On October 10, 2023, the Securities and Exchange Commission (“SEC”) adopted amendments to the rules governing beneficial ownership¹ reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). Among other things, the amendments shorten the deadlines for initial and amended Schedule 13D and Schedule 13G filings and, in a departure from the proposed rules, issue guidance regarding (1) cash-settled derivative securities and (2) group formations. The aim of the final amendments is to accelerate access to material information by investors in today’s “fast-paced” financial markets. The amendments mark the first time in nearly 50 years that the filing deadlines for Schedules 13D and 13G have been changed.

In summary, the final amendments will become effective 90 days after publication in the Federal Register and do the following:

• Shorten filing deadlines – Investors filing a Schedule 13D and Schedule 13G will be required to submit their filings within a shorter timeframe than previously required. Compliance with the amended Schedule 13D filing deadlines will be required upon effectiveness of the final amendments, whereas compliance with amended Schedule 13G filing deadlines will be required beginning September 30, 2024.
• Clarify disclosure requirements – Item 6 of Schedule 13D has been clarified to require disclosure of interests in all derivative securities, including cash-settled derivative securities, that use a covered class as a reference security.
• Require structured, machine-readable language – Schedule 13D and Schedule 13G filings will require submission using an XML-based language for quantitative disclosures, textual narratives and identification checkboxes. Voluntary compliance with the structured, machine-readable data amendments will be allowed beginning December 18, 2023, but all relevant filers must comply beginning December 18, 2024.
• Provide guidance on cash-settled derivatives and group formation – The SEC provided further guidance as to when cash-settled derivatives are counted toward the threshold for beneficial ownership, as well as to what constitutes formation of a group for the purposes of beneficial ownership.

1. Shorten Deadlines for Initial and Amended Schedules 13D and 13G Filings

Under Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G, any person or group of persons owning or acquiring more than five percent of any covered class of equity securities is required to publicly file with the SEC either a Schedule 13D or 13G, depending on the nature of its ownership and the circumstances of its acquisition of securities. Generally, an investor with control intent files a Schedule 13D, and Exempt Investors² and investors without a control intent, including Qualified Institutional Investors³ and Passive Investors,⁴ file a Schedule 13G. The final amendments shorten the deadlines for making these filings. The SEC also provided a table in the adopting release summarizing differences between the current deadlines to the revised deadlines under the final amendments, which is included in Annex I.

New Schedule 13D Requirements:

• Initial filing deadline of within five business days after acquiring beneficial ownership of more than five percent or losing eligibility to file on Schedule 13G (deadline reduced from 10 calendar days).
• Amendments must be filed within two business days (instead of “promptly”) from a material⁵ change from the facts set forth in the last Schedule 13D.

New Schedule 13G Requirements for Passive Investors:

• Initial filing deadline of within five business days after acquiring beneficial ownership of more than five percent (deadline reduced from 10 calendar days).
• Amendments must be filed within 45 days following the calendar quarter-end in which a material change from the set of facts set forth in the previous Schedule 13G occurred (deadline changed from 45 days after the year in which such changes occurred).
• Amendments must be filed within two business days (instead of “promptly”) after beneficial ownership exceeds 10 percent or changes by more than five percent.

New Schedule 13G Requirements for Qualified Institutional Investors and Exempt Investors:

• Initial filing deadline of 45 calendar days after the calendar quarter-end in which the investor beneficially owns more than five percent of the covered class (deadline changed from 45 calendar days after year-end).
• For Qualified Institutional Investors, initial filing deadline is within five business days after the month-end in which beneficial ownership exceeds 10 percent (deadline reduced from 10 calendar days after month-end).
• Amendments must be filed within 45 days following the calendar quarter-end in which a material change from the set of facts set forth in the previous Schedule 13G occurred (deadline changed from 45 days after the year in which such changes occurred).
• For Qualified Institutional Investors, amendments must be filed within five business days after the month-end in which beneficial ownership exceeds 10 percent or changes by more than five percent.

New Filing Cut-Off Times:

• The EDGAR cut-off times for Schedule 13D and Schedule 13G filings will be extended from 5:30 p.m. to 10:00 p.m. Eastern Time.

2. Clarify Disclosure Requirements with Respect to Derivative Securities

The final amendments modify Item 6 of Schedule 13D to clarify that an individual must disclose interests in all derivative securities, including cash-settled derivative securities, that use a covered class as a reference security. The purpose of this change is to remove any ambiguity in the scope of the disclosure obligations in Item 6.

3. Require Schedule 13D and Schedule 13G Filings to Use Structured, Machine-Readable Data Language

Under the final amendments, Schedule 13D and Schedule 13G filings must use a structured, machine-readable data language. In particular, all disclosures, including quantitative disclosures, textual narratives and identification checkboxes must use an XML-based language so that market participants can more easily access, compile and analyze information contained in the disclosures. Exhibits may remain unstructured under the new requirements.

4. Provide Guidance on Cash-Settled Derivatives and Group Formation

Rather than adopting proposed amendments to Rule 13d-3 deeming certain holders of cash-settled derivative securities as beneficial owners, the SEC chose to rely on guidance in an attempt to provide clarity on circumstances in which such holders may become beneficial owners. The SEC indicated it will look to facts and circumstances that suggest beneficial ownership exists for the holder of any cash-settled derivative security, but that its previous guidance on the applicability of Rule 13d-3 to security-based swaps provides an instructive analytical framework.

Similarly, in light of concerns that the proposed amendments to Rule 13d-5 about group formations could have had chilling effects on shareholder engagement, the SEC instead provided guidance on group formations for the purpose of determining beneficial ownership. The adopting release codifies the SEC’s views that “the determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, 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 are sufficient to constitute the formation of a group.”

Despite the SEC’s attempts to provide greater clarity in this space, significant ambiguities remain about when a group is deemed to exist, as Commissioner Hester Pierce noted in her dissent.

Timing, SEC Enforcement, and Next Steps

The final amendments become effective 90 days from publication in the Federal Register. Compliance deadlines are:

• Structured, machine-readable data requirements: voluntary compliance allowed beginning December 18, 2023, and mandatory compliance starting December 18, 2024
• Amended Schedule 13G filing deadlines: beginning September 30, 2024
• Amended Schedule 13D filing deadlines and other amendments: upon effectiveness of the final amendments 90 days after publication in the Federal Register

The adoption of the final amendments comes on the heels of the SEC announcing charges against six individuals and five public companies for failure to comply with Sections 13(d) and 16(a) of the Exchange Act. The SEC specifically noted the assistance of the Division of Enforcement’s Office of Investigative & Market Analytics (“Division”), underscoring the Division’s increased reliance on data analytics to find and prosecute these violations. The SEC also indicated that there may be more charges to come in this area, characterizing its investigation of potential beneficial ownership violations as “ongoing.” It is clear that beneficial ownership reporting is an area of increasing interest for the SEC.

Beneficial owners should take note of the accelerated filing triggers and corresponding deadlines under the final amendments and plan accordingly. Furthermore, beneficial owners should consider transitioning their Schedule 13D and Schedule 13G filings to structured, machine-readable data language once voluntary compliance is allowed.

Please contact the V&E Team to discuss these developments and their potential effects on your business.

ANNEX I

Source: Final Rule: Modernization of Beneficial Ownership Reporting, SEC Release Nos. 33-11253; 34-98704 (October 10, 2023), at 10–11.

¹ For the purposes of sections 13(d) and 13(g) of the Exchange Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

1. Voting power which includes the power to vote, or to direct the voting of, such security; and/or
2. Investment power which includes the power to dispose, or to direct the disposition of, such security.

See 17 CFR 240.13d-3(a).

² “Exempt Investors” means persons holding beneficial ownership of more than five percent of a covered class, but who have not made an acquisition of beneficial ownership subject to Section 13(d).

³ “Qualified Institutional Investors” includes a broker or dealer registered under Section 15 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, a person registered as an investment adviser 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 Investment Company Act of 1940, 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 who have acquired securities in the covered class in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect. See 17 CFR 240.13d-1(b)(1)(i)–(ii).

⁴ “Passive Investors” refers to beneficial owners of more than five percent but less than 20 percent of a covered class who can certify under Item 10 of Schedule 13G that the subject 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.

⁵ With respect to Schedules 13D and 13G amendment filing requirements, the adopting release noted that “an acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities” will be deemed “material.” Note that acquisitions or dispositions of less than those amounts may also be material depending upon the facts and circumstances. The change in percentage ownership is calculated based on the number of securities acquired/disposed of divided by the number of securities outstanding before the first such acquisition/disposition (i.e., not the change in the reporting person’s ownership percentage).