B2. Comments Received

Commenters were divided on proposed Rule 13d-3(e). Many commenters expressed general support for the proposed amendment.453 A number of these commenters indicated that proposed Rule 13d-3(e) would add needed market transparency.454 One commenter expressed the view that the proposal would mitigate what it described as “hidden risk concentration.”455 Another commenter stated that the proposal would provide “the markets more generally with full information” and allow stockholders to better assess whether to support or oppose activists’ proposals.456 Some commenters asserted that an investment fund used derivatives (reportedly forward purchase contracts) to conceal an economic interest in an issuer that it later converted into a profitable beneficial ownership stake ultimately reported on Schedule 13D.457

Opposing commenters, by contrast, raised numerous objections to proposed Rule 13d-3(e).458 Some of these commenters questioned whether there was a sound basis for the proposal.459 One commenter asserted that the proposal was not based on empirical analysis or “evidence to establish . . . an actual problem in the marketplace” and is a “solution in search of a problem.”460 Other commenters asserted that holders of cash-settled derivative securities should not be deemed beneficial owners because such derivative securities confer no control or influence over the voting or disposition of the reference equity securities.461 Some commenters asserted that in actuality, a counterparty would not look to the derivative holder as to whether to acquire for hedging purposes, or how to vote and/or dispose of, any securities of the reference class or that doing so would be contrary to market practice and/or standard industry legal documentation.462 Several opposing commenters asserted that investors in cash-settled derivative securities already may be subject to regulation as beneficial owners under existing Rule 13d-3 in applicable circumstances or that the Commission could proceed via interpretation or other means and without a rule amendment.463 Similarly, one commenter stated that it may not be necessary to deem investors in cash-settled derivative securities beneficial owners if the Commission is satisfied that derivative counterparties can effectively and irrevocably contract out of the right to convert such derivatives to either physical ownership of underlying shares or any other form of voting rights.464

In addition, some opposing commenters expressed concerns regarding proposed Rule 13d-3(e) related to the APA or the Commission’s statutory authority to adopt the proposal. For example, some commenters said that the proposal represents an inappropriate expansion of the applicable statutory provisions465 or would be arbitrary and capricious, if adopted.466 Further, one commenter emphasized that “[b]y focusing on speculative harms; failing to engage seriously with the question whether new or different rules were needed to combat them; and failing to consider costs, the Proposed Rule falls short of providing a sound justification for the proposals being made.”467 The commenter stated that “[f]or these reasons, the Commission has not satisfied its obligations under sections 3(f) and 23(a)(2) of the Exchange Act.”468

Finally, some opposing commenters discussed other concerns regarding proposed Rule 13d-3(e). Some commenters expressed concern that the proposal would inhibit activist investment strategies.469 Other commenters expressed concern that the proposed rule, including its “change of control” standard, is overly broad, unclear, and would be difficult to administer.470 Many commenters indicated that the proposal’s computational methodology, including the need to conduct daily calculations, would be complex or increase the compliance burden of the rule.471 In addition, one commenter noted that the “concept of beneficial ownership is used . . . in many other federal and state laws and rules, as well as in contracts” and, therefore, “expanding the definition of ‘beneficial ownership’” as proposed in Rule 13d-3(e) could have “significant unintended consequences.”472 Further, another commenter indicated that the proposed rule’s expansion of the scope of the matters that may give rise to beneficial ownership “could result in potential and significant overreporting by [investment] advisers, leading to unfounded inferences from public filings that holders of cash-settled derivatives may have voting and investment power over securities that they do not, in fact, have, nor do they have the right to acquire.”473