The current deadlines for filing the Schedule 13D and Schedule 13G have not been updated since 1968 and 1977, respectively. According to the SEC, changes in the financial markets and technology warrant a reassessment of these filing deadlines and other aspects of the beneficial ownership rules to meet the needs of today’s investors and other market participants. The proposed amendments address these needs by improving transparency and providing more timely information for shareholders and the market.
On February 10, 2022, the Securities and Exchange Commission (SEC) announced proposed rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (Exchange Act). The proposed amendments would update those rules to provide more timely information to meet the needs of today's financial markets. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the five percent threshold, clarify group formation, and create related exemptions.
Proposed Amendments to Revise Filing Deadlines and Filing Date Assignment
The SEC proposed a series of amendments that would revise the deadlines for filing the initial and amended beneficial ownership reports on Schedules 13D and 13G and expand the timeframe within a given business day in which such filings may be timely made.
Currently, the Schedule 13D initial filing deadline is 10 days after acquiring beneficial ownership of more than 5 percent or losing eligibility to file on Schedule 13G, and the Schedule 13G filing deadline for certain institutional investors is 45 days after calendar year-end in which ownership exceeds 5 percent, and 10 days after acquiring beneficial ownership of more than 5 percent for passive investors.
Under the proposed amendments, the Schedule 13D initial filing deadline would be decreased from 10 days to five days after acquiring more than 5 percent beneficial ownership, and the Schedule 13G initial filing deadline for certain institutional investors would be decreased from 45 days after calendar year-end to five days after month-end in which beneficial ownership exceeds 5 percent, and from 10 days to five days after acquiring beneficial ownership of more than 5 percent for passive investors.
The proposed amendments to Schedule 13D also would change the amendment filing deadline from promptly after the triggering event, to within one business day after the triggering event. For all Schedule 13G filers, the proposed amendments would require amendments to be filed five business days after the month in which a material change occurred rather than 45 days after the year in which any change occurred.
Finally, the filing cutoff deadline for Schedule 13D and Schedule 13G filers would be extended from 5:30 p.m. Eastern time to 10 p.m. Eastern time.
The SEC believes these changes are necessary in light of advances in technology and developments in the financial markets. Moreover, the proposal to shorten the initial filing deadline for Schedule 13D is consistent with previous efforts by Congress and the SEC to accelerate public disclosures of material information to the market.
Proposed Amendments to Regulate Cash-Settled Derivative Securities and Clarify Certain Disclosure Requirements
The proposed amendments set forth the circumstances under which a holder of a cash-settled derivative security would be deemed to be the beneficial owner of the reference equity securities. Specifically, proposed new Rule 13d-3(e) would provide that a holder of a cash-settled derivative security, other than a security-based swap, will be deemed the beneficial owner of the reference equity securities if the derivative is held with the purpose 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 such purpose or effect.
The proposed amendments to Schedule 13D clarify that a person is required to disclose interests in all derivative securities that use the issuer’s equity security as a reference security. Specifically, Item 6 to Schedule 13D would expressly state that such derivative contracts, arrangements, understandings and relationships with respect to an issuer’s securities, including cash-settled security-based swaps and other derivatives which are settled exclusively in cash, would need to be disclosed under Item 6 of Schedule 13D.
The proposed amendment also would clarify that the derivative security need not have originated with the issuer or otherwise be part of its capital structure in order for a disclosure obligation to arise. At present, the formulation “with respect to securities of the issuer” in Item 6 might be read to suggest that contracts, arrangements, understandings or relationships that only create economic exposure to the issuer’s equity securities or are otherwise considered synthetic could be excluded. Accordingly, to remove any ambiguity as to the scope of the required disclosures, the SEC proposed to revise Item 6 to expressly state that the use of derivative instruments, including cash-settled security-based swaps and other derivatives settled exclusively in cash, which use the issuer’s securities as a reference security are included among the types of contracts, arrangements, understandings and relationships which must be disclosed.
Proposed Amendments to Group Formation and Exemptions
The proposed amendments clarify and confirm the application of Rule 13d-5 to two or more persons who “act as” a group under Sections 13(d)(3) and (g)(3) of the Exchange Act. Those circumstances would include, among other things, “tipper-tippee” relationships in which a person shares non-public information about an upcoming Schedule 13(d) filing with another person who subsequently purchases the issuer’s securities based on that information.
The proposed amendments would reorganize Rule 13d-6 and exempt certain circumstances from resulting in a person being deemed to have acquired beneficial ownership of, or otherwise to beneficially own, equity securities of a covered class for purposes of Sections 13(d) and 13(g). For example, proposed Rule 13d-6(c) would provide that two or more persons will not be deemed to have acquired beneficial ownership of, or otherwise beneficially own, an issuer’s equity securities as a group solely because of their concerted actions related to an issuer or its equity securities, including engagement with one another or the issuer, provided they meet certain conditions. Specifically, the proposed exemption would be available only if such persons are not directly or indirectly obligated to take such actions (e.g., pursuant to the terms of a cooperation agreement or joint voting agreement).
Additionally, the proposed amendments would add new paragraph (d) to Rule 13d-6, in light of proposed new Rule 13d-3(e), to avoid impediments to certain financial institutions’ ability to conduct their business in the ordinary course. Proposed Rule 13d-6(d) would provide that two or more persons will not be deemed to have formed a group under Section 13(d)(3) or 13(g)(3) solely by virtue of their entry into an agreement governing the terms of a derivative security. This exemption would only be available if the agreement is a bona fide purchase and sale agreement entered into in the ordinary course of business. Further, the exemption would only be available if such persons do not enter into the agreement 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.
Proposed Structured Data Requirements for Schedules 13D and 13G
The proposed amendments replace the current HTML or ASCII requirement for Schedules 13D and 13D in the EDGAR Filer Manual with a structured data language requirement—specifically, with a requirement to use Schedule 13D /G-specific XML—for the disclosures reported on those Schedules. The SEC believes that a structured, machine-readable data language requirement for the disclosures reported on Schedules 13D and 13G would greatly improve the accessibility and usability of the disclosures, allowing investors to access, aggregate and analyze the reported information in a much more timely and efficient manner.
The public comment period on the proposed rules will remain open for 60 days following publication of the release on the SEC’s website or 30 days following its publication in the Federal Register, whichever period is longer.
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