SEC Proposes Rules for Shorter Deadlines and More Transparency in Share Ownership Reporting

By: James D. Evans, Ran Ben-Tzur, Per Chilstrom, David A. Bell, David K. Michaels, Robert A. Freedman, Ron C. Llewellyn

On February 10, 2022, the U.S. Securities and Exchange Commission issued a proposal (Proposed rules: Modernization of Beneficial Ownership Reporting) that would amend Regulation 13D-G under the Securities Exchange Act of 1934 (Exchange Act).

The proposed amendments would, primarily, shorten the time periods within which Schedules 13D and 13G, including amendments, are required to be filed and would also address, among other things, filing requirements for certain derivative securities and circumstances under which investors may, or may not, constitute a “group” for the purposes of the filing requirements.

In particular, the proposed rules would create an express exemption for investors to take certain concerted actions, including engagement with one another and the issuer, without being regarded as a “group,” provided the investors are not acting with the purpose or effect of changing or influencing the control of the issuer. Further, the proposed amendments would require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

If adopted, the amendments would provide all market participants enhanced transparency, and would, as importantly, provide public companies with greater visibility regarding significant shareholders and their activities. In particular, they would be able to identify potential activists and their share acquisitions sooner than under the current reporting requirements of Regulation 13D-G.

Such visibility may lead to opportunities for companies to engage sooner with key shareholders to address concerns before they escalate into formal demands. Further, activist investors often slowly accumulate holdings prior to crossing the filing trigger threshold for Schedules 13D and then use the pre-filing period to rapidly accumulate additional securities to maximize their holdings prior to the filing deadline. The proposed amendments would limit these additional stealth accumulations to the extent impacted by volume and pricing considerations over the shorter period.

Background

Rule 13d-1 currently requires the filing of a Schedule 13D by a person or group that acquires beneficial ownership of more than 5% of a class of equity securities registered under section 12 of the Exchange Act (referred to as a covered class). This filing is due within 10 days of the date that the person or a group acquires an amount of securities that exceeds the 5% threshold.

Certain specified institutional investors (referred to in the proposing release as Qualified Institutional Investors, or QIIs) that would otherwise be required to file a Schedule 13D may file a shorter form—Schedule 13G—within 45 days of the end of the year in which they exceed 5% ownership, provided they acquired the securities in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer.

In addition, any other investor who would otherwise be required to file a Schedule 13D may file a Schedule 13G if it has acquired less than 20% of the covered class and has not acquired the securities with the purpose or with the effect of changing or influencing the control of the issuer (such other investors being referred to in the proposing release as Passive Investors). The Schedule 13G is required to be filed by these Passive Investors within 10 days of their acquiring more than 5% of the covered class.

Certain persons may own more than 5% of a covered class but not have previously been required to file a Schedule 13D or 13G. For example, investors who owned securities of the company prior to the class of securities being registered under the Exchange Act would not have made an acquisition requiring the filing of Schedule 13D or 13G. These investors (referred to in the proposing release as Exempt Investors) are required to file a Schedule 13G within 45 days of the end of the calendar year for which they are first required to file.

Filers of Schedules 13D and 13G are required to file amendments to their respective schedules to report changes in their holdings or status, within specified deadlines, as further discussed below. In certain cases of changed circumstances, Schedule 13G filers must file in place of that schedule a Schedule 13D, again within certain specified deadlines. For the purposes of Regulation 13D-G, investors acting in concert may constitute a group and thus be required to aggregate their holdings for the purpose of determining if a Schedule 13D or 13G is required.

Proposed Changes to Filing Deadlines

The proposing release contains a chart that succinctly sets forth the proposed and current filing dates. This chart is included in Appendix A.

The most notable change that would be implemented by the proposed amendments is to shorten the period within which Schedules 13D and 13G, and amendments thereto, are required to be filed. The proposed rules would shorten the deadline for filing an initial Schedule 13D from 10 to five days following the acquisition of more than 5% of the covered class. Other deadline changes included in the proposed rules are:

  • A QII or Passive Investor that has filed a Schedule 13G and thereafter develops an intent to acquire or hold the securities for the purpose or effect of changing or influencing the control of the issuer would be required to file a Schedule 13D within five days of developing such intent. The current rule requires filing the Schedule 13D within 10 days.
  • If any “material change” occurs in an investor’s holdings or status from that reported in its Schedule 13D, such investor would be required to file an amended Form 13D within one business day. The current rule requires such amendment to be filed “promptly.”
  • A QII or Exempt Investor would be required to file the initial Schedule 13G within five business days after the last day of the month in which beneficial ownership first exceeds 5%. As noted above, the current rule requires QIIs and Exempt Investors to file Schedules 13G within 45 days of the end of the year in which their ownership exceeds 5%.
  • A Passive Investor would be required to file an initial Schedule 13G within five days of acquiring beneficial ownership of more than 5% of a covered class. As noted above, the current rule requires Passive Investors to file their Schedules 13G within 10 days of exceeding the threshold.
  • A QII or Exempt Investor would be required to file an amendment to its Schedule 13G within five business days after the end of the month in which a reportable change occurs. The current rule requires such filing within 45 days of the end of the year in which any such change occurs. In addition, the proposed rules would require an amendment only for a “material change” from the information presented in the previous filing, while the current rule requires the reporting of “any changes.”
  • A QII would be required to amend its Schedule 13G within five days of exceeding 10% beneficial ownership or an increase or decrease of more than 5% of the covered class. The current rules require such filing within 10 days of the end of the month in which such 10% ownership threshold is exceeded.
  • A Passive Investor would be required to amend its Schedule 13G within one business day of exceeding 10% beneficial ownership or an increase or decrease of more than 5% of the covered class. The current rules require such filing “promptly” after exceeding such 10% ownership.
  • The SEC is also proposing to amend Rule 13(a) of Regulation S-T to permit Schedules 13D and 13G, and any amendments thereto, that are submitted by direct transmission on or before 10 p.m. EST on a given business day to be deemed to have been filed on the same business day. Under the current rules, a filing must be submitted by 5:30 p.m. EST to be deemed filed on that day.

Other Amendments

Rule 13d-3 defines beneficial ownership for the purposes of applying the various provisions of Regulation 13D-G. Rule 13d-3 does not currently directly address the beneficial ownership implications of cash-settled derivative securities. The proposed rules would add a new subsection to Rule 13d-3 which would treat an investor in a cash-settled derivative security as the beneficial owner of the derivative’s reference securities, as if the investor held the reference securities directly, to the extent the investor acquires or holds the derivative with a view towards changing or influencing control of the issuer of the reference securities.

Among other things, this would prevent investors from using derivatives to “park” shares of a reference security with a counter-party and then later acquire them. The proposing release notes that, by contrast, security based swaps, as defined in the Exchange Act and the rules and regulations thereunder, would not be included among the derivative securities covered by the proposed amendment to Rule 13d-3. The proposed rules would also revise Schedule 13D itself to remove any implication that a person is not required to disclose interests in all derivative securities that use a covered class as a reference security.

Rule 13d-5 addresses when persons acting in concert may be regarded as a “group” whose activities must be aggregated for the purposes of Regulation 13D-G. The proposed rules would amend Rule 13d-5 to remove the potential implication that an express or implied agreement among group members is a necessary precondition to the formation of a group under the Exchange Act and, by extension, Regulation 13D-G. The proposed rules would also add a new provision in Rule 13d-5 that would affirm that if a person, in advance of filing a Schedule 13D, discloses to any other person that such filing will be made and such other person acquires securities in the covered class for which the Schedule 13D will be filed, then those persons are deemed to have formed a group within the meaning of Section 13(d)(3) of the Exchange Act.

The proposed rules would also amend existing Rule 13d-6 to set forth the circumstances under which two or more persons may (i) communicate and consult with one another and engage with an issuer without concern that they will be subject to regulation as a group with respect to the issuer’s equity securities; and (ii) enter into an agreement governing a derivative security in the ordinary course of business without concern that they will become subject to regulation as a group with respect to the derivative’s reference equity securities.

Finally, the proposed rules would provide that all disclosures on Schedules 13D and 13G, including quantitative disclosures, textual narratives and identification checkboxes, be filed using a structured, machine-readable data language. Specifically, the proposed rules would require that all Schedules 13D and 13G be filed using an XML-based language. Only the exhibits to Schedules 13D and 13G would remain unstructured.

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