SEC Proposes Significant Changes to the Rules Governing Beneficial Ownership Reporting (Schedules 13D and 13G)
- Schedule 13D
- Initial Filing Deadline: Shorten the deadline from 10 days to 5 days after an investor acquires beneficial ownership exceeding 5% or an investor loses eligibility to file on Schedule 13G. (Rules 13d-1(a), (e), (f) and (g))
- Amendment Filing Deadline: Change the deadline from “promptly” to 1 business day after a material change to the facts set forth in Schedule 13D. (Rule 13d-2(a))
- Schedule 13G
- Initial Filing Deadline:
- Qualified Institutional Investors & Exempt Investors: Shorten the deadline from 45 days after calendar year-end to 5 business days after month-end in which beneficial ownership exceeds 5%. (Rules 13d-1(b) and (d))
- Passive Investors: Shorten the deadline from 10 days to 5 days after acquiring beneficial ownership exceeding 5%. (Rule 13d-1(c))
- Initial Filing Deadline:
- Amendment Filing Deadline:
- All Schedule 13G Filers: Shorten the deadline from 45 days after calendar year-end in which “any” change occurred to 5 business days after month-end in which a “material” change occurred. (Rule 13d-2(b))
- Qualified Institutional Investors: Shorten the deadline from 10 days after month-end in which beneficial ownership exceeded 10% or there was, as of month-end, a 5% increase or decrease in beneficial ownership to the date 5 days after beneficial ownership exceeds 10% or there was a 5% increase or decrease in beneficial ownership. (Rule 13d-2(c))
- Passive Investors: Change the deadline from “promptly” to 1 business day after beneficial ownership exceeds 10% or there was or a 5% increase or decrease in beneficial ownership. (Rule 13d-2(d))
The Commission acknowledged the administrative challenges the shortened deadlines would put on investors and proposed extending the filing “cut-off” time from 5:30 pm to 10:00 pm Eastern time to alleviate some of the burden. (Rules 13(a)(2) and (4) of Regulation S-T)
Limiting Amendment Triggering Events for Schedule 13G
Instead of an amendment obligation arising for Schedule 13G filers upon the occurrence of “any” change in the facts previously reported, the proposed amendments would revise Rule 13d-2(b) to require filers to amend only if a “material” change occurs. There would be no change, however, to the existing requirement under Rules 13d-2(c) and (d) that qualified institutional investors and passive investors amend Schedule 13G upon beneficial ownership exceeding 10% or a 5% increase or decrease in beneficial ownership.
Reporting of Certain Cash-Settled Derivative Securities
Rule 13d-3 provides standards for determining beneficial ownership, which primarily consider whether an investor has or shares investment or voting power over a covered security. In line with that standard, derivative securities that are exercisable or convertible within 60 days for a covered security (i.e., settled “in-kind”) have been deemed part of an investor’s beneficial ownership. At the same time, however, holding derivatives that entitle the holder to nothing more than economic exposure to a covered security (i.e., “cash-settled”) historically has not been considered sufficient to constitute beneficial ownership. Over the years, commenters have raised concerns about circumstances in which an investor in a cash-settled derivative may have de facto influence or control over an issuer by pressuring a counterparty to make certain decisions regarding the voting and disposition of substantial blocks of securities. Given the Commission’s belief that a holder of cash-settled derivatives could influence or change control of an issuer, it has proposed a new rule that would, in specified circumstances, deem the holder of a cash-settled derivative security to be the beneficial owner of the reference security.
- Beneficial ownership of cash-settled derivative securities: Proposed Rule 13d-3(e) would provide that a holder of a cash-settled derivative security, other than a security-based swap, would be deemed the beneficial owner of the reference equity security if the derivative is held with the purpose or effect of changing or influencing the control of the issuer of the reference securities, or in connection with or as a participant in any transaction having such purpose or effect.
Notably, the rule provides that a person would be deemed to beneficially own the number of securities calculated using the larger of two methods, and one of the methods requires daily recalculation based on the most recent closing price of the reference equity security. Also notable, only long positions in derivative securities would be counted. Short positions in derivative securities could not be netted against long positions or otherwise taken into account.
Clarifying Disclosure Regarding Derivative Securities
Additionally, the Commission proposes to amend Schedule 13D to clarify the disclosure requirements with respect to derivative securities. Item 6 to Schedule 13D would be amended to explicitly require disclosure of derivative securities, including derivative securities limited to using a covered security as a reference security, such as cash-settled derivatives.
Group Formation and Related Exemptions
In enacting the beneficial ownership reporting requirements, Congress recognized that multiple investors holding in the aggregate a large stake could collectively seek to change or influence control of an issuer, even if no individual member of the group were subject to the beneficial ownership reporting requirements for holders of more than 5% of the covered security. Congress attempted to address this by deeming two or more persons who act together for the purpose of acquiring, holding or disposing securities to be a “group” subject to reporting obligations, and imputing to the group the beneficial ownership of its members. The Commission proposed amendments that are intended to clarify certain situations involving group formation and related exemptions.
- “Agreement” not a requirement for group formation: Rule 13d-5 would be amended to track the text of Exchange Act Section 13(d)(3) and (g)(3), which specify that two or more persons who “act as” a group for purposes of acquiring, holding or disposing securities are treated as a group. The amendments would remove the current reference to an “agreement” between two or more persons and thereby eliminate the potential for Rule 13d-5 to be construed to require an express or implied agreement for a group to be formed. These amendments would clarify that the determination as to whether two or more persons are acting as a group does not depend solely on the presence of an agreement. Depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer would be sufficient to constitute the formation of a group.
- Tipper-Tippee relationship results in group formation: In line with the proposed amendment to remove the reference to an “agreement” between two or more persons, a new provision in Rule 13d-5 would provide that if a person discloses an upcoming Schedule 13D filing to any other person who subsequently acquires the issuer’s securities based on that information, then those persons will be deemed to have formed a group. Accordingly, a tipper-tippee relationship would create a group subject to beneficial ownership reporting.
The Commission recognizes these amendments may raise concerns among investors as to whether communications and other activities would constitute the formation of a group and have proposed two new exemptions to deal with certain of those concerns.
- Exemption for communications without intent to influence: New Rule 13d-6(c) would clarify that investors could communicate with one another or jointly with the issuer about concerted actions without being subject to regulation as a group, provided that such communications were without the purpose or effect of changing or influencing control of the issuer and that such persons are not directly or indirectly obligated to take such actions.
- Exemption for agreements governing derivatives: New Rule 13d-6(d) would provide the circumstances under which an investor and a financial institution could enter into an agreement governing the terms of a derivative security (without the purpose or effect of changing or influencing control of the issuer) without being subject to regulation as a group.
Structured Data Requirements
The proposed amendments would require that Schedule 13D and 13G use a structured, machine-readable data language that would apply to all information disclosed on the schedules.
Some of the proposed changes may be challenging for investors, particularly the 1 business day deadline for Schedule 13D amendments, daily calculations for cash-settled derivative securities and removal of the reference to “agreement” in the rule regarding group formation. The comment period for the proposed rule amendments will remain open until April 11, 2022, or 30 days following publication in the Federal Register, whichever period is longer.
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