In February last year, the SEC proposed to amend the complex beneficial ownership reporting rules—most notably, the timing of Schedules 13D and 13G filings. In the press release announcing the proposed 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.” The proposal was on the SEC’s most recent agenda with a target date of April 2023 for final action. But so far, no action taken. Then, on Friday, the SEC announced that it was reopening the comment period for this proposal until June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever is later. Why? This memorandum from the Division of Economic and Risk Analysis may be the answer. The SEC believes that the information in the memo “has the potential to be informative for purposes of further evaluating the Proposed Amendments.”
Among other changes, the SEC’s proposal would accelerate the filing deadlines for Schedule 13D beneficial ownership reports from 10 days to five days and require amendments to be filed within one business day (as opposed to “promptly”). For Schedules 13G, the filing deadline would be accelerated to five business days after the end of the month for qualified institutional investors and exempt investors, and would allow five days for passive investors to file. The proposal also provides that holders of certain cash-settled derivative securities would be “deemed” beneficial owners of the reference equity securities and would clarify the definition of “group.” (See this PubCo post.)
The DERA memo provides additional background and baseline data on Schedules 13D and 13G filings, investigates potential effects on activism that may result from the proposed change to the initial Schedule 13D filing deadline, and provides additional analysis of “potential harms to certain selling shareholders under the existing filing deadline.” New quantitative analyses are also included.
Baseline data and background. First up, DERA corrects the record on the number of Schedule 13D filings in 2020. While it had reported about 10,000 filings in the proposing release, on review, DERA determined that that number included a lot of duplication and that the real number was around 5,000, about the same as in 2021. Likewise, there was a similar error in reporting the number of 13G filings in the proposing release for 2020; the 44,000 reported were actually around 22,000. In 2021, there were about 25,000 Schedule 13G filings.
In the memo, DERA distinguishes between filings that result from corporate actions—such as share acquisitions through mergers and acquisitions, IPOs, other restructurings, private placements, compensation awards or other off-market transactions—and filings that result from an accumulation of shares in open-market trading—which are more likely to discuss potential plans and proposals—that may be characteristic of activist campaigns. DERA finds that acceleration of the Schedule 13D filing deadline would not significantly impact the activities of corporate-action filers, which represent about 80% of the filings, although they may experience an increase in compliance costs. The data suggests that for corporate-action filers, the benefits of a shortened filing window may be limited because there is a limited market reaction to the filing between the day of the proposed 5-day deadline and the day after the actual filing date, which “implies that little market-moving information is revealed during this period.”
DERA did find, however, that accelerating the Schedule 13D filing deadline is more likely to affect activist campaigns. For non-corporate action filings, the data indicates that, at the proposed 5-day deadline, “there remains information that has not been fully incorporated into market prices as of that point.” According to DERA, this “pattern of returns suggests that there is greater potential for improvement in allocative efficiency and a reduction in information asymmetry under a shortened deadline with respect to these non-corporate-action filings. Also, these filers may be more likely to be impacted under the proposed amendments than those associated with corporate- action filings, as any open-market accumulations of shares between the proposed deadline and their actual filing date (i.e., in many cases, on days six through ten following the trigger date) may become more costly under the proposed amendments.”
Potential effects on activist campaigns. Research shows, DERA reports, that “activist campaigns are, on average, associated with an economically significant increase in shareholder value around the filing or other announcement date,” although there is some debate about attributing causation. There is also debate about the impact on others, such as competing companies. Looking at a sample of 2,371 non-corporate-action filings, DERA found that about 66% of filers completed acquiring 100% of their reported stakes by the proposed 5-day deadline, 92% of filers acquired 90% and 98% acquired 75%. That data means that 2% of filers acquired 25% of their stakes after the proposed 5-day filing deadline, and 8% acquired 10% after the deadline. If the deadline were accelerated as proposed, filers that accumulated the rest of their stakes after day 5 may decide to abandon their plans to acquire more, or they could adapt to the new window by reducing their stake or acquiring shares more quickly, “based on their assessment of their own costs and benefits of adapting.” DERA reports that “academic studies have found that lower levels of activist ownership are associated with smaller increases in shareholder value.” DERA concludes, however, that it is “unable to predict how, if at all, a particular filer may change its behavior in response to a shortened filing deadline.”
Potential effects associated with certain selling shareholders. In response to comments, DERA also provides a quantitative analysis of the potential harms, under current rules, to shareholders selling to informed, opportunistic traders, that is, those who “become aware of a potential campaign before the filer’s ownership and intentions are made public on Schedule 13D.” Studies have found “abnormally high trading volume” around the time that the filer crosses the 5% mark, suggesting that some traders might have some inside information. The analysis focuses on “harms that may accrue between the proposed filing deadline and the current filing deadline.” DERA estimates that the aggregate of “potential harms that could be avoided by shortening the filing deadline to five calendar days if no filers abandon campaigns (and filers do not adapt in such a way that the harms may still accrue) is about $93 million per year.” DERA finds that “these harms may be avoided under the proposed filing deadline.” But, once again, DERA “cannot predict with a reasonable degree of certainty how activists and other market participants are likely to respond to the proposed changes and thus to predict how likely it is for these harms to be avoided.” In addition, DERA suggests that the information asymmetry that arises out of trading opposite potentially informed, opportunistic traders “may have broader implications for trust in markets and liquidity. In particular, lessening an informational advantage that some market participants may perceive to be unfair could enhance trust in the securities markets, thereby promoting capital formation.”
