On July 9, 2026, the SEC's Division of Corporation Finance issued six new Corporation Finance Interpretations, including CFIs 105.08, 105.09, 105.10, 110.09, 110.10, and Proxy Rules CFI 155.02. The three CFIs addressing total return swaps, taken together, resolve a legal question that has generated significant uncertainty and litigation risk in the shareholder activism context for more than a decade.
The core holding, from CFI 105.08: a standard cash-settled total return equity swap that settles exclusively in cash, only refers to a class of equity securities for purposes of identifying a reference security, and does not confer any voting or investment power or any right to acquire such securities, does not cause the purchaser of the TRS to become a beneficial owner of the reference securities or of any equity securities the counterparty may hold for hedging purposes, solely as a result of entering into the TRS.
CFI 105.09 then addresses when a TRS does create beneficial ownership, and CFI 105.10 addresses the mental state required for a "plan or scheme to evade" reporting. Together they draw a clear analytical framework that corporate legal, investor relations, and activist defence teams need to understand.
This post explains the mechanics of a cash-settled TRS, what beneficial ownership means under Section 13(d), why the CSX litigation created years of confusion, precisely what each CFI says, what changes for activists building positions, what changes for corporate defence programs, and what limits remain on TRS use.
What Is a Cash-Settled Total Return Swap and Why Did Beneficial Ownership Matter?
A total return equity swap is a bilateral contract in which the party receiving the total return (the long party or TRS purchaser) agrees to receive from the counterparty (the short party) cash payments equal to the appreciation in the value of a specified number of shares of a reference company, plus any dividends paid on those shares. In exchange, the long party pays the short party a floating rate on a notional principal amount, effectively the cost of financing an equivalent equity position.
Under a cash-settled TRS, no shares change hands. Settlement is purely in cash based on the mark-to-market movement of the reference security's price. The long party never acquires, votes, or holds any shares in the reference company. The counterparty typically hedges its exposure by purchasing the reference shares in the market, but those shares belong to the counterparty as its own trading inventory. The long party has no legal or contractual right to those shares.
The beneficial ownership question mattered enormously for three reasons.
First, Section 13(d) requires any person or group that acquires beneficial ownership of more than 5% of a class of registered equity securities to file a Schedule 13D within five calendar days. The 5% threshold is a public disclosure trigger that alerts the target company, other shareholders, and the market to a potential accumulation. If a TRS purchaser is a beneficial owner of the reference shares held by the counterparty for hedging, that counterparty-held position counts toward the 5% threshold and may require disclosure that an activist has not yet made.
Second, activist investors have historically used cash-settled TRS to accumulate economic exposure to a target company's stock, often building a significant economic interest before publicly disclosing their position through a Schedule 13D. The ability to do so without triggering beneficial ownership has been the source of the legal controversy.
Third, for corporate defence teams, the question of whether TRS positions constitute beneficial ownership determines whether the target company's tracking of Schedule 13D and 13G filings reflects the activist's true economic interest in the company.
What Did the SEC Confirm in CFI 105.08 and CFI 105.09 on July 9, 2026?
The six CFIs issued July 9 were organised into three distinct sets addressing different aspects of the activism-related disclosure question. For TRS specifically, the framework is:
CFI 105.08 addresses the baseline case: a standard cash-settled TRS that settles exclusively in cash, only refers to a class of equity securities for identifying the reference security, and does not confer any voting or investment power or any right to acquire the reference securities. The question asks whether the TRS purchaser becomes a beneficial owner of the reference securities, including any shares the counterparty holds for hedging. The SEC's answer is no. Entering into such a TRS does not, standing alone, cause the purchaser to become a beneficial owner under Section 13(d) and Rule 13d-3.
CFI 105.09 addresses when a TRS does create beneficial ownership. The SEC confirms that beneficial ownership arises when the TRS contains additional features that go beyond the standard cash-settled structure, specifically when the TRS or an associated agreement confers voting or investment power over the reference securities, or when it gives the purchaser the right to acquire the reference securities. This is a conditional analysis: the TRS must be examined for any additional provisions that bring it within the beneficial ownership definition, not simply assumed to be outside it because it is labelled cash-settled.
CFI 105.10 addresses the "plan or scheme to evade" standard under Rule 13d-3(b). Rule 13d-3(b) provides that any person who uses a contract, arrangement, or device as part of a plan or scheme to evade the reporting requirements of Section 13(d) shall be deemed to be the beneficial owner of the underlying securities. The SEC clarifies in CFI 105.10 that the mental state required for a "plan or scheme to evade" is the intent to circumvent reporting requirements that would otherwise apply. Entering into a TRS for legitimate economic hedging or speculative purposes, with no intent to circumvent reporting, does not constitute a plan or scheme to evade even if the TRS results in avoiding beneficial ownership of shares one might otherwise have to report.
The three CFIs together say: a standard cash-settled TRS does not create beneficial ownership (105.08), but a TRS with voting or acquisition rights does (105.09), and using a TRS specifically to circumvent reporting obligations that would otherwise apply constitutes an evasion scheme (105.10).
What Is "Beneficial Ownership" Under Section 13(d) and Rule 13d-3?
Section 13(d) of the Securities Exchange Act of 1934 requires any person who directly or indirectly acquires beneficial ownership of more than 5% of a class of registered equity securities to file a Schedule 13D with the SEC within five calendar days of the acquisition. Section 13(g) provides a shorter-form alternative for passive investors with no intent to influence control.
Rule 13d-3(a) defines beneficial ownership to include 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 direct the voting of a security, or (2) investment power, which includes the power to dispose of or direct the disposition of a security.
Rule 13d-3(a) also treats a person as a beneficial owner if that person has the right to acquire beneficial ownership within 60 days, whether through the exercise of any option, warrant, or right, through the conversion of a security, or pursuant to any power to revoke a trust, discretionary account, or similar arrangement.
Rule 13d-3(b) separately provides that any person who uses any contract, arrangement, or device as part of a plan or scheme to evade the reporting requirements of Section 13(d) or (g) shall be deemed a beneficial owner.
The critical feature of a standard cash-settled TRS is that it satisfies none of these conditions in the normal case. The TRS purchaser has no voting power over the reference shares because those shares are owned by the counterparty and the counterparty votes them as it chooses. The TRS purchaser has no investment power because they have no right to buy or sell the reference shares. The TRS purchaser has no right to acquire the reference shares because the contract settles exclusively in cash with no delivery of securities. And absent specific intent to evade reporting, Rule 13d-3(b) does not apply.
How Did the CSX Corp Case Create a Decade of Uncertainty on TRS Beneficial Ownership?
CSX Corporation v. The Children's Investment Fund Management (UK) LLP, decided by the District Court for the Southern District of New York in 2008 and reviewed by the Second Circuit in 2011, is the central litigation that created uncertainty about whether cash-settled TRS could constitute beneficial ownership.
The district court's 2008 decision held that TCI (Children's Investment Fund) had used cash-settled TRS to build a concealed economic interest in CSX stock, and that this use constituted a plan or scheme to evade Section 13(d) reporting under Rule 13d-3(b). The district court imposed certain disclosure-related remedies.
On appeal, the Second Circuit issued a divided opinion that, critically, did not resolve the beneficial ownership question. The court addressed the group formation issues and the share sterilisation remedy but declined to decide whether the long party to a cash-settled TRS beneficially owns the shares the counterparty holds as a hedge. The concurring opinion by Judge Winter argued at length that absent an agreement giving the long party control over voting or disposition of the hedging shares, no beneficial ownership exists, but that view did not command a majority.
The result was a void at the circuit court level. The district court's ruling imposing liability under Rule 13d-3(b) stood on the evasion theory, but the underlying question of whether a standard cash-settled TRS creates beneficial ownership under Rule 13d-3(a) was unresolved. Practitioners operating in the subsequent 15 years faced uncertainty about whether aggressive use of TRS could attract Rule 13d-3(b) liability even absent specific evasion intent, and whether the counterparty's hedging shares had to be attributed to the TRS purchaser for threshold calculation purposes.
The SEC staff had declined to issue definitive guidance on the question through the intervening period, leaving market participants to navigate based on the limited judicial record and their own legal analysis. CFIs 105.08, 105.09, and 105.10 are the first definitive SEC staff guidance on these questions since the CSX litigation.
What Specific Conditions Must a TRS Satisfy to Fall Outside Section 13(d)?
CFI 105.08 describes the standard cash-settled TRS that falls outside Section 13(d) using four specific conditions. All four must be satisfied.
The TRS must settle exclusively in cash. Any TRS that provides for physical delivery of shares as an alternative settlement mechanism, or that gives the long party the option to elect physical delivery, does not satisfy this condition. The settlement must be purely in cash without any equity settlement option.
The TRS must only refer to a class of equity securities as described in Rule 13d-1(i)(1) for purposes of identifying a reference security. This means the TRS references the share price of the relevant class of equity as the benchmark for cash payment calculation, without any other equity-related rights attaching.
The TRS must not confer any voting power with respect to the reference securities. An agreement that gives the TRS purchaser any right to direct how the counterparty votes the hedging shares, even informally, introduces voting power that would bring the TRS within Rule 13d-3(a)'s definition of beneficial ownership.
The TRS must not confer any investment power with respect to the reference securities, or any right to acquire such securities. An agreement that gives the TRS purchaser any right to purchase the hedging shares from the counterparty, or any ability to direct the counterparty's decision to buy or sell the hedging shares, introduces investment power or acquisition rights that would bring the TRS within the beneficial ownership definition.
CFI 105.09's implication is that any departure from these four conditions is examined to determine whether the resulting rights amount to beneficial ownership. The most common departure points in practice: side agreements or informal understandings that give the TRS purchaser soft influence over how the counterparty votes, options to purchase the hedging shares from the counterparty at a favourable price, or contractual representations that effectively guarantee the counterparty will maintain the hedge in a specified form throughout the TRS term.
What Changes for Activist Investors Building Positions Through Total Return Swaps?
For activist investors, CFIs 105.08 through 105.10 provide long-awaited clarity but also draw clear lines around permissible TRS use.
The clarity: a standard cash-settled TRS, meeting all four conditions described above, does not create beneficial ownership of the reference shares or the counterparty's hedging shares. An activist building economic exposure to a target company through a basket of such TRS positions does not need to include those positions in calculating whether the 5% Schedule 13D threshold has been crossed, provided the TRS positions satisfy the four conditions.
The limit: if the activist crosses 5% beneficial ownership in the reference securities through direct purchases (separately from the TRS), the Schedule 13D filing must describe the full economic interest in the company, including the TRS positions, even if the TRS positions are not themselves beneficial ownership. Item 6 of Schedule 13D requires disclosure of all contracts, arrangements, understandings, or relationships with any person with respect to any securities of the issuer, and a TRS position that gives the filer economic exposure to the issuer's stock falls within that disclosure requirement.
The evasion risk: CFI 105.10 confirms that using TRS specifically with the intent to circumvent reporting obligations that would otherwise apply constitutes a plan or scheme to evade under Rule 13d-3(b). An activist who uses TRS to avoid crossing the 5% beneficial ownership threshold while simultaneously using the economic exposure to influence the target's management, board, or shareholder base in ways that would typically be associated with a reportable accumulation faces evasion risk under this standard. The CFI clarifies the mental state requirement, but the intentional evasion path remains a prohibited route.
The practical result for activist strategies: pure economic exposure building through standard cash-settled TRS, with no intention to influence or evade reporting, is confirmed as outside Section 13(d). Hybrid strategies that combine TRS with informal coordination agreements, voting arrangements, or physical delivery options remain legally risky.
What Does This Mean for Corporate Defence Teams Monitoring Activist Accumulation?
For investor relations and corporate legal teams running activist defence programs, the July 9 CFIs update the analytical framework without resolving all monitoring challenges.
The clarification: a target company cannot assume that the Schedule 13D and 13G filings visible on EDGAR represent the complete economic interest of a potential activist. Standard cash-settled TRS positions are confirmed to fall outside Schedule 13D disclosure requirements, and those positions will not appear in any SEC filing until the activist crosses 5% beneficial ownership through direct share purchases or exercises rights that create beneficial ownership.
The monitoring implication: activist monitoring programmes that track only disclosed Schedule 13D and 13G positions miss the economic exposure activists build through TRS before reaching the disclosure threshold. Option-implied interest, 13F holdings data showing counterparty hedging position changes, borrow data, and prime broker chatter remain the primary monitoring tools for pre-13D TRS accumulation. The CFIs confirm that this monitoring gap is a feature of current law, not a compliance failure.
The activist fund structure disclosure: CFIs 110.09 and 110.10, issued alongside the TRS CFIs, address a separate but related activist disclosure question. CFI 110.09 provides that when an entity is formed for the purpose of raising funds to acquire securities of a specific issuer and engage in an activism campaign, the identities of investors providing more than $500 in acquisition financing must be disclosed under Item 3 of Schedule 13D. CFI 110.10 addresses the Instruction C persons disclosure in the same context. These CFIs increase the transparency requirements for activist vehicles and give corporate defence teams more information about the funding sources behind activist campaigns once the Schedule 13D threshold is crossed.
The update for defence programs: revise activist monitoring playbooks to reflect the confirmed legality of pre-disclosure TRS accumulation. Brief the board on the fact that an activist's true economic exposure at the time of Schedule 13D filing may be significantly larger than the number disclosed in the filing, because TRS positions built before filing are economic exposure but not beneficial ownership.
What Must Your Schedule 13D/13G Monitoring Program Update After This CFI?
Four specific updates are worth implementing in activist monitoring and shareholder engagement programs.
First, update the monitoring framework to reflect the TRS confirmation. Prior activist monitoring protocols may have assumed that aggressive TRS accumulation was a grey area that the target company could challenge. The CFI removes that challenge basis for standard cash-settled TRS. The monitoring framework should reflect that TRS positions are legal pre-disclosure accumulation tools, not violations, and plan accordingly.
Second, confirm that the shareholder rights plan (poison pill) and advance notice bylaw frameworks account for TRS-based accumulation. Some shareholder rights plans define the triggering ownership threshold to include economic interests through derivatives, including TRS positions. Others define ownership more narrowly using beneficial ownership under Rule 13d-3. If the target's rights plan uses the SEC's beneficial ownership definition, it may not capture TRS-based accumulation below 5% direct ownership. Legal counsel should review the rights plan definition in light of the CFI.
Third, brief the board on the distinction between beneficial ownership and economic interest. The CFI confirms a legal distinction that boards need to understand when considering defensive responses: an activist may have significant economic exposure to the company through TRS positions without any disclosure obligation until 5% beneficial ownership in direct shares is crossed. A board that waits for Schedule 13D disclosure before beginning a response may be responding to a position that has been building for months.
Fourth, update the activist scenario planning frameworks used by IR and legal teams to include TRS accumulation as a standard pre-disclosure tactic, with estimated timeline from first TRS accumulation to Schedule 13D crossing based on historical activist patterns.
What Are the Limits: When Does a TRS Still Trigger 13(d) Obligations?
The CFIs confirm standard cash-settled TRS are not beneficial ownership but leave several categories of TRS-adjacent structures within Section 13(d)'s scope.
A TRS with physical delivery option. Any TRS that gives the long party the right to elect physical delivery of the reference shares, even if cash settlement is the default, gives the long party a right to acquire the reference securities. That acquisition right brings the TRS within Rule 13d-3(a)'s 60-day acquisition provisions and creates beneficial ownership.
A TRS with voting arrangement. Any side agreement, informal understanding, or contractual provision under which the counterparty agrees to vote the hedging shares as directed by the long party confers voting power and creates beneficial ownership of those hedging shares.
A TRS as part of an evasion scheme. If the activist uses TRS specifically with the intent to accumulate economic exposure while circumventing the Section 13(d) reporting obligation that would apply if the position were held in direct shares, the CFI 105.10 evasion standard applies. The SEC's confirmation of the mental state requirement provides some clarity, but the line between strategic accumulation (permissible) and intentional evasion (prohibited) is a facts-and-circumstances determination.
A TRS combined with other rights. Some structured TRS arrangements include embedded options, side letter rights, or reference basket modifications that effectively give the long party rights beyond pure economic exposure. Each such feature must be independently assessed against Rule 13d-3(a)'s voting and investment power tests.
The July 9 CFIs draw the safe harbour clearly for standard structures. Departures from that standard require analysis.
Frequently Asked Questions
Does a cash-settled total return swap create beneficial ownership under Section 13(d)?
No, if it meets four conditions: settles exclusively in cash, only references a class of equity securities for identifying the reference security, does not confer voting power over the reference securities, and does not confer investment power over or any right to acquire the reference securities. This was confirmed by the SEC's Division of Corporation Finance in CFI 105.08, issued July 9, 2026.
What is SEC CFI 105.09?
CFI 105.09, issued July 9, 2026, addresses when a TRS does create beneficial ownership. It confirms that a TRS creates beneficial ownership when it contains provisions beyond the standard cash-settled structure, specifically when the TRS or an associated agreement confers voting or investment power over the reference securities, or gives the purchaser the right to acquire the reference securities.
What is the CSX case and how did it affect TRS disclosure?
CSX Corporation v. The Children's Investment Fund Management (UK) LLP involved an activist investor that built economic exposure to CSX stock through cash-settled TRS before publicly disclosing its position. The district court found the TRS use constituted a plan or scheme to evade Section 13(d) under Rule 13d-3(b). The Second Circuit declined in 2011 to resolve the underlying beneficial ownership question, leaving the legal status of TRS-based accumulation uncertain for 15 years until the July 9, 2026 CFIs.
Does a TRS that gives the holder the right to acquire shares still trigger 13(d)?
Yes. CFI 105.09 confirms that any TRS that gives the purchaser the right to acquire the reference securities, or that confers voting or investment power over those securities, creates beneficial ownership. The safe harbour in CFI 105.08 requires that the TRS not confer any right to acquire, in addition to the cash settlement, no voting power, and no investment power requirements.
What does the July 9, 2026 SEC guidance change for activist defence programs?
It confirms that standard cash-settled TRS accumulation before the 5% Schedule 13D threshold is a legally permitted pre-disclosure strategy. Corporate defence programs cannot rely on Schedule 13D and 13G filings as a complete picture of an activist's economic exposure. The CFIs also increase disclosure obligations for activist investment vehicles under CFIs 110.09 and 110.10, requiring disclosure of investors providing more than $500 in acquisition financing when the vehicle was formed for a specific activism campaign.
Key Takeaways
- On July 9, 2026, the SEC's Division of Corporation Finance issued six CFIs addressing beneficial ownership reporting, TRS, activist fund structures, and proxy rules. Three of the CFIs (105.08, 105.09, and 105.10) directly address cash-settled total return swaps.
- CFI 105.08 confirms that a standard cash-settled TRS that settles exclusively in cash, only refers to a class of equity securities for identifying the reference, and does not confer any voting or investment power or right to acquire the reference securities, does not create beneficial ownership of those securities or of any shares the counterparty holds for hedging.
- CFI 105.09 confirms that a TRS does create beneficial ownership when it includes provisions giving the purchaser voting or investment power over the reference securities, or any right to acquire them.
- CFI 105.10 clarifies that the "plan or scheme to evade" standard under Rule 13d-3(b) requires intent to circumvent reporting obligations that would otherwise apply. Standard TRS accumulation for economic exposure, without evasion intent, does not violate Rule 13d-3(b) even if it results in avoiding reporting that would apply if the position were held directly.
- For activists, the CFIs confirm the legality of pre-disclosure TRS accumulation through standard structures and draw clear lines around the features that would bring a TRS within beneficial ownership.
- For corporate defence programs, the CFIs confirm that Schedule 13D and 13G filings do not capture TRS-based economic accumulation and should not be treated as a complete picture of activist exposure. Activist monitoring must include non-disclosed position tracking.
- CFIs 110.09 and 110.10 separately require that entities formed to conduct specific activism campaigns disclose the identities of investors providing more than $500 in acquisition financing under Item 3 of Schedule 13D.
- Rights plans and advance notice bylaws should be reviewed to confirm whether their ownership definitions capture TRS-based economic exposure or are limited to beneficial ownership as defined by Rule 13d-3.
