The US Securities and Exchange Commission (SEC) adopted amendments on October 10, 2023 to the rules governing beneficial ownership reporting on Schedules 13D and 13G and provided guidance on the rules’ application. The revisions and guidance generally shorten the period for making both initial filings and amendments, clarify requirements for derivative securities and considerations regarding acting as a group, and require that certain information be provided in a structured data format.
On February 10, 2022, the SEC proposed amendments with respect to beneficial ownership reporting pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the Exchange Act). These regulations generally require that all positions exceeding 5% of a class of securities registered under Section 12 of the Exchange Act or of a registered closed-end investment company (among other issuers) be publicly reported.
The proposed amendments sought to (1) accelerate initial filing deadlines, (2) revise treatment of cash-settled derivative securities, (3) provide guidance regarding group formation, and (4) require that certain information be provided in a structured data format.
A significant number of public comments were submitted with respect to the rulemaking, which represented a variety of viewpoints on the proposal, including those who cited the increased administrative burdens and costs associated with the proposed changes, while some others supported the SEC’s efforts to address the technological advances underlying the changes.
FINAL AMENDMENTS AND GUIDANCE
Filing Deadlines
While the final rules do not go as far as some of those initially proposed, there are significant changes to the deadlines for initial and amended Schedule 13D and 13G filings.[1] The following chart compares current filing deadlines with those under the amended rules:
In connection with the accelerated filing deadlines, the amendments also extend the filing “cut-off” time—that is, the time by which a filing must be accepted by the SEC to be considered filed on that day—for all Schedule 13D and 13G filings made on EDGAR from 5:30 pm to 10:00 pm Eastern time, which aligns with the current cut-off time applicable to Section 16 filings.[3]
Derivatives Securities
As a general matter, the holder of a cash-settled derivative security has not been considered to beneficially own the reference equity securities underlying the derivative position in the absence of an agreement or understanding with respect to the voting or disposition of such underlying equity securities, and the derivative position is not held in order to evade beneficial ownership reporting requirements.
The proposed amendments would have provided that a holder of a cash-settled derivative security, other than a security-based swap, be deemed the beneficial owner of the reference equity securities 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.
The proposal was not included in the adopting release; however, the release emphasized that the holder of a cash-settled derivative security may already be deemed the beneficial owner under current rules if the cash-settled derivative security provides the holder, directly or indirectly, with exclusive or shared investing power over the reference security, such as through a contractual term.
Furthermore, if the cash-settled derivative security is acquired with the purpose or effect of divesting the holder of beneficial ownership of the reference security as part of a plan or scheme to evade the reporting requirements, the holder may be deemed a beneficial owner under Rule 13d-3(b).
Item 6 of Schedule 13D requires beneficial owners to describe any contracts, arrangements, understandings, or relationships with respect to any securities of the issuer. Consistent with its proposal, the SEC amended Item 6 of Schedule 13D to explicitly clarify that a reporting person is required to disclose interests in derivatives relating to an issuer’s securities, including cash-settled security-based swaps and other derivatives that are settled exclusively in cash, even if the reporting person is not deemed to beneficially own the reference equity securities underlying those derivative securities.
Acting as a Group
Under the beneficial ownership reporting framework, reporting may be required by a “group,” which may be created by the collective efforts of individuals or entities to acquire, hold, or dispose of securities of an issuer. While certain proposed revisions relating to “group” formation were not adopted by the SEC, the amendments revise Rule 13d-5 to expressly impute to the group acquisitions made by a group member after the date of group formation and to carve out intra-group transfers of equity securities of a covered class.
The SEC did not codify the definition of a “group” as proposed, but it did reiterate its guidance that the determination of a “group” remains rooted in the statute and not in any specific language articulated in the related rules. The SEC highlighted that the analysis of whether two or more persons acted together for the purpose of acquiring, holding, or disposing of securities of an issuer, as contemplated by Sections 13(d)(3) and 13(g)(3) of the Exchange Act, is a facts and circumstances–based determination.
Consistent with case law and various SEC interpretations and actions, the determination is not based solely on the presence or absence of an express agreement, and a “group” can be formed when two or more persons take concerted action or agree informally to act as one.
Structured Data Requirement
Under the amendments, disclosures made on Schedules 13D and 13G must be filed using software that uses a 13D/G-specific XML-based language to make the process more efficient for investors and markets to access, compile, and analyze disclosed information.
COMPLIANCE DATES
The adopted amendments will become effective 90 days after publication in the Federal Register. In a concession to commenters, the SEC provided an extended compliance deadline for certain aspects of the amendments. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024.
Compliance with the structured data requirement for Schedules 13D and 13G will be required beginning on December 18, 2024, although early adoption is welcomed. Compliance with the other amendments, including the deadlines for initial and amended Schedules 13D, will be required upon their effectiveness.
KEY TAKEAWAYS
The acceleration of the filing and amendment deadlines may increase the burdens of beneficial ownership reporting. The five-day reporting deadline may be difficult to meet in many instances, particularly with respect to Schedule 13D filings. It will be imperative that systems be in place to ensure compliance with accelerated filing requirements or prevent exceeding reporting thresholds until the reporting persons are prepared to make the required disclosures in a timely manner.
[1] Beneficial ownership reporting by large investors with an intent to influence or control the issuer generally is filed under Schedule 13D. In contrast, Qualified institutional investors (QIIs) and passive investors that do not intend to influence or control the issuer generally file under Schedule 13G.
[2] Note that market practice, as supported by SEC guidance and case law, has generally been to file an amendment in one and two business days.
[3] All other filings, including periodic reports and registration statements, generally must be filed by 5:30 pm to be considered filed on that date, and the amendments do not impact those deadlines.
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