SEC Issues No-Action Relief to Bank of America in Connection with Equity Derivatives Market-Making Activity | Practical Law

SEC Issues No-Action Relief to Bank of America in Connection with Equity Derivatives Market-Making Activity | Practical Law

The SEC's Division of Corporation Finance issued no-action relief under Exchange Act Rule 14e-5, which prohibits certain purchases in connection with tender offers, to Bank of America Securities, Inc. (BofA), a registered broker-dealer, permitting BofA and its affiliates to engage in certain hedging activities in connection with index-linked equity derivatives transactions that may otherwise qualify as "subject securities" or "related securities" under Rule 14e-5.

SEC Issues No-Action Relief to Bank of America in Connection with Equity Derivatives Market-Making Activity

by Practical Law Finance
Published on 30 Jan 2020USA (National/Federal)
The SEC's Division of Corporation Finance issued no-action relief under Exchange Act Rule 14e-5, which prohibits certain purchases in connection with tender offers, to Bank of America Securities, Inc. (BofA), a registered broker-dealer, permitting BofA and its affiliates to engage in certain hedging activities in connection with index-linked equity derivatives transactions that may otherwise qualify as "subject securities" or "related securities" under Rule 14e-5.
On January 27, 2020, the SEC's Division of Corporation Finance issued no-action relief under Rule 14e-5 of the Exchange Act, which prohibits certain purchases in connection with tender offers, to Bank of America Securities, Inc. (BofA), a registered broker-dealer, permitting BofA and its affiliates to engage in certain hedging activities in connection with index-linked equity derivatives transactions that may otherwise qualify as "subject securities" or "related securities" under Rule 14e-5.
Rule 14e-5 generally prohibits a "covered person" from purchasing any subject security (securities sought in a tender offer) or related securities unless the purchase is part of the tender offer. Rule 14e-5 includes certain exceptions, one of which allows for covered persons to engage in "basket transactions," permitting purchases of a basket of securities containing a subject security or related security where:
  • The purchase is in the ordinary course of business and not to facilitate the tender offer.
  • The basket contains 20 or more securities.
  • Covered and related securities do not "comprise" more than 5% of the value of the basket.
According to BofA in its request for relief, BofA and its affiliates qualify as covered persons under Rule 14e-5 because they act as dealer manager or advisor in connection with certain tender offers. BofA also notes in its letter that it engages in equity derivatives market-making activity, during which it may seek to hedge its positions by purchasing or arranging to purchase securities that are subject securities or related securities under Rule 14e-5. In addition, BofA and its affiliates sometimes avail themselves of the basket exception when hedging market-making positions.
In 2008, the SEC's Division of Trading and Markets issued no-action relief (2008 No-Action Letter) under Rule 14e-5 to Morgan Stanley, stating that it would not recommend enforcement in circumstances related to hedging activities with respect to a merger arbitrage index, under certain conditions, or if a market-maker hedged the index by purchasing the individual underlying equity security, in certain circumstances.
BofA noted that the 2008 No-Action Letter was applicable to indexes with as few as 17 components and where subject securities or related securities composed more than 5% of a given index. The 2008 No-Action Letter included a set of ten conditions.
BofA, in its letter requesting relief, requested that the SEC permit BofA and its affiliates to engage in hedging activities in connection with their index-linked equity derivatives transactions, subject to all of the conditions as set forth in the 2008 No-Action Letter, as well as the following criteria:
  • The relevant index would not be sponsored, administered, or otherwise controlled by BofA or its affiliates.
  • At the time the derivatives transaction is initiated or amended:
    • such index would be "comprised of" at least 17 different equity securities, issued by at least 17 different issuers; and
    • no subject or related securities would exceed 10% of the index.
The SEC's Division of Corporation Finance granted the relief as requested by BofA, stating that it would not recommend enforcement under Rule 14e-5, subject to the conditions as set forth by BofA in its letter requesting relief, which include the conditions of the 2008 No-Action Letter. The conditions, as noted by the SEC, include the following:
  • The hedging activities are effected in the ordinary course of business.
  • The underlying equity securities or related securities acquired as a result of hedging will not be tendered in any offer.
  • BofA or its affiliates will not directly or indirectly enter into derivatives transactions with an offeror in a tender offer.
  • No such derivative transaction will be entered into with the purpose of facilitating any tender offer by the counterparty.
  • The registration statement and other offer documents relating to any tender offer will disclose the possibility of, or the intention to make, purchases of the underlying equity securities or related securities outside the tender offer.
  • BofA or its affiliates will otherwise comply with Rule 14e-5.
For information on equity derivatives, see Practice Note, Equity Derivatives: Overview (US).