Publication
SEC Adopts Amendments to Rules Governing Beneficial Ownership Reporting
On October 10, 2023, the U.S. Securities and Exchange Commission (the SEC) adopted amendments to the rules governing beneficial ownership reporting requirements under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the Exchange Act). In addition, the adopting release provides guidance regarding certain cash-settled derivative securities and considerations regarding “group” formation. These rule amendments, along with the related guidance, mark the most significant reforms to the beneficial ownership reporting requirements in more than 50 years.
Background
Schedules 13D and 13G of the Exchange Act require persons or a group who own or acquire beneficial ownership of more than five percent of equity securities registered under the Exchange Act to file ownership reports with the SEC. An investor with control intent files Schedule 13D, while exempt investors and investors without a control intent such as qualified institutional investors (QIIs) and passive investors, file Schedule 13G. The underlying premise of these reporting requirements is to give other stockholders and the securities markets notice of significant acquisitions or potential changes in control of public companies.
New Filing Deadlines
The amended rules significantly change the deadlines for initial and amended Schedule 13D and 13G filings. Below is a table outlining the current deadlines compared to the amended deadlines:
FILING |
CURRENT DEADLINE |
AMENDED DEADLINE |
Initial |
Within ten calendar days after acquiring beneficial ownership of more than five percent or losing eligibility to file on Schedule 13G |
Within five business days after acquiring beneficial ownership of more than five percent or losing the ability to file on Schedule 13G |
Amendments to Schedule |
Promptly after a material change 1 in the facts set forth in the previous Schedule 13D |
Within two business days after a material change in the facts set forth in the previous Schedule 13D |
Initial |
For QIIs: Within 45 calendar days after the calendar year-end in which beneficial ownership exceeds five percent, or within 10 calendar days after the month-end in which beneficial ownership exceeds ten percent For exempt investors 2: Within 45 calendar days after the calendar year-end in which beneficial ownership exceeds five percent For passive investors 3: Within 10 calendar days after acquiring beneficial ownership of more than five percent of an issuer’s registered equity securities |
For QIIs: Within 45 calendar days after the end of the calendar quarter in which beneficial ownership exceeds five percent, or within five business days after the month-end in which beneficial ownership exceeds ten percent For exempt investors: Within 45 calendar days after the end of the calendar quarter in which beneficial ownership exceeds five percent For passive investors: Within five business days after acquiring beneficial ownership of more than five percent |
Amendments to Schedule |
For all 13G filers: Within 45 calendar days after the calendar year-end in which any change occurred For QIIs: Within ten calendar days after month-end in which beneficial ownership exceeds ten percent or there was, as of the month-end, a five percent increase or decrease in beneficial ownership For passive investors: Promptly after exceeding ten percent beneficial ownership or a five percent increase or decrease in beneficial ownership |
For all 13G filers: Within 45 calendar days after calendar quarter-end in which a material change occurred For QIIs: Within five business days after month-end in which beneficial ownership exceeds ten percent or a five percent increase or decrease in beneficial ownership For passive investors: Within two business days after exceeding ten percent beneficial ownership or a five percent increase or decrease in beneficial ownership |
In addition, the amended rules extend the EDGAR filing “cut-off” times for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern Time. Notably, the amended cut-off times align with the current cut-off time applicable to Section 16 filings.
Cash-Settled Derivative Securities
The SEC ultimately did not adopt the proposed changes to Rule 13d-3, which would have deemed certain holders of cash-settled derivative securities, other than security-based swaps, as beneficial owners of the reference equity security underlying the derivative position. Rather than expand the definition of beneficial ownership, the adopting release emphasizes that existing guidance on Rule 13d-3, including the SEC’s Security-Based Swaps Release 4 from 2011, provides sufficient clarity. As provided in the guidance of the adopting release, the holder of cash-settled derivative securities may be deemed to be a beneficial owner where such derivative:
- confers voting and/or investment power (such as through a contractual provision);
- 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
- grants a right to acquire an equity security within 60 days.
While the SEC did not adopt the proposed amendments expanding the definition of beneficial ownership, the amended rules revised Item 6 of Schedule 13D to require a description of any contracts or arrangements, legal or otherwise, relating to any derivative securities that use the issuer’s securities as a reference security, including cash-settled derivatives.
Acting as a Group
Rather than adopt the proposed amendments to Rule 13d-5, which would have removed the reference to an “agreement” between two or more persons as a requirement for forming a group, the SEC chose to provide guidance on the existing legal standard established in Section 13(d)(3) and Section 13(g)(3), specifically, to emphasize its views that the determination as to 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. Much of this Rule 13d-5 guidance in the adopting release was in the form of Q&As, which sought to specifically address some commenters’ fear that the proposed amendments would chill shareholder engagement.
The Q&As address a variety of common shareholder engagement practices. For example, two or more shareholders communicating with each other regarding an issuer of securities (including discussions that relate to the 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), whether in public or private, alone and without more, would not rise to the level of acting as a group under Section 13(d)(3) and Section 13(g)(3). Another example covered in the Q&As touches on a beneficial owner of a substantial block of an issuer’s securities intentionally communicating with other market participants that a Schedule 13D will be made (to the extent this information is not yet public), and such other market participants purchasing the same issuer securities based upon this communication. The SEC states that in this scenario, the blockholder and the other market participants would be acting as a group within the meaning of Section 13(d)(3).
Structured Data Requirement
The SEC adopted, as proposed, amended rules requiring filers to use a machine-readable XML-based language that is “structured” and specific to Schedules 13D and 13G. All information disclosed on Schedules 13D and 13G including quantitative disclosures, textual narratives, and checkboxes would need to be structured using the specific XML-based language, while exhibits filed with Schedules 13D and 13G may remain unstructured. This requirement is intended to make it easier for investors and other market participants to access, compile and analyze information that is disclosed on Schedules 13D and 13G.
Compliance Dates
The amendments, including the revised Schedule 13D filing deadlines, will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024.
What’s Next?
Filers should begin taking steps to ensure compliance with these new accelerated filing and amendment deadlines. To the extent reasonably practicable, investors may want to delay any transactions that would result in beneficial ownership of more than five percent of a registered equity security until the reporting person(s) are prepared to make the required disclosures in a timely manner.
For more information relating to this topic, please reach out to Stephen Hackman, Pierce Haesung Han, Connor Skelly or any other Ice Miller attorney.
1 Rule 13d-2(a) provides that a “material change” for purposes of this rule includes “any material increase or decrease in the percentage of the class beneficially owned” and provides that “[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed ‘material’ for purposes of this section.” The adopting release reiterates that these are non-exclusive circumstances in which an amendment is required.
2 The term “exempt investors” refers to persons holding beneficial ownership of more than 5 percent of a covered class, but who have not made an acquisition of beneficial ownership subject to Section 13(d).
3 The term “passive investors” refers to beneficial owners of more than 5 percent but less than 20 percent of a covered class who can certify under Item 10 of Schedule 13G that the subject securities were not acquired or held for the purpose or effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction have such purpose or effect.
4 See Beneficial Ownership Reporting Requirements and Security-Based Swaps, Release No. 34-64628 (June 8, 2011).
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
