First, as a preliminary matter, public interest in this rule proposal has recently increased and it could be both helpful and beneficial to facilitate increased public review on this lengthy rule proposal with another comment period extension. Retail investors are not always as familiar or well-versed with the nuances of these rule proposals as commenters from the financial industry who have both the means and the interest in guiding rule proposals for their interests, sometimes at the expense of other market participants (including retail investors). Retail investors, such as myself, would appreciate another extension to the comment period.
Second, I support proposed amendments to revise filing deadlines as technological improvements have increased the speed information is disseminated where shorter deadlines improve disclosures, reduce delays, and narrow information asymmetries that may harm investors. The public and all market participants deserve adequate and timely disclosures of material information, including accumulation of and significant equity ownership. Third, I am AGAINST the proposed amendments to Rule 13d-3 regulating the use of cash-settled derivative securities; especially the proposal to add new paragraph (e) to Rule 13d-3. As noted in the background, "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". This rule proposal exists because, under certain circumstances, "holders of such derivative securities may have both the incentive and ability to influence or control the issuer of the reference securities" so "the proposed amendment would “deem” holders of such derivative securities to beneficially own the reference securities just as if they held such securities directly". But is it wise for the SEC to adopt a rule proposal that would allow the tail to wag the dog? As noted by Dr. Susanne Trimbath (https://twitter.com/susannetrimbath/status/1672708011167739904), this proposed rule appears to give derivatives holders voting rights. As the SEC understands Rule 13d-3 determines who are beneficial owners with the right to vote (see, e.g., https://www.sec.gov/corpfin/divisionscorpfinguidancereg13d-interphtm), this proposed rule for amending Rule 13d-3 has farther reaching implications that are not publicly disclosed in the rule proposal; which is sufficient basis on its own to reject the proposed amendments to Rule 13d-3. Furthermore, as cash settled derivatives often result in cash payment settlements rather than physical delivery of the underlying securities, there is no guarantee that any rights to acquire the underlying will be exercised, for example through the exercise of an option. Thus, the proposed rule amendment to deem certain derivatives holders as beneficial holders risks increasing the number of potential voting shares diluting shareholder rights and overly complicating an already chaotic voting process burdened with over-voting and empty voting. A right to acquire a security should not confer the same benefits as having acquired the security. The solution is simple: derivatives holders should not be beneficial owners unless the derivatives directly conveys voting rights and/or the power to dispose of the underlying security. If a market participant desires ownership rights, they can own the security. Fourth, I am AGAINST the proposed amendment to Rule 13d-3(e) for determining the number of equity securities that a holder of a cash-settled derivative security will be deemed to beneficially own. As noted, "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" which explicitly excludes short positions. As noted by White & Case (https://www.whitecase.com/insight-alert/sec-reopens-comment-period-proposed-rule-amendments-modernize-beneficial-ownership), this proposed rule would have the SEC require a daily calculation to deem a holder of a cash-settled derivative security to beneficially own securities by considering only long positions without netting against short positions that would otherwise offset the long positions. As explicitly stated in the proposal, "[s]hort 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" for determining the number of equity securities that a holder of a cash-settled derivative security will be deemed to beneficially own. This proposed rule amendment significantly disadvantages retail investors, including myself, as more sophisticated market participants can enter into fully hedged long and short cash-settled derivatives position, effectively net zero, enabling them to be deemed as beneficial owners for a significant number of equity securities for the long position while explicitly required to not net the long position against the short position. In combination with voting rights conferred to beneficial owners, this enables more sophisticated market participants to synthetically create unlimited voting rights at the cost of some minor cash-secured derivatives transaction fees. The solution is simple: derivatives holders should not be beneficial owners unless the derivatives directly conveys voting rights and/or the power to dispose of the underlying security. If a market participant desires ownership rights, including the ability to vote, they can simply own the security. Fifth, I am AGAINST the proposed amendment to Rule 13d-3 for deeming holders of certain cash-settled derivative securities to be the beneficial owners. I am sympathetic to the issues raised in the proposed rule where the use of cash-settled derivatives may significantly influence control and/or beneficial ownership. As a notable example from 2008 Volkswagen short squeeze, Porsche held almost a third of VW's shares in cash-settled options in addition to a 40%+ stake. Reporting of significant derivatives positions should be separate from conferring beneficial ownership rights. I would fully support rule proposals to require reporting and making publicly available significant derivatives positions, both long and short, by market participants. As noted, "[a]t a minimum, greater transparency could influence counterparties' risk management decisions", adequate and timely disclosures of derivatives positions would improve disclosure and narrow information asymmetries allowing market participants to properly price in the potential risks of a short squeeze that may otherwise harm investors. I am also sympathetic to how "[a]n 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". However, the proposed amendments to deem holders of cash-settled derivatives as beneficial holders to trigger "resulting disclosures [that] could alert issuers and the market to the possibility of rapid accumulations of, and high concentrations in, a covered class" requires unnecessary steps resulting in unintended consequences and side effects of conferring beneficial ownership rights to derivatives holders. Simply reporting and making information publicly available satisfies the disclosure requirements without unnecessarily conferring rights of beneficial ownership to derivatives holders. Simply reporting and making information publicly available is of the utmost importance when, "[i]n 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." Conferring rights of beneficial ownership to derivatives holders over-complicates the situation when the apparent goal is simply "greater transparency [to] influence counterparties' risk management decisions". Lastly, while this comment letter may not directly address all elements of the proposed rule, this does not mean I am either for or against the other elements. See, for example, the first point above where additional time could be helpful to facilitate increased public review as a result of recently heightened public interest in this proposal. If another comment period extension is unavailable, I believe that it is in the public's interest to reject this rule proposal instead of adopting it because the downsides and risks to the market and investors in amending Rule 13(d)-3 as proposed significantly outweigh any benefits from revising filing deadlines. Thank you for your attention and consideration of retail investor comments. Regards,