SEC Addresses Hedge Fund Disclosure

The Securities and Exchange Commission did not grant the authority to undermine the anti-evasion rule in the CSX and The Children’s Investment Fund Management (TCI) litigation case. Ultimately, the SEC sided with the activist hedge fund investors and against the 13D disclosure requirement for holders of cash-settled total return swaps, according to a memo submitted by Theodore Mirvis and Paul Rowe of Wachtell, Lipton, Rosen & Katz.

The issue between CSX and TCI is whether TCI failed to disclose beneficial ownership of CSX shares from cash-settled, total return equity swaps.

TCI participated in swaps with eight counterparties, which allowed TCI to hold more than 14 percent of CSX’s shares. The SEC’s decision was in favor of TCI and rejected CSX’s claims that the shares were had by methods that would require reporting under Rule 13D.

The SEC concluded that the swap transaction was not undermining and did not intend to “plan or scheme to invade.” The SEC’s position on this particular case is unique in that the judge’s decision does not necessarily reflect the overall Commission’s views on the matter. Judges can decide what questions to ask.

Mirvis and Rowe call for regulatory reforms and a close examination of the rule-making process, taking into account that no two cases are exactly alike.