[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]

The SEC has proposed to amend the complex beneficial ownership reporting rules.  In the press release announcing the changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” Currently, according to Gensler, investors “can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the 5 percent threshold, clarify group formation, and create related exemptions.”  Here is the fact sheet, and here is the proposing release. Consistent with the apparently new comment period formula, the public comment period for each proposal will be open for 60 days following publication of the proposing release on the SEC’s website (April 11, 2022) or 30 days following publication in the Federal Register, whichever period is longer.  

Acceleration of filing deadlines

Section 13(d) applies only to beneficial owners who make non-exempt acquisitions of more than 5% of a covered class.  Section 13(g) and corresponding Rule 13d-1(d) apply to beneficial owners of more than 5% who are not subject to Section 13(d) because they either made an exempt acquisition or an acquisition otherwise not covered by the statute. Under current rules, Reg 13D-G requires an investor who beneficially owns more than 5% of a covered class of equity securities to report the investor’s beneficial ownership by filing either a Schedule 13D or a Schedule 13G, depending on the nature of ownership and circumstances of acquisition. (It’s complicated.)

In light of advances in technology and developments in the financial markets, the SEC is proposing to “modernize” the reporting system by, among other things, revising the various filing deadlines: 

Schedule 13D

• “Revise the Rule 13d-1(a) filing deadline for the initial Schedule 13D to five days after the date on which a person acquires more than 5% of a covered class of equity securities.” Currently, Rule 13d-1(a) requires the initial Schedule 13D to be filed within 10 calendar days after the date on which a person acquires beneficial ownership of more than 5% of a class of equity securities registered under Section 12. According to the SEC, the current filing deadline “raises concerns that material information about potential change of control transactions is not being disseminated to the public in a manner that would be considered timely in today’s financial markets. The delay in reporting this material information contributes to information asymmetries that could harm investors.” The SEC acknowledges “the chilling effect that a shortening of the initial Schedule 13D filing deadline could have on a shareholder’s ability and incentive to effect changes at companies that may benefit all shareholders, particularly where the shortened deadline may increase the costs and reduce the incentives for those shareholders attempting such change of control efforts. We do not believe, however, that a shortening of the deadline would unduly disrupt that balance, as many Schedule 13D filers currently do not avail themselves of the full 10-day filing period.” The proposed five-day deadline reflects the SEC’s attempt to maintain that balance.  However, the SEC is requesting comment on possible changes to the proposed deadline.

• “Amend Rules 13d-1(e), (f) and (g) to shorten the filing deadline for the initial Schedule 13D required to be filed by certain persons who forfeit their eligibility to report on Schedule 13G in lieu of Schedule 13D to five days after the event that causes the ineligibility.”  Rule 13d-1(b) permits investors to file Schedule 13G instead of Schedule 13D if they have no control intent, own their shares in the ordinary course and are qualified institutional investors (brokers, banks, registered investment companies, etc.). Rule 13d-1(c) permits investors to file Schedule 13G instead of Schedule 13D if they have no control intent and hold more than 5% but less than 20% of a covered class (“Passive Investors”). If they become ineligible—e.g., have a “disqualifying purpose or effect,” or more or are no longer QIIs or reach 20%, as applicable—Rules 13d-1(e), (f) and (g) generally require that they file initial Schedules 13D within 10 days of losing their Schedule 13G eligibility. (However, QIIs that would then qualify as Passive Investors may be able to simply amend their Schedules 13G.) The SEC has preliminarily concluded that it makes sense to treat these persons who become ineligible to file on Schedule 13G the same as regular initial 13D filers and shorten the filing deadline to five days after the date on which the person became ineligible to report on Schedule 13G.

Schedule 13D amendments

• “Revise the filing deadline under Rule 13d-2(a) for amendments to Schedule 13D to one business day after the date on which a material change occurs.” Currently, filers of Schedule 13D are required to file amendments ”promptly” if there is a material change in the facts set forth in the statement, including “material changes in the level of beneficial ownership caused by an involuntary change in circumstances, such as a reduction in the amount of beneficial ownership caused solely by an increase in the number of shares outstanding.” To remove any uncertainty and promote consistency, the SEC is proposing to  amend Rule 13d-2(a) to require that all amendments to Schedule 13D be filed within one business day after the material change that triggers the amendment obligation.

Schedule 13G

• “Amend Rules 13d-1(b) and (d) to shorten the deadline for the initial Schedule 13G filing for Qualified Institutional Investors (“QIIs”) and Exempt Investors to within five business days after the last day of the month in which beneficial ownership first exceeds 5% of a covered class.” Currently, under Rule 13d-1(b), a QII must file an initial Schedule 13G within 45 days after the end of the calendar year, if the QII beneficially owned more than 5% of a covered class at the end of that calendar year, and within 10 days after the end of the month if the QII beneficially owned more than 10% of a covered class as of the last day of that month. Currently, Rule 13d-1(d) also imposes an initial Schedule 13G filing deadline of 45 days after the end of the calendar year for “Exempt Investors,” that is, persons that hold “beneficial ownership of more than 5% 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)” such as persons who acquired their shares pre-IPO (e.g., founders) and persons who have not acquired more than 2% in 12 months. The SEC recognizes that these exempt “beneficial owners may continue to influence or control the issuer.”  The SEC suggests that the current “deadlines and manner of applicability not only could give rise to a gap in reporting for persons who possess the potential to change control of an issuer—or, in the case of Exempt Investors, may already control an issuer—but also risk devaluing the importance of the disclosures when made, if made at all.” Accordingly, the SEC is proposing to amend Rules 13d-1(b) and (d) to shorten the filing deadlines for the initial Schedule 13G to be filed by QIIs and Exempt Investors to five business days after the end of the month in which beneficial ownership exceeds 5% of a covered class. The deadline related to 10% ownership would be eliminated. The SEC believes that the proposed acceleration will “result in more timely disclosures while minimizing any additional burdens.” 

• “Amend the deadline in Rule 13d-1(c), which permits Passive Investors to file an initial Schedule 13G in lieu of Schedule 13D within 10 days after acquiring beneficial ownership of more than 5% of a covered class, to five days after the date of such an acquisition.” Under current Rule 13d-1(c), Passive Investors electing to report on Schedule 13G in lieu of Schedule 13D are required to file within 10 days after acquiring beneficial ownership of more than 5% of a covered class. The SEC suggests that, when Rule 13d-1(c) was first adopted, “Passive Investors may not have had reasonable access to advanced technologies to make more immediate filings possible.”  But now that technology is readily available.  To maintain “historical regulatory consistency,” the SEC is proposing to accelerate the filing deadline in Rule 13d-1(c) to five days after the date the person becomes obligated to file an initial Schedule 13G. 

Schedule 13G amendments

• “Revise the filing deadlines required for amendments to Schedule 13G in Rule 13d-2(b) to five business days after the end of the month in which a reportable change occurs.”  Under Rule 13d-2(b), an amendment to Schedule 13G is currently required to be filed within forty-five days after the end of each calendar year if, as of the end of the calendar year, there are any changes in the information reported in the previous filing on that Schedule. To ensure that information is timely and useful, the SEC is proposing to amend Rule 13d-2(b) to require that an amendment to Schedule 13G be filed within five business days after the end of the month in which a material change occurs in the information previously reported. The proposed revision of the amendment trigger to “material change” conforms the rule to the statutory language and codifies the SEC’s historic interpretation of the requirement.

• ”Amend Rule 13d-2(c) to shorten the filing deadline for Schedule 13G amendments filed pursuant to that provision to five days after the date on which beneficial ownership first exceeds 10% of a covered class, and thereafter upon any deviation by more than 5% of the covered class, with these requirements applying if the thresholds were crossed at any time during a month.” Under current Rule 13d-2(c), QIIs must amend their Schedules 13G within 10 days after the end of the first month in which their beneficial ownership exceeds 10% of a covered class, calculated as of the last day of the month. Once across the 10% threshold, currently QIIs must file additional amendments 10 days after the first month in which they increase or decrease their beneficial ownership by more than 5% of the covered class. Those requirements are in addition to the requirements to file amendments to reflect any change within 45 days after calendar year-end. The SEC is proposing to require that QIIs amend their Schedules 13G “within five days after the date on which their beneficial ownership exceeds 10% of a covered class, rather than the current requirement of 10 days after the end of the month. Similarly, once across the 10% threshold, QIIs would be required to file additional amendments five days after the date on which they increase or decrease their beneficial ownership by more than 5% of the covered class, rather than the current requirement of 10 days after the end of the month.” The SEC believes that the “high thresholds” in the rule “warrant that the amendment be rapidly disseminated to the market.”

• “Amend Rule 13d-2(d) to revise the filing deadline for Schedule 13G amendments filed pursuant to that provision from a ‘promptly’ standard to one business day after the date on which beneficial ownership exceeds 10% of a covered class, and thereafter upon any deviation by more than 5% of the covered class.” A similar rule applies to Passive Investors under current Rule 13d-2(d): Passive Investors must amend their Schedules 13G “promptly” upon acquiring greater than 10% of a covered class and then amend “promptly” if they increase or decrease their beneficial ownership by more than 5% of the covered class. Those requirements are also in addition to the requirements to file amendments to reflect any change within 45 days after calendar year-end. The SEC is proposing to amend Rule 13d-2(c) to accelerate those filing deadlines to one business day after the date that the amendment obligation arises.

The SEC is also proposing to amend Rule 13(a) of Reg S-T to permit Schedules 13D and 13G and any amendments to those Schedules to be “submitted by direct transmission on or before 10 p.m. eastern time on a given business day to be deemed to have been filed on the same business day.” The SEC is also proposing to amend Rule 201(a) of Reg S-T “to remove the opportunity for a Schedule 13D or 13G filer to pursue a temporary hardship exemption under that rule,” although the possibility of a filing date adjustment under the same circumstances would remain available.

Got it? No? Well, here’s the SEC’s table showing the proposed changes:

Cash-settled derivatives

The SEC is proposing to add new paragraph (e) to Rule 13d-3, which would deem holders of certain cash-settled derivative securities to be the beneficial owners of the reference covered class. Rule 13d-3 includes standards for determining whether a person is a beneficial owner subject to Section 13(d).  For example, Rule 13d-3(d)(1) provides that a person is deemed to be a beneficial owner of a covered class if that person holds an option or warrant or other right to acquire the covered class that is exercisable or convertible within 60 days. Currently, however, derivatives that “entitle the holder to nothing more than economic exposure to a covered class historically [have] not been considered sufficient to constitute beneficial ownership.”  Nevertheless, commenters have suggested that cash-settled derivative securities may be used in the context of changes of control, and holders of cash-settled derivatives may still seek to “influence or control an issuer by pressuring a counterparty to make certain decisions regarding the voting and disposition of substantial blocks of securities,” raising concerns about failure of current Rule 13d-3 to address those circumstances.

To address these concerns, the SEC is proposing to add Rule 13d-3(e), which would deem holders of certain cash-settled derivative securities to be beneficial owners of the reference securities if the derivative security is held “with the purpose or effect of changing or influencing the control of the issuer of such class of equity securities, or in connection with or as a participant in any transaction having such purpose or effect.” (“Derivative security” would have the meaning set forth in Rule 16a-1(c), excluding security-based swaps.) The proposed rule is “designed to make information available about any large positions in cash-settled derivative securities and, by implication, the related reference securities.” The SEC believes that “the potential for a holder of a cash-settled derivative security to exert influence on a counterparty that may directly hold the reference securities implicates the same concerns that the Commission articulated in adopting Rule 13d-3(d)(1).” Like in-kind-settled derivative securities, the reference securities would be deemed outstanding for the purpose of calculating the percentage of the relevant covered class beneficially owned by the holder of the derivative security, but not for any other person’s percentage calculation.  The number of equity securities deemed beneficially owned would be calculated according to the formula set forth in paragraph (e)(2), which takes into account the delta between changes in the value of the derivative security as compared to changes in the value of the reference security and may vary depending on whether or not the agreement governing the terms of the derivative security provides a way to calculate the number of reference securities.  Proposed Rule 13d-3(e) would not apply to security-based swaps, which are currently the subject of a separate rulemaking. Interestingly, the release asks if, regardless of whether proposed Rule 13d-3(e) is adopted, the SEC should increase the 60-day time period for determining beneficial ownership in Rule 13d-3(d)(1) to 90, 120, 180 or some greater number of days.

“Group” under Rule 13d-5

The SEC is also proposing to amend Rule 13d-5 to “clarify and affirm its application to two or more persons who ‘act as’ a group under Sections 13(d)(3) and (g)(3) of the Exchange Act.”  The proposed amendments include a number of technical or conforming changes, as well as the following:

• Amend Rule 13d-5 to specify that when two or more persons ‘act as’ a group under Section 13(d)(3) or Section 13(g)(3), the group shall be deemed to have become the beneficial owner, for purposes of Sections 13(g)(1) and (2) of the Act, of the beneficial ownership held by its members.” The SEC is proposing to amend Rule 13d-5(b) to provide that when two or more persons “act as a group” under Section 13(d)(3) or under Section 13(g)(3), “the group will be deemed to have acquired beneficial ownership of all of the equity securities of a covered class beneficially owned by each of the group’s members as of the date on which the group is formed.” This amendment is designed to clarify that “the determination as to 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.” The SEC points out that some courts have required proof of an agreement as a prerequisite to group formation.  However, the SEC believes that a “plain reading” of the statute shows that “an agreement is not a necessary element of group formation,” nor is there any indication that that was Congress’s intent. Rather, the existence (or not) of a group is “dependent upon the facts and circumstances. Recognizing that two or more persons may take concerted action informally and without memorializing their intentions in writing, the Commission has relied upon circumstantial evidence instead of an agreement to establish that two or more persons combined in furtherance of a common objective.”  Accordingly, the proposal to amend Rule 13d-5 tracks the statutory text, specifying that “two or more persons who ‘act as’ a group for purposes of acquiring, holding or disposing securities are treated as a group,” and removing the reference to an “agreement between two or more persons.”

• Add a new provision 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 shall be deemed to have formed a group within the meaning of Section 13(d)(3).” In the proposing release, the SEC observes that information that a person will make a Schedule 13D filing in the near future can be material and, by sharing that information with other investors, the person may incentivize those investors to acquire shares before the filing is made.  Are those investors now acting as part of a group? To “provide clarity on this issue, enhance investor confidence and promote accurate price discovery in the capital markets,” the SEC is proposing to add a new provision stating that a person who, directly or indirectly, shares with another market participant (an investor or trader of a covered class, see fn.144) confidential information about an upcoming Schedule 13D filing that the person will be required to make, “with the purpose of causing others to make purchases,“ would form a “group” with someone who subsequently purchases the issuer’s securities based on this information. Under proposed Rule 13d-5(b)(1)(ii), the “group will be deemed to have acquired beneficial ownership of the securities of any market participant with whom the large blockholder has communicated material information regarding its impending filing obligation on the earliest date on which the acquisition by the recipient (or recipients, as the case may be) of the material information occurs….” Accordingly, proposed Rule 13d-5(b)(1)(ii) “would provide that the conduct specified in the rule is sufficient to find that a group had been formed under Section 13(d)(3) and, at the same time, deem that group to have made the acquisition necessary to trigger application of Section 13(d)(1). The proposed rule would serve as an additional, not exclusive, means of establishing that the tipper and tippee formed a group that made an acquisition subject to Section 13(d).“ The blockholder would then “be obligated to acknowledge the existence of the group under Item 2 of the cover page of Schedule 13D, and provide any other required disclosures as a group member.”

• Specify that a group subject to Section 13(d) or 13(g) will be deemed to acquire any additional equity securities acquired by a member of the group after the date of the group’s formation, carving out any intra-group transfers of equity securities.  Investors may form a group before shares are registered under Section 12 or when the group holds less 5% of a covered class. Without an express provision making post-formation acquisitions of beneficial ownership by group members acquisitions by the group, the SEC has to prove the acquisition is attributable to the group.  To facilitate that process, the SEC is proposing “to amend Rule 13d-5 to expressly impute such acquisitions to the group.” Under proposed new Rules 13d-5(b)(1)(iii) and Rule 13d-5(b)(2)(ii), groups under Section 13(d)(3) and Section 13(g)(3) will be deemed to have acquired beneficial ownership of equity securities of a covered class if any member of the group becomes the beneficial owner of additional equity securities of the covered class after the date of the group’s formation. In addition, proposed Rules 13d-5(b)(1)(iv) and 13d-5(b)(2)(iii) would provide that a group under Section 13(d)(3) and  Section 13(g)(3), respectively, will be not deemed to have acquired beneficial ownership in a covered class if a member of the group becomes the beneficial owner of additional equity securities in such covered class through a sale by, or transfer from, another member of the group.

Exemptions to “group” formation under Rule 13d-6

In addition to reorganizing this rule, the SEC is adding a couple of provisions to exempt from the scope of Sections 13(d)(3) and 13(g)(3) certain actions taken by two or more persons if those actions do not have the purpose or effect of changing or influencing the control of an issuer and thus are not within the purpose of Section 13(d).

The first exemption is designed to avoid chilling communications.  Specifically, the SEC is proposing to add Rule 13d-6(c) which 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 or acquiring, holding, voting or disposing of the issuer’s equity securities, provided they meet certain conditions.  The persons must “independently determine to take concerted actions”; accordingly, the 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.)” In addition, the communications may not be undertaken “with the purpose or the effect of changing or influencing control of the issuer, and are not made in connection with or as a participant in any transaction having such purpose or effect.”

Second, in light of proposed new Rule 13d-3(e) regarding derivative securities and to “avoid impediments to certain financial institutions’ ability to conduct their business in the ordinary course,” the SEC is proposing to add Rule 13d-6(d), which 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 be available only if (1) the agreement is a bona fide purchase and sale agreement entered into in the ordinary course of business, and (2) the agreement was not entered into 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.

Schedule 13D

The SEC is also proposing to amend Item 6 of Schedule 13D “to remove any implication that a person is not required to disclose interests in all derivative securities that use a covered class as a reference security.” Currently, Item 6 requires beneficial owners to “[d]escribe any contracts, arrangements, understandings or relationships (legal or otherwise) among the persons named in Item 2 [of Schedule 13D] and between such persons and any person with respect to any securities of the issuer.” Cash-settled derivative securities were not expressly included among the examples provided. To clarify that interests in all derivative securities must be disclosed, the proposed amendment would expressly require disclosure of “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.” The SEC is also proposing to 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.”

Structured data

The SEC is proposing to require that Schedules 13D and 13G be filed in part using an XML-based language specific to Schedules 13D and 13G, including quantitative disclosures, textual narratives and identification checkboxes, but not exhibits.

Implications for Section 16

Currently, Rule 16a-1(a)(1) defines 10% holders under Section 16 as persons deemed 10% beneficial owners under Section 13(d) and the rules thereunder, including the definition of beneficial ownership that includes securities exercisable or convertible within 60 days. The proposed amendments to Rules 13d-3, 13d-5 and 13d-6 would directly impact the analysis under Rule 16a-1(a)(1) as to whether a person is a 10% holder, including ownership of cash-settled securities, group formation acquisition and exemptions from group formation. Because the SEC sees a similarity in the underlying purposes of these rules—identifying persons with influence or control—the SEC is not proposing any amendments to Rule 16a-1(a)(1), but is soliciting public comment on the Section 16 implications.

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