ARTICLE
27 October 2023

SEC Adopts Amendments To Rules Governing Beneficial Ownership Reporting

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Kramer Levin Naftalis & Frankel LLP

Contributor

Kramer Levin provides its clients proactive, creative and pragmatic solutions that address today’s most challenging legal issues. The firm is headquartered in New York with offices in Silicon Valley and Paris and fosters a strong culture of involvement in public and community service. For more information, visit www.kramerlevin.com
On Oct. 10, the SEC adopted amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934.
United States Corporate/Commercial Law
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On Oct. 10, the U.S. Securities and Exchange Commission (SEC) adopted amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (Exchange Act). These amendments shorten the period for making both initial filings and amendments and require that certain information be presented in a structured data format. In addition, the SEC provided guidance on the treatment of cash-settled derivative securities and group formation under the beneficial ownership reporting rules.

Background

Sections 13(d) and 13(g) of the Exchange Act, along with Regulation 13D-G, require investors or groups who beneficially own more than 5% of a covered class of equity securities to publicly report such ownership on Schedule 13D or Schedule 13G. Exchange Act Rule 13d-3 provides that a security is beneficially owned by a person who has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security, or who has the right to acquire beneficial ownership of such security within 60 days. These requirements apply to voting equity securities registered under Section 12 of the Exchange Act: generally, shares listed on a U.S. stock exchange, including shares of foreign private issuers and smaller reporting companies.

Accelerated Filing Deadlines

Schedule 13D

Under the new rules, the filing deadline for an initial Schedule 13D is five business days after becoming a 5% beneficial owner (compared with 10 calendar days under the current rules). Furthermore, the new rules require Schedule 13D to be amended within two business days of any material change (the current rules require that such amendments be made "promptly" following a material change). For purposes of Schedule 13D, material changes include, among other items, acquisitions or dispositions of 1% or more of a class of securities.

Schedule 13G

Investors falling into one of the following three categories can disclose their beneficial ownership on the shorter Schedule 13G instead of Schedule 13D:

  • Exempt Investors: Persons specified in Rule 13d‑1(d) who beneficially own more than 5% of a class of equity securities but who have not made an acquisition of beneficial ownership subject to Section 13(d), such as investors who acquired all their securities prior to a company's initial public offering, and investors who acquire no more than 2% of a covered class of securities within a 12-month period, pursuant to Section 13(d)(6)(B) of the Exchange Act
  • Qualified Institutional Investors (QIIs): Institutional investors specified in Rule 13d-1(b), including registered brokers or dealers, banks, insurance companies, investment companies and advisers, and pension funds, who acquired securities in the covered class in the ordinary course of business and not with the purpose or effect of changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having such purpose or effect
  • Passive Investors: Persons specified in Rule 13d-1(c), who beneficially own more than 5% but less than 20% of a class of equity securities, who can certify under Item 10 of Schedule 13G that the securities were not acquired and are not held for the purpose or effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purpose or effect

QIIs and Exempt Investors are now generally subject to a 45-day initial filing deadline after the end of the quarter in which beneficial ownership exceeds 5% of the covered class, instead of 45 days after the end of the calendar year in which the investor became a 5% holder. The initial filing deadline for QIIs that exceed 10% beneficial ownership is reduced from 10 calendar to five business days after the end of the month in which that threshold is crossed. The initial filing deadline for Passive Investors is shortened from 10 calendar to five business days. Amendments to a Schedule 13G generally must be filed within 45 days after the calendar quarter in which a material change occurs (including acquisition or disposition of more than 1% of the class of securities), rather than 45 days after the calendar year in which any change occurs.

The following table summarizes the changes.

Schedule 13D Current Revised
Initial 13D Filing Deadline Within 10 days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. Rules 13d-1(a), (e), (f) and (g). Within five business days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. Rules 13d‑1(a), (e), (f) and (g).
13D Amendment Triggering Event Material change in the facts set forth in the previous Schedule 13D, including acquisition or disposition of beneficial ownership of 1% or more of the class of securities. Rule 13d-2(a). Same as current Schedule 13D: Material change in the facts set forth in the previous Schedule 13D, including acquisition or disposition of beneficial ownership of 1% or more of the class of securities. Rule 13d-2(a).
13D Amendment Filing Deadline Promptly after the triggering event. Rule 13d-2(a). Within two business days after the triggering event. Rule 13d-2(a).
Filing "Cutoff' Time 5:30 p.m. Eastern time. Rule 13(a)(2) of Regulation S-T. 10 p.m. Eastern time. Rule 13(a)(4) of Regulation S-T.
Schedule 13G Current Revised

Initial 13G Filing Deadline

QIIs & Exempt Investors: 45 days after calendar year-end in which beneficial ownership exceeds 5%. Rules 13d-1(b) and (d). QIIs & Exempt Investors: 45 days after calendar quarter-end in which beneficial ownership exceeds 5%. Rules 13d-1(b) and (d).
QIIs: 10 days after month-end in which beneficial ownership exceeds 10%. Rule 13d-1(b). QIIs: Five business days after month-end in which beneficial ownership exceeds 10%. Rule 13d‑1(b).
Passive Investors: Within 10 days after acquiring beneficial ownership of more than 5%. Rule 13d-1(c). Passive Investors: Within five business days after acquiring beneficial ownership of more than 5%. Rule 13d-1(c).

13G Amendment Triggering Event

All Schedule 13G Filers: Any change in the information previously reported on Schedule 13G. Rule 13d-2(b). All Schedule 13G Filers: Material change in the information previously reported on Schedule 13G, including acquisition or disposition of beneficial ownership of 1% or more of the class of securities. Rule 13d‑2(b).
QIIs & Passive Investors: Upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rules 13d-2(c) and (d). QIIs & Passive Investors: Same as current Schedule 13G: Upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rules 13d-2(c) and (d).

13G Amendment Filing Deadline

All Schedule 13G Filers: 45 days after calendar year-end in which any change occurred. Rule 13d‑2(b). All Schedule 13G Filers: 45 days after calendar quarter-end in which a material change occurred. Rule 13d-2(b).
QIIs: 10 days after month-end in which beneficial ownership exceeded 10% or there was, as of the month-end, a 5% increase or decrease in beneficial ownership. Rule 13d-2(c). QIIs: Five business days after month-end in which beneficial ownership exceeds 10% or a 5% increase or decrease in beneficial ownership. Rule 13d-2(c).
Passive Investors: Promptly after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rule 13d-2(d). Passive Investors: Two business days after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rule 13d-2(d).
Filing "Cutoff" Time All Schedule 13G Filers: 5:30 p.m. Eastern time. Rule 13(a)(2) of Regulation S-T. All Schedule 13G Filers: 10 p.m. Eastern time. Rule 13(a)(4) of Regulation S-T.

Extended EDGAR Filing Hours

The new rules amend Rule 13(a) of Regulation S-T to extend the EDGAR filing cutoff time for filing Schedules 13D and 13G from 5:30 p.m. Eastern time to 10 p.m. Eastern time.

Treatment of 'Cash-Settled' Derivative Securities

The amendments further clarify the disclosure requirements of Schedule 13D with respect to derivative securities. The SEC did not adopt proposed Rule 13d-3(e) to deem holders of cash-settled derivative securities to be beneficial owners of underlying reference securities. However, the SEC provided guidance on the circumstances in which derivatives may confer beneficial ownership under Rule 13d-3 in cases where the derivative (1) confers voting or investment power, (2) is used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to evade the reporting requirements, or (3) grants a right to acquire an equity security. In addition to the guidance regarding derivative securities, parties should be aware that the SEC recently reopened the comment period on its proposal for security-based swap ("SBS") position reporting, as discussed below, indicating that it may act on the proposal in the near future.

The amendments also clarify that cash-settled derivatives using an issuer's securities as reference securities are subject to the disclosure obligations of Item 6 of Schedule 13D, including derivatives not originating with, offered or sold by the issuer, such as cash-settled options or SBSs.

Group Formation

The SEC also provided guidance for determining when two or more persons will be deemed to have formed a "group" under Regulation 13D-G. The guidance provides several examples illustrating the SEC's views on situations in which a group is formed for purposes of Rule 13d-5(b). In particular, the SEC reiterated its view that formation of a group does not depend on the presence of an express agreement and that, depending on the facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer can be sufficient to constitute the formation of a group, and the resulting group will be deemed to be a "person" as provided in Sections 13(d)(3) and 13(g)(3) of the Exchange Act. The SEC explains that, although an express agreement is not required, evidence must indicate a common purpose to acquire, hold or dispose of securities of an issuer, such as an informal arrangement or coordination to further that purpose, beyond the mere presence of two or more persons taking similar actions.

The SEC provided examples to illustrate its views on activities that do not result in formation of a group. In the SEC's view:

  • A group is not formed merely as a result of a discussion in private or in a public forum, such as a conference that involves an independent and free exchange of ideas and views among shareholders, including discussions regarding changes in issuer practices; submission of a nonbinding shareholder proposal, a joint engagement strategy that is not control related, or a "vote no" campaign against individual directors in uncontested elections.
  • A group is not formed when two or more shareholders engage in similar discussions with an issuer's management, without taking any other actions.
  • A group is not formed when shareholders jointly make recommendations to an issuer regarding its board composition where (1) there is no discussion of individual directors or board expansion; (2) there is no commitment, agreement or understanding among the shareholders regarding voting on management's director candidates; and (3) there is no attempt to bind the board to take action.
  • A group is not formed as a result of submitting a nonbinding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8.
  • A group is not formed when an activist investor seeks support for its proposals to an issuer's board or management by means of a conversation, email, phone contact or meetings between a shareholder and the activist, without further actions like consenting or committing to a course of action.
  • A group is not formed as a result of a shareholder announcing its voting intentions, such as intention to vote in favor of an unaffiliated activist investor's director nominees, without more.
  • However, the SEC explains that a group may be formed if a beneficial owner of a substantial block of securities that is subject to Schedule 13D reporting obligations intentionally communicates to other investors that such a filing will be made (to the extent this information is not yet public) with the purpose of causing others to make purchases in the same class of securities and purchases are made as a direct result of the blockholder's information.

Structured Data Requirements for Schedules 13D and 13G

Finally, to make it easier for investors and markets to access, compile and analyze information disclosed on Schedules 13D and 13G, the amendments require that all filings contain machine-readable XML-based data language. This requirement applies to all information disclosed on Schedules 13D and 13G, with an exception for exhibits, which will not be subject to this requirement.

Compliance Dates for Beneficial Ownership Reporting

These amendments will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will begin on Sept. 30, 2024, while compliance with the structured data requirement for Schedules 13D and 13G will begin on Dec. 18, 2024.

Takeaways for Beneficial Ownership Reporting

These amendments will require investors to implement or enhance systems to monitor beneficial ownership in order to meet the accelerated Schedule 13D and 13G filing and amendment deadlines. In particular, the Schedule 13G amendments will require monitoring to determine whether quarterly amendments are required.

In addition, investors should consider the SEC's guidance on group formation when engaging with other investors. In particular, the guidance signals the SEC's interest in scrutinizing "wolf pack" activities, where multiple activist investors make contemporaneous acquisitions of an issuer's shares.

Related Developments: SEC Comment Period Reopening for Reporting Security-Based Swap Positions on Schedule 10B

Although the SEC did not adopt proposed Rule 13d-3(e) to deem holders of cash-settled derivative securities to be beneficial owners of underlying reference securities, it recently reopened the comment period for the proposal to adopt new Rule 10B-1, which would require public disclosure of SBS positions that exceed certain thresholds. The proposed rule is aimed at increasing transparency in the SBS market. If it's adopted, persons or groups with SBS positions over the reporting thresholds will need to promptly file the required information on a new Schedule 10B. Although the comment period technically expired on Aug. 21, parties have continued to submit comments on the proposal.

Swap Reporting Information Requirements

If the proposed rule is adopted, the Schedule 10B would require disclosure of items such as (1) notional amount of the applicable SBS position; (2) summary information on the position in and securities or loans underlying the SBS position; and (3) any ownership of instruments relating to the underlying security or loan, or group or index of securities or loans. Determinations of who is considered a beneficial owner for purposes of this rule are similar to those set forth in Section 13(d) of the Exchange Act.

Swap Reporting Thresholds

The proposed reporting thresholds would vary for credit default swaps, SBSs tied to debt securities and SBSs tied to equity securities as follows:

Type of SBS Position Reporting Threshold
Credit default swaps

The least of:

  • A long notional amount of $150 million
  • A short notional amount of $150 million
  • A gross notional amount of $300 million
SBS positions on debt securities that are not credit default swaps A gross notional amount of $300 million
SBS positions based on equity securities

The lesser of:

  • Notional Threshold: A gross notional amount of $300 million (including the value of underlying equity securities and adjusted notional amount of certain other derivatives owned, if the SBS gross notional amount exceeds $150 million)
  • Percentage Threshold: An SBS equivalent position that represents more than 5% of a class of equity securities (including underlying equity securities owned by the holder of the SBS position, as well as the number of shares attributable to certain other derivatives owned, if the SBS equivalent position exceeds 2.5%)

Filing Deadlines Under Swap Reporting Proposal

Initial SBS positions on a Schedule 10B would need to be reported "promptly," and no later than the end of the first business day following the transaction that results in the SBS position exceeding the applicable reporting threshold. Amendments to a Schedule 10B would also need to be filed "promptly" upon the occurrence of any "material change," and no later than the end of the first business day following the material change. For this purpose, a change equal to 10% or more of an SBS position previously disclosed in a Schedule 10B would be deemed "material."

Takeaways for Swap Reporting Proposal

In the reopened comment period, the SEC requested comments on, among other things, whether the proposed reporting threshold should be higher or lower for the applicable SBS positions. While adoption of Rule 10B-1 would improve information access among SBS market participants, it would also impose significant reporting burdens for those that hold positions above the applicable reporting thresholds, given the short filing timeline and complex calculations required for compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
27 October 2023

SEC Adopts Amendments To Rules Governing Beneficial Ownership Reporting

United States Corporate/Commercial Law

Contributor

Kramer Levin provides its clients proactive, creative and pragmatic solutions that address today’s most challenging legal issues. The firm is headquartered in New York with offices in Silicon Valley and Paris and fosters a strong culture of involvement in public and community service. For more information, visit www.kramerlevin.com
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