In February 2022, the Security and Exchange Commission (the “SEC”) proposed an amendment (the “Amendment”) to Schedules 13D and 13G of the Securities Exchange Act of 1934, to modernize its reporting rules and ultimately to speed up the rate at which information is made available to the public. As of this post, rule changes have not been adopted, but the SEC’s stated dated for final action, April 2023, is fast approaching. So, we thought it would be good to refresh memories on the proposals and see if there are any takeaways for current practice.

Takeaways for Current Practice: The first takeaway seems to be that the SEC would like to see Scheduled 13D and amendments to Schedule 13D filed sooner rather than later. That said, haste can make for mistakes. So, while reporting persons should work to file sooner, they should also take extra care to ensure the disclosure is accurate.

The other takeaways are that the Amendment provides some useful guidance on reporting derivative instruments (including cash-settled, security-based swaps and other derivatives settled exclusively in cash) in a Schedule 13G, and some helpful data points on the group concept, which are discussed in a separate post.

Refresher on Statutory Requirements: The Securities Exchange Act of 1934 (commonly called the “Exchange Act” or the “1934 Act”) is a wide-ranging law that regulates secondary trading of securities in the U.S., namely those transactions which occur after an initial offerings and most often between non-issuing parties. Section 13 of the Exchange Act, the section of the proposed Amendment, regulates public company reporting requirements for their owners (and those with voting and/or investment control and authority, collectively the “Beneficial Owners” as further defined in Rule 13d-3 of the Exchange Act). Included in those reporting requirements are obligations for Beneficial Owners to file Schedules 13D and 13G reports when and if they gain significantly large ownership positions in a single security.

Most Beneficial Owners must report to the SEC, using a Schedule 13D, when they acquire more than 5% in a publically traded security or sufficiently increase their voting authority in that security after having crossed the 5% threshold. The intent of the rule is to provide the marketplace with important investment information, namely that some of the publicly traded company’s shareholders are positioned to make changes in the control of the company and/or for a possible corporate takeover. Beneficial Owners who directly or indirectly reach the 5% threshold typically must complete a Schedule 13D to report key relevant information to the public including: (i) the name of the public security held, (ii) information about the Beneficial Owner that has acquired the large stake (including the name, address, and citizenship or place of organization of each), (iii) the source of the funds for that acquisition, (iv) the intent in taking such a large stake in the company, (v) the exact number and % of shares held, (vi) any agreements , arrangements or other terms connected to the acquisition (including whether voting and investment power is held solely by the reporting Beneficial Owner or shared with others), and (vii) documents supporting the reported information (including a list of any transactions in the securities over the last 60 days). The current Schedule 13D deadlines, typically give investors 10 calendar days to make their filings and they are required to promptly file amendments for all material changes.

Some Beneficial Owners that would otherwise be required to file a full Schedule 13D, meet requirements which indicate they do not intend to exercise control over the security, despite their 5% or greater holding and may instead file a Schedule 13G. The Schedule 13G is a shorter, abbreviated, less intrusive and less burdensome disclosure than the Schedule 13D. Beneficial Owners, such as Exempt Investors, Qualified Institutional Investors or Passive Investors (as further defined in Rule 13(d)-1 of the Exchange Act) who do not intend to exercise control over the publicly trade security, despite their 5% or larger holding may qualify for the relevant exemptions to file only the Schedule 13G. In addition, to the lower and less intrusive disclosure requirements of the Schedule 13G, its deadlines for Qualified Institutions and Exempt Investors (although not for Passive Investors) are far more generous than the Schedule 13D requirements, with most filings due annually, within 45 days of the end of the calendar year in which they exceed the 5% threshold. 

Refresher on Proposed Amendment: Under the proposed Amendment, as detailed in a second Foley post (found here) the SEC proposed modifications to the Beneficial Owner determinations and what counts toward the 5% threshold. Additionally, under the proposed Amendment, filing deadlines for Schedules 13D and 13G are greatly accelerated from the already relatively fast reporting to even faster reporting. The proposed initial filing deadline for a Schedule 13D is halved, from 10 calendar days to only 5 calendar days, and amendments to Schedule 13D would be required to be filed within only 1 calendar day (instead of the current “promptly”). Schedule 13G deadlines are similarly shortened from annual to monthly, requiring filing within 45 days after the month in which a reportable change occurs (instead of within 45 days of the end of the calendar year). The new proposed rule extends the EDGAR filing time from 5:30 p.m. Eastern Time on the last day for filing to 10:00 p.m. Eastern Time, and imposes specific formatting requirements for all but the exhibits. Lastly, to make it easier for investors and markets to access, compile and analyze information disclosed on Schedules 13D and 13G, the proposed amendments would require filing use a machine-readable data language. This requirement would apply to all information disclosed on Schedules 13D and 13G.

The SEC released a chart summarizing their proposed changes to the filing deadlines (reprinted at the end of this post from Section II.A of the SEC Proposed Amendment https://www.sec.gov/rules/proposed/2022/33-11030.pdf )

The SEC Chair Gary Gensler explained, “[i]nvestors currently can withhold market moving information from other shareholders for 10 days after crossing the 5% threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner.”

Considerations if Adopted: The SEC’s aim to increase the speed at which this information is shared with the public may have good intent, but should the new rules be adopted, security-holders and investment personnel will need a proactive plan to face the administrative obstacles required to meet such short filing deadlines. In all likelihood, this would necessitate internal procedural changes and in certain cases, additional staffing to accommodate the increased compliance burden. Shortening the Schedule 13D timeline to 5 days (and only 1 day for amendments) leaves little room for error, particularly in a disclosure document where the substance of the disclosure is as important as the speed. Similarly, transitioning the Schedule 13G to a monthly requirement, not annual, will require changes to internal procedures to ensure the filings are made on a timely basis.

Section II.A of the SEC Proposed Amendment https://www.sec.gov/rules/proposed/2022/33-11030.pdf: