SEC Adopts Amendments to Rules Governing Schedule 13D and Schedule 13G Beneficial Ownership Reporting

On October 10, 2023, the US Securities and Exchange Commission (the “SEC”) adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). The amendments:

• Accelerate the filing deadlines for Schedule 13D from 10 calendar days to five business days;
• Require that amendments to Schedule 13D be filed within two business days after the date of a triggering event; 
• Accelerate the initial filing deadline of Schedule 13G for qualified institutional investors and exempt investors from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter;
• Accelerate the initial filing deadline of Schedule 13G for passive investors from 10 days to five business days;
• Require that amendments to Schedule 13Gs for all filers be filed 45 days after the calendar quarter in which a material change has occurred rather than the previous requirement of 45 days after the calendar year in which any change occurred;
• Clarify the Schedule 13D disclosure requirements with respect to derivative securities; and
• Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.

In addition, the adopting release provides guidance regarding:

• The application of the current beneficial ownership reporting rules to an investor’s use of certain cash-settled derivatives (the SEC elected not to adopt new rules that would have deemed certain holders of cash-settled derivative securities to be the beneficial owners of the reference class of securities and instead reiterated and emphasized existing guidance on the applicability of Rule 13d-3 to cash-settled derivative securities); and
• The application of the current legal standard found in Sections 13(d)(3) and 13(g)(3) of the Exchange Act to certain common types of shareholder activities with respect to the formation of a group. 

To ease filers’ administrative burdens associated with these accelerate 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. The final rules will become effective 90 days following publication of the adopting release in the Federal Register. See the table below for relevant compliance dates.

Background

Exchange Act Sections 13(d) and 13(g), along with Regulation 13D-G, require an investor who beneficially owns more than five percent of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G, as applicable, to report their ownership. An investor with control intent files Schedule 13D, while exempt investors and investors without a control intent, such as qualified institutional investors and passive investors, file Schedule 13G. Until this month’s action, the deadlines for filing the initial Schedule 13D and Schedule 13G had not been updated since 1968 and 1977, respectively. 

In February 2022, the SEC proposed amendments to the Schedule 13D and 13G reporting regime. Under the SEC’s proposal, the deadlines for Schedule 13D and Schedule 13G filings would have been accelerated and Schedule 13G filings would have been required to be amended on a more current basis. The proposed rules also would have changed how some cash-settled derivatives are treated and further defined the circumstances under which a “group” has been formed by two or more investors. 

The final rules are generally consistent with the deadlines in the proposal except to use business days instead of calendar days in calculating the deadline for initial Schedule 13D and 13G filings and changing the deadline for amended Schedule 13Gs to 45 calendar days after quarter end. The SEC elected not to adopt proposed rules related to group determination and whether cash-settled derivatives equate to beneficial ownership of the underlying equity securities. Instead, guidance on those topics is provided in the adopting release.

Key Changes

Accelerated Filing Deadlines for Initial and Amended Schedule 13Ds and Schedule 13Gs

The following table summarizes the changes adopted with respect to Schedule 13D and 13G filings, as described more fully in the section after the table.

Summary of Key Changes and Amendments

Schedule 13D

• Shortening the filing deadline for an initial Schedule 13D from within 10 calendar days to within five business days after the date on which a person acquires beneficial ownership of more than five percent of a covered class.
• Shortening the filing deadline for an initial Schedule 13D required to be filed by certain persons who become ineligible to report on Schedule 13G in lieu of Schedule 13D from within 10 calendar days to within five business days after the event that causes the ineligibility.
• Revising the deadline for filing amendments to Schedule 13D from “promptly” to within two business days after the date on which a material change occurs.
• Permitting Schedule 13D 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.

Schedule 13G

• Shortening the deadline for an initial Schedule 13G filing for Qualified Institutional Investors (“QII”)  and Exempt Investors  from within 45 days after the end of the calendar year in which beneficial ownership first exceeds five percent of the covered class of securities to within 45 days after the end of the calendar quarter in which beneficial ownership first exceeds five percent of a covered class of securities.
• Shortening the deadline for Passive Investors  to file an initial Schedule 13G in lieu of Schedule 13D from within 10 calendar days to within five business days after the date on which they acquire beneficial ownership of more than five percent of a covered class of securities.
• Shortening the general deadline for Schedule 13G amendments from within 45 days after the end of the calendar year in which any change occurs to within 45 days after the end of the calendar quarter in which a material change occurs.
• Shortening the deadline for Exempt Investors to file a Schedule 13G amendment from within 10 calendar days after the end of the month in which beneficial ownership first exceeds 10% of a covered class to within five business days after the end of the month in which beneficial ownership first exceeds 10% of a covered class, and thereafter upon any increase or decrease by more than 5% of the covered class.
• Revising the deadline for Passive Investors to file a Schedule 13G amendment from “promptly” after beneficial ownership first exceeds 10% of a covered class to within two business days after beneficial ownership first exceeds 10% of the covered class, and thereafter upon any increase or decrease by more than five percent of the covered class.
• Permitting Schedule 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.

SEC Amendments and Guidance on Derivative Securities

Amendment to Schedule 13D Related to Derivative Securities

Item 6 of Schedule 13D currently requires beneficial owners to describe any contracts, arrangements, understandings, or relationships they have with respect to any securities of the issuer. The SEC adopted an amendment to Schedule 13D, as codified in Rule 13d-101 under the Exchange Act, to clarify that the disclosure required by Item 6 is intended to include a description of all derivative securities held by the filer that use a covered security as their reference security, including cash-settled security-based swaps and other derivatives that are settled exclusively in cash.

SEC Guidance on Cash-Settled Derivative Securities

However, the SEC elected not to enact proposed rules that would have deemed certain holders of cash-settled derivative securities to be the beneficial owners of the reference class of securities. Instead, the SEC determined that its guidance on the applicability of existing Rule 13d-3 to cash-settled derivative securities, similar to the guidance provided in its 2011 release on security-based swaps release,  is sufficient. In the 2011 release, the SEC explained that a holder of a security-based swap may become a beneficial owner as determined under Rule 13d-3 in cases where the security-based swap arrangement (i) confers voting and/or investment power (or a person otherwise acquires such power based on the purchase or sale of the swap arrangement), (ii) is used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to evade the reporting requirements, or (iii) grants a right to acquire an equity security (within 60 days if passive; at any time if not). In the 2023 adopting release for amendments we discuss here, the SEC stated that Rule 13d-3 may be applied similarly to both holders of security-based swaps and non-security-based swaps that are cash-settled derivatives to treat those persons as beneficial owners under the circumstances described above. Although these arrangements to the extent settled exclusively in cash generally are designed to represent only an economic interest in the reference securities, facts and circumstances may arise where the holder of these securities may have voting or investment power as described in Rule 13d-3(a) and therefore may be deemed to be a beneficial owner of the reference securities. 

SEC Guidance on Group Formation

Although the SEC did make some technical amendments to Rule 13d-5, it decided not to adopt various proposed amendments to Rule 13d-5 that, among other things, were intended to codify the SEC’s views 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 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. Concerned that such a codification might chill shareholder engagement, the SEC instead elected to provide guidance on the application of the existing standard found in the relevant statutory text (Sections 13(d)(3) and 13(g)(3)). This guidance provides that:

• Discussions held by stockholders in private or in a public forum such as a conference that involves independent and free exchange of ideas and views, without more, will not constitute formation of a group.
• Two or more stockholders do not act in a group when they engage in conversations with management without taking any other actions.
• A group is not formed when two or more stockholders jointly make recommendations to a company regarding the structure and composition of the company’s board of directors when no discussion of individual directors or board expansion occurs and no commitments, agreements or understandings are made among the stockholders to approve or vote against management’s candidates if the company does not implement the recommended actions of the stockholders (i.e., the stockholders only make recommendations and do not attempt to convince the board to take specific actions through a change in the existing board membership or bind the board to take action).
• A group is not formed if, without other concerted action, stockholders jointly submit a non-binding stockholder proposal under Rule 14a-8 of the Exchange Act.
• The announcement or communication by a stockholder of its intention to vote in favor of an unaffiliated activist’s director nominees, without more, does not constitute a group between the stockholders and the activist.
• If a beneficial owner of securities that is or will be required to file a Schedule 13D intentionally communicates to others that its Schedule 13D will be forthcoming (if that fact is not yet public) with the purpose of causing such persons to make purchases of securities of the same class, and another person makes purchases in the same class as a direct result of that communication, a group would be deemed to have been formed between these holders.

The SEC indicated, however, that intentional communications by the beneficial owner of a substantial block of a covered security that is, or will be required to, file a Schedule 13D to other market participants that such a filing will be made (to the extent this information is not yet public) with the purpose of causing such market participants to make purchases in the same class of covered security may cause such block holder and any market participants who made purchases as a direct result of such communication to become subject to regulation as a group.

Structured Data Filing Requirement for Schedule 13D and Schedule 13G

The SEC adopted amendments that will require all Schedule 13D and Schedule 13G disclosures, except exhibits to such filings, be filed in EDGAR using a machine-readable XML-based language specific to such filings. As is the case with other EDGAR XML filings, reporting persons will be able to, at their option, submit filings directly to EDGAR in such 13D/G-specific XML or use a web-based reporting application developed by the SEC that will generate the Schedule in 13D/G-specific XML in connection with the submission of the filing to EDGAR.

 

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