The Managed Funds Association (MFA) has filed an amicus brief with the US Court of Appeals for the Second Circuit, on 18 July 2008, seeking clarity on rules relating to total return swaps. MFA represents the alternative investment industry including hedge funds, funds of funds and managed futures funds.
MFAs brief responds to the 11 June 2008 opinion by United States District Judge Lewis A. Kaplan on the CSX Corporation case against The Childrens Investment Fund Management (UK) LLP, et al. The opinion contains a number of broad statements, principally in dicta, about the applicability of rules to transactions involving total return swaps that are contrary to widespread current industry and SEC understanding of the law.
“MFAs members routinely enter into total return swap agreements and have significant interest in understanding and complying with the legal rules governing the use of these investment vehicles,” says Richard H. Baker, MFA president and CEO. “We are seeking reaffirmation of the clear principles of law the industry has followed for many years.”
The clear principles of which MFA urges reaffirmation include:
That a total return swap, standing alone, does not make the long party a “beneficial owner” of the references shares;
That investing through a total return swap, rather than through a purchase of shares, so as not to trigger a Section 13(d) reporting obligation does not, without more, constitute a “plan or scheme to evade” a reporting requirement; and
That in order to form a “group,” investors must reach an agreement to coordinate investing activity, not merely engage in information-sharing or similar activity common to among investors.
MFA takes no position on the outcome of the appeal. MFA asks only that the Court of Appeals reaffirm the principles identified above and reject any contrary implications suggested by the district courts opinion.
A pdf copy of MFA’s brief is available on the organization’s website.