U.S. SEC Adopts Amendments to Beneficial Ownership Reporting Rules

On October 10, 2023, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments[1] to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”).

The amendments adopted by the SEC, among other things:

• Accelerate the filing deadline for an initial Schedule 13D beneficial ownership report to five business days after acquiring beneficial ownership of more than 5% from the current ten calendar days;
• Require an amendment to a Schedule 13D to be filed within two business days following a triggering event;
• Accelerate the filing deadline for an initial Schedule 13G beneficial ownership report by a qualified institutional investor (“QII”)[2] or exempt investor[3] to 45 days after the end of a quarter in which an investor’s beneficial ownership exceeds 5%;
• Accelerate the filing deadline for an initial Schedule 13G beneficial ownership report by a passive investor[4] to five business days after acquiring beneficial ownership of more than 5% from the current ten calendar days;
• Accelerate the filing deadline for Schedule 13G amendments, including requiring all Schedule 13G filers to amend a report for any material change within 45 days after the end of a calendar quarter in which the material change occurred, versus the current requirement to amend within 45 days of calendar year end for any change; and
• Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

Importantly, the SEC did not adopt proposals that would have deemed certain holders of cash‑settled derivative securities as beneficial owners of the covered security and would have conferred group membership in certain specified instances. The SEC instead opted to provide guidance on the application of existing rules to those situations.

Amendments to Schedule 13D and 13G Filing Deadlines

Appendix 1 contains a chart that summarizes the new filing deadlines for initial Schedules 13D and 13G and amendments thereto. Key changes from the proposed rules[5] include:

• Schedule 13D initial filings: due five business days after acquiring more than 5% versus five calendar days in proposed rules.
• Schedule 13D amendments: due two business days after a triggering event versus one business day in the proposed rules.
• Schedule 13G initial filings:
• Passive Investors: due five business days after acquiring more than 5% versus five calendar days in the proposed rules.
• QIIs and Exempt Investors: due 45 days after calendar quarter-end in which an investor’s beneficial ownership exceeds 5% versus five business days after month-end in which ownership exceeds 5% in the proposed rules.
• Schedule 13G amendments:
• All Schedule 13G Filers for Material Changes: due 45 days after calendar quarter-end in which a material change occurs versus five business days after month-end in which a material change occurs.
• QIIs when Ownership Exceeds 10%: due five business days after month-end in which beneficial ownership exceeds 10% or, thereafter, a 5% increase or decrease in beneficial ownership. The proposed rules provided for a five calendar day deadline.
• Passive Investors when Ownership Exceeds 10%: due two business days after exceeding 10% beneficial ownership or, thereafter, a 5% increase or decrease in beneficial ownership. The proposed rules provided for a one business day deadline.

In addition to the changes to the filing deadlines described above and in Appendix 1, the rules provide for the filing of Schedules 13D and 13G, and amendments thereto, up until 10:00 p.m. Eastern Time, rather than the current 5:30 p.m. filing cut-off.

Amendments and Guidance on Derivatives

Item 6 of Schedule 13D

Item 6 of Schedule 13D requires the reporting person to “[d]escribe any contracts, arrangements, understandings or relationships (legal or otherwise) among the persons named in Item 2 and between such persons and any person with respect to any securities of the issuer.” Consistent with the proposed rules, the SEC adopted revisions to Item 6 to clarify that a reporting person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s subject security as an underlying security.

Cash-Settled Derivative Securities

The proposed rules addressed when ownership of cash-settled derivative securities would confer beneficial ownership of the underlying securities, as well as certain disclosure requirements regarding such beneficial ownership. The SEC declined to adopt final rules addressing those matters and instead provided guidance regarding how the existing requirements of Rule 13d-3 may confer beneficial ownership of the underlying securities on holders of cash-settled derivative securities. The SEC’s guidance for cash-settled derivative securities provides that holders of such securities should be deemed the beneficial owner of the underlying securities to the extent the cash-settled derivative securities, directly or indirectly:

• confer voting and/or investment power over the underlying securities;
• are 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 beneficial ownership reporting requirements; or
• grant a right to acquire the underlying securities.

The SEC’s guidance is consistent with statements in its 2011 release addressing beneficial ownership reporting requirements and security-based swaps.

Guidance relating to Groups

Section 13(d)(3) of the Exchange Act provides that “when two or more persons act as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of the securities of an issuer, such syndicate or group shall be deemed a ‘person’ for purposes of [Section 13(d)].” The proposed rule changes were intended to clarify the circumstances under which two or more persons have formed a group. The SEC, however, decided against adopting the proposed rule changes and instead issued guidance to clarify the application of existing rules to certain potential group situations. In particular, the SEC provided examples of shareholder actions that, without further action, would not confer group status for purposes of Section 13(d)(3) or Section 13(g)(3) of the Exchange Act, as follows:

• Communications between two or more shareholders regarding an issuer or its securities (including discussions that relate to improvement of the long-term performance of the issuer, changes in issuer 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);
• Communications between two or more shareholders and management of an issuer;
• Joint recommendations by two or more shareholders to an issuer regarding the structure and composition of the issuer’s board of directors where (1) no discussion of individual directors or board expansion occurs and (2) no commitments are made, or agreements or understandings are reached, among the shareholders regarding the potential withholding of their votes to approve, or voting against, management’s director candidates if the issuer does not take steps to implement the shareholders’ recommended actions;
• Joint submission by two or more shareholders of a non-binding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8 for presentation at a meeting of shareholders;
• Conversations, emails, phone contacts, 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; and
• Announcements or communications by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees.

The SEC, however, advised that a group may be formed when a substantial beneficial owner (that is or will be required to file a Schedule 13D) intentionally communicates to other market participants that the beneficial owner will file a Schedule 13D with the purpose of inducing such persons to purchase the underlying securities, and one or more of the other market participants purchases the securities as a direct result of that communication. The SEC noted that the final determination as to whether a group is formed between the beneficial owner and the other market participants will ultimately depend upon the facts and circumstances, including (1) whether the purpose of the beneficial owner’s communication with the other market participants was to cause them to purchase the securities and (2) whether the market participants’ purchases were made as a direct result of the information shared by the beneficial owner.

While the SEC’s guidance is useful, group determinations are very fact dependent. As noted by the SEC in the adopting release, “[t]he determination depends on an analysis of all the relevant facts and circumstances and not solely on the presence or absence of an express agreement, as two or more persons may take concerted action or agree informally.”

Structured Data Filing Requirements

The final rules require Schedules 13D and 13G to be filed using a structured, machine-readable data language. All disclosures, including quantitative disclosures, textual narratives, and identification checkboxes, on Schedules 13D and 13G will have to be filed using an XML-based language to facilitate the ability to access, compile, and analyze information that is disclosed on Schedules 13D and 13G. The structured data filing requirements will not apply to exhibits to Schedules 13D and 13G.

Implications for Shareholder Activism and Hostile M&A

The amendments could have significant tactical implications for activist shareholders and the companies they may target, as well as for “toe-hold” accumulations of shares by a hostile bidder. A few examples include:

• The proposed amendments could make it more difficult for a market participant to obtain a position that is large enough to provide it the desired leverage in an activist campaign or hostile offer, by shortening to five business days from 10 calendar days the period of time in which accumulations beyond the 5% reporting threshold can continue to be made prior to public disclosure.
• \Alternatively, an activist’s or hostile bidder’s desire to make significant purchases before filing the Schedule 13D could increase the cost of those purchases by compressing the demand for shares into a shorter buying period. Purchases after the Schedule 13D filing also would likely come at an increased cost, increasing the blended cost of the toe-hold position.
• Quarterly amendments by QIIs and Exempt Investors will give issuers the ability to better prioritize and tailor their investor outreach programs over time, both outside and during an activist campaign or hostile offer.
• The practice of one activist investor talking with another in advance of a Schedule 13D filing to “tip” the other about the activist’s designs on the company and intent to file a Schedule 13D may be significantly impacted by the increased likelihood that the SEC would conclude that a Schedule 13D “group” had been formed by that communication.

Compliance Dates

The final rule amendments become effective 90 days after publication in the Federal Register, subject to the following exceptions:

• The structured data requirements become effective on December 18, 2024; and
• The new Schedule 13G filing deadlines become effective September 30, 2024 (i.e., an investor 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 the filer previously reported on Schedule 13G).

Changes to Schedule 13D and 13G Filing Deadlines

[1] Release Nos. 33-11253; 34-98704, Modernization of Beneficial Ownership Reporting (October 10, 2023) (the “Final Release”).

[2] Under Rule 13d-1(b), “qualified institutional investors” include, among others, registered broker-dealers, banks, insurance companies, registered investment companies, and registered investment advisers. The investor also must hold the shares in the ordinary course of business without a control intent or effect.

[3] Rule 13d-1(d) makes Schedule 13G available to “exempt investors,” which are investors that became beneficial owners of more than 5% without having made an acquisition recognized under Section 13(d)(1). Typical exempt investors are pre-IPO investors who acquired their shares before the issuer had registered a class of equity securities under Section 12. An exempt investor may lose its eligibility to file on Schedule 13G by acquiring more than 2% of the equity security in a 12-month period.

[4] Under Rule 13d-1(c), an investor that owns less than 20% and holds the shares without control intent or effect may file a Schedule 13G as a “passive investor.”

[5] Release Nos. 33-11030; 34-94211, Modernization of Beneficial Ownership Reporting (February 10, 2022).