SEC Reopens Comment Period for Proposal to Amend Schedule 13D/G Reporting Requirements
[35270]
May 01, 2023
TO: Chief Compliance Officer CommitteeClosed-End Investment Company Committee
Derivatives Markets Advisory Committee
Equity Markets Advisory Committee
Investment Advisers Committee
SEC Rules Committee RE: SEC Reopens Comment Period for Proposal to Amend Schedule 13D/G Reporting Requirements
On April 28, the Securities and Exchange Commission (SEC or "Commission") reopened the comment period for its proposal to amend the rules governing beneficial ownership reporting on Schedules 13D and 13G ("Proposal").[1] The Commission reopened the comment period to allow interested persons an opportunity to comment on the supplemental data and analysis contained in a memorandum the SEC's Division of Economic and Risk Analysis (DERA) added to the public comment file for the Proposal on April 28 ("DERA Memo").[2] The Commission reopened the comment period until the later of 30 days after publication in the Federal Register or June 27, 2023. ICI does not plan to submit supplemental comments on the Proposal, as the DERA Memo does not address the issues that were the focus of ICI's April 2022 comment letter.
Summary of DERA Memo
DERA prepared its memorandum to provide additional background and baseline data on Schedule 13D and 13G filings and provide supplemental analysis on two issues regarding Schedule 13D Filings that were raised by commenters. Specifically, the DERA Memo analyzes: (i) the potential effects on activism that may result from the proposed shortening of the Schedule 13D filing deadline, and (ii) potential harms to certain selling shareholders under the existing Schedule 13D filing deadline.
Background
For purposes of its analysis, DERA categorizes Schedule 13D filings from 2011-2021 as either "corporate action filings," which are typically associated with beneficial ownership acquired in events such as mergers and acquisitions, IPOs, other restructurings, private placements, or compensation awards, or "non-corporate action filings," which are typically associated with the accumulation of shares in open-market trading through a sequence of transactions and are likely to involve activist campaigns. DERA finds that for 2011-2021, 80% of 13D filings were corporate action filings, and 20% of the filings were non-corporate action filings. Based on its analysis, DERA finds that the benefits of the proposed shortened 13D filing period may be limited with respect to corporate action filings, but that there may be greater potential benefits of a shortened 13D filing period for non-corporate action filings.[3]
Potential Effects on Activism
Some commenters suggested that the economic analysis in the Proposal could have been enhanced by further consideration of existing studies on activist campaigns and quantification of the potential effects of the proposed amendments on activist campaigns. DERA provides further analysis of these issues, considering the academic literature and the 20% of 13D filings that were non-corporate action filings, but concludes that it is unable to ascertain the likelihood of the potential impacts of the Proposal on activism because it "cannot predict with a reasonable degree of certainty how activists and other market participants would respond to the proposed changes."[4]
Potential Harms to Selling Shareholders
Some commenters also suggested that the economic analysis in the Proposal could have been enhanced by a quantitative analysis of the potential harms to selling shareholders under the current Schedule 13D filing deadline. In response, DERA provides a quantitative analysis of the potential harms, under current rules, to shareholders who sell to traders other than the 13D filer. These traders may become aware of a potential activist campaign before a Schedule 13D is filed. DERA again focuses on the 20% of filings that were non-corporate action filings and concludes that it "cannot predict with a reasonable degree of certainty how activists and other market participants are likely to respond to the proposed changes and thus . . . how likely it is for these harms to be avoided."[5] DERA nonetheless estimates potential harms to selling shareholders that could be avoided if the 13D filing deadline were shortened to five days, noting different factual assumptions that would change the amount of harms avoided.[6]
DERA concludes with an assertion that harms to selling shareholders from this type of activity "may have broader implications for trust in markets and liquidity" and, therefore, lessening unfair informational advantages in the market "could enhance trust in the securities markets, thereby promoting capital formation."[7] DERA speculates that, under current rules, the risk of facing these opportunistic traders may cause market makers to charge wider bid-ask spreads, thus reducing liquidity.[8]
Sarah A. Bessin
Deputy General Counsel - Markets, SMAs & CITs
Notes
[1] The Commission's release reopening the comment period is available at https://www.sec.gov/rules/proposed/2023/33-11180.pdf. For a summary of the Proposal, please see ICI Memorandum No. 34034 (Feb. 15, 2022), available at https://www.ici.org/memo34034. On April 7, 2022, ICI filed a comment letter on the Proposal. For a summary of ICI's comment letter, please see ICI Memorandum No. 34102 (Apr. 7, 2022), available at https://www.ici.org/memo34102.
[2] The DERA Memo is available at https://www.sec.gov/comments/s7-06-22/s70622-20165251-334474.pdf.
[3] DERA observes "that there is greater potential for improvement in allocative efficiency and a reduction in information asymmetry under a shortened deadline with respect to these non-corporate-action filings." DERA Memo at 7-8.
[4] DERA memo at 11.
[5] DERA memo at 20.
[6] DERA memo at 26.
[7] DERA memo at 27.
[8] Id.