Yesterday, 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 provides guidance on the definition of “group” formation. According to SEC Chair Gary Gensler, “[t]oday’s 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. I plan to publish an update to this post with more detail from the adopting release at a later time, so stay tuned.
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 ownership and circumstances of acquisition. Generally, an investor with control intent must file a Schedule 13D, while Exempt Investors and investors without control intent, such as Qualified Institutional Investors and Passive Investors, file Schedule 13G. (It can get complicated.)
Adopting release.
Amendments to Schedules 13D and 13G. The final amendments to Schedules 13D and 13G attempt to modernize the reporting system by, among other things, accelerating the various filing deadlines. According to the fact sheet:
- “For Schedule 13D, the amendments shorten the initial filing deadline from 10 days to five business days and require that amendments be filed within two business days.
- For certain Schedule 13G filers (i.e., qualified institutional investors and exempt investors), the amendments shorten the initial filing deadline from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5 percent of the covered class.
- For other Schedule 13G filers (i.e., passive investors), the amendments shorten the initial filing deadline from 10 days to five business days.
- In addition, for all Schedule 13G filers, the amendments generally require that an amendment be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.
- Finally, the amendments accelerate the Schedule 13G amendment obligations for qualified institutional investors and passive investors when their beneficial ownership exceeds 10 percent or increases or decreases by 5 percent.
- To ease filers’ administrative burdens associated with these shortened deadlines, the amendments extend the filing “cut-off” times in Regulation S-T for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time.
- To remove uncertainty as to the scope of Schedule 13D’s disclosure requirements with respect to derivative securities, the amendments revise Item 6 of Schedule 13D to clarify that a person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security.
- Additionally, to make it easier for investors and markets to access, compile, and analyze information disclosed on Schedules 13D and 13G, the amendments require that these filings use a structured, machine-readable data language. This requirement applies to all information disclosed on Schedules 13D and 13G (other than exhibits).” [Emphasis added.]
SEC guidance. The adopting release includes some SEC guidance. According to the fact sheet:
- “The adopting release provides guidance on the applicability of existing Rule 13d-3 to cash-settled derivative securities (other than security-based swaps). The guidance is similar to guidance the SEC previously provided in 2011 regarding the applicability of Rule 13d-3 to security-based swaps.”
- In addition, the adopting release provides guidance on the application of the legal standard in Sections 13(d)(3) and 13(g)(3) with respect to the formation of a group. The guidance clarifies that, in the SEC’s view, “the determination of 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 adopting release also provides guidance on the application of the current legal standard found in Sections 13(d)(3) and 13(g)(3) to certain common types of shareholder engagement activities.”
Timing. According to the fact sheet, the amendments will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024.
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 writes, is to “mitigate information asymmetries between everyday investors, on the one hand, and 13D filers and ‘informed bystanders,’ on the other hand.” But she seems to view that mitigation as unfair and potentially bad for the economy. “By the Commission’s logic,” she says, “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 is 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.” For example, the amended deadline for initial Schedule 13D filings has been set at five business days, “which is a meaningful change from the proposed deadline of five calendar days.” Likewise, for Schedule 13G, the final amendments require filings within 45 calendar days after the calendar quarter in which the ownership threshold is crossed, while the proposal would have required initial and amended filings within five business days after month-end. 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.
As of this posting, statements by the other Commissioners have not been published.
