ICI Files Comment Letter on SEC Proposal to Amend Schedule 13D/G Reporting Requirements

[34102]

April 7, 2022

TO: ICI Members
Chief Risk 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
Disclosure
Fund Accounting & Financial Reporting
Investment Advisers
Operations
Settlement
Trading and Markets RE: ICI Files Comment Letter on SEC Proposal to Amend Schedule 13D/G Reporting Requirements

 

ICI has filed a comment letter with the SEC on its proposal to amend the rules governing beneficial ownership reporting on Schedules 13D and 13G ("Proposal").[1]  Our letter is attached and is summarized below.

ICI's letter explains that the SEC has not persuasively explained why it is appropriate to aggressively shorten the filing deadlines for Schedules 13D and 13G, particularly the Schedule 13G filing deadline for QIIs. Such a dramatically accelerated filing schedule raises significant concerns regarding harm to, and unnecessary costs to, advisers and their clients, including funds and their investors. ICI urges the Commission to revise its proposed filing deadlines to be consistent with the intent of Sections 13(d) and 13(g) and the fundamental difference between investors that acquire beneficial ownership of more than five percent of a covered class of securities with the purpose or effect of changing or influencing control of the issuer and investors that beneficially own more than five percent with no such purpose or effect, as well as the further distinction between non-control investors and the subset of those investors that are QIIs—institutions that acquire beneficial ownership in the ordinary course of business. ICI's basis and recommendations for revising the filing deadlines are discussed in Sections IV and V of our letter, and may be summarized as follows:

Issue

Current Requirement

SEC Proposal

ICI Recommendation

Initial Schedule 13D filing: Rule 13d-1(a)

Within 10 days after the date on which a person acquires beneficial ownership of more than five percent of a covered class of equity securities

Within 5 days after the date on which a person acquires beneficial ownership of more than five percent of a covered class of equity securities

Within 5 business days after the date on which a person acquires beneficial ownership of more than five percent of a covered class of equity securities

Amendments to Schedule 13D: Rule 13d-2(a)

"Promptly" following a material change

Within one business day of a material 

Retain standard of "promptly" following a material change or revise to specify "promptly, but within no more than three business days, following a material change"

Initial Schedule 13G filing by QIIs: Rule 13d-1(b)

Within 45 days after the end of the calendar year as of which the QII beneficially owns more than 5% of a covered class of equity securities

Within 5 business days after the end of the month as of which the QII beneficially owns more than 5% of the covered class of equity securities

Within 45 days after the end of the calendar quarter as of which the QII beneficially owns more than 5% of a covered class of equity securities

Amendments to Schedule 13G filings: Rule 13d-2(b)

Within 45 days after the end of the calendar year as of which any change occurred

Within 5 business days after the end of the month as of which a material change occurred including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned

Within 45 days after the end of the calendar quarter as of which a material change occurred; confirm that a change in beneficial ownership of <5% will not be deemed material for these purposes

10% Amendments to Schedule 13G by QIIs: Rule 13d-2(c)

Within 10 days after the end of the first month as of which the QII's beneficial ownership exceeds 10% of a covered class of equity securities and, thereafter, within 10 days after the end of the first month as of which the QII's beneficial ownership increases or decreases by 5%

Within 5 days after the QII's beneficial ownership exceeds 10% and, thereafter, within 5 days after a 5% increase or decrease in beneficial ownership

Retain current rule: Within 10 days after the end of the first month as of which the QII's beneficial ownership exceeds 10% of a covered class of equity securities and, thereafter, within 10 days after the end of the first month as of which the QII's beneficial ownership increases or decreases by 5%

We make the following recommendations and points in the remainder of the letter:

• In Section VI, we discuss the implications of proposed new Rule 13d-3(e).[2]  While we support the SEC's proposed exclusion from this rule of security-based swaps in recognition of its current proposal that would require reporting of large positions in these instruments, we are concerned that the rule 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 would outweigh the potential benefits of having an explicit anti-evasion provision.
• In Section VII, we discuss our views on the SEC's proposed changes to the concept of a "group" for purposes of Sections 13(d) and 13(g).[3]  We are deeply concerned that this aspect of the Proposal would likely have a broader effect than the SEC anticipates and would have highly detrimental unintended consequences. We explain that the SEC's proposed expansion of the concept of a "group" is inconsistent with the legislative history and case law of Sections 13(d) and 13(g) and would completely undermine the SEC's proposed exemptions in proposed Rule 13d-6(c) and (d),[4]  create significant uncertainty, and have a deeply chilling effect on legitimate actions by industry participants fearful of inadvertently forming a group. We recommend changes to broaden and clarify the scope of these proposed exemptions.
• In Section VIII, we express our support for the SEC's proposed changes to the filing process for Schedules 13D and 13G, including extending the filing cut-off times in the SEC's EDGAR system and requiring that Schedules 13D and 13G be filed using an XML-based structured data language. We also support the SEC extending the EDGAR filer support hours to reflect the extended filing cut-off times.
• In Section IX, we urge 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, including sufficient time to incorporate the new XML taxonomy into their systems. We note that, in addition to the Proposal, the Commission has issued over 20 other significant rule proposals within the last six months alone, many of which would impose new or enhanced reporting obligations on market participants. 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 and testing 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. In the meantime, we encourage the SEC to take meaningful steps to mitigate the cumulative effects of its rulemakings by more closely analyzing its existing reporting obligations and determining whether some of its proposed 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.

[2] Proposed Rule 13d-3(e) provides 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.

[3] The Proposal would amend Rule 13d-5(b)(1) by redesignating it as Rule 13d-5(b)(1)(i) and removing the word "agree" from the rule so that an agreement would not be a necessary prerequisite to finding the existence of a group for purposes of Sections 13(d) and 13(g). The Proposal also 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).

[4] Proposed Rule 13d-6(c) provides that, subject to certain conditions, 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 the issuer's equity securities, including engagement with one another or the issuer, or acquiring, holding, voting, or disposing of the issuer's equity securities. Proposed Rule 13d-6(d) provides that, subject to certain conditions, 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.