The US Securities and Exchange Commission proposed amendments on February 10 with respect to reporting beneficial ownership on Schedules 13D and 13G that, if adopted as proposed, would significantly shorten the period for making initial filings and amendments, revise treatment of cash-settled derivative securities (other than cash-settled swaps), provide guidance regarding group formation, and require that certain information be provided in a structured data format.

ACCELERATED FILING REQUIREMENTS

Current Requirements

The Securities and Exchange Commission’s (SEC) beneficial ownership reporting rules currently impose varying timing requirements depending on multiple factors, including the regulated status of the filing persons, the amount of securities beneficially owned, the purpose of the acquisition, and the timing of the acquisition. Generally, all positions exceeding 5% of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or of a registered closed-end investment company (among other issuers) must be reported at least on an annual basis.

For example, persons who acquire more than 5% of the class with the purpose or effect of influencing or changing control of the issuer must file a Schedule 13D, with potentially extensive disclosure and exhibit requirements, within 10 calendar days of the acquisition that causes the beneficial ownership to exceed 5%. On the other hand, a registered investment company and other qualified institutional investors (QIIs) that acquire more than 5% but 10% or less of the class in the ordinary course of business and without the purpose or effect of influencing control of the issuer, may wait until 45 days after the close of the calendar year to disclose its position as of year-end, assuming it still exceeds 5% at the end of the year. Non-regulated passive investors (Passive Investors) must file an initial Schedule 13G within 10 days of exceeding 10%.

Finally, persons who acquired their position prior to the time the class became subject to the beneficial ownership reporting requirements, or who qualify for an exemption from filing under Section 13(d) of the Exchange Act (Exempt Investors), must file a Schedule 13G pursuant to Section 13(g) of the Exchange Act within 45 days after the close of the calendar year to disclose its position as of year-end, assuming it still exceeds 5% at the end of the year.

The amendment requirements likewise vary depending on the Schedule and the nature of the filer. Schedules 13D must be amended “promptly” following a material change, including a 1% change in reported beneficial ownership. Schedules 13G must be amended annually by Exempt Investors, annually by QIIs unless their ownership exceeds 10% as of the close of any month (in which case the amendment is due within 10 days of the close of the month), and annually by Passive Investors unless their ownership exceeds 10% at any time. Additional amendments are required by QIIs and Passive Investors that reported in excess of 10% beneficial ownership after a change of position of 5% or more (calculated at month’s end by QIIs).

Revised Requirements

The proposed amendments would shorten the initial filing deadline for Schedule 13D from 10 days to five days and require that amendments be filed within one business day. For QIIs and Exempt Investors, the proposed amendments would shorten the initial filing deadline for a Schedule 13G from 45 days after year-end to five business days after the end of the month in which the investor beneficially owns more than 5% of the covered class. For Passive Investors, the proposed amendments would shorten the initial filing deadline from 10 days to five days. Finally, for all Schedule 13G filers, the proposed amendments would require that an amendment be filed five business days after the month in which a material change occurred rather than 45 days after the year in which any change occurred.

The proposed amendments also would accelerate the amendment obligations for certain Schedule 13G filers upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership of a covered class, requiring that QIIs and Passive Investors file an amendment within five days and one business day, respectively.

The SEC included a helpful chart in its release comparing the reporting and amendment deadlines under the current and proposed rules.

CASH-SETTLED DERIVATIVES

The proposed amendments would provide that holders of certain cash-settled derivative securities will be “deemed” beneficial owners of the reference equity securities. Currently, a holder of an option, warrant, convertible note, or convertible preferred stock that provides that exercise of a conversion right can be settled in cash (or at the discretion of the issuer) does not have beneficial ownership of the underlying security.

Specifically, proposed Rule 13d-3(e) would provide that a holder of a cash-settled derivative security, other than a security-based swap (the SEC on December 15, 2021 proposed separate reporting requirements for Large Security-Based Swap Positions), will 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. When determining ownership of equity securities, only long positions in derivative securities would be counted and short positions would not be netted against long positions.

In addition, the proposed amendments would revise Item 6 of Schedule 13D 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

The proposed amendments would clarify the circumstances under which two or more persons have formed a “group” under Regulation 13D-G and the Exchange Act, as follows:

• The amendments would provide that a group is created when two or more persons “act as” a group for purposes of acquiring, holding, or disposing. The amendments would make clear that the determination as to 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.
• A group would include, among other things, “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.
• The proposal would also codify the SEC’s position that an acquisition is necessary following group formation to trigger a group filing obligation.

The SEC also proposed to amend Rule 13d-5 to expressly impute to the group acquisitions made by a group member after the date of group formation. The amendment is intended to ensure that the acquisitions are attributed to the group once the group’s collective ownership exceeds 5% of the class or otherwise becomes subject to the reporting requirements (for example, following an initial public offering).

In addition, in part to offset the potential of the new amendments relating to groups to chill communications among shareholders or impeding shareholders’ engagement with issuers, the proposed amendments would provide new 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 address circumstances in which (1) investors communicate with one another or the issuer without the purpose or effect of changing or influencing control of the issuer and (2) investors and financial institutions enter into agreements governing the terms of derivative securities.

IMPLICATIONS FOR SECTION 16

The proposed amendments expanding the definition of beneficial owner would directly impact the analysis under Rule 16a-1(a)(1) as to whether a person is a 10% holder subject to Section 16 reporting obligations. For example, because proposed Rule 13d-3(e) would provide that holders of cash-settled derivative securities in specified circumstances will be “deemed” beneficial owners of the reference securities in a covered class for purposes of Sections 13(d) and (g), those holders also would be deemed beneficial owners of such reference securities for purposes of determining whether that person is a 10% holder under Section 16, including the reporting requirements, short-swing profit liability, and short sale prohibitions. Similarly, the expansion of the concept of group to include “tipper” and “tippee” would subject those persons to Section 16 as well.

IMPACT OF PROPOSED RULES

The proposed rules are part of an effort by the SEC to increase transparency in the capital markets. For example, simultaneously with the proposals, the SEC proposed to increase position reporting by private funds and has proposed reporting requirements for Large Security-Based Swap Positions. Of course, these position reporting requirements would be in addition to the current Form 13F and Form PF quarterly filing requirements by institutional managers and Section 16 reporting requirements by 10% holders and other insiders. The acceleration of the filing and amendment deadlines will significantly increase the burdens of beneficial ownership reporting. The five-day reporting deadline will be difficult to meet in many instances, particularly with respect to Schedule 13D filings. It will be imperative that systems be in place to prevent exceeding reporting thresholds unless the responsible persons are alerted and the disclosures are ready to be prepared. In recognition of this burden, the proposed amendments would extend the filing “cut-off” times for Schedules 13D and 13G from 5:30 pm to 10:00 pm eastern time, the same cut-off time for Section 16 filings.

The amendments regarding group formation are consistent with current interpretations by the SEC staff but are intended principally to reduce the SEC’s evidentiary burden in litigation. Many institutional investors will welcome the exemptions for consultations by investors, which is considered a significant area of uncertainty.

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