ICI Draft Comment Letter on SEC's Proposal to Amend Schedule 13D/G Reporting Requirements - Your Comments Requested by March 23

[34077]

March 16, 2022

TO: Chief Compliance Officer Committee
Closed-End Investment Company Committee
Derivatives Markets Advisory Committee
Equity Markets Advisory Committee
Investment Advisers Committee
SEC Rules Committee RE: ICI Draft Comment Letter on SEC's Proposal to Amend Schedule 13D/G Reporting Requirements - Your Comments Requested by March 23

 

On February 10, the Securities and Exchange Commission proposed amendments to its rules governing beneficial ownership reporting on Schedules 13D and 13G ("Proposal").[1] Comments on the Proposal are due on April 11, although ICI expects to file by April 7.

We have prepared the attached draft comment letter for your review and comment. The draft letter, which is summarized below, includes a number of highlighted notes to you and questions on which we seek your specific feedback, in addition to any other comments you may have on the letter. Please provide your written comments to me at sarah.bessin@ici.org by Wednesday, March 23. We have scheduled a member call on Friday, March 25, from 12-1 pm ET to discuss comments and resolve any outstanding issues. We will send you an Outlook calendar invitation for that call.

Background

ICI's letter explains that ICI members typically file Schedule 13G and meet the definition of a "Qualified Institutional Investor" (QII), although members may, in limited circumstances, file a Schedule 13D. The letter further explains how closed-end funds may use Schedule 13D data.

Filing Timeframes for Schedules 13D/G Must Reflect the Purposes of These Provisions

The letter asserts that the SEC has not persuasively explained why it is appropriate to aggressively shorten the filing deadlines for Schedules 13D and 13G. We question the Commission's explanation that shortening the filing deadlines is warranted based on technological developments, pointing out that the Commission has not technologically updated its own systems on which market participants rely to obtain the data needed to make these filings. We also question the Commission's assertions that shortening the filing deadlines is necessary to address "information asymmetries" and "reporting gaps" that could harm investors. Without evidence, the SEC suggests that QIIs may sell down positions before the end of a reporting period to avoid having to report. We do not believe these unsupported claims are an appropriate basis on which to dramatically shorten the reporting deadlines for QIIs filing on Schedule 13G. The letter then provides the legislative and administrative history of Sections 13(d) and 13(g), which does not support either the SEC's stated concerns with respect to Schedule 13G filers, or the accelerated timeframes it proposes.

Recommended Filing Deadlines for Schedules 13D and for QIIs Filing on Schedule 13G

For the initial filing on Schedule 13D, we recommend that the Commission provide five business days instead of five calendar days as proposed. More generally, we urge the Commission to measure all of the filing deadlines with respect to the rules under Sections 13(d) and 13(g) in business days, rather than calendar days. For amendments to Schedule 13D, we recommend that the Commission retain the current standard of "promptly," rather than requiring that amendments be made within one business day, to provide reasonable flexibility for market participants to take the steps they need to prepare and file amendments without fear of being in violation of the rule's amendment filing deadline.

For the initial filing on Schedule 13G, we recommend that the Commission require a QII to file quarterly, within 10 business days of end of a quarter at which the QII beneficially owns more than five percent of a covered class of equity securities. Currently, QIIs are required to file an initial Schedule 13G within 45 days after the end of the calendar year in which the QII's beneficial ownership exceeds five percent. We explain that accelerating this filing obligation to monthly, within five business days, is unprecedented and inappropriate.

For similar reasons, we recommend that the SEC apply the same time frame to amendments by QIIs to a previously filed Schedule 13G—i.e., require that amendments be filed within 10 business days of the end of a quarter in which a material change occurred. We request, however, that the Commission clarify what constitutes a material change, to ensure that QIIs are required to file amendments only with respect to those changes that are important to market participants and are not subject to unnecessary filing burdens. Specifically, we request that the SEC confirm that a change in beneficial ownership of less than five percent will not generally be deemed material for these purposes.

For QIIs that exceed 10% beneficial ownership, we recommend that the Commission retain the current approach under Rule 13d-2(c) of determining 10% beneficial ownership as of the end of a month, although we recommend amending the rule to require that the amendment be filed within 10 business days, rather than calendar days, to provide for consistent reference to business days across the Commission's Section 13(d)/(g) rules.

The SEC Should Revise Proposed Derivatives Provisions to Avoid Inadvertent Consequences

The letter supports the SEC's historical position that derivative securities that entitle the holder to nothing more than economic exposure to a security should rarely result in beneficial ownership for purposes of Sections 13(d) or 13(g). We urge the Commission to maintain this position and avoid more broadly attributing beneficial ownership to derivatives counterparties. Doing so would be inconsistent with longstanding legal precedent and industry practice, and could have significant unintended consequences, reaching far beyond these rules.

The SEC proposes to add a new rule, Rule 13d-3(e), providing that a holder of a cash-settled derivative security, other than a security-based swap, will be deemed the beneficial owner of the reference security if the derivative security is held with the purpose or effect of changing or influencing the control of the issuer of the reference security or in connection with or as a participant in any transaction having that purpose or effect. We support the SEC's proposed exclusion of security-based swaps in recognition of its current proposal that would require reporting of large positions in these instruments. The letter expresses concern, however, that proposed new Rule 13d-3(e) would inadvertently apply to a broader range of situations than the SEC intended. We question whether such a specific provision is necessary, and believe that the unintended negative consequences of the provision may well outweigh the potential benefits of having an explicit anti-evasion provision.

Treatment as a "Group" for Purposes of Sections 13(d) and 13(g)

The Proposal would make several changes to Rule 13d-5 addressing when a "group" is formed for purposes of Sections 13(d) and 13(g). While we appreciate the SEC's intent in these proposed provisions to better define the scope of a "group" for purposes of Sections 13(d) and 13(g), we believe these provisions would likely have a broader effect than the SEC anticipates and would have detrimental unintended consequences. We disagree with the Commission's assertion that an agreement is not necessary to form a group for purposes of Sections 13(d) and 13(g) and believe that the Commission's proposal to remove the word "agree" from the regulatory language in Rule 13d-5 may exceed its statutory authority.

The SEC explains that proposed new Rule 13d-5(b)(1)(ii) is intended to prevent circumvention of Section 13(d) through concerted activity even in the absence of an express or implied agreement. This proposed rule raises the question of whether intent is necessary to form a group for purposes of Sections 13(d) and 13(g). We are concerned that this rule would have unintended consequences and create uncertainty, and recommend that the Commission eliminate it.

The letter also discusses the two new proposed exemptions in Rule 13d-6 intended to provide 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. 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: (i) to persons who are not directly or indirectly obligated to take such actions; and (ii) 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 Commission intends 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). It would also 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 voting of the issuer's shares with respect to management or shareholder proposals.

The letter explains that, while we strongly support the intent of this proposed exemption, we believe that, as drafted, and in conjunction with the SEC's proposed approach to the concept of "group" in Rule 13d-5, the proposed exemption would cover a narrower range of conduct than the SEC intends and would create uncertainty regarding the activities that may result in group status. As a result of these concerns, we believe industry participants would be hesitant to rely on the exemption, unless it is revised as ICI recommends.

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, provided that the agreement: (i) is a bona fide purchase and sale agreement entered into in the ordinary course of business; and (ii) is not 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 explains that this exemption is necessary to avoid a financial institution and its counterparty from being deemed to be acting as a group as a result of a financial institution's foreseeable "covering" of its position for the duration of the derivative by acquiring and holding the reference security.

ICI's letter questions whether this proposed provision is necessary or would instead create uncertainty. Market participants have been entering into ordinary course derivatives transactions for years without treating these transactions as creating a group for purposes of Sections 13(d) and 13(g). In the absence of additional factors that would suggest the existence of a group, it is unclear why an explicit exemption is necessary.

ICI Supports Changes to the Filing Process

The letter explains that ICI supports the SEC's proposed extension of the filing cut-off times in the EDGAR system for filing Schedules 13D and 13G from 5:30 pm to 10:00 pm ET each business day, in recognition of the additional burdens placed on filers by SEC's proposed shortened filing deadlines. For similar reasons, ICI supports the SEC's proposal to extend the EDGAR filer support hours beyond 6 pm ET.

ICI supports the SEC's proposal to require that Schedules 13D and 13G be filed in an XML-based structured data language. We urge the SEC, however, to provide a sufficiently long compliance period for funds and advisers to incorporate XML reporting.

The SEC Must Provide an Adequate Implementation Period

The letter urges the SEC, in any final rules and amendments, to include compliance dates that will provide funds, advisers, and other market participants with adequate time to implement the changes that the SEC proposes. We note that, in addition to the Proposal, the Commission has issued 20 other significant rule proposals within the last six months alone, many of which would impose new or enhanced reporting obligations on market participants. The vast majority of these proposals, if adopted, would affect funds and investment advisers. Implementation of these rules would require a tremendous amount of work and devotion of resources by funds, investment advisers, and other market participants.

Accordingly, we urge the Commission to propose a holistic, staged multi-year implementation schedule with respect to all of the reporting rules it adopts, taking into account the combined implementation efforts that will be required across all of these rulemakings, how the rulemakings inter-relate, and the related impacts and burdens on funds, advisers, and other market participants. The SEC should provide public notice and an opportunity for comment on a proposed staged implementation schedule. In the meantime, the SEC should take meaningful steps to mitigate the cumulative effects of its rulemakings by more closely considering its existing reporting obligations and determining whether some of these reporting obligations may be duplicative or unnecessary.

 

Sarah A. Bessin
Associate General Counsel

endnotes

[1] For a summary of the Proposal, please see ICI Memorandum No. 34034 (Feb. 15, 2022), available at https://www.ici.org/memo34034.