Last Friday, the Securities and Exchange Commission (SEC) reopened the comment period for its proposed amendments to modernize the rules governing beneficial ownership reporting. The proposed amendments to Regulation 13D-G would: (1) update the filing deadlines for Schedules 13D and 13G beneficial reports, (2) expand the definition of beneficial owners to include the holders of certain derivative securities, (3) re-define circumstances under which two or more persons have formed a “group” that would be subject to beneficial reporting obligations, and (4) require Schedules 13D and 13G to be filed using structured data requirements.

The SEC is seeking to modernize its reporting requirements and improve the efficiency and efficacy of the information made available to the public. Rule 13d-3 of the Exchange Act regulates public company reporting requirements for their beneficial owners. Beneficial owners are obligated to file Schedules 13D and 13G reports when and if they gain significantly large ownership positions in a single security. Exchange Act Sections 13(d) and 13(g), along with Regulation 13D-G, require that an investor who beneficially owns more than 5 percent of a covered class of equity securities must report such beneficial ownership by publicly filing either a Schedule 13D or a Schedule 13G. The current deadlines for filing the initial Schedule 13D and Schedule 13G have not been updated since 1968 and 1977, respectively.

• First, the proposed amendments would shorten the initial filing deadline for Schedule 13D from 10 days to 5 days and require any amendment filings to be filed within one business day. More drastically, certain Schedule 13G filers (e., qualified institutional investors and exempt investors) would be required to file their initial filings within five business days of month-end compared to the current 45 days after year-end when they exceed more than 5 percent of beneficial ownership of a covered class security. For passive investors, the proposal would shorten the Schedule 13G initial filing deadline from 10 days to 5 days. Lastly, for all Schedule 13G filers, the proposed amendments would require that an amendment be filed 5 business days after month-end in which the material change occurred compared to the existing 45 days after the year in which any change occurred.
• Under the proposed amendments, holders of certain cash-settled derivative securities will be deemed beneficial owners of the underlying securities. Under the current Rule 13d, cash-settled derivatives are not treated as counting toward a beneficial owner’s 5% threshold for purposes of Schedule 13D. As proposed, the SEC would count the beneficial ownership status of the referenced shares of the cash-settled derivatives, other than security-based swaps, toward beneficial ownership for Section 13D reporting purposes. The amendment would only apply to those beneficial owners who have an intent to control and does not apply to beneficial owners that file Schedule 13Gs.
• The proposed amendments would clarify the instances where two or more persons form a group to be deemed beneficial owners of securities. Currently under Regulation 13D-G when investors form a “group,” the group is considered the beneficial owner of all the securities owned by the group’s members. The amendment seeks to eliminate the need for an explicit agreement for a group to be formed. The SEC identifies circumstances such as a “tipper-tippee” relationships in which a person shares non-public information about an upcoming Schedule 13D filing with another person who subsequently purchases the issuer’s securities based on that information to be under the formation of a group.
• The proposed amendments provide new exemptions that permit investors to communicate and consult with each other, engage with issuers, and execute certain transactions without being treated as a “group.” The first exemption covers instances where the communication will not lead to a change or influence of control over the issuer. The second exemption addresses financial institutions who enter into agreements that define the terms of the derivatives securities.

The amendments to modernize the rules governing beneficial ownership reporting reflect the SEC’s effort in making it easier for the public to access, compile and analyze information.  In doing so, the SEC seeks to require all Schedule 13D and 13G filings to use a structured, machine-readable data language. The public comment period will remain open until June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever period is longer. We will continue to monitor the SEC’s decision in terms of the proposal.