
deemed not to have acquired any equity securities beneficially owned
by the other members of the group.''
---------------------------------------------------------------------------

Request for Comment
    67. Should we amend Rule 13d-6 as proposed?
    68. Should we add new Rule 13d-6(c), as proposed, to exempt certain
concerted actions by two or more persons from serving as the basis for
group formation? Are the proposed conditions for reliance on this
exemption appropriate? For example, is there another way that we can
ensure that persons seeking to rely upon the exemption would
independently reach decisions that result in concerted action being
taken other than by requiring that such persons not be directly or
indirectly obligated to take concerted actions, as proposed in Rule
13d-6(c)(2)? Alternatively, if we adopt proposed Rule 13d-6(c), should
we omit proposed paragraph (c)(2) and, therefore, only condition
availability of the exemption on the requirement set forth in proposed
paragraph (c)(1)?
    69. Is the proposed Rule 13d-6(c) exemption broad enough to exempt
activity by shareholders who coordinate to make non-binding proposals
under 17 CFR 240.14a-8 or otherwise, or is an express exemption needed
for shareholders who act together in introducing such proposals?
    70. Should we add new Rule 13d-6(d), as proposed, to exempt the
entrance by two or more persons into an agreement governing the terms
of a derivative security from serving as the basis for group formation?
Are the proposed conditions for reliance on this exemption appropriate?
For example, does the condition that the agreement must be a bona fide
purchase and sale agreement entered into in the ordinary course of
business mitigate the concerns underlying Sections 13(d)(3) and
13(g)(3)?
    71. Will the proposed new exemptions in Rule 13d-6 facilitate any
actions that would be contrary to the intent of Sections 13(d) and
13(g)?
    72. Congress broadly determined that when two or more persons ``act
as'' a group for the purpose of acquiring, holding or disposing of a
covered class, the persons would be treated as a single person for
purposes of reporting beneficial ownership. Are there actions taken
among shareholders other than the ones that we have proposed to exempt
that the Commission should consider exempting?
    73. To the extent that a group would qualify to report on Schedule
13G pursuant to Rule 13d-1(b), (c), or (d), do the costs of such a
group complying with the beneficial ownership reporting requirements
outweigh the benefits? For example, how would a Schedule 13G filed by a
group contribute to price discovery? Should the Commission wholly
exempt any group that qualifies to file a Schedule 13G from having to
report at all, and if so, under what other conditions, if any, should
such an exemption be available?
    74. Should we redesignate current Rule 13d-5(b)(2) as new Rule 13d-
6(b), as proposed? Would the relocation of that exemption, without
altering the substance of that exemption, alter its availability or use
or have any other collateral effects?

E. Proposed Amendments to Schedule 13D To Clarify Disclosure
Requirements Regarding Derivative Securities

    We are proposing to amend Schedule 13D, codified at Rule 13d-101,
to clarify the disclosure requirements with respect to derivative
securities held by a person reporting on that schedule. Specifically,
we are proposing to amend Item 6 to Schedule 13D to remove any
implication that a person is not required to disclose interests in all
derivative securities that use a covered class as a reference security.
1. Background
    In enacting Sections 13(d)(1)(A) through (E),\151\ Congress
specified certain information that beneficial owners must report once
they incur a filing obligation. Under Section 13(d)(1)(E), Congress
provided that a beneficial owner must report ``information as to any
contracts, arrangements, or understandings with any person with respect
to any securities of the issuer, including [the] transfer of any of the
securities, joint ventures, loan or option arrangements, puts or calls,
guaranties of loans,

guaranties against loss or guaranties of profits, division of losses or
profits, or the giving or with holding of proxies . . . .'' Consistent
with the mandate of Section 13(d)(1)(E), this baseline disclosure
requirement has existed within Schedule 13D since 1968.
---------------------------------------------------------------------------

    \151\ 15 U.S.C. 78m(d)(1).
---------------------------------------------------------------------------

    Schedule 13D sets forth the information that beneficial owners
reporting pursuant to Rule 13d-1(a) or 13d-2(a) must disclose. In
addition to the information specified by Sections 13(d)(1)(A) through
(E), Congress also authorized the Commission to require disclosure of
``such additional information'' it prescribes as ``necessary or
appropriate in the public interest or for the protection of
investors.''
    Item 6 of Schedule 13D requires beneficial owners to ``[d]escribe