SEC proposes significant changes to beneficial ownership reporting

On February 10, 2022, the Securities and Exchange Commission (the SEC) proposed to change beneficial ownership reporting requirements provided under the Regulation 13D and the Regulation 13G (the Proposal).^[1][2] If adopted, the Proposal would:

• revise the current deadlines for Schedule 13D (13D or Form 13D) and Schedule 13G (13G or Form 13G) filings;
• expand the definition of beneficial owner;
• provide clarity regarding formation of a group for reporting purposes; and
• require filers to use a structured and machine-readable data language while making their filings.

Background

Currently, Regulation 13D and Regulation 13G generally require beneficial owners who own more than five percent of equity securities to publicly file either a 13D or 13G within ten days after acquiring more than five percent of equity securities. Amendments to 13D or 13G must be filed promptly after any material change occurs.

In addition, certain type of beneficial owners, such as qualified institutional investors (the QIIs), passive investors, and exempt investors must each file a 13G, and any amendments thereto, within certain periods of time. Under the current reporting regime:

• passive investors must file their initial 13G within ten days after acquiring beneficial ownership of more than five percent and any amendments thereto promptly after exceeding ten percent beneficial ownership or a five percent increase or decrease in beneficial ownership;
• QIIs and exempt investors must file their initial 13G within forty-five days after calendar year-end in which their beneficial ownership exceeded five percent;
• QIIs must also file an amendment to 13G within ten days after month-end in which beneficial ownership exceeded ten percent or there was, as of the month end, a five percent increase or decrease in beneficial ownership; and
• all 13G filers must file any changes that occurred to the information previously reported on a 13G within forty-five days after calendar year-end in which the relevant change occurred.

The five percent reporting threshold also may be triggered by a group of two or more persons or entities that beneficially own shares of registered securities if the group was formed for the purpose of acquiring, holding, voting or disposing of the registered securities. A group may satisfy its 13D or 13G filing obligation by either a single joint filing on behalf of each member or by individual filings by each group member.

Proposed Rule Amendments

Some major changes included in the Proposal are described below.

13D and 13G Filing Deadlines

If adopted, the Proposal would:

• shorten the deadline for filing an initial 13D from ten days to five days;
• revise the time period for any amendments to a 13D from “promptly” following the date on which a material change occurs (generally, two business days) to one business day;
• shorten the deadlines for initial 13G filings by QIIs and exempt investors from forty-five days after year-end to five business days after the end of the month in which the investor beneficially owns more than five percent of the equity securities;
• shorten the deadlines for initial 13G filings by passive investors from ten days to five days;
• require that an amendment be filed within five business days after the month in which a material change occurred rather than forty-five days after the year in which any change occurred for all 13G filers; and
• revise the amendment obligations for QIIs and passive investors upon exceeding ten percent beneficial ownership or a five percent increase or decrease in beneficial ownership of relevant equity securities, requiring them to file an amendment within five days and one business day, respectively.

The following table summarizes the current deadlines for 13D and 13G filings and changes provided by the Proposal.

In addition to the above, the Proposal provides that the “cut-off” time for filing a13D or 13G would be 10:00 p.m. Eastern Standard Time on the relevant business day in lieu of current 5:30 p.m. Eastern Standard Time. Moreover, the Proposal also would require that all disclosures, including quantitative disclosures, textual narratives, and identification checkboxes, on a 13D or 13G to be filed using an XML-based language (excluding exhibits).

Beneficial Ownership Related to Derivatives

The Proposal reflects the SEC’s continued focus on derivatives by providing that certain holders of cash-settled derivative securities (other than security-based swaps) will be “deemed” beneficial owners of the reference equity securities for purposes of determining their 13D and 13G reporting obligations. Specifically, holders of cash-settled derivatives that have the purpose or effect of changing or influencing the control of the issuer of the reference securities, or that acquired those securities in connection with or as a participant in any transaction having such purpose or effect, would be required to reporting those reference securities on Forms 13D and 13G. Additionally, 13D would be revised to clarify that a person would be required to disclose interest in all derivative securities that use the issuer’s equity security as a reference security.

Group Formation

The Proposal expands the definition of persons included in a group and creates new exclusions:

1. Expansion of Persons Included in a Group

• acting in concert would be sufficient for group formation, even absent an agreement; and
• any person who shares non-public information about an upcoming 13D filing to another market participant will be deemed part of a group with such other market participant “to the extent such information was shared with the purpose of causing such other person or persons to acquire equity securities of the same class for which 13D will be filed,” (e.g., tipper-tippee relationships).

b.  Exclusions

• any investors who communicate and consult with each other, jointly engage with issuers, and execute certain transactions would not be considered a “group” to the extent such communications are not made with the purpose or effect of changing or influencing control of the issuer; and
• any persons entering into an agreement setting forth the terms of a derivative security transactions would not be considered a “group” to the extent such communications are not made with the purpose or effect of changing or influencing control of the issuer.

Comment Period

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

Comments submitted to date are available on the SEC’s website.^[3]

Conclusion

The SEC continues to modernize the rules for both investors and other market participants by providing stricter deadlines for 13D and 13G filings, as well as targeting wider range of persons in terms of beneficial ownership obligations. In this respect, we believe that it is imperative for persons to put the necessary systems in place to meet shorter deadlines, for derivative holders, or other persons to assess their positions in order to determine whether they would be subject to beneficial owner reporting obligations following the adoption of the Proposal.

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