Release No. 34-14910

June 30, 1978

Filing and Disclosure Requirements Relating to Beneficial Ownership

ACTION: Final rules.

SUMMARY: The Commission is amending rules governing the disclosure of beneficial ownership and related requirements which took effect on May 30, 1978. These amendments relate to the application of such rules to a parent holding company and certain of its subsidiaries and to the beneficial ownership of pledged securities, including securities pledged to a broker-dealer in connection with margin account transactions. This action is taken as a result of certain interpretative questions concerning the rules and to clarify certain of the provisions of those rules.

EFFECTIVE DATE: Immediately, upon publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: John Granda, Office of Disclosure Policy and Proceedings, Division of Corporation Finance, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549, (202/755-1750).

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission today announced the amendment of rules adopted in Securities Exchange Act Release No. 5925 (April 21, 1978) (43 FR 18484). The actions announced in the release were effective May 30, 1978 and pertain to amendments to rules and Schedule 13D (17 CFR 240.13d-101), the adoption of new Schedule 13G (17 CFR 240.13d-102) and the rescission of Form of Form 13D-5(17 CFR 240.13d-102) relating to disclosure by certain beneficial owners of securities pursuant to Section 13(d) of the Securities Exchange Act of 1934 ("Exchange Act") (15 U.S.C. 78a et seq., as amended by Pub. L. No. 94-29 (June 4, 1975) and Pub. L. No. 95-213 (December 19, 1977)). In that release, the Commission also amended certain of its forms and schedules under the Securities Act of 1933 ("Securities Act") (15 U.S.C. 77a et seq.) and under the Exchange Act to require issuers to disclose in a more uniform manner the percentage of their securities beneficially owned by certain persons. ¹

The amendments announced by the Commission herein involve revisions to Rule 13d-1(b)(1)(ii)(G) and Rule 13d-3(d)(3) concerning the filing obligation on Schedules 13D and 13G, and the determination of beneficial ownership, respectively.

Table of Contents

I. Background.

A. Proposed Amendment to Rule 13d-(b)(1)(ii)(G): Parent Holding Companies.

Rule 13d-1(b), among other things, addresses the obligation of certain persons to file statements on Schedule 13G and specifies certain conditions which if met enable reporting persons to use the short form rather than the long statement, Schedule 13D. In general, those conditions include a requirement that a person filing on Schedule 13G in satisfaction of a reporting obligation under Section 13(d) be a specified type of institutional investor-such as a bank, insurance company, broker-dealer, investment company or employee benefit plan-or that the filing person have a specified relationship to such investors. Thus, the rule as adopted in Release No. 33-5925 states that the persons eligible to use the short form include a parent holding company, provided certain conditions are met, including a condition by which holdings of less than one percent by a subsidiary which was not entitled to use the short form would not void the availability of the short form for the parent. ²

As pointed out in Release No. 33-5925, the basis for the one percent provisions contained in the rule was that any requirement that all of the parents subsidiaries owning the subject securities be one of the designated institutions, as a condition to the parents use of Schedule 13G, would effectively make the short form unavailable to most persons choosing to erect a holding company structure. This result would exist, for example, if a bank holding company had a single non-qualifying subsidiary which was the beneficial owner of securities of the subject class, with such ownership being attributed to the parent holding company. Since the Commission determined that a de minimus provision was consistent with the public interest, the one percent test was included in the rule, so long as the information called for by Schedule 13D is furnished in the parents Schedule 13G with respect to the securities held by such subsidiary.

The amendments contained herein are intended to clarify and, in certain respects, relax the conditions of the provision. To confirm that holdings by the parent holding company itself are within the de minimus standard, the rule has been revised to indicate that the one percent provision applies to holdings of the parent holding company as well as to those of the non-qualifying subsidiaries. Also, to clarify the intention of the Commission in adopting the de minimus provision, it is stated that the one percent ceiling is the "aggregate" amount held directly by the parent and directly and indirectly by its non-qualifying subsidiaries.

The amendments also delete the requirement that Schedule 13D-type information be furnished in the parents Schedule 13G. The Commissions intention concerning the requirement had been to preserve the parents eligibility for the short form when minimal amounts of securities were held by non-qualifying subsidiaries, provided the subsidiaries disclosure concerning only its holdings was comparable to that of persons required to report on Schedule 13D. However, questions have arisen concerning the conceptual difficulty in segregating the non-qualifying subsidiary for purposes of preparing the Schedule 13D information, and it has been pointed out that the scope of General Instruction C and the items of Schedule 13D would elicit disclosure concerning such a broad category of persons, holdings and transactions as to effectively undermine the intent of the de minimus provision. In view of the remaining conditions to the availability of Schedule 13G, including the requirements that the acquisitions be in the ordinary course of business and not for the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect, the Commission believes it is appropriate to delete the requirement concerning the inclusion of Schedule 13D-type information.

B. Proposed Amendment to Rule 13d-3(d)(3): Pledges.

Rule 13d-3 defines the term "beneficial ownership" in terms of voting power or investment power and describes situations in which persons are deemed not to be the beneficial owner of securities. Rule 13d-3(d)(3) addresses the situation in which a person who is a pledgee of securities might, upon default, be deemed the beneficial owner of such securities. As explained in Release No. 33-5925, the pledge provision was adopted largely in response to comments of institutional investors, particularly banks, who urged that they do not receive pledged securities for the purpose of exercising investment or voting powers and that if the pledgee were deemed to be the beneficial owner of the pledged securities immediately upon default, serious practical compliance problems would be presented. In recognition of these problems, the Commission adopted Rule 13d-3(d)(3) stating, generally, that a pledgee, after default, would not be deemed the beneficial owner of the pledged securities, provided certain conditions were met. ³ The conditions relevant to the action taken in this release are the requirement that the pledge agreement not grant to the pledgee the power to dispose or to direct the disposition of the pledged securities prior to default, and the provision which limits the application of the pledge provision of the rule to those agreements in which the pledgee is an institutional investor, as specified in Rule 13d-1(b)(1)(ii).

It has been pointed out that in view of customary margin account contracts, the condition that the pledge agreement not convey investment power prior to default might suggest that the broker-dealer would be the beneficial owner of all securities placed in such accounts, even prior to default. In view of practical necessities in the operation of margin accounts, the Commission recognizes that this condition concerning investment power should not be applied to such arrangements and has made an appropriate revision to Rule 13d-3(d)(3). It should be recognized, however, that remaining conditions include requirements that the pledge be in the pledgees ordinary course of business and not for the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with any transaction having such purpose or effect. It is also to be emphasized that the provisions concerning the beneficial ownership status of the pledgee generally offer no relief to the pledgor; inasmuch as the pledgor normally would have voting power or investment power over the pledged securities, the beneficial ownership of pledged securities, in a margin account or otherwise, would be attributable to the pledgor and aggregated with all other securities of such class beneficially owned by the pledgor, to determine such persons filing obligation under Section 13(d).

The amendments contained here also include two other relatively minor revisions to Rule 13d-3(d)(3). First, the provision containing the requirement that the pledgee be a person specified in Rule 13d-1(b)(1)(ii) has been expanded to include persons meeting the conditions set forth in Rule 13d-1(b)(1)(ii)(G), the provision discussed above concerning parent holding companies. Thus, the pledge provisions of Rule 13d-3(d)(3) are applicable to parent holding companies and non-qualifying subsidiaries, but only in cases in which the aggregate amount of securities held by such persons does not exceed one percent.

Another amendment to Rule 13d-3(d)(3) deletes from the introductory phrase of that rule the term "as to which there has been a default." That phrase might have been read as limiting the scope of the pledge provision and it is deleted to provide clarity as to the beneficial ownership status of pledged securities prior to default.

II. Certain Findings.

As required by Section 23(a)(2) of the Exchange Act, the Commission has specifically considered the impact which the amendments herein would have on competition. The Commission has found that these amendments will not significantly burden competition and, in any event, has determined that any possible resulting competitive burden will be far outweighed by, and is necessary and appropriate to achieve, the benefits of this information to investors.

III. Effective Date of the Amendments.

The following amendments will be effective immediately upon publication in the FEDERAL REGISTER.

IV. Authority.

The Commission hereby amends Rules 13d-1(b)(1)(ii)(G) and 13d-3(d)(3) pursuant to the authority set forth in Sections 3(b), 13, 14, and 23 of the Exchange Act. The Commission finds that these amendments have already been generally subject to comment during the Public Fact-Finding Investigation in the Matter of Beneficial Ownership, Takeovers and Acquisitions by Foreign and Domestic Persons ⁴ or as a result of the proposals published in Exchange Act Release No. 34-13292 (43 FR 12355), or the issues raised in Exchange Act Release No. 34-13900 (42 FR 44964) and are either technical in nature or are less burdensome than previous requirements, such that further notice and rulemaking procedures pursuant to the Administrative Procedure Act (5 U.S.C. 553) are not necessary.

V. Text of Amended Rules.

Part of 240 of Chapter II of Title 17 of the Code of Federal Regulations is amended as follows:

1. §240.13d-1(b)(1)(ii)(G) is revised to read as follows:

§240.13d-1 Filing of Schedules 13D and 13G.

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(G) A parent holding company, provided the aggregate amount held directly by the parent, and directly and indirectly by its subsidiaries which are not persons specified in Rule 13d-1(b)(ii) (A) through (F), does not exceed one percent of the securities of the subject class;

* * * * *

2. §240.13d-3(d)(3) is revised to read as follows:

§240.13d-3 Determination of beneficial owner.

* * * * *

(d) * * *

(3) A person who in the ordinary course of business is a pledgee of securities under a written pledge agreement shall not be deemed to be the beneficial owner of such pledged securities until the pledgee has taken all formal steps necessary which are required to declare a default and determines that the power to vote or to direct the vote or to dispose or to direct the disposition of such pledged securities will be exercised, provided that:

(i) The pledgee agreement is bona fide and was not entered into with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b);

(ii) The pledgee is a person specified in Rule 13d-1(b)(ii), including persons meeting the conditions set forth in paragraph (G) thereof; and

(iii) The pledgee agreement, prior to default, does not grant to the pledgee:

(A) The power to vote or to direct the vote of the pledged securities; or

(B) The power to dispose or direct the disposition of the pledged securities, other than the grant of such power(s) pursuant to a pledge agreement under which credit is extended subject to Regulation T (12 CFR 220.1 to 220.8) and in which the pledgee is a broker or dealer registered under section 15 of the Act.

* * * * *

Secs. 3(b), 13(d)(1), 13(d)(2), 13(d)(5), 13(d)(6), 14(d)(1), 23; 48 Stat. 882, 894, 895, 901; sec. 203(a), 49 Stat. 704, sec. 8, 49 Stat. 1379; sec. 10, 78 Stat. 88a; secs. 2, 3, 82 Stat. 454, 455; secs. 1, 2, 3-5, 84 Stat. 1497; secs. 3, 18, 89 Stat. 97, 155; 15 U.S.C. 78c(b), 78m(d)(1), 89m(d)(2), 78m(d)(5), 78m(d)(6), 78n(d)(1), 78w.

By the Commission.

²As adopted in Release No. 33-5925, Rule 13d-1(b)(1)(ii)(G) provides:

(G) A parent holding company, provided that: (1) the Schedule 13G is being used to report the indirect acquisition of the beneficial ownership of securities acquired by a subsidiary; and (2) such subsidiary is a person specified in Rule 13d-1(b)(1)(ii) (§240.13d-1(b)(1)(ii)) except that the inclusion in the reported holdings of not more than one percent of a class beneficially owned by a subsidiary that is not so specified will not prevent the use of Schedule 13G, so long as the information called for by Schedule 13D is furnished in the parents Schedule 13G with respect to the securities of such subsidiary.

³As adopted in Release No. 33-5925, Rule 13d-3(d)(3) provides:

(3) A person who in the ordinary course of his business is a pledgee of securities under a written pledge agreement as to which there has been a default shall not be deemed to be the beneficial owner of such pledged securities until the pledgee has taken all formal steps necessary which are required to declare such default and determines that the power to vote or to direct the vote or to dispose or to direct the disposition of such pledged securities will be exercised: Provided, That:

(i) The pledge agreement is bona fide, does not grant the power to vote or to direct the vote or to dispose or to direct the disposition of such pledged securities to the pledgee prior to default, and was not entered into with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b); and

(ii) The pledgee is a person specified in Rule 13d-1(b)(1)(ii).

⁴Exchange Act Release Nos. 11003 (September 9, 1974) (39 FR 33855) and 11088 (November 5, 1974) (39 FR 41223).