In a Congressional meeting early this week, Mary Schapiro, chairwoman of the SEC, stated that the agency is considering extending the regulatory rules of the Securities Exchange Act to holders in equity swaps. Under the 13D disclosure rules, investors are required to disclose stakes of 5% or more in a company. According to an article from the New York Times DealBook, hedge funds have recently been utilizing off-exchange swap agreements to avoid reporting regulations. Investors sign swap agreements with Investment banks who buy an prearranged amount of shares in a company on behalf of the investor without fully transferring ownership. Although investors claim that they own the “economics” of the stock, they do not actually hold the shares.
Shareholder activists, such as Carl C. Icahn and Nelson Peltz, as well as commercial bank Toronto-Dominion, have all used swap contracts to secretly acquire large stakes in companies. Although many of these investors claim that they have no control over the companies’ shares, the truth of the matter is that their stake in the company gives them enormous influence over shareholders and board decisions. In January 2008, JANA partners and Sandell Asset Management acquired close to one fifth of CNET Networks without anyone knowing by negotiating a swap agreement.
Although the SEC has yet to reach a conclusion regarding equity swaps, the chairwoman’s statements indicate that the SEC is intent on putting an end to the practice.
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