United States: SEC Adopts Amendments To Beneficial Ownership Rules

On October 10, 2023, the Securities Exchange Commission (SEC) adopted amendments to its rules regarding the reporting of beneficial ownership.¹ The amendments primarily focus on beneficial ownership reporting as required under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, along with Regulation 13D-G.

The amendments include:

• Reducing the deadlines for initial and amended Schedule 13D and 13G filings;
• Defining the Schedule 13D disclosure requirements regarding derivative securities; and
• Enforcing the use of a structured, machine-readable data language for Schedules 13D and 13G filings.

The adopting release also provides guidance from the SEC regarding what activities amongst two or more persons may be considered to be acting as a group under Sections 13(d) and 13(g).

To the extent issuers are proactive, the amendments will provide increased transparency and more timely information about significant ownership changes, enabling them to have a better understanding of their investor base and anticipate potential effects of the ownership changes.

Background of 13(d) and 13(g)

Sections 13(d) and 13(g) require persons who possess more than 5% of a company's registered class of voting securities to disclose their beneficial ownership on either Schedule 13D or Schedule 13G, depending on the characteristics of the person as well as if the person has the intent to control or influence the activities of the Company.

The amendments reflect the SEC's effort to modernize the reporting criteria, ensuring prompt and comprehensive information disclosure, marking the most comprehensive changes to Schedules 13D and 13G in several decades.

Accelerated Schedule 13D Filing Deadlines

Under the current rules, any person obligated to submit a Schedule 13D must do so within 10 calendar days after crossing the threshold of owning 5% of a class of registered voting equity securities and revise it promptly in case of any significant changes. The amended rules require an initial Schedule 13D filing within five business days of crossing the threshold and amendments to be filed within two business days of any material change in the previously reported information.

Accelerated Schedule 13G Filing Deadlines and Quarterly 13G Amendments

Under the current rules, the deadlines for Schedule 13G filings differ depending on whether a person files as a qualified institutional investor (QII), an exempt investor, or a passive investor. The new rules accelerate the deadlines for filing an initial Schedule 13G (i) for QIIs and exempt investors, to 45 days after the end of the quarter, and (ii) for passive investors, to five business days. Subsequent amendments are generally required within 45 days after the end of the quarter during which a material change occurs; shorter deadlines apply to QIIs or passive investors with over 10% beneficial ownership.

While the SEC stopped short of defining what constitutes a "material" change for these purposes, it referred to the general concept of materiality under Rule 12b-2.² However, the SEC indicated that any acquisitions or dispositions of 1% or more of the outstanding class of securities will be deemed "material" for amendment purposes.

Extension of EDGAR Filing Cut-Off Time

Given the tightened filing deadlines, the amendments also extend the filing cut-off times for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern Time.

Guidance on Cash-Settled Derivative Securities

While the SEC proposed amendments to deem holders of cash-settled derivatives as beneficially owning the underlying securities, they opted against adopting these changes. Instead, the SEC provided guidance outlining the limited circumstances under which a holder of cash-settled derivatives would be deemed as beneficially owning the underlying shares under the current rules.

Revised Guidance and Rules on the Formation of a "Group"

With respect to formations of a "group" under sections 13(d)(3) and 13(g)(3), the SEC clarified that no express agreement is required to form a group but instead two or more persons could be deemed to have acted together if they take concerted actions for the purpose of acquiring, holding (including voting) or disposing of issuer securities, which depend significantly on facts and circumstances related to the actions taken by the persons. The SEC clarified that communications alone are not sufficient to form a group.

Structured Data Requirements

The new rules require Schedules 13D and 13G to be filed using a machine-readable, structured data format as EDGAR XML filings to enhance accessibility, compilation, and analysis of the disclosure.

Compliance Dates

The amendments will take effect 90 days after publication in the Federal Register, with compliance for new Schedule 13G deadlines starting on September 30, 2024. Compliance with the structured data requirements is not required until December 18, 2024, with voluntary compliance permitted from December 18, 2023.

Footnotes

1. See Modernization of Beneficial Ownership Reporting, Final Rule (October 10, 2023)

2. 17 C.F.R. § 240.12b-2 (stating that the term "material," when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered).

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