On February 10, 2020, the Securities and Exchange Commission (the “SEC”) proposed rule amendments (the “Proposed Amendments”) to accelerate the filing deadlines for Schedule 13D and 13G filings, expand the beneficial-ownership reporting obligations to capture the acquisition of certain derivative securities, and clarify the standards for formation of a control group that is subject to those reporting obligations. The long-anticipated changes, in particular the proposal to halve the 13D filing window, aim to modernize the beneficial-ownership reporting obligations to keep pace with modern financial markets and reduce the opportunity for investors to clandestinely accumulate large, potentially hostile positions in public companies.
Background
Under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”), an investor who acquires beneficial ownership of more than five percent of a covered class of equity securities must publicly report such beneficial ownership and other information by filing either a Schedule 13D or a Schedule 13G with the SEC. A Schedule 13D is required where the investment is made with a control intent, while the shorter-form Schedule 13G is available to qualifying passive investors. The aim of these reporting requirements is to give notice to the target company, other shareholders, and the securities market of significant new stakes in reporting companies and the acquiror’s intentions. Currently, the deadlines for filing a Schedule 13D is 10 calendar days after crossing the 5%-threshold and, for certain institutional Schedule 13G filers, 45 calendar days from the end of the calendar year in which the investor crosses the 5%-threshold or 10 days after the end of the month in which it crosses the 10%-threshold. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended Section 13(d)(1) of the Exchange Act to grant the SEC the authority to shorten the deadline for filing the initial Schedule 13D, yet the 10-day deadline has not been updated since it was enacted in 1968.
The 10-day filing window for Schedule 13D has been a subject of criticism for some time, as it allows investors to cross the 5%-threshold and continue accumulating stock for 10 days before any reporting obligation or other restrictions kick in. The SEC has noted that the10-day period is longer than both the deadlines public companies must meet to make various mandated disclosures (e.g., four business days to report material events triggering a Form 8-K filing obligation, “prompt disclosure” under Regulation FD to publicize unintentional selective disclosure) and the two-day deadline for insiders to report changes of beneficial ownership on Form 4.
Proposed Amendments
Schedule 13D filing deadline. The Proposed Amendments would shorten the deadline under Rule 13d-1 for filing an initial Schedule 13D from 10 days to five days after crossing the 5%-threshold or losing eligibility to file on Schedule 13G. The Proposed Amendments would require that amendments to a Schedule 13D be filed within one business day after the triggering event (a change from “promptly” after the triggering event).
Schedule 13G filing deadline. For Schedule 13G filers who are considered qualified institutional investors (“QIIs”)1 or exempt investors,2 the Proposed Amendments would shorten the typical initial filing deadline from 45 days after year-end3 to five business days after the end of the month in which the investor’s beneficial ownership first exceeds five percent of the covered class of equity securities. For other Schedule 13G filers considered passive investors, the Proposed Amendments would shorten the initial filing deadline from 10 days after crossing the 5%-threshold to five days.
The Proposed Amendments would also accelerate the amendment obligations for QIIs and passive investors upon exceeding 10 percent beneficial ownership or a five percent increase or decrease in beneficial ownership of a covered class, requiring that QIIs file an amendment within five days and passive investors file within one business day. For all Schedule 13G filers, the Proposed Amendments would require that an amendment for other material changes be filed five business days after the month in which the material change occurred, compared to the previous 45-days-after-year-end deadline. If implemented, these changes could meaningfully increase the number and frequency of filings required by traditional QIIs such as mutual funds and registered investment advisers.
Administrative ease. To reduce administrative challenges that the accelerated deadlines may cause, the Proposed Amendments would extend the filing cut-off times for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time. In addition, all information disclosed on Schedules 13D and 13G, including quantitative disclosures, textual narratives and identification checkboxes, will be required to be filed using an XML-based language.
Derivative securities. The Proposed Amendments, specifically proposed new Rule 13d-3(e), would deem a long holder of a cash-settled derivative security, other than a security-based swap, a beneficial owner of the reference equity security if the derivative is held either (i) with the purpose (or effect) of “changing” or “influencing” the control of the issuer or (ii) in connection with or as a participant in any transaction having such purpose or effect.
Item 6 of Schedule 13D would also be revised to clarify that a person is required to disclose interests in “all derivative securities,” including cash-settled derivative securities, that use the issuer’s equity security as a reference security.
Group formation and related exemptions. The Proposed Amendments clarify the circumstances under which two or more persons form a “group” under Regulation 13D-G and the Exchange Act, removing any requirement for an express agreement between two or more persons to form a group as long as the persons “act as” a group for purposes of acquiring, holding or disposing securities. The Proposed Amendments discuss the motivation for this change, describing a scenario in which a large blockholder who is planning a proxy contest and has incurred or will incur a filing obligation seeks support from other investors for its still-undisclosed plan. Sharing the fact of a pending 13D filing obligation with other investors may allow the blockholder to gather support for the campaign before the issuer is aware of it, and may incentivize the other investors to acquire shares in expectation of a price increase once the 13D is filed. To prevent these types of frontrunning, “tipper-tippee” relationships, in which a person shares non-public information about an upcoming Schedule 13D filing with another person who subsequently purchases the issuer’s securities based on that information, would establish a group filing requirement.
Recognizing how this change broadens the definition of a “group” and creates the potential to chill benign communications among investors, the Proposed Amendments add exemptions to permit investors to communicate and consult with each other, jointly engage with issuers, and execute certain transactions without being subject to regulation as a group. Specifically, those exemptions would provide that a group-filing obligation is not triggered (i) where the investors interact with one another or the issuer without the purpose or effect of changing or influencing control of the issuer, and are not obligated to interact pursuant to a cooperation agreement or joint voting agreement, or (ii) solely by virtue of financial institutions entering into agreements governing the terms of derivative securities.
Comment Period
The public comment period will remain open for the longer of 60 days following publication of the Proposed Amendments on the SEC’s website or 30 days following publication of the Proposed Amendments in the Federal Register.
Footnotes
1) Such QIIs include: a broker or dealer registered under Section 15(b) of the Exchange Act; a bank as defined in Section 3(a)(6) of the Exchange Act; an insurance company as defined in Section 3(a)(19) of the Exchange Act; an investment company registered under Section 8 of the Investment Company Act of 1940 (the “1940 Act”); an investment adviser registered under Section 203 of the Investment Advisers Act of 1940; a parent holding company or control person (if certain conditions are met); an employee benefit plan or pension fund that is subject to the provisions of the Employee Retirement Income Security Act of 1974; a savings association as defined in Section 3(b) of the Federal Deposit Insurance Act; a church plan that is excluded from the definition of an investment company under Section 3(c)(14) of the 1940 Act; non-U.S. institutions that are the functional equivalent of any of the institutions listed in Rules 13d-1(b)(1)(ii)(A) through (I), so long as the non-U.S. institution is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to the equivalent U.S. institution; and related holding companies and groups.
2) Exempt investors include persons holding beneficial ownership of more than 5% of a covered class at the end of the calendar year, but who have not made an acquisition of beneficial ownership subject to Section 13(d). For example, persons who acquire all their securities prior to the issuer registering the subject securities under the Exchange Act are not subject to Section 13(d) and persons who acquire not more than 2% of a covered class within a 12-month period are exempted from Section 13(d) by Section 13(d)(6)(B), but in both cases are subject to Section 13(g).
3) Passive QIIs that own more than 10% of a class of equity securities as of month end must currently make a filing within 10 days of the end of such month.
