SEC Amends Rules Regarding Beneficial Ownership Reporting
On October 10, the SEC enacted a series of amendments to the rules that govern beneficial ownership reporting. The amendments, inter alia: (1) revise the current deadlines for Schedule 13D and Schedule 13G filings and amendments; (2) clarify disclosure requirements with respect to certain derivative securities; and (3) set forth the circumstances under which two or more persons may communicate and consult with each other and/or engage with an issuer without concern that they will be subject to regulation as a group.
- Shorten the initial Schedule 13D filing deadline to within five business days after the date on which a person acquires beneficial ownership of more than 5% of a covered class of equity securities or loses eligibility to file on Schedule 13G1
- Revise the Schedule 13D amendment filing deadline from “promptly” to within two business days after the date on which a material change occurs
- Shorten the initial Schedule 13G filing deadline for Qualified Institutional Investors (QIIs)2 to within 45 days after the quarter-end on which its beneficial ownership of a covered class first exceeds 5% or within five business days after the end of the first month in which its beneficial ownership exceeds 10% of the class (computed as of the last day of the month)
- Shorten the initial Schedule 13G filing deadline for Exempt Investors3 to within 45 days after the quarter-end in which its beneficial ownership of a covered class first exceeds 5%
- Shorten the initial Schedule 13G filing deadline for Passive Investors4 to within five business days after the date on which it acquires beneficial ownership of more than 5% of a covered class of equity securities
- Shorten the Schedule 13G amendment filing deadline to within 45 days after the end of the calendar quarter in which a material change occurs
- Shorten the Schedule 13G amendment filing deadline for QIIs to within five business days after the end of the month in which its beneficial ownership of a covered class exceeds 10% (computed as of the last day of the month); and thereafter, to within five business days after the end of the month in which such beneficial ownership (computed as of the last day of the month) is increased or decreased by more than 5%
- Revise the Schedule 13G amendment filing deadline for Passive Investors to within two business days after acquiring in excess of 10% of a covered class; and thereafter within two business days after increasing or decreasing such beneficial ownership by more than 5%
Schedule 13D and 13G filings and amendments submitted to EDGAR by direct transmission on or before 10 p.m. eastern time on any business day will be deemed filed on that business day. The previous temporary hardship exemption in Regulation S-T (for unanticipated technical difficulties) will no longer be available for these filings and amendments. However, Schedule 13D and 13G filers will remain eligible to request a filing date adjustment under Rule 13(b) of Regulation S-T.
The SEC did not adopt its proposal to deem certain holders of cash-settled derivative securities (other than holders of security-based swaps (SBS)) as beneficial owners of the reference covered class. Instead, the adopting release provides guidance on the applicability of existing Rule 13d-3 to cash-settled derivative securities, excluding SBS, similar to the guidance provided in the SEC’s Security-Based Swaps Release, which describes the circumstances under which a holder of a SBS may become a beneficial owner as determined under Rule 13d-3.
As is the case with persons holding cash-settled SBS, Rule 13d-3 may be applied to holders of non-SBS cash-settled derivatives. Although non-SBS derivative securities settled exclusively in cash generally are designed to represent only an economic interest, the following facts and circumstances may result in a determination of beneficial ownership of the referenced covered class: (1) where a non-SBS cash-settled derivative security provides its holder, directly or indirectly, with sole or shared voting or investment power (within the meaning of Rule 13d-3(a)), over the reference covered class or (2) where 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).
In addition, under Rule 13d-3(d)(1), a person is deemed a beneficial owner of an equity security if the person (1) has a right to acquire such beneficial ownership 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. 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.
Item 6 of Schedule 13D, which requires beneficial owners to describe any contracts, arrangements, understandings or relationships with respect to any securities of the issuer, has been amended to expressly require disclosure of interests in all derivative securities (including cash-settled SBS and other cash-settled derivatives) that use the issuer’s equity security as a reference security. 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.
The statutory text of Exchange Act Sections 13(d)(3) and (g)(3) provides that when two or more persons act as a group for the purpose of acquiring, holding, or disposing of securities of an issuer, such group shall be deemed a “person.” The language of Rule 13d-5(b) (which states: “When two or more persons agree to act together…”) is not meant to serve as a substitute for the statutory standard. Whether a group has been formed will depend on whether the persons acted together for the stated purposes. The presence or absence of an express agreement is not determinative. However, 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.”
To provide further clarity on group formation, the adopting release includes guidance (in a “question and response” format) on the application of the foregoing standards to common types of shareholder engagement activities, including the following:
- A group would not be formed when shareholders communicate with each other, without more, regarding an issuer or its securities (including discussions relating to improvement of the issuer’s long-term performance, changes in 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).
- A group is not formed when shareholders engage in discussions, without more, with an issuer’s management.
- A group is not formed when shareholders jointly make recommendations to an issuer regarding board structure and composition if: (1) there is no discussion of individual directors or board expansion and (2) no commitments are made, or agreements or understandings reached, regarding withholding their votes to approve, or voting against, management’s director candidates if the issuer does not take steps to implement such recommendation.
- A group is not formed if shareholders jointly submit a non-binding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8 for presentation at a shareholder’s meeting.
- A conversation, email, phone contact, or meetings between a shareholder and an activist investor that is seeking support for its proposals to an issuer’s board or management, without more (such as consenting or committing to a course of action), would not result in the shareholder and activist being deemed to form a group; however, joint or coordinated publication of soliciting materials might be indicative of group formation.
- A communication by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees, without more, would not be sufficient to find that the shareholder and the activist investor formed a group.
- 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 (if 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, the blockholder and any of those market participants would potentially constitute a group. Relevant facts and circumstances include: (1) whether the purpose of the blockholder’s communication was to cause the other market participants to purchase the securities and (2) whether the market participants’ purchases were made as a direct result of the information shared by the blockholder.
In addition, Rule 13d-5 has been amended to specify that a group subject to reporting obligations under Section 13(d) or 13(g) shall be deemed to acquire any additional equity securities acquired by any member of the group after the group’s formation (other than intra-group transfers of equity securities).
With respect to derivative securities, the SEC does not believe that persons who, in the ordinary course of business, acquire derivative securities settled exclusively in cash would generally be deemed to act as a group under Sections 13(d)(3) and 13(g)(3) with the financial institutions that sell such derivatives. Although the financial institution counterparty may purchase and hold securities in the reference covered class, if the counterparty acts on its own initiative and not at the direction of the investor or otherwise on its behalf, there is no basis to assert that the investor and counterparty acted in concert.
Structured, Machine-Readable Language
All disclosures, including quantitative disclosures, textual narratives, and identification checkboxes, on Schedules 13D and 13G must be filed using an XML-based language specific to Schedules 13D and 13G. Only the exhibits to Schedules 13D and 13G would remain unstructured.
The amendments will become effective 90 days after publication in the Federal Register; provided that compliance with the revised Schedule 13G filing deadlines under Rules 13d-1 and 13d-2 will not be required before 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 that the filer previously reported on Schedule 13G. Compliance with the structured data requirement for Schedules 13D and 13G will not be required until December 18, 2024 (voluntary compliance will be permitted commencing on December 18, 2023).
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The day on which the acquisition of beneficial ownership occurs is not counted in the five business day period. For example, if the reporting person crossed the 5% reporting threshold or loses Schedule 13G eligibility on a Monday, its Schedule 13D filing would be due by the 10 p.m. EDGAR filing deadline on the following Monday (assuming no federal holidays). A business day is the period from 12:00 a.m. to 11:59 p.m. eastern (i.e., Washington, D.C.) time, regardless of where the reporting person or issuer are located.
Qualified Institutional Investors include a broker or dealer registered under Section 15(b) of the Exchange Act, a bank as defined in Section 3(a)(6) of the Exchange Act, an insurance company as defined in Section 3(a)(19) of the Exchange Act, an investment company registered under Section 8 of the Investment Company Act of 1940, an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, a parent holding company or control person (if certain conditions are met), an employee benefit plan or pension fund that is subject to the provisions of the Employee Retirement Income Security Act of 1974, a savings association as defined in Section 3(b) of the Federal Deposit Insurance Act, a church plan that is excluded from the definition of an investment company under Section 3(c)(14) of the Investment Company Act of 1940, non-U.S. institutions that are the functional equivalent of any of specified institutions, so long as the non-U.S. institution is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to the equivalent U.S. institution, and related holding companies and groups.
The term “Exempt Investor” refers to persons holding 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). For example, persons who acquire all their securities prior to the registration of the class of securities under the Exchange Act are not subject to Section 13(d) and persons who acquire not more than 2% of a covered class within a 12-month period are exempted from Section 13(d) by Section 13(d)(6)(B), but in both cases are subject to Section 13(g). Section 13(d)(6)(A) exempts acquisitions of subject securities acquired in a stock-for-stock exchange that is registered under the Securities Act of 1933.
“Passive Investors” are beneficial owners of more than 5% but less than 20% of a covered class who can certify that the subject securities were not acquired or held for the purpose or effect of changing or influencing the control of the issuer and were not acquired in connection with or as a participant in any transaction having such purpose or effect.