[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
Last week, without an open meeting, the SEC adopted rule amendments governing beneficial ownership reporting under Exchange Act Sections 13(d) and 13(g), updating Reg 13D-G to “require market participants to provide more timely information on their positions to meet the needs of investors in today’s financial markets.” Commissioner Hester Peirce dissented. In essence, the amendments accelerate the filing deadlines for Schedules 13D and 13G. The adopting release also clarifies the disclosure requirements of Schedule 13D with respect to derivative securities and provides guidance on the definition of “group” formation. In addition, the amendments require that these Schedules be filed in XBRL, and to that end, the SEC made a number of technical changes to Reg S-T. The adopting release also discusses the changes that had been proposed, but that, in response to comment, were not adopted, including proposed changes to the rules that would have deemed certain holders of cash-settled derivative securities to be beneficial owners of the reference covered class, and proposed rule amendments that would have addressed formation of a group and provided two new exemptions. Instead, the SEC is amending Schedule 13D to clarify that interests in derivative securities must be disclosed and, in the adopting release, provides guidance on those two topics. According to SEC Chair Gary Gensler, the “adoption updates rules that first went into effect more than 50 years ago. Frankly, these deadlines from half a century ago feel antiquated….In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company. I am pleased to support this adoption because it updates Schedules 13D and 13G reporting requirements for modern markets, ensures investors receive material information in a timely way, and reduces information asymmetries.”
Here is the press release, the fact sheet and the 295-page final rule.
Adopting release
Background
Under Exchange Act Sections 13(d) and 13(g), and Reg 13D-G, an investor who acquires beneficial ownership of more than 5% of a covered class of equity securities must file with the SEC either a Schedule 13D or a Schedule 13G, depending on the nature of the ownership and circumstances of acquisition. (The SEC notes that the application of Section 13(d) is “contingent on the existence of an acquisition. Determining that an acquisition has occurred—in particular, an acquisition that is neither exempt nor otherwise not recognized under Section 13(d)(1)—is thus necessary to establish the application of Section 13(d).”) Generally, an investor that holds the securities with the purpose or effect of changing or influencing the control of the issuer must file a Schedule 13D, while Exempt Investors, Qualified Institutional Investors and Passive Investors file Schedule 13G. (Note that the SEC has advised that the roles of officers or directors “most likely eliminate their eligibility to file on Schedule 13G pursuant to Rule 13d-1(c) [as Passive Investors] because they have the ability to directly or indirectly influence the management and policies of an issuer.”) Exempt Investors are 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. Qualified Institutional Investors are beneficial owners that have acquired 5% or more of a covered class in the ordinary course of business, such as brokers, investment companies, banks, investment advisors, insurance companies, employee benefit plans, etc., and that own the securities without the purpose or effect of changing or influencing the control of the issuer. Passive Investors are beneficial owners that have acquired 5% to 20% of a covered class without control intent.
In February 2022, the SEC issued its proposal to accelerate or clarify the various deadlines under Reg 13D-G to reduce information asymmetries, particularly in light of technological advances over the last 50 years, when the rules originally went into effect. In particular, according to the SEC, the current filing deadline raised “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.” (See this PubCo post.)
Comments on most aspects of the proposal were generally mixed, with commenters taking opposing positions on costs and benefits, including whether it would be beneficial or harmful to mitigate information asymmetries and whether that mitigation was an appropriate justification for the change, whether technological changes should play a role in determining filing deadlines, whether the changes would disincentivize shareholder activism, whether shareholder activism was necessarily beneficial to companies and other shareholders or harmful, whether the amendments were an abuse of discretion or authorized by Dodd-Frank and more. Some commenters preferred to retain the more flexible “promptly” standard that is used in some rules. With regard to changes to the deadlines for Schedule 13G, some questioned the need for the proposed changes given that information in these filings was “unlikely to be material information that is market-moving.” Some opposing commenters raised the issue of potential compliance burdens—the necessity of “marshalling complex and evolving facts and making difficult disclosure judgments” within the abbreviated timeframes and the increased possibility of error—associated with the proposed amendments, and recommended longer filing deadlines than proposed.
Acceleration of Schedule 13D and Schedule 13G filing deadlines
The following amendments were adopted regarding acceleration of the Schedule 13D filing deadlines:
- Rule 13d-1(a): Shortening the filing deadline for the initial Schedule 13D from 10 days to within five business days after the date on which a person acquires beneficial ownership of more than 5% of a covered class.
- Rules 13d-1(e), (f) and (g): Shortening the filing deadline for the initial Schedule 13D required to be filed by QIIs and Passive Investors who become ineligible to report on Schedule 13G from 10 days to five business days after the event that causes the ineligibility, such as when the intent of the holder changes to control intent, when a Passive Investor’s beneficially ownership reaches 20% or more of a covered class or when a QII no longer holds the shares in the ordinary course of business.
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. However, in the proposing release, the SEC expressed concerned that a 10-day filing deadline “contributes to information asymmetries that could harm investors.” In light of “advances in technology and developments in the financial markets,” the SEC had originally proposed to accelerate the deadline to five days, noting “that shortening that deadline would be consistent with previous efforts to accelerate public disclosures of material information to the market.” For similar reasons, the SEC had proposed to make conforming changes—i.e., accelerating the filing deadline to five days—to Rules 13d-1(e), (f), and (g) “so that persons who initially elected to report beneficial ownership on Schedule 13G, in lieu of a Schedule 13D, but subsequently lost their eligibility would be treated no differently from persons who make a Schedule 13D their initial filing.” In both of these cases, the SEC was “mindful of the need to balance the market’s demand for timely information and the administrative burden placed upon a filer to adequately and accurately prepare that information.”
The SEC appears to have heard the issue raised by commenters with respect to compliance burdens on shareholders filing Schedules 13D, particularly those engaging in activism and changes of control, and, in response, adopted a five-business day deadline in the final rules, rather than the proposed five calendar days. That means that the SEC must receive the filing by the fifth business day after the date on which the initial Schedule 13D filing obligation arises—i.e., the date on which a person acquires beneficial ownership of more than 5% of a covered class. For the same reasons, the final rules provide for a five-business day deadline under Rules 13d-1(e), (f), and (g), rather than the proposed five calendar days, meaning that the SEC must receive the filing by the fifth business day after the date on which the initial Schedule 13D filing obligation arises—i.e., the date on which a person loses eligibility to file on Schedule 13G.
In the adopting release, the SEC expressed its continued belief in the need to shorten the filing deadline to ensure investors receive material information on a timely basis in light of advancements in technology and developments in the financial markets that may enable an investor to accumulate a large stake more quickly. According to the SEC, the final changes will “improv[e] market transparency, facilitate[e] better-informed decision-making by investors, and enhance[e] the efficiency of resource allocation.” The SEC noted that in the “vast majority of campaigns, the shareholder currently accumulates at least 90 percent of its equity stake, with many accumulating 100 percent of their equity stake, within the amended five-business day deadline,” and that “shareholder activists may continue to experience abnormal positive returns from activism even after filing their initial Schedule 13D.” By comparison, the SEC observed that, since 1993, it has abbreviated the settlement cycle three times as a result of technological advances. The SEC “acknowledge[d] that benefits may stem from the information asymmetry between a Schedule 13D filer and the market,” and explained that it ”did not not focus on the reduction of these asymmetries as a justification for shortening the initial Schedule 13D deadline.” In the end, the SEC maintained that the amended five-business day deadline reflected an effort “to ensure investors receive material information in a timely manner while, at the same time, maintaining the appropriate balance between issuers of securities and the shareholders who seek to exert influence or control over issuers, especially when compared with the proposed five-calendar day deadline….”
- Rule 13d-2(a): Revising the deadline for filing amendments to Schedule 13D to two business days 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 in the narrative and “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 about what “promptly” means and to promote consistency, the SEC proposed 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. Even under the current standard, there was some question by the SEC as to whether a delay in filing beyond a business day might be “beyond the date the filing reasonably can be filed” and, therefore, “may not be prompt.”
Under the final rules, in response to comments, Schedule 13D amendments will be due within two business days after the date of a material change. The SEC believes that shifting from the proposed one-business day deadline to a two-business day deadline will alleviate some of the compliance burdens of the proposal and provide adequate time to prepare and file the amendment, while ensuring that markets receive the material information “in a sufficiently prompt manner.”
The following amendments were adopted regarding acceleration of the Schedule 13G filing deadlines:
- Rules 13d-1(b) and (d): Shortening the deadline for the initial Schedule 13G filing for QIIs and Exempt Investors to within 45 days after the end of the calendar quarter in which beneficial ownership first exceeds 5% of a covered class.
- Rule 13d-1(c): Shortening the deadline for Passive Investors to file an initial Schedule 13G (in lieu of Schedule 13D) to within five business days after the date on which they acquire beneficial ownership of more than 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 in which the QII acquired beneficial ownership of more than 5% of a covered class, but only if the QII beneficially owned more than 5% 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. In addition, for Exempt Investors, Rule 13d-1(d) currently imposes an initial Schedule 13G filing deadline of 45 days after the end of the calendar year, “but only for investors who have become beneficial owners without having made an acquisition recognized under Section 13(d)(1).” The SEC recognizes that these Exempt Investors “may continue to influence or control the issuer.” 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.
With regard to QIIs and Exempt Investors, the SEC proposed to amend Rules 13d-1(b) and (d) to shorten the filing deadline for the initial Schedule 13G to five business days after the end of the month in which beneficial ownership exceeds 5% of a covered class. The SEC believed that these changes “would result in more timely disclosures while minimizing any potential additional burdens.” The deadline related to 10% ownership for QIIs was proposed to be eliminated. The SEC contended that “the current initial Schedule 13G filing deadlines’ length and manner of applicability to QIIs and Exempt Investors together could, in certain circumstances, frustrate the purposes of Sections 13(d) and 13(g),” and the proposed amendments were “intended to improve transparency and avoid any gaps in reporting.” In addition, to maintain consistency with the Schedule 13D filing deadline, the SEC proposed to amend the filing deadline for Passive Investors in Rule 13d-1(c) to five days after the date the person becomes obligated to file an initial Schedule 13G. The SEC suggested 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 was readily available.
As with the rules adopted for Schedule 13D, here too the SEC made changes in deadlines initially proposed. Specifically, as adopted and in response to comments, the initial Schedule 13G filing deadline for QIIs and Exempt Investors will be 45 days after calendar quarter-end. The SEC observed that 45 days aligns with the filing deadline for Form 13F filed by institutional investment managers and, for all filers, is expected to be less burdensome. Although the SEC had proposed to eliminate the current provision of Rule 13d-1(b)(2) that operates to accelerate that initial filing deadline for QIIs if beneficial ownership exceeded 10% at the end of any month, the SEC instead amended that Rule to require that the initial Schedule 13G be filed within five business days (instead of the current requirement of 10 days) after the end of the first month in which the QII’s beneficial ownership exceeded 10% of a covered class, computed as of the last day of the month. The SEC believes that the new deadline “should help mitigate concerns that some opposing commenters expressed regarding the risk of QIIs and Exempt Investors prematurely disclosing sensitive portfolio holdings information to the market.”
Under the final rules, Passive Investors will be required to file their initial Schedules 13G within five business days, as opposed to five calendar days, after the date on which the Passive Investor acquired beneficial ownership of more than 5% of a covered class, consistent with the deadline for initial Schedule 13D filings. The SEC noted that “research indicates that at least some beneficial owners may improperly rely on Rule 13d-1(c) to file a Schedule 13G in lieu of a Schedule 13D to obscure their control purpose,” making it appropriate to shorten their initial Schedule 13G filing deadline.
The SEC believes it is appropriate to accelerate these deadlines in “light of the technological advancements and developments in the financial markets in the more than 40 intervening years…to ensure beneficial ownership information disclosed in an initial Schedule 13G is reported in a manner that is considered timely by modern standards. We also expect that shortening those deadlines from year-end to quarter-end will reduce the risk that QIIs and Exempt Investors sell down their positions before the end of the year and avoid reporting altogether.”
- Rule 13d-2(b): Shortening the deadline for Schedule 13G amendments filed by a Passive Investor or QII to report a material change in reported information to 45 days after the end of the calendar quarter in which a reportable change occurs.
Under Rule 13d-2(b), an amendment to Schedule 13G is currently required to be filed by Passive Investors or QIIs 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 proposed 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,” as opposed to “any” change, would conform the rule to the statutory language and codifies the SEC’s historic interpretation of the requirement.
Under the final rules, consistent with recommendations from several commenters, amendments to Schedule 13G will have a filing deadline of 45 days after calendar quarter-end (as opposed to the proposed five business days after month-end). The SEC believes that 45 days is appropriate because it aligns with the filing deadline for Form 13F and is otherwise a familiar timeframe for other filers. In addition, the SEC is amending the rule to require amendments only for “material changes.” The addition of “material” codifies the SEC’s view that there is an “inherent materiality standard in the provisions governing Schedule 13G filings.” The adopting release notes that language in Rule 13d-2(a), including the statement that “[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed ‘material,’” is “equally instructive for purposes of determining what changes are material under Rule 13d-2(b).”
- Rule 13d-2(c): Shortening the filing deadline for Schedule 13G amendments filed by a QII (to report beneficial ownership in excess of 10% and 5% changes thereafter) to five business days after the end of the month in 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.
The SEC proposed 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 have been 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 believed that the “high thresholds” in the rule “warrant that the amendment be rapidly disseminated to the market.”
In response to comments, the SEC revised these deadlines. Under the final rules, QIIs must file amendments within five business days after the end of the first month in which an amendment obligation is triggered, rather than five calendar days after the trigger date. The SEC believes that the revision will alleviate the burden on filers to which some objected, while allowing investors to receive material information in a timely manner. These requirements are in addition to the requirements to file amendments to reflect any change within 45 days after calendar year-end.
- Rule 13d-2(d): Revising the deadline for Schedule 13G amendments filed by Passive Investors (to report beneficial ownership in excess of 10% and 5% changes thereafter) to two business days 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.
The SEC proposed to amend Rule 13d-2(c) to accelerate those filing deadlines to one business day after the date that the amendment obligation arises. The amendment was proposed for substantially the same reasons as the proposal to shorten the filing deadlines for the initial Schedule 13G and for Schedule 13D amendments.
In response to comments, the SEC revised the “promptly” deadline in the final rules to require filing of an amendment two business days, instead of one business day, after the date on which an amendment obligation is triggered under Rule 13d-2(d). According to the adopting release, the filing deadline was changed for the same reasons the filing deadline for Schedule 13D amendments was changed to two business days and to retain the historical consistency with that deadline. These requirements are also in addition to the requirements to file amendments to reflect any change within 45 days after calendar year-end.
- Regulation S-T: extending the filing cut-off time.
Under Rule 13(a) of Reg S-T, most filings must be submitted by direct transmission on EDGAR commencing on or before 5:30 p.m. eastern time in order to be deemed filed on the same business day; if later, they will be deemed filed as of the next business day. To allow additional time for preparation, and consistent with the Section 16 filing deadlines, the SEC proposed to amend Rule 13(a)(4) of Reg S-T to “permit Schedules 13D and 13G, and any amendments thereto, that are submitted by direct transmission commencing 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” and to amend Rule 201(a) of Reg S-T to eliminate the ability of a Schedule 13D or 13G filer to rely on a temporary hardship exemption under that rule. Commenters largely supported the proposed amendments. The SEC decided to amend the rules as proposed, providing for a 10 p.m. transmission cut-off and eliminating the temporary hardship exemption for these filings. Schedule 13D and 13G filers will, however, remain eligible to request a filing date adjustment under Rule 13(b) of Reg S-T. Filer support hours were not extended.
These changes related to Schedules 13D/G filings are summarized in the SEC’s table below:
| Issue | Current Schedule 13D | New Schedule 13D | Current Schedule 13G | New Schedule 13G |
|---|---|---|---|---|
| Initial Filing Deadline | Within 10 days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. Rules 13d-1(a), (e), (f), and (g). | Within five business days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. Rules 13d-1(a), (e), (f), and (g). | QIIs & Exempt Investors: 45 days after calendar year-end in which beneficial ownership exceeds 5%. Rules 13d-1(b) and (d). QIIs: 10 days after month-end in which beneficial ownership exceeds 10%. Rule 13d- 1(b). Passive Investors: Within 10 days after acquiring beneficial ownership of more than 5%. Rule 13d-1(c). | QIIs & Exempt Investors: 45 days after calendar quarter- end in which beneficial ownership exceeds 5%. Rules 13d-1(b) and (d). QIIs: Five business days after month-end in which beneficial ownership exceeds 10%. Rule 13d-1(b). Passive Investors: Within five business days after acquiring beneficial ownership of more than 5%. Rule 13d-1(c). |
| Amendment Triggering Event | Material change in the facts set forth in the previous Schedule 13D. Rule 13d-2(a). | Same as current Schedule 13D: Material change in the facts set forth in the previous Schedule 13D. Rule 13d-2(a). | All Schedule 13G Filers: Any change in the information previously reported on Schedule 13G. Rule 13d-2(b). QIIs & Passive Investors: Upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rules 13d- 2(c) and (d). | All Schedule 13G Filers: Material change in the information previously reported on Schedule 13G. Rule 13d-2(b). QIIs & Passive Investors: Same as current Schedule 13G: Upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rules 13d- 2(c) and (d). |
| Amendment Filing Deadline | Promptly after the triggering event. Rule 13d-2(a). | Within two business days after the triggering event. Rule 13d-2(a). | All Schedule 13G Filers: 45 days after calendar year-end in which any change occurred. Rule 13d-2(b). QIIs: 10 days after month-end in which beneficial ownership exceeded 10% or there was, as of the month- end, a 5% increase or decrease in beneficial ownership. Rule 13d- 2(c). Passive Investors: Promptly after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rule 13d- 2(d). | All Schedule 13G Filers: 45 days after calendar quarter-end in which a material change occurred. Rule 13d-2(b). QIIs: Five business days after month-end in which beneficial ownership exceeds 10% or a 5% increase or decrease in beneficial ownership. Rule 13d-2(c). Passive Investors: Two business days after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. Rule 13d- 2(d). |
| Filing “Cut- Off” Time | 5:30 p.m. eastern time. Rule 13(a)(2) of Regulation S-T. | 10 p.m. eastern time. Rule 13(a)(4) of Regulation S-T. | All Schedule 13G Filers: 5:30 p.m. eastern time. Rule 13(a)(2) of Regulation S-T. | All Schedule 13G Filers: 10 p.m. eastern time. Rule 13(a)(4) of Regulation S-T. |
Cash-settled derivative securities
The SEC had proposed to add new paragraph (e) to Rule 13d-3 to deem certain holders of cash-settled derivative securities, other than security-based swaps (SBS), to be the beneficial owners of the covered class. Commenters were divided, with some opposing commenters asserting that investors in cash-settled derivative securities may already “be subject to regulation as beneficial owners under existing Rule 13d-3 in applicable circumstances or that the Commission could proceed via interpretation or other means and without a rule amendment.” And that’s the route the SEC chose, concluding that a rule change was not needed and that SEC guidance would provide sufficient clarity.
The guidance provides that, under Rule 13d-3, holders of non-SBS cash-settled derivatives may be beneficial owners in certain instances, such as where facts and circumstances indicate that the holder of these securities may have voting or investment power or may otherwise be deemed a beneficial owner:
- Under Rule 13d-3(a), to the extent that a non-SBS cash-settled derivative security provides its holder, directly or indirectly, with exclusive or shared voting or investment power, within the meaning of that rule, over the reference covered class through a contractual term of the derivative security or otherwise;
- Under Rule 13d-3(b), to the extent a non-SBS cash-settled derivative security is acquired with the purpose or effect of divesting its holder of beneficial ownership of the reference covered class or preventing the vesting of that beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g);
- Under Rule 13d-3(d)(1), if the person (1) has a right to acquire beneficial ownership of the equity security within 60 days or (2) acquires the right to acquire beneficial ownership of the equity security with the purpose or effect of changing or influencing the control of the issuer of the security for which the right is exercisable, or in connection with or as a participant in any transaction having such purpose or effect, regardless of when the right is exercisable. Rule 13d-3(d)(1) applies regardless of the origin of the right to acquire the equity security. If such a right originates in a derivative security that is nominally “cash-settled” or from an understanding in connection with that derivative security, Rule 13d-3(d)(1) would apply.
Group formation
In the proposing release, the SEC had proposed to amend Rule 13d-5 to address various issues regarding “groups.” In the final rules, however, the SEC is adopting only two of those proposed rule changes. In particular, among rules not adopted, the SEC had proposed amendments regarding group formation that would have tracked the statutory text of Sections 13(d)(3) and (g)(3), removing the reference to an “agreement between two or more persons” and instead indicating that a “group” is formed when two or more persons “act as” a group under Section 13(d)(3). The SEC elected not to adopt those amendments and is instead issuing guidance on the operation of existing Rule 13d-5(b) and Sections 13(d)(3) and 13(g)(3) that “clarifies and affirms that, among other matters, two or more persons who ‘act as’ a group for purposes of acquiring, holding, or disposing securities may be treated as a group.” That is, no express agreement to act as a group is required. The SEC had also proposed to amend Rule 13d-5 to provide that if a person shares (or tips) non-public information about an upcoming Schedule 13D filing with the purpose of causing others to make purchases of the same class, a person who subsequently purchases securities based on the tip would have formed a group.
Comments were mixed, with disagreement over whether the proposal would interfere with shareholder activism or collaboration or whether passive institutional investors might be at risk of being deemed part of a group just because they met with an activist. Some contended that the proposed standard was overly broad or that eliminating the “agreement” requirement “would contravene the plain meaning of the statutory text, disregard the legislative history, and depart from ‘long-established’ judicial precedent.” Some also raised questions about the implications for “groups” under Section 16. While some were concerned “based on their view that the amendments could result in a group being formed for purposes of Sections 13(d)(3) and 13(g)(3) absent some evidence of agreement, arrangement, understanding, or concerted action,” in the adopting release, the SEC confirms that that was not the intent of the proposal.
After consideration of comments, as noted above, the SEC elected not to adopt those two rule changes regarding group formation, but “instead to provide guidance as to the application of the existing legal standard established in Sections 13(d)(3) and 13(g)(3) with respect to the formation of a group.” The SEC observes that Sections 13(d)(3) and 13(g)(3), which are identical, were intended to address the problem of “coordinated circumvention” of the filing requirement “by deeming two or more persons to be one person for purposes of Sections 13(d) and 13(g)…when they ‘act as’ a group for at least one of the three purposes specified in the statutory provisions (i.e., acquiring, holding, or disposing of securities of an issuer).”
In its guidance, the SEC confirms that “[n]either the statute nor our rules provide a definition of a ‘group.’ The appropriate legal standard for determining whether a group is formed is found in Sections 13(d)(3) and 13(g)(3).” Whether a group is formed “depends on a determination of whether they acted together for the purpose of ‘acquiring,’ ‘holding,’ or ‘disposing of’ securities of an issuer.” These persons could be “viewed as acting together,” the SEC advises, “if they are taking concerted actions in furtherance of any of these purposes. The determination depends on an analysis of all the relevant facts and circumstances and not solely on the presence or absence of an express agreement, as two or more persons may take concerted action or agree informally.” Further, “to determine that a group has been formed under Section 13(d)(3) or 13(g)(3), the evidence must show, at a minimum, indicia, such as an informal arrangement or coordination in furtherance, of a common purpose to acquire, hold, or dispose of securities of an issuer.” However, the SEC notes, “[i]f two or more persons took similar actions, that fact is not conclusive in and of itself that a group has been formed.”
To address concerns expressed by some commenters that the SEC’s proposal “could chill shareholder engagement,” the SEC provides a Q&A on “the application of the current legal standard found in Section 13(d)(3) and 13(g)(3) to certain common types of shareholder engagement activities.” In essence, the Q&A advises that a group is not formed where there is simply an “independent and free exchange of ideas” without other indicia of group formation. A summary of the Q&A guidance is included as an addendum at the end of this post, but, for those interested, the entirety of the guidance, which begins on page 131 of the adopting release, is recommended.
Imputing acquisitions to the group
The SEC proposed two rules, applicable to groups under Sections 13(d)(3) and 13(g)(3), respectively, that would expressly impute to the group acquisitions made by a group member after the date of group formation once the collective beneficial ownership among group members exceeds 5% of a covered class. There were no comments on these rules. After redesignating them as Rules 13d-5(b)(1)(ii) and (b)(2)(i), and modifying the rules to “attribute acquisitions by group members to the group at any time after the group has been formed rather than after the date on which the group has been formed,” the SEC adopted these two rules.
Intra-group transfers
The SEC also proposed two rules, applicable to groups under Sections 13(d)(3) and 13(g)(3), respectively, to provide that a group “will not be 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.” After redesignating these provisions as Rules 13d-5(b)(1)(iii) and 13d-5(b)(2)(ii) and modifying the rule to account for the possibility that group members may make intra-group transfers on the same day but after the time at which the group has been formed instead of ‘after the date of group formation,’” the SEC adopted these two rules.
Proposed new exemptions
The SEC had proposed two new exemptions as amendments to Rule 13d-6, designed to address potential issues that could arise in connection with the proposed rules regarding group formation. However, the proposed rules regarding group formation were not adopted and commenters expressed a number of concerns about these proposed exemptions. As a result, and given the guidance provided in the adopting release, the SEC elected not to adopt the two proposed exemptions.
Amendment to Schedule 13D regarding derivative securities
Currently, it seems to be unclear whether, under Item 6 of Schedule 13D, beneficial owners are required to identify cash-settled derivatives among their “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.” The SEC proposed to amend Schedule 13D to clarify the disclosure requirements “to expressly state that the use of derivative securities, including cash-settled SBS 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.” In addition, the SEC proposed 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.”
Many commenters thought that the proposed amendment would be confusing and present a logistical and compliance challenge. Nevertheless, the SEC believes that “investors could benefit from a more complete disclosure of a Schedule 13D filer’s economic interests in the relevant issuer, including economic interests via positions in cash-settled derivatives.” Accordingly, the SEC adopted the amendment to Item 6 of Schedule 13D as proposed. Specifically, Rule 13d-101 is being amended “to expressly state that derivative contracts, arrangements, understandings, and relationships with respect to an issuer’s securities, including cash-settled SBS and other derivatives which are settled exclusively in cash, would need to be disclosed under Item 6 of Schedule 13D in order to comply with Section 13(d)(1) and Rule 13d-1(a).” The SEC is also “eliminating the ‘including but not limited to’ language in Item 6 that currently precedes the itemization of the instruments or arrangements covered to remove any implication that additional interests may need to be disclosed.”
Structured data requirement
The SEC proposed to require that beneficial ownership reports on Schedules 13D and 13G be filed using a structured, machine-readable data language, specifically, an XML-based language specific to Schedules 13D and 13G. As proposed, “all disclosures, including quantitative disclosures, textual narratives, and identification checkboxes, would be structured in 13D/G-specific XML,” except for exhibits to the Schedules, which would remain unstructured. Apparently, commenters “overwhelmingly” loved the idea, and the SEC has adopted the requirement as proposed.
Compliance dates
The final amendments will become effective 90 days after publication in the Federal Register. However, compliance with the revised Schedule 13G filing deadlines under Rules 13d-1 and 13d-2 will not be required until September 30, 2024. For example, under Rule 13d-2(b), as amended, a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024 if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G. In addition, compliance with the structured data requirement for Schedules 13D and 13G will not be required until December 18, 2024, although filers may comply voluntarily beginning December 18, 2023.
Commissioners’ views
Gensler. In his statement, Gensler observed that the amendments were adopted under authority from Dodd-Frank. According to Gensler, the core of the amendments “is about reducing overall information asymmetries in the market, promoting transparency, allowing better-informed decision-making by investors, and improving liquidity, by shortening the filing deadlines for Schedules 13D and 13G.” With regard to acceleration of the Schedule 13D deadline, he observed that “[w]hen someone acquires shares in a company with the intent to control that company, that can be market-moving information. Delayed disclosure can create information asymmetry. In an era of 24-hour media cycles and high-frequency trading, shortening this deadline brings Schedule 13D filings more into modern times.” He also emphasized that the final rules “reflect changes from the proposing release in response to public comment,” including two proposed changes to the regulatory text that were not adopted, but instead issued as guidance. “Taken together,” he concluded, “the final rules will benefit markets and the investing public.”
Peirce. As noted above, Peirce was a dissenting vote. In her statement, she contended that, although the final rule is better than the proposal, it still lacks a justification. The purpose of the amendments, according to the SEC, she wrote, is to “mitigate information asymmetries between everyday investors, on the one hand, and 13D filers and ‘informed bystanders,’ on the other hand.” But she seemed to view that mitigation as unfair and potentially bad for the economy. “By the Commission’s logic,” she said, “narrowing the filing window should enable uninformed traders to share in profits created by the diligent efforts of more informed investors. But, absent a compelling reason, people who lawfully possess information should not have to hand that information over to their uninformed counterparties. The Commission’s position ignores that disparities in information and perspective are central to the functioning of our markets.” In particular, she was concerned about the possibility of preventing an individual “who has worked hard to identify a mismanaged company and develop a strategy for improving it from getting adequately compensated for that work and the associated risk.” And while technology may have changed in 50 years,
“the basic principle remains that people will not go to the trouble of identifying ways in which companies can improve unless they are rewarded for that work. And if investors pare back their monitoring of companies, other investors and the broader economy could suffer. The Commission’s economic analysis takes great pains to show that the changes will not impair activist investors that much, but in the process demonstrates that the rule will have substantial effects on how these investors proceed. The result could be fewer potentially corporate value-enhancing campaigns. This ‘modernization’ effort might better be characterized as an insulation effort—insulating corporate managers from scrutiny.”
She also expressed concern about the changes to Schedule 13G. According to Peirce,“[s]hortening filing deadlines for investors who generally have no plans to effect a change in control lacks any economic rationale. Under the amendments, 13G filers will have to give up their intellectual property earlier than they do now and thus subject themselves to copycatting and frontrunning. This cost to one group of investors is not outweighed by a corresponding benefit to other investors.” She also had questions about the guidance in the adopting release. For example, with regard to the guidance on groups, she asked whether “the group guidance inappropriately downplay[s] the importance of an ‘agreement’ in group formation? Is the group guidance unnecessarily accommodating to activists whose objectives are not to increase the value of the company at issue, but to further a cause that is either neutral or detrimental to the value of the company?” She would have preferred that the SEC include the guidance in a proposal.
Uyeda. In his statement, Commissioner Mark Uyeda observed, with apparent approval, that the “final amendments reflect consideration of the concerns raised by commenters in response to the proposal.” In particular, he noted the meaningful changes in the final rules in the filing deadlines for initial Schedule 13D filings and Schedule 13G filings. In addition, he observed that the final rules exclude certain proposed amendments regarding group formation and cash-settled securities; instead, the SEC provides guidance about group formation based on the statute and, for cash-settled derivatives, guidance that is “consistent with the treatment of security-based swaps set forth in a prior Commission release.” He observed that these changes reflect recognition by the SEC that “‘benefits may stem from the information asymmetry between a Schedule 13D filer and the market,’ which results ‘from their own expenditures on research and analysis or from their efforts and expenditures to pursue changes at the issuers in which they accumulate these shareholdings.’” In sum, he found the amendments to be appropriate responses to modern advances in technology.
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ADDENDUM
Summary of Q&A guidance regarding “group” formation
In its guidance, the SEC provided a number of examples when, in its view, no “group” is formed:
- When two or more shareholders engage in communications, including “discussions that relate to improvement of the long-term performance of the issuer, changes in issuer practices, submissions or solicitations in support of a non-binding shareholder proposal, a joint engagement strategy (that is not control related), or a ‘vote no’ campaign against individual directors in uncontested elections,” whether in a private meeting or public forum, “that involve[] an independent and free exchange of ideas and views among shareholders, alone and without more.”
According to the SEC, “Sections 13(d)(3) and 13(g)(3) were intended to prevent circumvention of the disclosures required by Schedules 13D and 13G, not to complicate shareholders’ ability to independently and freely express their views and ideas to one another… Thus, an exchange of views and any other type of dialogue in oral or written form not involving an intent to engage in concerted actions or other agreement with respect to the acquisition, holding, or disposition of securities, standing alone, would not constitute an ‘act’ undertaken for the purpose of ‘holding’ securities of the issuer under Section 13(d)(3) or 13(g)(3).”
- When two or more shareholders engage in discussions with an issuer’s management, without taking any other actions.
For similar reasons, the SEC advises that “two or more shareholders do not ‘act as a . . . group’ for the purpose of ‘holding’ a covered class within the meaning of those terms as they appear in Section 13(d)(3) or 13(g)(3) if they simply engage in a similar exchange of ideas and views, alone and without more, with an issuer’s management.”
- When “shareholders jointly make recommendations to an issuer regarding the structure and composition of the issuer’s board of directors where (1) no discussion of individual directors or board expansion occurs and (2) no commitments are made, or agreements or understandings are reached, among the shareholders regarding the potential withholding of their votes to approve, or voting against, management’s director candidates if the issuer does not take steps to implement the shareholders’ recommended actions.”
The SEC advises that, where recommendations are made “in the context of a discussion that does not involve an attempt to convince the board to take specific actions through a change in the existing board membership or bind the board to take action,” it does not believe that a group has been formed.
- When shareholders jointly submit a non-binding shareholder proposal to an issuer under Rule 14a-8.
The SEC does not believe that “shareholders engaging in a free and independent exchange of thoughts about a potential shareholder proposal, jointly submitting, or jointly presenting, a non-binding proposal to an issuer in accordance with Rule 14a-8 (or other means) should be treated differently from, for example, shareholders jointly meeting with an issuer’s management without other indicia of group formation…..Assuming that the joint conduct has been limited to the creation, submission, and/or presentation of a non-binding proposal, those statutory provisions would not result in the shareholders being treated as a group.” This view, the SEC notes, assumes the absence of “‘springing conditions’ such as an arrangement, understanding, or agreement among the shareholders to vote against director candidates nominated by the issuer’s management or other management proposals if the non-binding proposal is not included in the issuer’s proxy statement or, if passed, not acted upon favorably by the issuer’s board.”
- When a shareholder and an activist investor that is seeking support for its proposals to an issuer’s board or management, engage in a conversation, email, phone contact or meetings, without more, such as consenting or committing to a course of action, or “granting of irrevocable proxies or the execution of written consents or voting agreements that demonstrate that the parties had an arrangement to act in concert.”
Again, the SEC views these activities as “merely the exchange of views among shareholders about the issuer…. Activities that extend beyond these types of communications, which include joint or coordinated publication of soliciting materials with an activist investor might, however, be indicative of group formation, depending upon the facts and circumstances.”
- When a shareholder announces or communicates the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees, without more.
The SEC does “not view a shareholder’s independently-determined act of exercising its voting rights, and any announcements or communications regarding its voting decision, without more, as indicia of group formation.…Shareholders, whether institutional or otherwise, are thus not engaging in conduct at risk of being deemed to give rise to group formation as a result of simply independently announcing or advising others—including the issuer—how they intend to vote and the reasons why.”
A group may be formed, however, if “a beneficial owner of a substantial block of a covered class that is or will be required to file a Schedule 13D intentionally communicates to other market participants (including investors) that such a filing will be made (to the extent this information is not yet public) with the purpose of causing such persons to make purchases in the same covered class, and one or more of the other market participants make purchases in the same covered class as a direct result of that communication.” In that case, the blockholder and any of those market participants that made purchases “raise the possibility that all of these beneficial owners are ‘act[ing] as’ a ‘group for the purpose of acquiring’ securities of the covered class within the meaning of Section 13(d)(3).” The SEC notes that, although “each group member individually bears a reporting obligation arising under Rule 13d-1(k)(2), a tippee would not become a member of a group, and thus would not incur a reporting obligation, until it makes a purchase of securities of the same covered class in response to having been tipped even if the tippee already is a beneficial owner of that class.” Non-public information about the blockholder’s prospective Schedule 13D filing in the near future “may incentivize the market participants who received the information to acquire shares before the filing is made” and may also raise investor protection concerns. Whether a group is formed will depend on the “facts and circumstances, including (1) whether the purpose of the blockholder’s communication with the other market participants was to cause them to purchase the securities and (2) whether the market participants’ purchases were made as a direct result of the information shared by the blockholder.”
