SEC Proposes Amendments to Schedule 13D/G Reporting Requirements

[34034]

February 15, 2022

TO: ICI Members
Chief Compliance Officer Committee
Closed-End Investment Company Committee
Derivatives Markets Advisory Committee
Equity Markets Advisory Committee
Investment Advisers Committee
SEC Rules Committee SUBJECTS: Closed-End Funds
Compliance
Derivatives
Investment Advisers
Operations
Trading and Markets RE: SEC Proposes Amendments to Schedule 13D/G Reporting Requirements

 

On February 10, the SEC, by seriatim approval, proposed amendments to its rules governing beneficial ownership reporting on Schedules 13D and 13G ("Proposal").[1] Comments on the proposal are due the later of: (i) April 11, 2022 (60 days following the publication of the proposing release on the SEC's website); or (ii) 30 days following publication of the proposing release in the Federal Register. The Proposal is summarized below.

Proposed Changes to Schedule 13D Filings

Currently, Section 13(d)(1) of the Securities Exchange Act of 1934 ("Exchange Act") requires a disclosure statement to be filed within 10 days after an acquisition or otherwise becoming the beneficial owner of more than five percent of a covered class of equity securities[2] or "within such shorter time as the Commission may establish by rule." Rule 13d-1(a) under the Exchange Act provides a for a 10-day filing deadline for the initial Schedule 13D, and Rule 13d-2(a) under the Exchange Act requires that, if there is any material change to the information in Schedule 13D, an amendment must be filed promptly. The Dodd-Frank Act amended Section 13(d)(1) to provide the Commission with the authority to shorten, by rule, the deadline for filing Schedule 13D.

The Commission proposes to amend Rule 13d-1(a) to shorten the initial filing deadline for Schedule 13D from 10 days to five days[3] after the date on which a person acquires beneficial ownership of more than five percent of a covered class of equity securities, and amend Rules 13d-1(e), (f) and (g) to shorten the filing deadline to five days for persons who lose their eligibility to file on Schedule 13G. The Commission also proposes to amend Rule 13d-2(a) to require that amendments to Schedule 13D be filed within one business day of a material change. The Commission explains that revising the reporting deadline is consistent with previous Congressional and Commission efforts to accelerate public disclosure of material information to the market, including Section 16 reports, Form 4 filings, and Form 8-K reports, as well as similar beneficial ownership reports in certain foreign jurisdictions.

The Commission believes that shortening the filing deadline is warranted based on technological developments since Section 13(d)(1) was enacted in 1968, as well as a need to address information asymmetries in the markets that could harm investors. Specifically, the Commission is concerned that, currently, large shareholders may acquire additional shares during the 10-day period before reporting, and that investors who do not know about the large position may enter into securities transactions during that period that may be mispriced as a result. Shortening the filing period would make this market-moving information available more quickly, "improving opportunities for more efficient and more accurate price discovery."[4]

Proposed Changes to Schedule 13G Filings

Rule 13d-1 under the Exchange Act provides that certain investors that acquire more than five percent of a covered class of equity securities may file a Schedule 13G instead of a Schedule 13D. These investors are referred to in the Proposal as Qualified Institutional Investors (QIIs)[5]  and Passive Investors.[6] Another category of investors, Exempt Investors,[7] are required to file Schedule 13G. Registered funds and advisers, when holding securities "in the ordinary course of . . . business " and "not with the purpose [or] effect of changing or influencing the control of the issuer" typically meet the definition of QIIs and file a Schedule 13G.

The Commission proposes to amend Rules 13d-1(b) and (d) to shorten the Schedule 13G filing deadline for QIIs and Exempt Investors from 45 days after year-end in which beneficial ownership exceeds five percent, to five business days after the end of the month in which the investor beneficially owns more than five percent of the covered class of equity securities. The Commission proposes to amend Rule 13d-1(c) to shorten the initial filing deadline for Passive Investors filing Schedule 13G, from 10 days to five days after acquiring beneficial ownership of more than five percent of the covered class.

The Commission proposes to amend Rule 13d-2(b) to shorten the deadline to file amendments to Schedule 13G from 45 days after the end of the year in which any change occurred to five business days after the end of the month in which a material change occurred including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned.[8]  The Commission notes that this proposed deadline is consistent with the proposed five business day deadline for QIIs' and Exempt Investors' initial Schedule 13G filings.

Currently, QIIs and Passive Investors have to file an amendment to Schedule 13G if they exceed 10% beneficial ownership and, thereafter, when their beneficial ownership increases or decreases by five percent.[9] The Commission proposes to amend Rule 13d-2(c) and (d) to accelerate these filing deadlines for QIIs, from 10 days to five days,[10] and for Passive Investors, from "promptly" to one business day. Given its proposal to accelerate the deadline to file amendments on Schedule 13G to five business days after month-end, the Commission asks whether it is necessary to retain the language in Rule 13d-2(c) that imposes an additional amendment obligation on QIIs after exceeding 10% of a covered class of equity securities.  

In proposing to change the reporting obligation for QIIs and Exempt Investors from 45 days after year-end to five business days after month-end and shortening the deadline for QIIs to report when beneficial ownership exceeds 10%, the Commission believes that the shorter reporting deadlines may discourage these investors from selling down positions before the end of the calendar year or month-end, as applicable, to avoid a reporting obligation. The Commission believes this more timely disclosure will minimize additional burdens because these investors "should already have well-established compliance systems in place to monitor Schedule 1G ownership levels to determine whether filing obligations have been triggered."[11]

Treatment of Derivative Securities

Rule 13d-3(a) provides that, for purposes of Section 13(d) and 13(g), a "beneficial owner" of a security includes any person who, directly or indirectly, has or shares (i) voting power which includes the power to vote, or to direct the voting of, the security; and/or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. Rule 13d-3(b) is an anti-evasion provision that provides that a person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement, or any other contract, arrangement or device "with the purpose or effect of divesting the person of beneficial ownership of a security or preventing vesting of beneficial ownership as part of a plan or scheme to evade the reporting requirements of section 13(d) or (g)" will be treated as a beneficial owner of the securities. Rule 13d-3(d) provides that a person will be deemed to be the beneficial owner of a security if the person has the right to acquire beneficial ownership of the security within sixty days through, among other methods, the exercise of any option, warrant or right, or the conversion of a security.[12] The rule provides that the option, warrant, right, or convertible security also may result in an independent obligation to file with respect to the underlying security.

Thus, under the current rule, an investor will be deemed a beneficial owner of a covered class of equity securities if, for example, the investor: (i) holds a right to acquire the security (through the exercise of an option or warrant or conversion of a security) that is exercisable or convertible within 60 days; (ii) obtains a right to acquire the security for the purpose or with the effect of changing or influencing control of the issuer (regardless of when the right may be exercised, exchanged, or converted); or (iii) is found, based on the facts and circumstances, to have used cash-settled derivative securities to engage in a plan or scheme to evade the reporting requirements of Sections 13(d) or (g).[13] The SEC historically has generally not extended the concept of beneficial ownership, for purposes of Section 13(d) and (g), to derivative securities that entitle the holder to nothing more than economic exposure to a covered class of securities.[14]     

The Proposal would add a new rule, Rule 13d-3(e), providing that a holder of a cash-settled derivative security, as defined in Rule 16a-1(c),[15] other than a security-based swap, will be deemed the beneficial owner of the reference equity securities if the derivative security is held with the purposes 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 that purpose or effect. The Commission believes that when an investor holds a cash-settled derivative security with the purpose or effect of changing or influencing the control of the issuer, the investor may exert influence on a counterparty that directly holds the reference asset.[16] The proposed rule also includes a formula for calculating the number of equity securities that a holder of a cash-settled derivative will be deemed to beneficially own.[17] 

Importantly, proposed Rule 13d-3(e) excludes security-based swaps, in recognition of the separate rule the SEC has proposed, Rule 10B-1 under the Exchange Act, which would require reporting of large positions in security-based swaps.[18] The SEC believes that the disclosures of cash-settled security-based swap positions that would be reported under proposed Rule 10B-1 would provide sufficient information, and that including these positions under Rule 13d-3(e) would be duplicative.

The SEC explains that this new rule would be applied separately from, and in addition to, existing Rules 13d-3(a) and (b), which may, depending on the facts and circumstances, apply independently to persons who purchase or sell cash-settled derivatives, as described above.

The Proposal also 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, including cash-settled derivative securities that do not originate with the issuer, such as security-based swaps.

Treatment of a "Group"

Rule 13d-5(b)(1) provides that, when two or more persons agree to act together to acquire, hold, vote, or dispose of a covered class of equity securities, the group is deemed to have acquired beneficial ownership, for purposes of Sections 13(d) and 13(g). Rule 13d-5(b)(2) provides a conditional exemption from treatment as a group for "concerted actions" relating to purchases of a covered class of equity securities directly from an issuer in a non-public offering. Neither Section 13(d) nor Section 13(g) defines the term "group," the existence of which is determined based on a facts and circumstances analysis.

The Proposal would make several clarifying changes to Rule 13d-5 and would amend the rule in several respects. First, the Proposal would amend Rule 13d-5(b)(1) by redesignating it as Rule 13d-5(b)(1)(i) and removing the reference to an "agreement" between two or more persons to make it clear that, consistent with the text of Sections 13(d) and 13(g), an express agreement is not necessary to determine that two or more persons are acting as a group. For example, concerted actions by two or more persons for the purpose of acquiring, holding, or disposing of a covered class of equity securities are sufficient to constitute formation of a group. 

Second, the Proposal would add new Rule 13d-5(b)(1)(ii), which would provide that, if a person shares non-public information about the person's upcoming Schedule 13D filing with the purpose of causing others to make purchases of the same class of an issuer's covered securities, and another person subsequently purchases the issuer's securities based on this information, these persons will be deemed to have formed a group within the meaning of Section 13(d)(3). The SEC explains that this provision is intended to address a situation in which a large shareholder tips another person regarding the large holder's impending Schedule 13D filing obligation, and is intended to prevent circumvention of Section 13(d) through concerted activity even in the absence of an express or implied agreement.[19] 

Third, the Proposal would add new Rules 13d-5(b)(1)(iii) and 13d-5(b)(2)(ii), which would provide that a group for purposes of, respectively Section 13(d)(3) or Section 13(g)(3), will be deemed to have acquired beneficial ownership of a covered class of equity securities if any member of the group becomes the beneficial owner of additional equity securities of that class after the date of the group's formation. These rules are intended to make it clearer when acquisitions of beneficial ownership of a covered class of equity securities should be attributed to a group. Proposed Rules 13d-5(b)(1)(iv) and 13d-5(b)(2)(iii) would exclude from the coverage of these proposed beneficial ownership attribution rules intra-group transfers of equity securities of a covered class.

Exemptions

Rule 13d-6 under the Exchange Act provides a conditional exemption from Section 13(d) for the acquisition of securities of an issuer in a preemptive subscription rights offering by a person who, prior to the acquisition, was a beneficial owner of more than five percent of the outstanding securities of the same class as those acquired. The Proposal would add two new exemptions to Rule 13d-6 so that certain actions taken by two or more persons will not cause them to be deemed to be acting as a group, for purposes of Sections 13(d) and 13(g), where those actions do not have the purpose or effect of changing or influencing the control of an issuer. The Proposal also would redesignate Rule 13d-5(b)(2) as Rule 13d-6(b).

Proposed Rule 13d-6(c) provides that two or more persons will not be deemed to beneficially own an issuer's equity securities as a group, for purposes of Sections 13(d)(3) or 13(g)(3), solely because of their concerted actions with respect to an issuer's equity securities, including engagement with one another or the issuer, or acquiring, holding, voting, or disposing of the issuer's equity securities. The proposed exemption would be available only to persons who are not directly or indirectly obligated to take such actions (e.g., pursuant to the terms of a cooperation or joint voting agreement) and where the communications are not undertaken with the purpose or effect of changing or influencing control of the issuer, and are not made in connection with or as a participant in any transaction having such purpose or effect. The SEC explains that this exemption would permit institutional investors or shareholder proponents to communicate with one another regarding an issuer's performance or corporate policy matters involving issuers without being deemed to form a group, for purposes of Sections 13(d) or 13(g). The exemption would allow them to take similar action with respect to the issuer or its securities, including engaging directly with the issuer's management or coordinating their proxy voting of the issuer's shares with respect to management or shareholder proposals.[20]

Proposed Rule 13d-6(d) provides that two or more persons will not be deemed to have formed a group for purposes of Sections 13(d)(3) or 13(g)(3) solely because they enter into an agreement governing the terms of an equity-based derivative security (e.g., a market participant entering into a derivative security with a financial institution counterparty in the ordinary course). To rely on the exemption (i) the agreement must be a bona fide purchase and sale agreement entered into in the ordinary course of business; and (ii) the agreement may not be entered into with the purpose or effect of changing or influencing control of the issuer, or in connection with or as a participant in any transaction having such purpose or effect. The SEC believes this exemption is necessary to avoid these persons being deemed to be acting as a group as a result of the financial institution's foreseeable "covering" of its position for the duration of the derivative by acquiring and holding the reference security.

Changes to the Filing Process

In recognition of the additional administrative burdens placed on investors by shortening the reporting deadlines for Schedules 13D and 13G, the SEC proposes to amend Rule 13(a)(4) of Regulation S-T to extend the filing cut-off times in EDGAR for filing Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. ET each business day. Thus, filings made prior to 10:00 p.m. ET on a business day would be treated as received by the SEC on that business day.[21] In connection with this proposed amendment, the SEC proposes to amend Rule 201(a) to remove the ability for a Schedule 13D or 13G filer to request a temporary hardship exemption, as it should no longer be necessary.[22] The SEC asks, if it amends Rule 13(a)(4) of Regulation S-T, as proposed, whether it should also extend EDGAR filer support hours beyond 6:00 p.m. ET.

Currently, Schedules 13D and 13G are required to be filed electronically on the SEC's EDGAR system in HTML or ASCII. The SEC proposes to require that Schedules 13D and 13G instead be filed using an XML structured data language specific to Schedules 13D and 13G. For both Schedules, all disclosures, textual narratives, and identification checkboxes, would be required to be filed in XML, with the exception of the exhibits to the Schedules.

 

Sarah A. Bessin
Associate General Counsel

endnotes

[1] The Proposal is available at https://www.sec.gov/rules/proposed/2022/33-11030.pdf?utm_medium=email&utm_source=govdelivery ("Proposing Release"), the SEC's Fact Sheet is available at https://www.sec.gov/files/33-11030-fact-sheet.pdf, and Commissioner Peirce's dissenting statement is available at https://www.sec.gov/news/statement/peirce-13d-20220210?utm_medium=email&utm_source=govdelivery.

[2] Securities that are subject to reporting under Section 13(d) include any equity security of a class which is registered pursuant to Section 12 of the Exchange Act, or any equity security of any insurance company which would have been required to be so registered except for the exemption contained in Section 12(g)(2)(G) of the Exchange Act, or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940, or any equity security issued by a Native Corporation pursuant to Section 1629c(d)(6) of title 43, or otherwise becomes or is deemed to become a beneficial owner of any of the foregoing upon the purchase or sale of a security-based swap that the Commission may define by rule. Rule 13d-1 explicitly excludes non-voting securities from the scope of reporting under Section 13, with the caveats for derivatives discussed below.

[3] As proposed, this would mean five calendar days, not business days. The Commission asks whether it should instead use business days for purposes of measuring the deadline.

[4] Proposing Release at 23.

[5] Qualified Institutional Investors, as used in the Proposal, include, among others, registered investment companies,  registered investment advisers, registered broker-dealers, banks, and non-US institutions that are the functional equivalent of the institutions listed in Rule 13d-1(b)(1)(ii)A)-(I), as long as the non-US institution is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to the equivalent US institution. See Rule 13d-1(b); Proposing Release at n.6. 

[6] Passive Investors, as used in the Proposal, refers to beneficial owners of more than five percent but less than 20% of a covered class who can certify under Item 10 of Schedule 13G that the subject securities were not acquired or 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. These investors are ineligible to report beneficial ownership pursuant to Rules 13d-1(b) or (d) but are eligible to report beneficial ownership on Schedule 13G in reliance upon Rule 13d-1(c). See Rule 13d-1(c); Proposing Release at n.8.

[7] Exempt Investors, as used in the Proposal, refers to persons holding beneficial ownership of more than five percent 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). See Proposing Release at n.7.

[8] An amendment would not need to be filed with respect to a change in the percent of class outstanding previously reported if the change results solely from a change in the aggregate number of securities outstanding.

[9] QIIs are required by Rule 13d-2(c) to file these additional amendments 10 days after the first month in which they increase or decrease their beneficial ownership by more than five percent of the covered class, calculated as of the last day of the month.

[10] Note that this would be five calendar days, although the Commission asks whether the deadline should instead be expressed in business days. More broadly, the Commission asks whether this amendment obligation is necessary, given the Commission's proposed amendments to shorten the deadline for QIIs to file amendments to their Schedule 13G. Proposing Release at 47.

[11] Proposing Release at 37.

[12] The rule provides further that "[a]ny securities not outstanding which are subject to such options, warrants, rights or conversion privileges shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but shall not be deemed to be outstanding for the purpose of computing the percentage of the class by any other person."

[13] Proposing Release at n.97.

[14] Proposing Release at 53 and nn.87, 114, 198. The Dodd-Frank Act added new Section 13(o) to the Exchange Act, which provides that a person shall be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap, only to the extent that the Commission adopts rules after making certain determinations with respect to the purchase or sale of security-based swaps. Following the 2011 effective date of Section 13(o), the SEC readopted, without change, the relevant portions of Rules 13d-3 and 16a-1 under the Exchange Act, and confirmed that it was not changing the definition of beneficial ownership with respect to those rules. See Beneficial Ownership Reporting Requirements and Security-Based Swaps, Release No. 34-64628 (June 8, 2011), available at https://www.sec.gov/rules/final/2011/34-64628.pdf.  

[15] Rule 16a-1(c) defines "derivatives securities" as any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege at a price related to an equity security, or similar securities with a value derived from the value of an equity security, but shall not include:

1. Rights of a pledgee of securities to sell the pledged securities;
2. Rights of all holders of a class of securities of an issuer to receive securities pro rata, or obligations to dispose of securities, as a result of a merger, exchange offer, or consolidation involving the issuer of the securities;
3. Rights or obligations to surrender a security, or have a security withheld, upon the receipt or exercise of a derivative security or the receipt or vesting of equity securities, in order to satisfy the exercise price or the tax withholding consequences of receipt, exercise or vesting;
4. Interests in broad-based index options, broad-based index futures, and broad-based publicly traded market baskets of stocks approved for trading by the appropriate federal governmental authority;
5. Interests or rights to participate in employee benefit plans of the issuer;
6. Rights with an exercise or conversion privilege at a price that is not fixed; or
7. Options granted to an underwriter in a registered public offering for the purpose of satisfying over-allotments in such offering.

[16] For purposes of this proposed rule, and similar to existing Rule 13d-3(d)(1)(i), any securities that are not outstanding but are referenced by the relevant cash-settled derivative security will be deemed to be outstanding solely for the purpose of calculating the percentage of the relevant covered class beneficially owned by the holder of the derivative security.

[17] The holder would include the larger of (in each case as applicable): (A) The product that is obtained by multiplying (x) the number of securities by reference to which the amount payable under the derivative security is determined by (y) the delta of the derivative security; and (B) The number that is obtained by (x) dividing the notional amount of the derivative security by the most recent closing market price of the reference equity security, and then (y) multiplying such quotient by the delta of the derivative security. The proposed rule specifies that only long positions should be counted and that the calculation in clause (e)(2)(i)(B)(x) should be performed on a daily basis. The proposed rule also provides that, if a derivative security does not have a fixed delta, the delta must be calculated on a daily basis.

[18] For ICI's summary of proposed Rule 10B-1, please see ICI Memorandum No. 33972 (Dec. 21, 2021), available at https://www.ici.org/memo33972.

[19] The SEC asks whether the proposed rule would unduly chill communications between shareholders and market participants, such as investment advisers and, if so, whether modifications should be made to the rule to address those concerns. Proposing Release at 92.

[20] Proposing Release at 95. The SEC asks whether the proposed exemption is broad enough to exempt activity by shareholders who coordinate to make non-binding proposals under Rule 14a-8 under the Exchange Act or otherwise, or whether an express exemption is needed for shareholders who act together in introducing such proposals.

[21] The SEC has made similar amendments to Regulation S-T with respect to Forms 3, 4, and 5 and Schedule 14N.

[22] The Commission notes that the filer could still request a filing date adjustment under the same circumstances that a temporary hardship exemption would have been available. Proposing Release at 51.