SEC Proposes Amendments to Modernize Rules Governing Beneficial Ownership Reporting

February 17, 2022

On February 10, 2022, the SEC approved a proposal that would amend Regulation 13D-G to modernize beneficial ownership reporting (Proposal) in light of advances in technology and developments in the financial markets.  Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (Exchange Act), along with certain rules promulgated thereunder, require, among other things, that an investor who beneficially owns more than five percent of a covered class of equity securities (covered class) must report such beneficial ownership by publicly filing either a Schedule 13D or a Schedule 13G.  Investors that may be required to file Schedule 13D or Schedule 13G include registered broker-dealers, banks, insurance companies, registered investment advisers, and registered investment companies.

The Proposal would: (i) accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports (both initial filings and amendments); (ii) expand the application of Regulation 13D-G to confer “deemed” beneficial ownership of shares of the covered class referenced by a cash-settled derivative security (other than security-based swaps) under certain circumstances as described below; (iii) clarify the circumstances under which two or more persons will be deemed to have formed a “group” for purposes of their respective beneficial ownership reporting obligations; (iv) require that Schedules 13D and 13G be filed using a structured, machine-readable data language; and (v) remove the temporary hardship exemption under Rule 201(a) of Regulation S-T for late filings.

Accelerated filing deadlines.  The Proposal would shorten the initial filing deadline for Schedule 13D from ten calendar days after acquiring beneficial ownership of more than five percent of a covered class to five calendar days and require that all amendments be filed within one business day (currently, such amendments are due “promptly”).  For Schedule 13G, the initial filing deadline would be shortened for qualified institutional investors and exempt investors that beneficially own more than five percent of a covered class as of the end of a year from forty-five calendar days after the end of such year to five business days after the end of any month in which the investor beneficially owns more than five percent of the covered class as of the end of the month; and for passive investors, from ten calendar days after acquiring beneficial ownership of more than five percent of a covered class to five calendar days.

All Schedule 13G filers would be required to file amendments five business days after the month in which a “material” change occurred in any of the information currently reported in the filer’s Schedule 13G (as opposed to forty-five calendar days after the year in which any change occurred).  Additionally, a qualified institutional investor would be required to amend its Schedule 13G filing within five days after the date on which its beneficial ownership exceeds ten percent of a covered class, and thereafter, once across that ten percent beneficial ownership threshold, within five days after the date on which the qualified institutional investor’s beneficial ownership percentage increases or decreases by more than five percent of the covered class.  A passive investor would be required to amend its Schedule 13G filing within one business day after the date on which its beneficial ownership exceeds ten percent of a covered class, and thereafter, once across that ten percent beneficial ownership threshold, within one business day after the date on which the passive investor’s beneficial ownership percentage increases or decreases by more than five percent of the covered class.

The Proposal would also extend the filing cut-off times for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time.

Application to specified cash-settled derivative securities.  In addition, the Proposal would establish a new Rule 13d-3(e), providing 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.  Item 6 of Schedule 13D would also be revised to clarify that a person must disclose interests in all cash-settled derivatives (including security-based swaps) that use the issuer’s equity security as a reference security.

Group formation.  The Proposal would also clarify the circumstances under which a “group” is formed under Regulation 13D-G and the Exchange Act.  Such circumstances would include, among others, the case of a tipper-tippee relationship in which a person shares non-public information about an upcoming Schedule 13D filing with another person with the purpose of causing such other person to acquire securities of the same covered class.  In that circumstance, a group would be deemed to be formed by such persons as of the earliest date in which the tippee acquired beneficial ownership of the covered class based on such information.

New exemptions would also be provided where investors communicate with one another or the issuer without the purpose or effect of changing or influencing control of the issuer and where investors and financial institutions enter into agreements governing the terms of derivative securities.

Structured data language.  The Proposal would require that filings of Schedules 13D and 13G use a structured machine-readable data language (with the exception of the exhibits thereto).

Regulation S-T.  Finally, the Proposal would remove the temporary hardship exemption under Rule 201(a) of Regulation S-T if a filer experiences unanticipated technical difficulties that prevent its timely submission of a Schedule 13D or 13G filing.

The SEC press release can be found here.

The Proposal can be found here.

A fact sheet on the Proposal can be found here.

Commissioner Peirce dissented from the Proposal and expressed her opposition in a statement that can be found here.


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