On June 3, the International Swaps and Derivatives Association, Inc. (ISDA) filed jointly with the Securities Industry and Financial Markets Association (SIFMA) an amicus brief supporting The Children’s Investment Fund (TCIF) in the case of CSX Corporation v. TCI. One of the legal questions presented during the case was the standard for determining when a person is a "beneficial owner" of a security within the meaning of Section 13 of the Securities Exchange Act of 1934.
On June 11, Judge Kaplan of the U.S. District Court (SDNY) ruled that the defendants, hedge funds, by entering into cash-settled equity total return swaps referenced to CSX, are deemed beneficial owners of the referenced CSX stock held by its short counterparty. He ruled that under the specific circumstances presented, the defendants created an arrangement that, as part of a plan or scheme to avoid disclosure, prevents the vesting of beneficial ownership.
Notably, however, Judge Kaplan’s narrow, fact specific holding did not reach the broad conclusion that the holder of a swap beneficially owns the referenced stock held by its short counterparty. ISDA continues to support the position, as noted in its Amicus Brief to the Court, that a short party in a swap contract that hedges its swap exposure by acquiring the referenced shares does not confer beneficial ownership of the referenced shares to the long party.
"ISDA supports disclosure of share ownership (above relevant thresholds) and any arrangements to acquire shares or voting rights. It also supports an active approach to ensuring compliance with this. We maintain that there is a meaningful difference between cash-settled derivatives and such ownership, as noted in our Amicus Brief to the court," said Katherine Darras, General Counsel, Americas, ISDA.
