Aug. 22, 2023
Vanessa Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street, N.E, Washington, D.C. 20549 File No. S7-6-22; (Modernization of Beneficial Ownership Reporting) Dear Ms. Countryman: Thank you for extending the opportunity to comment on S7-06-22 entitled "Modernization of Beneficial Ownership Reporting" as a retail investor. Please note that all quotes within are taken from the proposed rule unless otherwise noted. First, 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. Second, 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 under no circumstance should the derivative holder be considered the beneficial holder or be granted voting rights of the investors shares. 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. Third, 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. Forth, 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. I believe that it is in the public's interest to reject this rule proposal as written 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. Best Regards, United States Household Investor ------- Original Message ------- On Tuesday, August 22nd, 2023 at 12:01 AM, concernedcitizen401 <[REDACTED]> wrote: I support this proposal as it allows greater transparency within the markets when considered in line with other reporting requirements. I continue to support this proposal despite concerns raised by other comments in regard to how it might have the potential to cause liquidity and other operational issues for large companies such as hedgefunds and other entities represented by MFAs. I strongly support this proposal and praise the effort in preventing evasion of the reporting rule. I strongly support transparency and the PUBLIC disclosure of this data. I am concerned that excessively large swaps are a threat to financial and national stability. Please look into Archegos Capital Management and other potential hidden “lurking bombs” that need to be revealed as soon as possible. I hope to see more rules like this in future. I request that the threshold be lowered to $0. While the rule prohibits things like spreading a large swap position out to evade the threshold, this will likely be done by bad actors and the SEC may or may not be in a position to detect it. By providing the public with swap data, and lowering the threshold, more of this fraud may be detected. It is important that the rule be hardened against evasion (e.g. by multiple actors colluding to build a large position through separately acquiring smaller positions that evade reporting requirements). We do not want to see the rule watered down in practice. I also support applying this rule internationally, funds and firms cannot be allowed to use borders to evade the rules of the market. Regarding the ownership of such positions being by either parent companies or child entities should not create any exemptions regarding any laws on reporting asset, swap or debt positions on a daily basis. Any company and it's subsidiary(ies) should each be forced by law to report any and all positions without any exemptions regarding the legal entity of the subsidiary or residency as long as they operate on United States soil in regulated or unregulated markets/exchanges. Both traditional assets should be reported along with digital assets positions without exemptions. Any position that holds a monetary value, positive or negative, should be reported separately to indicate both the long and the short position so to not bypass any loopholes or technicalities with hiding high risk assets through zero balanced positions through subsidiaries, shell or shelf companies as global financial system participants are doing these days through so called \"offshore safe haven\" countries with questionable reporting and fraud/securities laws. Any change in position size, positive or negative, should be reported automatically during market hours. Nearly everything is automated through computer systems, high speed trading and networks, having EDGAR filings be done at the end of business days should have been a legal requirement year ago. Any complaints about the amount of hours lost processing these transactions should be considered as false. The calculations in costs regarding spent hours should be firstly considered as a ploy to calculate a human doing the work while the entire system is automated and only a fraction of the cost to implement basic new features should be considered. As most financial participants employ their own IT departments, these costs to implement reporting requirements should be considered as \"cost of doing business\" as they make hundreds of millions and billions of profit per year and are more happily paying millions of fines regarding financial malpractice as defined by FINRA rules then spend a fraction on abiding the law set forward in this rule by implementing some new computer code. The commission should take a zero stance against non-reporting of financial assets, both positive or negative, traditional or digital. All positions should be reported separately per legal entity/owner without exceptions. With all the new rules proposed to make the financial system more transparent and fairer for ALL market participants, this reporting rule should be set without a threshold and prior to the market close the day that a position was opened, modified or closed. The fines for violating these rules should also be increased to be at least ten-fold the value of the not reported position, per violation and be on public record so that any participants will be able to do business in the United States with trustworthy intermediaries or partners to rebuild trust in the financial system. The commission should also take this opportunity to help and/or guide other country financial system regulators to help them create more transparent and fairer markets as the problem is not restricted to the United States of America. I suggest looking at the entire swap portfolio to determine reporting requirements, not just parts: “The Commission should follow the precedent in Rule 13h-1, which identifies “large traders” using the trader’s entire position in all National Market System securities. The overall picture of a trader’s appetite for excessive risk can only be formed by looking at their total swap position. Allowing large traders to take on excessive risk via swaps in many different individual securities while avoiding reporting requirements is against the spirit of the rule and goes against the Commission’s prior rulemaking. The Security-Based Swap Position includes all security-based swaps based on the same underlying security or reference entity, regardless of whether they are debt (including CDS) or equity-based, so that funds and firms cannot evade reporting requirements by using different types of complex financial instruments. I agree with the definition of security-based swaps and it must be appropriately wide to minimize evasion. I agree with daily reporting and praise the Commission’s public release of the data. Daily reporting should required during market hours to avoid improper behaviors prior to end of day settling of client records. It empowers citizens to protect themselves from excessive risk and the companies they own from hostile actors. “The Commission should absolutely utilize its authority under Section 10B(d) of the Exchange Act to publicly release data. Fraud is widespread, and the resources of the SEC are limited. By allowing the public to see potentially dangerous swap activity, they will be better able to assess the investments they make and observe the dynamics of the market. A more level playing field is absolutely in the public interest, and the damage that can be done via swap activity (e.g., Archegos) necessitates that investors be equipped to defend themselves and the markets they use. The SEC should finalize this rule ASAP. Best Regards, United States Household Investor