[35497]
October 27, 2023
TO: ICI MembersChief 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 Adopts Amendments to Schedule 13D/G Reporting Requirements
On October 10, the SEC adopted final amendments to its rules governing beneficial ownership reporting on Schedules 13D and 13G ("Final Rules").[1] We are pleased that the Final Rules reflect many of ICI's comments.[2] The Final Rules were approved by the Commission by a 4-1 vote (Commissioner Peirce dissented), on a seriatim basis.[3] We provide a summary of the Final Rules below. For your convenience, as Appendix A to this Memorandum, we attach a chart comparing the key elements of the Final Rules with (i) current requirements; (ii) the SEC's proposal ("Proposal");[4] and (iii) ICI's recommendations. As Appendix B to this Memorandum, we attach the SEC's guidance, in the form of a series of questions and answers, on when certain common shareholder engagement activities may result in the formation of a "group" for purposes of Section 13(d)(3) and 13(g)(3).
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[5] 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.
Consistent with ICI's comments and those of certain other commenters, the Commission will require that initial Schedule 13D filings be made within five business days[6] after the date on which a person acquires beneficial ownership of more than five percent of a covered class of securities, and that persons who become ineligible to report on Schedule 13G must make an initial filing on Schedule 13D within five business days after the event that causes the ineligibility. This was a change from the Proposal, which would have shortened the initial filing deadline for Schedule 13D from 10 days to five calendar days after the date on which a person acquires beneficial ownership of more than five percent of a covered class, or after the date on which a person loses eligibility to file on Schedule 13G. The Commission amended Rule 13d-2(a) to require that amendments to Schedule 13D must be filed within two business days of a material change, rather than one business day, as proposed.
Changes to Schedule 13G Filings
Rule 13d-1 under the Exchange Act provides that Qualified Institutional Investors (QIIs)[7] and Exempt Investors[8] that acquire more than five percent of a covered class of equity securities may file a Schedule 13G instead of a Schedule 13D. The current deadline for QIIs and Exempt Investors to file an initial Schedule 13G is 45 days after the end of the calendar year as of which the investor owns more than five percent of a covered class of equity securities.
Consistent with ICI's recommendation, the SEC shortened the deadline to 45 days after the end of the calendar quarter in which beneficial ownership first exceeds five percent of a covered class. This is a significant change from the Proposal, which would have required filing within five business days after the end of the month as of which the investor beneficially owned more than five percent of a covered class. The Commission also shortened the initial filing for Passive Investors[9] filing Schedule 13G from 10 days to five business days after the date on which they acquired beneficial ownership of more than five percent of a covered class.[10]
Also consistent with ICI's recommendation, the Commission amended 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 45 days after the end of the calendar quarter in which a material change occurred, consistent with the filing deadline for initial 13G filings by QIIs and Exempt Investors. The Commission rejected ICI's suggestion that a change in beneficial ownership of less than five percent should not be deemed material for these purposes, stating that:
The term 'material,' however, already is defined in Rule 12b-2 and is a familiar, established concept in the Federal securities laws. As such, we do not believe it is necessary or advisable to adopt a new materiality standard for purposes of Schedule 13G amendments under Rule 13d-2(b) or to provide an express safe harbor from the application of Rule 13d-2(b) for certain specified de minimis changes in beneficial ownership. . . . . Further, because both Rule 13d-2(a) and (b) will now share the same materiality standard for determining when an amendment is due, the language in Rule 13d-2(a), including the statement that "[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed 'material,'" is equally instructive for purposes of determining what changes are material under Rule 13d-2(b).[11]
Currently, QIIs must file an amendment to Schedule 13G within ten days after the end of the first month in which they exceed 10% beneficial ownership and, thereafter, within 10 days after the end of the first month as of which their beneficial ownership increases or decreases by five percent. Passive Investors currently must file an amendment to Schedule 13G "promptly" after the investor's beneficial ownership exceeds 10% or increases or decreases by five percent. The Commission amended Rule 13d-2(c) and (d) to accelerate these filing deadlines for QIIs, from 10 calendar days to five business days, and for Passive Investors, from "promptly" to two business days.
Treatment of Derivative Securities
Rule 13d-3(a) currently 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. 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.
As proposed, the Final Rules will 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. Based on comments received, the Commission declined to adopt proposed Rule 13d-3(e), which would have provided that a holder of a cash-settled derivative security, as defined in Rule 16a-1(c), other than a security-based swap (SBS), 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.[12]
In lieu of adopting Rule 13d-3(e), the Commission provided guidance in the Adopting Release regarding the application of the current beneficial ownership reporting rules to an investor's use of certain cash-settled derivative securities. The Commission stated that this guidance is intended to be similar to the guidance it previously provided regarding application of the beneficial ownership reporting requirements to SBS.[13] The Commission stated that, while cash-settled non-SBS derivative securities generally are designed to represent only an economic interest, there may be facts and circumstances under which a holder of these securities may have voting or investment power for purposes of Rule 13d-3(a), or otherwise could be deemed to be a beneficial owner, for purposes of Rule 13d-3(b) or (d). In particular:
- Under Rule 13d-3(a), to the extent a non-SBS cash-settled derivative security provides its holder, directly or indirectly, with exclusive or shared voting or investment power, within the meaning of that rule, over the reference covered class through a contractual term of the derivative security or otherwise, the holder of that derivative security may become a beneficial owner of the reference covered class.
- To the extent a non-SBS cash-settled derivative security is acquired with the purpose or effect of divesting its holder of beneficial ownership of the reference covered class or preventing the vesting of that beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g), the derivative security may be viewed as a contract, arrangement, or device within the meaning of those terms as used in Rule 13d-3(b), and the holder of the cash-settled derivative security may be deemed a beneficial owner under Rule 13d-3(b).
- Under Rule 13d-3(d)(1), a person is deemed a beneficial owner of an equity security if the person (1) has a right to acquire beneficial ownership of the equity security within 60 days or (2) acquires the right to acquire beneficial ownership of the equity security with the purpose or effect of changing or influencing the control of the issuer of the security for which the right is exercisable, or in connection with or as a participant in any transaction having such purpose or effect, regardless of when the right is exercisable.[14]
Treatment of a “Group”
Rule 13d-5(b)(1) currently 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 Commission had proposed to amend Rule 13d-5 to:
- Revise Rule 13d-5(b)(1) to remove the word "agree" from the rule, suggesting that an agreement would not be a necessary prerequisite to finding the existence of a group for purposes of Section 13(d)(3) or 13(g)(3);
- Add new paragraph (b)(1)(ii) to specify that if a person, in advance of filing a Schedule 13D, discloses to any other person that such filing will be made and such other person acquires securities in the covered class for which the Schedule 13D will be filed, those persons will have formed a group within the meaning of Section 13(d)(3); and
- Add new paragraph (b)(2)(i) to specify that when two or more persons "act as" a group under Section 13(g)(3), the group will be deemed to have become the beneficial owner, for purposes of Section 13(g)(1) and (2) of the Exchange Act, of the beneficial ownership held by its members.
In response to concerns raised by commenters,[15] the Commission declined to adopt these amendments as part of the Final Rules and instead issued guidance in the Adopting Release on the operation of existing Rule 13d-5(b) and Sections 13(d)(3) and 13(g)(3). Importantly, the Commission confirmed that:
The proposed amendments were not intended to change how the Commission views what is meant by "act as a group" for purposes of Sections 13(d)(3) and 13(g)(3). They were intended to codify through a rule amendment our views that "the determination of 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."[16]
The Commission explained that whether two or more persons are deemed to form a "group" for purposes of Sections 13(d)(3) and 13(g)(3) depends on a determination of whether they acted together for the purposes of acquiring, holding, or disposing of the securities of an issuer. This is a facts and circumstances determination that does not require an express agreement but may be satisfied by concerted action or informal agreement. The Commission recognizes, however, that to determine that a group has been formed under Section 13(d)(3) or 13(g)(3), the evidence must show, "at a minimum, indicia, such as an informal arrangement or coordination in furtherance, of a common purpose to acquire, hold, or dispose of securities of an issuer. If two or more persons took similar actions, that fact is not conclusive in and of itself that a group has been formed." The Commission noted that "inadvertent or coincidental contact would not be sufficient to satisfy the standard given the absence of volitional acts made in concert or in coordination with others." The Commission provided guidance, in the form of a series of examples, regarding the application of the current legal standard in Section 13(d)(3) and 13(g)(3) to several common types of shareholder engagement activities. We include a summary of this guidance in Appendix B to this Memorandum.
The Commission also adopted several amendments to Rule 13d-5, as proposed, including adding language specifying that a group subject to reporting obligations under Section 13(d) or Section 13(g) will be deemed to acquire any additional equity securities acquired by a member of the group after the group's formation, excluding intragroup transfers of equity securities.
Based on comments received, the Commission declined to adopt two exemptions relating to "group" treatment, for purposes of Section 13(d)(3) and 13(g)(3).[17] Proposed Rule 13d-6(c) would have exempted two or more persons from being deemed to beneficially own an issuer's equity securities as a group, for purposes of Sections 13(d)(3) or 13(g)(3), solely due to 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.
Proposed Rule 13d-6(d) would have exempted two or more persons from being deemed to have formed a group 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).
The Commission declined to adopt these exemptions, given that it did not amend Rule 13d-5, as described above, and explained that the guidance it provided in the Adopting Release will help address its "goals of preserving shareholder communications and engagement with issuers that are undertaken without the purpose or effect of changing or influencing control." In declining to adopt Proposed Rule 13d-6(d), the Commission confirmed that "an agreement between an investor in a cash-settled derivative security and a counterparty entered into for the ordinary course of business would fail to satisfy the 'act as a . . . group' element in Sections 13(d)(3) and 13(g)(3) absent other indicia of group status such as agreements to vote or other factors."
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 adopted, as proposed, an amendment to 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 pm to 10:00 pm ET each business day. Thus, filings made prior to 10:00 pm ET on a business day would be treated as received by the SEC on that business day. Also as proposed, the SEC amended 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.[18] The SEC is not extending EDGAR filer support hours beyond 6 pm ET, although it requested comment on this.
Currently, Schedules 13D and 13G must be filed electronically on the SEC's EDGAR system in HTML or ASCII. The Final Rules 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, will be required to be filed in XML, with the exception of the exhibits to the Schedules.
Compliance Dates
The Final Rules will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the new XML structured data requirements for Schedules 13D and 13G will be required on December 18, 2024.
Sarah A. Bessin
Deputy General Counsel - Markets, SMAs & CITs
Notes
[1] See Modernization of Beneficial Ownership Reporting, Securities Act Rel. No. 33-11252, Exchange Act Rel. No. 98704 (Oct. 10, 2023), available at https://www.sec.gov/files/rules/final/2023/33-11253.pdf ("Adopting Release").
[2] ICI submitted a comment letter in April 2022.
[3] Chair Gensler, Commissioner Peirce, and Commissioner Uyeda made statements on the Final Rules.
[4] For a summary of the Proposal, please see ICI Memorandum No. 34034 (Feb. 15, 2022), available at https://www.ici.org/memo34034.
[5] 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.
[6] The term "business day" currently is not defined in Section 13(d) or 13(g) or any of the rules thereunder. The Commission amended Rule 13d-1(i) to add a new paragraph (2) that defines "business day" for purposes of Regulation 13D-G to mean any day, other than Saturday, Sunday, or a federal holiday, from 12:00 am to 11:59 pm ET. The Commission clarifies later in the Adopting Release, however, that only filings made prior to 10:00 pm ET on a business day will be treated as received by the SEC on that business day.
[7] Qualified Institutional Investors 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).
[8] Exempt Investors are 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).
[9] Passive Investors are 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).
[10] The Commission had proposed five calendar, rather than business, days.
[11] Adopting Release at 93-94.
[12] ICI had opposed this proposed amendment. We raised concerns that the proposed rule would inadvertently apply to a broader range of situations than the SEC intended. We questioned whether such a specific provision was necessary and asserted that the unintended negative consequences of the provision would outweigh the potential benefits of having an explicit anti-evasion provision.
[13] See Beneficial Ownership Reporting Requirements and Security-Based Swaps, Exchange Act. Rel No. 34-64628 (June 8, 2011), available at https://www.sec.gov/files/rules/final/2011/34-64628.pdf.
[14] The Commission notes that, as it has stated with respect to SBS, Rule 13d-3(d)(1) applies regardless of the origin of the right to acquire the equity security. If the right originates in a derivative security that is nominally "cash-settled" or from an understanding in connection with that derivative security, Rule 13d-3(d)(1) would apply.
[15] ICI was strongly critical of this aspect of the Proposal in our comment letter, expressing deep concern that it would likely have a broader effect than the SEC anticipated and would have highly detrimental unintended consequences.
[16] Adopting Release at 128-29.
[17] ICI had raised significant concerns in our comment letter regarding these proposed exemptions, explaining that, as drafted, they were too narrow and, particularly in conjunction with the SEC's proposed amendments to the rules that define when a group is deemed to exist, would likely fail to exempt the very activities the Commission intends to protect, as well as create significant additional uncertainty.
[18] 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.