The latest chapter in our Practical Guide to the Regulation of Hedge Fund Trading Activities has been released. Chapter 3: Special Issues Under Sections 13(d) and 16 summarizes the filing requirements and liability provisions that continue to challenge hedge funds, due to the sometimes opaque law and complex trading patterns. We discuss both sets of requirements, because in our experience that is how real world issues tend to materialize and are resolved.
The scope of both Section 13(d) and Section 16 may cover a person whose holdings and those of its affiliates do not by themselves exceed the 5% or 10% thresholds. That can occur if the investor is part of a Section 13(d) "group" that acquires beneficial ownership of all of its members' equity in the aggregate (or, in some cases, that is deemed to be a "director-by-deputization" through a representative serving on the issuer's board of directors).
In this Chapter, we address the following questions, among others:
- How can an investor structure around an investment to avoid acquisition of a level of "beneficial ownership" that subjects the investor to Section 13(d) and/or Section 16?
- If subject to Section 13(d) or Section 16, how can an investor structure an investment to limit the scope of the transactions that it must report (and thereby also limit its exposure to liability)?
- How to avoid exceeding 5% or 10% beneficial ownership as a "group" (where one investor's beneficial ownership can be aggregated with that of others)?
- When does an investor become a beneficial owner of securities through derivatives, what types of derivatives are reportable, and can derivatives help an investor increase its economic exposure to an issuer without corresponding disclosure? (Just this past August, the Second Circuit clarified the application of Section 16 to derivatives).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.