Question

Descibe in a couple paragraphs what it means to be "Beneficial Owner" is, in terms of SEC Rule 13d-3 and 16a-1.

Why is it important to identify "Beneficial Owners," what is the meaning of it in terms of investing in companies that have "Beneficial Owners?"

Answer 1

WHO IS A BENEFICIAL OWNER UNDER 13d-3 -

a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

(1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or,

(2) Investment power which includes the power to dispose, or to direct the disposition of, such security.

(b) Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose of effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of section 13(d) or (g) of the Act shall be deemed for purposes of such sections to be the beneficial owner of such security.

(c) All securities of the same class beneficially owned by a person, regardless of the form which such beneficial ownership takes, shall be aggregated in calculating the number of shares beneficially owned by such person.

(d) Notwithstanding the provisions of paragraphs (a) and (c) of this rule:

(1)

(i) A person shall be deemed to be the beneficial owner of a security, subject to the provisions of paragraph (b) of this rule, if that person has the right to acquire beneficial ownership of such security, as defined in Rule 13d-3(a) (§ 240.13d-3(a)) within sixty days, including but not limited to any right to acquire: (A) Through the exercise of any option, warrant or right; (B) through the conversion of a security; (C) pursuant to the power to revoke a trust, discretionary account, or similar arrangement; or (D) pursuant to the automatic termination of a trust, discretionary account or similar arrangement; provided, however, any person who acquires a security or power specified in paragraphs (d)(1)(i)(A), (B) or (C), of this section, with the purpose or effect of changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having such purpose or effect, immediately upon such acquisition shall be deemed to be the beneficial owner of the securities which may be acquired through the exercise or conversion of such security or power. Any securities not outstanding which are subject to such options, warrants, rights or conversion privileges shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but shall not be deemed to be outstanding for the purpose of computing the percentage of the class by any other person.

(ii) Paragraph (d)(1)(i) of this section remains applicable for the purpose of determining the obligation to file with respect to the underlying security even though the option, warrant, right or convertible security is of a class of equity security, as defined in § 240.13d-1(i), and may therefore give rise to a separate obligation to file.

(2) A member of a national securities exchange shall not be deemed to be a beneficial owner of securities held directly or indirectly by it on behalf of another person solely because such member is the record holder of such securities and, pursuant to the rules of such exchange, may direct the vote of such securities, without instruction, on other than contested matters or matters that may affect substantially the rights or privileges of the holders of the securities to be voted, but is otherwise precluded by the rules of such exchange from voting without instruction.

(3) A person who in the ordinary course of his 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.

(4) A person engaged in business as an underwriter of securities who acquires securities through his participation in good faith in a firm commitment underwriting registered under the Securities Act of 1933 shall not be deemed to be the beneficial owner of such securities until the expiration of forty days after the date of such acquisition.

UNDER READOPTION OF 13d3 AND16a1 :

The SEC has readopted portions of Rules 13d-3 and 16a-1 to ensure that its current beneficial ownership definition, which applies for purposes of disclosure and short-swing profit rules, will continue in effect with respect to persons who purchase or sell security-based swaps (“SBS”) on and after July 16, 2011.

SBS include products such as credit default swaps on a single security or loan or a total return swap on one or a narrow-based index of securities, other than government securities. Currently, under Rules 13d-3 and 16a-1, contracts that will become SBS on July 16 may involve beneficial ownership for purposes of Sections 13 and 16 of the Exchange Act as follows:

• Under Rule 13d-3(a), a person who “has or shares voting power and/or investment power over securities” based on the purchase or sale of an SBS is a beneficial owner of the underlying security.
• Rule 16a-1(a)(2) includes holders of derivative securities in the definition of a “beneficial owner” for Section 16 purposes, including its short-swing profit provisions for insiders.
• Under Rule 13d-3(b), a person who uses an SBS as part of a plan or scheme to evade beneficial ownership reporting requirements is a beneficial owner of the underlying security.
• Under Rule 13d-3(d)(1) a person who, through SBS, has the right to acquire beneficial ownership of a security within 60 days, or at any time if the right is held for the purpose of changing or influencing control, is a beneficial owner of the underlying security.
• Rule 16a-1(a)(1) incorporates the beneficial ownership tests in Rules 13d-3(a), 13d-3(b), and 13d-3(d)(1) and makes them applicable in the Section 16 beneficial ownership context.

The SEC’s reproposal was prompted by Dodd-Frank’s addition of Section 13(o) to the Exchange Act, which states that beneficial ownership of an equity security may exist on the basis of the purchase or sale of an SBS, but only if the SEC issues a rule, after consulting with prudential regulators and the Secretary of the Treasury, that the purchase or sale provides incidents of ownership similar to direct ownership of the equity, and that including the purchase or sale of the SBS in the acquisition of beneficial ownership of the equity security is necessary to achieve the purposes of Section 13. This section becomes effective on July 16, 2011

WHY TO IDENTIFY :

• To ensure compliance with the law. Anti-corruption, sanctions, and anti-money laundering requirements dictate that you need to collect and analyze this information
• Wealthy individuals at risk of lawsuits often use trusts to act as the legal property owner. ASSET PROTECTION .
• Beneficial ownership is different from legal ownership.But there are some cases where the beneficial owner wishes anonymity.
• Securities and Exchange Commission (SEC) recognizes this and has regulated the practice.
• Panama Papers

• in 2016, the International Consortium of Investigative Journalists made public what it called the "Panama Papers." - culled from the archives of the law firm Mossack Fonseca & Co., show in detail the beneficial ownership of several thousands of offshore corporations.

• Many criminals will deliberately use the opacity of corporate vehicles to hide their identity, the true purpose of the account and the source or use of funds or property associated with the corporate vehicle.

• tax evasion ,corporate crime, such as money-laundering or bribery and corruption. state-sponsored terrorism activities.

• The Beneficial Ownership Data Standard (BODS) has been developed to serve as a conceptual and practical framework for collecting and publishing beneficial ownership data

• The Financial Action Task Force on Money Laundering (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing, that was established in 1989, sets international standards related to beneficial ownership, including how beneficial ownership is defined

WHY IDENTIFYING BO IS IMPORTANT WHEN INVESTING IN COMPANIES WITH BENEFICIAL OWNERS:

According to FATF  A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company or its management. Beneficial owners play key roles in managing and directing fund allocation subservient primarily to their interests. They can also exercise Veto powers. Investsments in such companies with BO , should require complete transparency and accuracy of BO records.