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The original was posted on /r/Superstonk by /u/WhatCanIMakeToday on 2023-06-27 03:30:12+00:00.
Dr. Susanne Trimbath tweeted on June 24 about how she believes SEC Rule Proposal S7-06-22 Modernization of Beneficial Ownership Reporting could give derivative holders voting rights.
Dave Lauer tweeted on June 26 and commented in SuperStonk about how he believes this same proposal "does not confer voting rights to holders of cash-settled derivatives".
I raised an alarm that we need eyes on this proposal. I'm going to blow your mind and walk you through how Dr. Trimbath and Dave Lauer can both technically be correct*, the best kind of correct.* What that means for this proposal. And yes, we still need eyes and comments to the SEC on this proposal.
Before we get into the details, it's worth emphasizing that this community (including me, Dr. Trimbath, Dave Lauer, and countless other [REDACTED] apes) are trying to understand the implications of these very complicated rule change proposals. Whereas the financial industry has $$$$$ to spend on an army of lawyers, campaign contributions, PACs, and countless other resources; we've got each other -- unpaid largely anonymous volunteers spending our precious time fighting entrenched corruption in our financial system by sharing knowledge.
Very few things in life are black and white
This SEC Proposal S7-06-22 Modernization of Beneficial Ownership Reporting [Federal Register, PDF] is a prime example of that.
On this SEC rule proposal, I started out on Team Trimbath as my DD found significant potential issues which could lead to certain derivatives holders having legitimized voting power. Not everyone is on board with this interpretation, including Dave Lauer. That's OK. Rule proposals can get incredibly complicated and changing one thing in a Rube Goldberg machine like our financial system can result in unintended consequences and unanticipated side effects.
Keep in mind that rule proposals to the SEC often need to satisfy the many interests. At the SEC, those interests have typically been from the financial industry who are against transparency and timely reporting.
👍 Dave Lauer and I agree that the proposed changes on reporting are good.
But just because we agree there's one good thing doesn't necessarily mean the whole rule proposal is good. Remember: in order to be adopted, rule proposals often need to satisfy many interests. I get something. You get something. They get something. What they get is probably not great for you and me.
Cash-Settled Derivatives: To Vote Or Not To Vote
I agree with Dave Lauer that "the simple answer is that the proposal does not and would not confer any voting rights to anybody". But wait... didn't I say I was on Team Trimbath on this? Let me explain...
This SEC Proposal says nothing about conferring voting rights to derivatives holders. Full stop. It doesn't. I read it. Instead of saying it confers voting rights, this proposal adds a new paragraph (3) to Rule 13d-3 (keep this rule number in mind, it's important) to "deem holders of certain cash-settled derivative securities as beneficial owners" 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".
We also are proposing to add new paragraph (e) to Rule 13d-3 to deem holders of certain cash-settled derivative securities as beneficial owners of the reference covered class. Holders of derivative securities settled exclusively in cash do not have enforceable rights or any other entitlements with respect to the reference security under the terms of the agreement governing the derivative. Under certain circumstances described more fully below, however, holders of such derivative securities may have both the incentive and ability to influence or control the issuer of the reference securities. Accordingly, the proposed amendment would “deem” holders of such derivative securities to beneficially own the reference securities just as if they held such securities directly.
[Modernization of Beneficial Ownership Reporting: Introduction]
Nothing in the proposal about giving holders of cash settled derivatives voting rights.
BUT Rule 13d-3 specifies who is a beneficial owner. And, the SEC has a FAQ on 13D-G Beneficial Ownership Reporting with Q&As on how Rule 13d-3 specifies who gets to vote. For example,
https://www.sec.gov/corpfin/divisionscorpfinguidancereg13d-interphtm
I agree with Dave Lauer that this rule just "deems" certain owners of derivatives as beneficial owners.
My read of this is that owners of derivatives are not actually beneficial owners - they're simply "deemed" beneficial owners for the purposes of this rule. That means they are subject to the same disclosure requirements as beneficial owners, which is a good thing. This is certainly getting confusing, but that's the best explanation I have at the moment. [dlauer SuperStonk Comment]
The primary stated goal of deeming derivatives owners as beneficial owners is to trigger beneficial owner disclosure requirements; this is in the SEC rule proposal.
https://www.federalregister.gov/d/2022-03222/p-258
https://www.federalregister.gov/d/2022-03222/p-283
Disclosure is good. We like disclosure and transparency; when it's done well.
To trigger the beneficial owner disclosure rules, this proposed rule amendment modifies Rule 13d-3 to deem holders of certain cash-settled derivative securities as beneficial owners to beneficially own the reference securities just as if they held such securities directly. Gain a big enough beneficial ownership stake, either by buying shares or using cash-settled derivatives which "deem" someone as owning shares, and the beneficial ownership disclosure rules come into force.
Rule 13d-3 - Not Just For Disclosures
The SEC has this convenient Rule 13d3 for determining who beneficial owners of a security are. So everyone uses it. Here are examples from Ford, Mercury, Chevron, Coherent (on proxyvote.com), and 🛏️🛁.
https://s201.q4cdn.com/693218008/files/doc_flipbook/2019-Proxy/PDF/ford-proxy2019_0101.pdf
https://ir.mrcy.com/node/12831/html
https://www.chevron.com/-/media/chevron/investors/documents/chevron-corporation-by-laws.pdf
https://www.chevron.com/-/media/chevron/investors/documents/chevron-corporation-by-laws.pdf
https://materials.proxyvote.com/Approved/192479/20210518/OTHER_469979/?page=361 (page B-3)
🛏️🛁 https://beICKdbaICKthanICKdbeyoICKnd.gcs-web.com/static-files/d11ad44c-6871-472d-bbfe-ce7fa7e601ef (remove ICKs, automod 🙄)
With everyone using Rule 13d-3 to determine beneficial ownership, changing Rule 13d-3 has side effects and externalities on who is determined to be a beneficial owner.
And the thing is, the definition of beneficial ownership [[WestLaw](https://content.next.westlaw.com/practical-law/document/I0f9fea55ef0811e28578f7ccc38dcbee/beneficial-...
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