In October, the SEC adopted rule changes that, among other things, shorten the filing deadlines for beneficial ownership reporting and require use of structured, machine-readable data. The agency has said the changes are aimed at modernizing rules that are more than a half-century old. Frank Borger Gilligan of Dickinson Wright digs into the changes and what they mean for covered entities.
On Oct. 10, the SEC adopted amendments to rules governing beneficial ownership reporting requirements on Schedules 13D and 13G under Regulation D-G and Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The final rules shorten the filing deadlines for initial and amended beneficial ownership reports (Schedules 13D and 13G), clarify the disclosure requirements with respect to derivative securities, provide guidance regarding group formation and require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.
The purpose of the amendments, SEC Chairman Gary Gensler said, is to modernize antiquated “rules that went into effect more than 50 years ago” to “require market participants to provide more timely information on their positions to meet the needs of investors in today’s financial markets.”
Background
Sections 13(d) and 13(g) require any person or group of persons who, directly or indirectly, acquire or hold beneficial ownership of more than 5% of a covered class of equity securities of an issuer to publicly report their beneficial ownership on either Schedule 13D or 13G — also known as “beneficial ownership reports” — as the case may be. Investors with “control intent” file reports on Schedule 13D, while exempt investors and investors without a control intent, such as qualified institutional investors and passive investors, file reports on Schedule 13G.
A person or group has beneficial ownership of an equity security if a person or group has or shares the power, directly or indirectly, to vote or direct the voting of a security or dispose of or direct the disposition of a security. A covered class of equity securities generally means a voting class of equity securities registered under the Exchange Act.
These beneficial ownership reports are intended to provide information about individuals or groups who have significant holdings in publicly traded companies. This allows other investors to make informed decisions about their own investments in the company. However, according to proponents of the amendments, technological advances in the past 50 years have rendered the deadlines provided in the current regulations inadequate.
Summary of amendments to filing deadlines
The primary purpose of the amendments is to accelerate the deadlines by which initial and amended Schedules 13D and 13G must be filed with the SEC.
The SEC modernized — i.e., shortened — the current deadlines, which were first adopted 50 years ago and had contemplated investors preparing paper filings and delivering them to the SEC. As Gensler noted, these deadlines have become antiquated by technological advances such as the internet, and the SEC believes that the current delay in reporting this material information may contribute to information asymmetries harmful to public investors. The new deadlines are designed, in part, to make potential material information available to investors in a more timely manner.
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Changes to beneficial ownership reporting deadlines |
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Schedule 13D |
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| Report type | Current | Amended |
| Initial | Investor is required to report within 10 calendar days of acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. | Investor is required to report within 5 calendar days of acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G. |
| Amendment | “Promptly” after the “triggering event.” A “triggering event” is a “material change” in facts set forth in the initial 13D. | Two business days after the “triggering event.” There was no change to the definition of “triggering event.” |
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Schedule 13G |
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| Report type | Current | Amended |
| Initial, QIIs and exempt investors | 45 calendar days after calendar year-end in which beneficial ownership exceeds 5%; and 10 calendar days after month-end in which beneficial ownership exceeds 10%. | 45 calendar days after calendar quarter-end in which beneficial ownership exceeds 5%; five business days after month-end in which beneficial ownership exceeds 10%. |
| Initial, passive investors | 10 calendar days after acquiring beneficial ownership of more than 5%. | Five business days after acquiring beneficial ownership of more than 5%. |
| Amendment, all filers | 45 calendar days after calendar year-end in which any change occurred. | 45 calendar days after calendar quarter-end in which a material change occurred. |
| Amendment, QIIs | 10 calendar days after month-end in which beneficial ownership exceeds 10% or there was, as of the month-end, a 5% increase or decrease in beneficial ownership. | Five business days after month-end in which beneficial ownership exceeds 10% or a 5% increase or decrease in beneficial ownership. |
| Amendment, passive investors | Promptly after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. | Two business days after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership. |
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Read moreGuidance on derivative securities
In addition to amending the filing deadlines for beneficial ownership reports, the SEC issued guidance regarding when holders of certain derivative securities could be seen as beneficial owners of the reference equity securities.
In its proposing release in February 2022, the SEC proposed Rule 13d-3(e), which would have deemed certain holders of cash-settled derivative securities to be beneficial owners of the reference covered class. The SEC declined to adopt this rule in its final rule and instead issued guidance to clarify the circumstances under which a holder of cash-settled derivative securities could be viewed as beneficially owning the reference equity securities.
The SEC’s guidance is similar to the guidance previously provided with respect to security-based swaps. Under this guidance, a holder of cash-settled derivative securities could be viewed as beneficially owning the reference securities if:
- The holder, directly or indirectly, has exclusive or shared investing power over the reference security.
- The cash-settled derivative security is acquired with the purpose or effect of divesting the holder of beneficial ownership of the reference security as part of a scheme to evade the reporting requirements under Sections 13(d) or 13(g) of the Exchange Act.
- Or the holder has the right to acquire beneficial ownership of the reference security within 60 days or acquires the right to acquire beneficial ownership of the reference security with the purpose or effect of changing or influencing control of the company, regardless of when the right is exercisable.
Guidance on group formation
The SEC gave additional guidance regarding when formation of a “group” occurs for the purpose of determining whether the 5% beneficial ownership threshold has been triggered. The SEC emphasized that the determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement; rather, it depends on the facts and circumstances — specifically, whether there was the concerted actions taken by two or more persons for the purpose of acquiring, holding or disposing of the securities. The SEC also provided several examples of the ways in which shareholders are permitted to communicate without forming a group, such as: (i) shareholders communicating with each other regarding an issuer or its securities without taking any further actions, (ii) shareholders engaging in discussions with an issuer’s management without taking any further actions, and (iii) shareholders jointly submitting a nonbinding shareholder proposal to the issuer.
Structured data language
Finally, but not insignificantly, the amendments require that all Schedules 13D and 13G, except for exhibits, be filed using structured, machine-readable data language and submitted through the SEC’s EDGAR filing platform using XML-based language.
Effective dates
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 Sept. 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required Dec. 18, 2024. Compliance with the other rule amendments will be required upon their effectiveness.
Summary
Under the final rules, investors will be required to submit their Schedules 13D and 13G filings within a shorter timeframe than previously required. The revised deadlines will increase compliance costs and will likely result in a significant increase in the number of filings required to be made. Perhaps more significantly, however, investors must be mindful of the deadline to file an amendment after a “triggering event.” Previously, investors were required to file an amendment to Schedule 13D “promptly” after a triggering event. Under the new rules, investors will be required to file an amendment within two business days of the triggering event.
Additionally, the SEC’s guidance on cash-settled derivative securities is consistent with the markets understanding of when such securities should be included in a beneficial ownership analysis and provides clarity in the treatment of such securities by using an existing and well-known standard.
Finally, the SEC’s decision to issue guidance regarding “group” status for the purpose of beneficial ownership reporting under Sections 13(d)(3) and 13(g)(3). The SEC affirmed that the standard for determining when a group is formed is when two or more persons act together for the purpose of acquiring, holding, or disposing of, securities of an issuer. Two or more persons “act together” when they take concerted actions in furtherance of any of these three purposes, regardless of any express agreement.
Frank Borger Gilligan, the former top securities regulator for the state of Tennessee, is a member of the corporate, M&A and securities practice group at Dickinson Wright. He regularly advises on the structuring and executing of public and private securities offerings, private equity and raising capital through Regulation D, Regulation A+ and Regulation Crowdfunding. Frank also advises clients on regulatory matters related to FinTech.
