Jun. 26, 2023
Hello. I appreciate the opportunity to provide feedback on S7-06-22 titled "Enhancing Reporting of Beneficial Ownership" as a retail investor. Please note that the following comments are sourced from the proposed rule unless stated otherwise. To begin, it would be beneficial to allow for an extended comment period to facilitate increased public review of this extensive rule proposal. Retail investors, like myself, may not always be familiar with the intricacies of such proposals compared to financial industry commenters who have the means and interest to shape rules in their favor, sometimes at the expense of other market participants, including retail investors. Granting an extension would be greatly appreciated. Next, I support the proposed amendments to revise filing deadlines, considering the advancements in technology that have accelerated the dissemination of information. Shorter deadlines can enhance disclosures, reduce delays, and address information imbalances that can harm investors. It is crucial for the public and all market participants to receive timely and adequate disclosures of material information, including significant equity ownership and accumulation. However, I oppose the proposed amendments to Rule 13d-3 concerning the regulation of cash-settled derivative securities, particularly the addition of new paragraph (e) to Rule 13d-3. As mentioned in the background, historically, holding derivatives that only offer economic exposure to a covered class has not been considered sufficient to establish beneficial ownership. This rule proposal arises from the concern that under certain circumstances, holders of such derivative securities may have the incentive and ability to influence or control the issuer of the reference securities. However, it is questionable whether the SEC should adopt a rule proposal that allows the tail to wag the dog. As noted by Dr. Susanne Trimbath, this proposed rule seems to grant voting rights to derivatives holders. Given that Rule 13d-3 determines who qualifies as beneficial owners with the right to vote, the implications of amending Rule 13d-3 extend beyond what is publicly disclosed in the proposal. This alone provides a sufficient basis to reject the proposed amendments. Additionally, cash-settled derivatives often result in cash payments instead of physical delivery of the underlying securities. There is no guarantee that any rights to acquire the underlying securities will be exercised. Therefore, deeming certain derivatives holders as beneficial owners through the proposed rule amendment risks increasing the number of potential voting shares, diluting shareholder rights, and further complicating an already chaotic voting process prone to over-voting and empty voting. The benefits of owning a security should not be conferred by merely having the right to acquire it indirectly through derivatives. The solution is straightforward: derivatives holders should not be deemed beneficial owners unless the derivatives directly convey voting rights and/or the power to dispose of the underlying security. If a market participant desires ownership rights, they should directly own the security. Moreover, I oppose the proposed amendment to Rule 13d-3(e) that determines the number of equity securities a holder of a cash-settled derivative security will be deemed to beneficially own. The proposal suggests that only long positions in derivative securities should be counted, explicitly excluding short positions. This rule would require a daily calculation to deem a holder of a cash-settled derivative security as a beneficial owner, considering only long positions without offsetting them against short positions. This significantly disadvantages retail investors, as more sophisticated market participants can engage in fully hedged long and short cash-settled derivative positions, effectively maintaining a net zero position. This enables them to be deemed beneficial owners of a substantial number of equity securities for the long position, while explicitly being prohibited from netting the long position against the short position. In combination with conferred voting rights, this allows sophisticated market participants to synthetically create unlimited voting rights at the cost of minimal cash-secured derivatives transaction fees. The solution remains simple: derivatives holders should not be considered beneficial owners unless the derivatives directly convey voting rights and/or the power to dispose of the underlying security. Market participants seeking ownership rights, including voting rights, should directly own the security. Furthermore, I am against the proposed amendment to Rule 13d-3, which deems holders of certain cash-settled derivative securities as beneficial owners. While I understand the concerns raised in the proposed rule regarding the potential influence of cash-settled derivatives on control and beneficial ownership, reporting significant derivatives positions should be separate from conferring beneficial ownership rights. I fully support rule proposals that require reporting and public disclosure of significant derivatives positions, both long and short, by market participants. Such transparency can influence counterparties' risk management decisions and enable market participants to adequately assess the potential risks of a short squeeze, protecting investors. I also acknowledge the impact that unwinding agreements governing cash-settled derivatives can have on the stock price of an issuer, as if the holder of the derivative held the stock directly. However, the proposed amendments to confer beneficial ownership rights to derivatives holders and trigger resulting disclosures may create unintended consequences and side effects. Simply reporting and making information publicly available would fulfill the disclosure requirements without unnecessarily granting beneficial ownership rights to derivatives holders. Lastly, this comment letter may not address all aspects of the proposed rule directly, but it does not imply that I support or oppose other elements. For instance, as mentioned earlier, an extension of the comment period would allow for increased public review, given the recent surge in public interest. If an extension is not possible, it is in the best interest of the public to reject this rule proposal rather than adopt it, as the risks and downsides of amending Rule 13(d)-3 as proposed outweigh any benefits derived from revising filing deadlines. Thank you for considering the comments of retail investors and paying attention to their perspectives. Kind regards A Household investor