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Rapid Rulemaking: SEC Update

Is Beneficial Ownership Coming of Age?

March 28, 2022

By Will Burns, Spencer F. Young, & Eboney Hutt

Despite the exponential advancements of technology over the past few decades and the development of internal compliance departments as our securities laws have developed over the years, the deadlines for Schedule 13D and Schedule 13G filings have not been updated to keep up with the times. Indeed, the initial filing deadline for Schedule 13D has been the same since 1968, and the initial filing deadline for Schedule 13G has remained unchanged since 1977.[1] Keeping in line with recent efforts to “modernize” its reporting system and improve the “timeliness” of filings, on February 10, 2022, the Securities and Exchange Commission (the “Commission”) proposed certain changes to Rules 13d-1 and 13d-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and to Rule 13(a) of Regulation S-T, which would shorten the deadline for filing Schedules 13D and 13G and any amendments thereto, and push out the cut-off time for such filings to 10 p.m., ET.[2] / [3] This alert summarizes these proposed amendments.

Current Rule(s) Under Sections 13(d) and 13(g) of the Exchange Act

As currently constructed, Sections 13(d) and 13(g) of the Exchange Act and the related rules require investors to report their beneficial ownership on Schedule 13D or Schedule 13G if they own five percent or more of a covered class of equity securities (referred to hereafter as a “covered class”).[4] Investors that beneficially own five percent or more of a covered class must file a long form Schedule 13D within ten days of such acquisition.[5] Certain investors who fit within the exemptions set forth in Rule 13d-1 are eligible to file a short form on Schedule 13G in lieu of a Schedule 13D.[6] For qualified institutional investors and exempt investors, Schedule 13G is generally due 45 days after the calendar year end for the year in which the investor acquired ownership,[7] and for passive investors, Schedule 13G is due within 10 days following the acquisition of 5% or more of the covered class.[8] / [9]

If certain changes occur in an investors’ percentage of beneficial ownership (for example, crossing the 10% threshold or increasing or decreasing ownership by more than five percent after crossing the 10% threshold), holders must “promptly” file amendments to their Schedule 13D or Schedule 13G filings, as applicable.[10] / [11] Schedule 13D filers must also “promptly” file an amendment if a material change in the information presented occurs.[12] / [13] Schedule 13G filers must file an annual amendment 45 days following year-end to reflect any changes in the prior filing not attributable to a change in the aggregate number of shares outstanding.[14] / [15] Finally, Schedule 13G filers who hold over 10% of a covered class are required to file amendments before year-end in certain circumstances.[16]

Schedule 13D—Proposed Changes to Initial Filings and Amendments

Under the proposed rule, amended Rule 13d-1(a) would shorten the deadline for initial Schedule 13D filings to within five days of the date on which an investor’s beneficial ownership of an issuer’s covered class exceeds 5%.[17] / [18] While there are no proposed changes to the set of circumstances that trigger the requirement to file an amendment, any amendments to a holder’s Schedule 13D would need to be filed within one business day of the triggering event, rather than “promptly”.[19] / [20] The proposed rule also includes amendments that would require filers who lose their Schedule 13G eligibility to file a Schedule 13D within five days of the loss thereof.[21] 

The Commission believes these changes will help curb information asymmetries among investors by enabling shareholders to more quickly find out that an investor has acquired enough of an issuer’s covered class to potentially change or influence control of the issuer.[22] This will help increase investor confidence in the markets by enabling investors to feel like they are transacting in appropriately priced securities and contribute to enhanced market efficiencies and liquidity.[23] In addition, given advances in technology, the new five-day deadline should not be burdensome for investors.[24]

Schedule 13G—Proposed Changes to Initial Filings and Amendments

Initial Filing

Under the proposed rule, once a qualified institutional investor or an exempt investor trips the five percent threshold, it will have five business days following month-end to file an initial Schedule 13G, a drastic decrease from the current forty-five days following year-end requirement.[25] For passive investors that acquire more than five percent of an issuer’s covered class, the deadline for the initial filing would decrease from ten to five calendar days.[26]

Deadline for Amendments

Additionally, the proposed rule accelerates the deadline for amendments to Schedule 13G and codifies the materiality standard for changes triggering an amended filing.[27] The changes would accelerate the amendment deadline for Schedule 13G filers from 45 days following the last day of the calendar year in which any change to the information currently presented in the filer’s Schedule 13G occurs to five business days following the end of the month that a material change occurs.[28] / [29]

Deadline for Amendments—Holders of 10% or More

Further, the deadlines for certain amendments to Schedule 13G for investors who hold greater than 10% of a covered class would also be accelerated under the proposed rule. Rather than 10 days following the month-end in which a qualified institutional investor’s beneficial ownership rises above 10% of a covered class, the deadline for an amended Schedule 13G would be five days after the acquisition.[30] Furthermore, after such investors cross the 10% threshold, fluctuations in their beneficial ownership greater than five percent of the covered class would also need to be filed within five days of the change.[31] For passive investors whose beneficial ownership crosses the over 10% threshold, a one-business day standard will replace the “promptly” standard. The one business day standard will also apply to over 10% passive investors whose beneficial ownership increases or decreases by over five percent of the covered class.[32]

Given the sophistication of qualified institutional investors, the Commission anticipates them to have fully developed compliance teams who will flag swings in their beneficial ownership of an issuer’s covered class and not be overly taxed by filing an amended Schedule 13G in an abbreviated timeframe. Therefore, the benefits of getting the information out to the market rapidly outweigh the increased burden on filers.[33]

Proposed Changes to the “Cut-Off” Times and Form for Schedules 13D and 13G

The Commission recognizes that the administrative challenges resulting from shortened deadlines could prove burdensome for certain filers.[34] Accordingly, rather than require filers submit any Schedule 13D and 13G filings by 5:30 p.m., Eastern time, the proposed amendments would extend the “cut-off” time for Schedule 13D and Schedule 13G filings to 10:00 p.m., Eastern time.[35] The proposed rule will require Schedules 13D and 13G to be filed using an XML-based language developed specifically for such filings so that they are machine-readable and more easily searchable for investors.[36]

Other Changes

There are additional changes included in the overhaul to the beneficial ownership reporting structure—including providing guidance on when investors have formed a “group” and regarding when holders of certain cash-settled derivative securities will be subject to Regulation 13D and 13G, which are outside the scope of this update.[37]

Conclusion

While the proposed rules are not yet effective, they herald significant changes to the deadlines applicable to Schedule 13D and Schedule 13G filings that will have an impact on investors. Once adopted, in house counsel should work to develop a plan to deal with the condensed filing cadence so that deadlines are not inadvertently missed. For example, filers will need to ensure that they obtain EDGAR codes well in advance of significant acquisitions that could trigger initial Schedule 13D or Schedule 13G filings so that technicalities do not hold up the filing. In addition, in house counsel will need to be ready to monitor closely their companies’ acquisitions and dispositions to ensure timely filings. In addition, when preparing beneficial ownership tables for registration statements or proxy statements, filers would need to keep in mind that amended Schedules 13G could be filed any time prior to filing and will not generally be due within 45 days of year-end. Accordingly, if the proposed rule is adopted as written, these and other impacts will require a wide-ranging recalibration of internal processes for filers to ensure compliance, and we are available to assist in guiding you through the adjustment.

Annex A


Issue
Current Schedule 13D Proposed New Schedule 13D Current Schedule 13G Proposed New Schedule 13G

Initial Filing Deadline

Within 10 days after acquiring beneficial ownership of more than five percent or losing eligibility to file on Schedule 13G. Rules 13d-1(a), (e), (f) and (g).

Within five days after acquiring beneficial ownership of more than five percent or losing eligibility to file on Schedule 13G. Rules 13d-1(a), (e), (f) and (g).

QIIs & Exempt Investors:
45 days after calendar yearend in which beneficial ownership exceeds five percent. Rules 13d-1(b) and (d).

QIIs & Exempt Investors:
Five business days after month-end in which beneficial ownership exceeds five percent. Rules 13d1(b) and (d).

Passive Investors: Within 10 days after acquiring beneficial ownership of more than five percent. Rule 13d1(c).

Passive Investors: Within five days after acquiring beneficial ownership of more than five percent. Rule 13d-1(c).

Amendment Triggering Event

Material change in the facts set forth in the previous Schedule 13D. Rule 13d-2(a).

No amendment proposed.

All Schedule 13G Filers:
Any change in the information previously reported on Schedule 13G. Rule 13d-2(b).

All Schedule 13G Filers:
Material change in the information previously reported on Schedule 13G. Rule 13d-2(b).

QIIs & Passive Investors:
Upon exceeding 10% beneficial ownership or a five percent increase or decrease in beneficial ownership. Rules 13d-2(c) and (d).

QIIs & Passive Investors:
No amendment proposed ownership. Rules 13d-2(c) and (d).

Amendment Filing Deadline

Promptly after the triggering event. Rule 13d-2(a).

Within one business day after the triggering event. Rule 13d-2(a).

All Schedule 13G Filers:
45 days after calendar yearend in which any change occurred. Rule 13d-2(b).

All Schedule 13G Filers:
Five business days after month-end in which a material change occurred. Rule 13d-2(b).

QIIs: 10 days after month-end in which beneficial ownership exceeded 10% or there was, as of the month-end, a five percent increase or decrease in beneficial ownership. Rule 13d-2(c).

QIIs: Five days after exceeding 10% beneficial ownership or a five percent increase or decrease in beneficial ownership. Rule 13d-2(c).

Passive Investors: Promptly after exceeding 10% beneficial ownership or a five percent increase or decrease in beneficial ownership. Rule 13d-2(d).

Passive Investors: One business day after exceeding 10% beneficial ownership or a five percent increase or decrease in beneficial ownership. Rule 13d-2(d).

 

   Duplicated from https://www.sec.gov/rules/proposed/2022/33-11030.pdf page 9-10 with slight modifications.

 

[1]   Modernization of Beneficial Ownership Reporting, Securities Act Release No. 33-11030; Exchange Act Release No. 34-94211 (proposed Feb. 10, 2022) [hereinafter Proposed Rule], at p. 14, https://www.sec.gov/rules/proposed/2022/33-11030.pdf , and https://www.sec.gov/files/33-11030-fact-sheet.pdf.

[2]   Proposed Rule, supra note 1, at pp. 6–9, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[3]   Unless otherwise noted all rule references herein refer to Exchange Act rules.

[4]   A “covered class” of equity securities generally includes those securities registered under Section 12 of the Exchange Act and are described in Section 13(d)(1) of the Exchange Act and Rule 13d-1(i).

[5]   Rule 13d-1(a).

[6]   Rule 13d-1(b)–(d).

[7]   Rule 13d-1(b)(2).

[8]   Rule 13d-1(c).

[9]   See footnotes 6–8 on pages 7–8 of the Proposed Rule for definitions of “qualified institutional investor”, “exempt investor,” and “passive investor.” https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[10]  Rule 13d-2(a), and Rule 13d-2(c)-(d).

[11]  The Commission has indicated that filings could be considered “prompt” if made during varying amounts of time, depending on the facts and circumstances surrounding the material change. For example, a complicated disclosure issue could warrant additional preparation time. The Commission has further stated that “‘[a]ny delay beyond the date the filing reasonably can be filed may not be prompt’ and that an amendment to a Schedule 13D reasonably could be filed in as little as one day following the material change.” https://www.sec.gov/rules/proposed/2022/33-11030.pdf pages 41-42. In practice, filings made within 2–5 days are generally considered to be made “promptly” according to practioners. See infra note 15.

[12]  Rule 13d-2(a).

[13]  Rule 13d-2(a) states that an acquisition or disposition of one percent or more of the covered class is deemed a material change. Whether a smaller change in percentage beneficial ownership is material is based upon the facts and circumstances.

[14]  Rule 13d-2(b).

 

[15]  For additional information regarding the current Section 13 filing requirements, see Paul Hastings’ article, SEC Reporting Obligations Under Section 13 and Section 16 of the Exchange Act, by Arthur L. Zwickel and Alicia M. Harrison, dated February 6, 2019 and accessible at: https://www.paulhastings.com/insights/client-alerts/sec-reporting-obligations-under-section-13-and-section-16-of-the-exchange-act.

[16]  See Rule 13d-2(c) and Rule 13d-2(d).

[17]  Proposed Rule, supra note 1, at p. 21, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[18]  For calculation purposes, day 1 is the day following the acquisition with respect to all changes in deadlines in the proposed rule. Proposed Rule, supra note 1, at p. 21, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[19]  Proposed Rule, supra note 1, at p. 42, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[20]  Amendments to Schedule 13D are triggered if there is any material change in the information included in a previous Schedule 13D filing. See Rule 13d-2(a).

[21]  Proposed Rule, supra note 1, at p. 30, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[22]  Proposed Rule, supra note 1, at pp. 16–17, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[23]  Proposed Rule, supra note 1, at p. 24, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[24]  Proposed Rule, supra note 1, at pp. 19–20, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[25]  Proposed Rule, supra note 1, at p. 37, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[26]  Proposed Rule, supra note 1, at p. 9, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[27]  Proposed Rule, supra note 1, at pp. 9, 43, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[28]  Proposed Rule, supra note 1, at pp. 42-43https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[29]  The Commission believes that there “is a materiality standard inherent in the provisions governing Schedule 13G filings.” Proposed Rule, supra note 1, at p. 43, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[30]  Proposed Rule, supra note 1, at p. 46, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[31]  Proposed Rule, supra note 1, at p. 46, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[32]  Proposed Rule, supra note 1, at p. 9, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[33]  Proposed Rule, supra note 1, at p. 46, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[34]  Proposed Rule, supra note 1, at p. 49, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[35]  Proposed Rule, supra note 1, at pp. 49–50, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[36]  Proposed Rule, supra note 1, at p.105, https://www.sec.gov/rules/proposed/2022/33-11030.pdf.

[37]       SEC Press Release, SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting, https://www.sec.gov/news/press-release/2022-22 (Feb. 10, 2022).

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Image: Will Burns
Will Burns
Partner, Corporate Department
Image: Spencer F. Young
Spencer F. Young
Senior Practice Group Attorney
Image: Eboney Hutt
Eboney Hutt
Associate, Corporate Department

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