The Securities and Exchange Commission has amended the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (Exchange Act). Sections 13(d) and 13(g) of the Exchange Act require an investor who beneficially owns more than 5% of a class of voting equity securities registered under Section 12 of the Exchange Act to report such beneficial ownership and certain changes in such ownership by publicly filing either a Schedule 13D or a Schedule 13G.
The due dates for Schedules 13D and 13G have remained unchanged since 1968 and 1977, respectively. The SEC’s amendments primarily expedite the submission deadlines for Schedule 13D and Schedule 13G and amendments thereto, provide clarity on disclosure obligations regarding derivative securities, including cash-settled derivative instruments, outline the conditions under which multiple individuals are considered to have formed a “group” subject to beneficial ownership reporting rules, and mandate the use of structured, machine-readable data language for filing Schedules 13D and 13G.
Filing Deadlines
Schedule 13D
The amendments reduce the initial filing period for Schedule 13D to five business days (previously 10 calendar days) from the date an investor acquires more than 5% beneficial ownership in an equity securities class or loses eligibility for Schedule 13G filing.
The revisions further mandate that a Schedule 13D amendment must be submitted within two business days after any material change in the information previously reported in the prior Schedule 13D. In contrast, the previous rules called for amendments to be filed “promptly” after a material change, which was open for interpretation.
Schedule 13G
For investors permitted to file on Schedule 13G as qualified institutional investors under Rule 13d-1(b), the amendments reduce the initial filing deadline to either (i) 45 days after the end of the calendar quarter in which beneficial ownership exceeds 5% of an equity securities class or (ii) five business days after the end of the month in which beneficial ownership surpasses 10% of an equity securities class. In contrast, the previous rules for qualified institutional investors required them to file an initial Schedule 13G within either (i) 45 days after the end of the calendar year in which beneficial ownership exceeded 5% of an equity securities class or (ii) 10 days after the end of the month in which beneficial ownership exceeded 10% of an equity securities class. The amendments specify that ownership is solely assessed as of the calendar quarter- or calendar month-ends, as applicable, rather than on any other dates during a quarter or month, as applicable.
For other passive investors who are eligible to use Schedule 13G according to Rule 13d-1(c), the amendments reduce the initial filing timeframe for Schedule 13G to five business days from the date when beneficial ownership surpasses 5% of an equity securities class. In contrast, the prior rules required passive investors to file an initial Schedule 13G within 10 calendar days after the date on which beneficial ownership exceeded 5% of an equity securities class.
For investors eligible to use Schedule 13G due to their exempt status under Rule 13d-1(d), the amendments reduce the initial filing deadline for Schedule 13G to 45 days after the end of the calendar quarter in which they attain beneficial ownership exceeding 5% of an equity securities class. In contrast, the previous rules required exempt investors to file an initial Schedule 13G within 45 days after the end of the calendar year in which beneficial ownership exceeded 5% of an equity securities class. Under the amendments, ownership is only assessed as of calendar quarter-ends, with no consideration of other dates within the quarter.
Notably, amendments will be triggered by any material change in the information reported in the Schedule 13G and would be due 45 calendar days after the end of the quarter in which any material change occurred. Under the current rules, except in certain situations, Schedule 13G filings must be amended within 45 days after the end of the calendar year for any changes to the previous disclosure.
The SEC declined to define what is a material change for these purposes and instead pointed to the general concept of materiality under Rule 12b-2. The SEC signaled that any acquisitions or dispositions of 1% or more of the outstanding class of securities should be deemed material for Schedule 13G amendment purposes, based on the 1% threshold prescribed under Rule 13d-2(a) for Schedule 13D amendment purposes.
Incorporation of “Cash-Settled” Derivative Securities Within the Scope of Section 13(d) Beneficial Ownership
Rule 13d-3 of the Exchange Act outlines the criteria for determining an individual’s status as a “beneficial owner” for Section 13(d) and 13(g) purposes. Presently, individuals holding cash-settled derivatives are generally not regarded as beneficial owners under the existing Rule 13d-3, except in situations involving additional facts and circumstances (e.g., arrangements that enable these holders to influence the voting of the referenced securities). The SEC has introduced a new paragraph (e) within Rule 13d-3, which establishes that a holder of a “cash-settled” derivative security, excluding security-based swaps, would be considered the beneficial owner of the equity securities if the derivative was held with the intention of influencing control over the issuer of the referenced securities, or in connection with or as part of any transaction with such intent or effect. This rule change considers a holder of cash-settled derivatives to be a beneficial owner, even in cases where they lack an explicit contractual right to vote or dispose of the underlying securities.
According to the new Rule 13d-3(e), a holder of a derivative security would be considered to have a beneficial ownership of securities equal to the greater of two amounts: (i) the number of securities associated with the derivative security, multiplied by the “delta” of the derivative security (which is the ratio representing the change in value of the derivative security compared to the change in value of the underlying security), and (ii) the result of dividing the notional value of the derivative security by the most recent market price of the reference security, then multiplying it by the “delta” of the derivative security (as defined above). The SEC would mandate daily computations, taking into account only long positions, with no offsetting against short positions.
The amendments to Item 6 of Schedule 13D explicitly mandate that a reporting person must provide information about derivative contracts, agreements, understandings, and affiliations related to an issuer’s securities, encompassing cash-settled security-based swaps and other derivatives solely settled in cash.
Definition of “Group”
The SEC’s adopting release for the rule amendments provides clarity that the formation of a Section 13(d)/(g) group doesn’t necessitate a formal agreement but only requires two or more individuals to “operate as” a group with the intent of acquiring, holding, or disposing of covered securities. As per Sections 13(d)(3) and (g)(3) of the Exchange Act, when two or more individuals “operate as a...group for the purpose of acquiring, holding, or disposing of an issuer’s securities,” the group is considered as a single filing entity. If the group collectively holds more than 5% of the covered securities class, all members become subject to Section 13(d) reporting requirements, irrespective of whether any individual member holds less than 5% of that class.
“Tipper-Tippee” Relationships
The SEC stated that no amendment to Rule 13d-5(b) is necessary, and provided guidance that such “tipper-tippee” activities raise the possibility that these persons are acting as a “group” within the meaning of Section 13(d)(3). The adopting release further explains that the final determination as to whether a group is formed will depend upon the facts and circumstances, including (i) whether the purpose of the person’s communication with the other market participants was to cause them to purchase the securities and (ii) whether the market participants’ purchases were made as a direct result of the information shared by the person.
The SEC has offered guidance indicating that engagements similar to “tipper-tippee” relationships might give rise to the possibility of these individuals acting as a “group” as defined in Section 13(d)(3). The adopting release elaborates that the ultimate determination of whether a group has been formed will hinge on the specific circumstances, including (i) the intent behind the individual’s communication with other market participants to induce them to acquire the securities, and (ii) whether the actions of the market participants in purchasing the securities were directly influenced by the information shared by the individual.
Acquisition or Sales of Additional Securities by a Member of the “Group”
The amendments further stipulate that if any member of a “group” with reporting obligations under Section 13(d)(3) or Section 13(g)(3) becomes a beneficial owner of additional equity securities in a particular class at any time following the group’s formation (including acquisitions on the same day the group was created), the entire group will be regarded as having acquired beneficial ownership of those securities and will be obligated to report them.
Further, the amended rules specify that a “group” will not be deemed to have gained beneficial ownership of additional equity securities if a group member attains beneficial ownership of those securities through a sale or transfer from another member within the same group, including intra-group transfers that occur on the same day but after the group’s formation.
Structured Data Requirements for Schedules 13D and 13G
To facilitate the accessibility and analysis of information provided in Schedules 13D and 13G for investors and market participants, the amendments stipulate that these filings must utilize a structured, machine-readable data language based on XML. This mandate encompasses all the information disclosed in Schedules 13D and 13G, while permitting exhibits to these schedules to retain their unstructured format.
Filing “Cut-off” Time
In order to alleviate the administrative challenges faced by filers due to the revised deadlines, the amendments prolong the “cut-off” times outlined in Regulation S-T for Schedules 13D and 13G, extending the deadline from 5:30 p.m. to 10:00 p.m. Eastern time on the applicable due date for initial filings or amendments. This extension takes into consideration potential difficulties for investors in time zones beyond the U.S. and institutional filers with intricate business structures that require extra time for gathering the necessary information.
Effective Dates
The amendments will take effect 90 days following their publication in the Federal Register. However, adherence to the updated Schedule 13G filing deadlines will be mandatory only starting as of September 30, 2024. Compliance with the structured data mandate for Schedules 13D and 13G will be obligatory starting on December 18, 2024, with an option for voluntary compliance commencing on December 18, 2023. It’s worth noting that the SEC’s guidance provided in the adopting release takes immediate effect and is not subject to the same timeline as the amendments. Market participants should review their internal policies and procedures to confirm the presence of systems and controls that enable adherence to the updated reporting obligations.
