SEC Interpretive Letter to Bank of America Clarifies Section 13 “Group” Status for Parties to OTC Derivative Contracts

On January 23, 2026, the staff (the “Staff”) of the Office of Mergers and Acquisitions in the U.S. Securities and Exchange Commission’s (the “SEC”) Division of Corporation Finance issued an interpretive letter to Bank of America, N.A. and its affiliates (collectively, “BofA”) clarifying that the entry by BofA and a sophisticated counterparty into over-the-counter (“OTC”) derivative contracts in the ordinary course of business, without more, is not a sufficient legal basis to deem the parties a reporting “group” (i.e., single person for purposes of calculating beneficial ownership) pursuant to Section 13(d)(1) or Section 13(g)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”).

The letter (the “BofA Letter”), was issued in response to a request submitted by BofA and O’Melveny & Myers LLP, and is available here.

The BofA Letter continues O’Melveny and BofA’s thought leadership and analytical innovation with respect to OTC derivative transactions, providing clarity to a long-standing interpretive question that resulted in significant uncertainty and disparate market practice with respect to whether entering into derivative contracts would cause financial institutions or their counterparties to exceed the beneficial ownership thresholds under Section 13(d) or Section 16 of the Exchange Act. Indeed, the BofA Letter is the sixth example of formal Staff interpretive guidance obtained by O’Melveny and BofA in the context of OTC derivatives since 2011 (including four prior interpretive letters and a compliance and disclosure interpretation issued in response to a formal interpretive letter request).

Prior to the BofA Letter, there existed substantial uncertainty as to whether parties to a derivative contract would be considered to be “acting as” a “group” for purposes of Section 13(d)(1) or Section 13(g)(1) of the Exchange Act as a result of entering into the contract. If the parties were deemed to be a reporting group, such group would beneficially own all of the shares of the class of securities underlying the derivative contract owned by each of the group members, thereby causing each of the parties: (i) if the group owned more than 5% of the outstanding class of securities, to become subject to reporting under Sections 13(d) or 13(g) of the Exchange Act, and (ii) if the group owned more than 10% of the outstanding class of securities, to be individually subject to Section 16 of the Exchange Act.

Over-the-Counter Derivative Contracts

The BofA Letter relates to over-the-counter derivative contracts referencing equity or other securities with corporate or institutional investor counterparties to facilitate a variety of business and economic objectives of the counterparty, including hedging price, market and other economic risks, achieving indirect or synthetic exposure to particular assets or facilitating proprietary or customer-facing trading activities, typically under the International Swaps and Derivatives Association documentation architecture.

Derivative contracts may result in the acquisition or disposition of the securities underlying the contract at various times and under various circumstances, depending on how the contract is structured. For example, acquisitions, dispositions or other transfers of the securities underlying the contract may occur at the time the parties enter into the contract; upon settlement, amendment or termination of the contract; or in relation to a financial institution’s contract-related hedging activities, which may include open market sales or purchases of the class of securities underlying the contract or the “crossing” or other transfer of such securities between the financial institution and the counterparty or other financial institutions. Upon entry into the derivative contract, the financial institution will customarily hedge its risk under the derivative transaction by offsetting its exposure to the securities underlying the contract. This hedging activity is generally at the discretion of the institution and for its own account, and the terms of the contract generally include an express agreement and acknowledgement by the counterparty that the financial institution may hedge its exposure in its sole discretion, and that the counterparty has no right to control the hedging activity of the financial institution. Similarly, the contracts generally do not provide for, and the financial institution otherwise generally does not permit, the counterparty to vote or direct the voting of any securities acquired or held by the institutions in respect of its hedge position for a contract.

“Group” Formation Under Exchange Act Section 13(d) or Section 13(g)

Pursuant to Section 13(d)(3) of the Exchange Act, when two or more persons “act as” a “partnership, limited partnership, syndicate, or other group” for the purpose of “acquiring, holding, or disposing” of securities of an issuer, such “syndicate or group” shall be a “person” for purposes of Section 13(d). The same language is set forth in Section 13(g)(3) of the Exchange Act, for purposes of Section 13(g). Accordingly, a “group” is considered a single person for purposes of calculating beneficial ownership, meaning the group must consider its aggregate beneficial ownership of applicable securities to determine whether relevant ownership have been met, including filing requirements under Sections 13(d) and 13(g) and the application of Section 16 to members of the group.

Because the question of whether persons “act as” a “group” depends on an analysis of all relevant facts and circumstances, prior to the BofA Letter, counterparties to OTC derivative transactions could not be certain that entry into such contracts would not itself be deemed an action that resulted in the parties becoming a group (for example, because the entry or settlement of the contract may result in the parties acquiring or disposing of securities to one another or as a result of hedging activity by the financial institution).

Interpretative Guidance in the BofA Letter

In the BofA Letter, the Staff indicated that it would not object to any determination by a financial institution that it does not “act as” a “group” with any counterparty to an OTC derivative and that, therefore, the institution together would not be required to aggregate ownership as a single “person,” solely as a consequence of entering into an OTC derivative contract.

In issuing its interpretative guidance, the Staff relied on the following representations by BofA (i.e., the financial institution):

• BofA’s entry into the derivative contract is undertaken in the ordinary course of its regular brokerage and banking business for strictly commercial purposes;
• The contracts are arm’s-length commercial transactions between financial institutions and sophisticated counterparties, and entered into to serve the parties’ distinctly different objectives and motivations;
• The contracts include an express agreement and acknowledgement by the counterparty that BofA may, in its sole discretion, hedge its exposure under the contract and that the counterparty has no right to control BofA’s hedging activity;
• The contracts do not provide for, and BofA otherwise does not permit, a counterparty to vote or dispose of, or direct the voting or disposition of, any securities acquired or held by BofA in respect of its hedge position for a contract;
• The acquisition and disposition of securities in connection with a contract may include: (i) the arm’s-length transfer of securities from one party to another at settlement, (ii) market transactions effected by BofA to establish prices for the contract, or (iii) the proprietary purchases and sales of securities by BofA at its sole discretion to hedge its exposure under the contract;
• BofA acts alone in making any risk management decisions for decidedly narrow commercial purposes based upon its own independent objectives and circumstances, and the parties do not act in concert or otherwise act in furtherance of a common purpose or goal; and
• Under no circumstances would BofA enter into a contract for the purpose of changing or influencing control of an issuer of a reference security.

All of these representations are generally applicable to ordinary course OTC derivative transactions, allowing financial institutions to rely on the BofA Letter under most circumstances.

Practical Impact of the BofA Letter and Further Considerations

The BofA Letter greatly facilitates OTC derivative transactions between financial institutions and counterparties, especially when the parties may beneficially own, in the aggregate, more than 10% of a class of equity securities registered under the Exchange Act. Because the underlying facts and representations supporting the Staff’s position in the BofA Letter are likely to be applicable to the vast majority of OTC derivatives entered into in the ordinary course of business, transactions that previously presented unacceptable risk to the parties may no longer exceed tolerable risk thresholds, expanding the availability of important OTC derivative transaction structures. Potential parties to OTC derivative contracts should, however, continue to carefully consider all relevant facts and circumstances that may impact the question of whether the parties may be deemed to “act as” a reporting “group.” Although the BofA Letter provides market participants with significant comfort that the parties to an equity derivative transaction should not be considered a group, the question remains fact-sensitive and requires thoughtful analysis. Financial institutions and their counterparties should continue to consider the overall relationship between the financial institution and the counterparty, motivations and objectives of the counterparty vis-à-vis the issuer of the underlying securities, form and structure of the derivative contract and any related agreements or understandings, as well as any purchases or sales of the same class of securities by any of the parties that are unrelated to the derivative contract. Finally, as noted by the Staff in its response to BofA, the Staff is not expressing any views regarding an institutional investor counterparty’s compliance with the federal securities laws, including any beneficial ownership reporting obligations that might arise under Section 13(d) or 13(g) and Regulation 13D-G.

If you have any questions regarding the BofA Letter, any other letters or issues discussed in this alert, or how to structure transactions consistent with relevant precedent, please contact the authors of this alert or your O’Melveny advisor. In addition, the authors of this alert wish to thank Glen A. Rae, Eric P. Hambleton, Michele Bianco and Miller Brownstein of BofA, who assisted with the submission of the interpretive request to the SEC and were instrumental in assessing relevant legal issues and current market practice.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Robert Plesnarski, an O’Melveny partner licensed to practice law in Pennsylvania and the District of Columbia; James M. Harrigan, an O’Melveny partner licensed to practice law in Maryland and the District of Columbia; and Aliza Cohen, an O’Melveny resource attorney licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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