SEC ACCELERATES SCHEDULE 13D/G FILING DEADLINES AND ISSUES GUIDANCE ON DERIVATIVES AND GROUP FORMATION

On October 10, 2023, the SEC adopted amendments to the rules governing the reporting of beneficial ownership of securities under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The amendments accelerate the deadlines by which Schedules 13D and 13G must be filed. While the SEC decided not to adopt proposed rules regarding disclosure of cash-settled derivatives and group formation, it issued guidance on these topics. In addition, the amendments mandate that Schedules 13D and 13G be filed in a machine-readable format similar to the one used for Section 16 filings on Form 4.

Compliance with the final rule, including the accelerated Schedule 13D filing deadlines, will be required as soon as the final rule becomes effective 90 days following the date the SEC’s adopting release is published in the Federal Register, subject to two exceptions: compliance with the revised Schedule 13G filing deadlines will be required beginning September 30, 2024; and compliance with the machine-readable format requirements will be required beginning December 18, 2024.

Background

Sections 13(d) and 13(g) of the Exchange Act require any person or group of persons who, directly or indirectly, acquire or hold beneficial ownership of more than 5% of a covered class of equity securities of an issuer to publicly report their beneficial ownership on a Schedule 13D or 13G. Under Rule 13d-3, “beneficial ownership” of an equity security means that a person has or shares the power, directly or indirectly, to vote or direct the voting of a security or dispose of or direct the disposition of a security. A covered class of equity securities generally means a voting class of equity securities registered under the Exchange Act.

Since the enactment of these provisions almost 50 years ago, technological advancements have arguably made it easier for investors who would become subject to these filing requirements to collect relevant information and prepare required filings on a more rapid timeline. Proponents of shortening Schedule 13D filing deadlines have pointed to these technological advancements, while supporters of the status quo have expressed concern that premature disclosures of beneficial ownership levels may limit the gains that can be realized by activists and other investors who see value opportunities.

In February 2022, the SEC weighed in on the debate by proposing rule amendments to, among other things, shorten the filing deadlines for Schedules 13D and 13G. The proposed changes reflected the SEC’s avowed goal of addressing information asymmetries between investors building a meaningful stake in an issuer and other investors. The final rule now adopted by the SEC differs in several important ways from the proposed rule amendments, in part in order to balance the desire for more timely information with the administrative burden of preparing accurate filings, and in part in recognition of the interests of institutional investors.

Amendments to Filing Deadlines and Process

The primary purpose of the final rule is to accelerate the deadlines by which initial and amended Schedules 13D and 13G must be filed with the SEC. The new deadlines, as compared to the current rules, are set forth in the tables below. Detailed explanations of the new deadlines can be found below the tables.

Schedule 13D

A person or group of persons that acquires beneficial ownership of more than 5% of a covered class of equity securities must report that acquisition on an initial Schedule 13D. An initial Schedule 13D must also be filed by persons or groups that previously reported their ownership on Schedule 13G but subsequently become ineligible to use Schedule 13G, for example because they originally qualified as “passive investors” without control intent but later hold the securities with the purpose or effect of changing or influencing the control of the issuer.

Under the prior rule, new 13D filers, including those who previously filed a Schedule 13G, were required to file their initial Schedule 13D within 10 days after acquiring beneficial ownership of greater than 5% of a covered class of equity securities or losing 13G eligibility. Under the new rule, the 10-day deadline has been shortened to five business days.^[1]

In addition, the SEC revised the deadline to file amendments to Schedule 13D to within two business days of the triggering event. Previously, any amendment to Schedule 13D, whether triggered as a result of an acquisition or disposition of securities or due to a material change in the facts set forth in a prior Schedule 13D, was required to be filed “promptly.” The SEC noted that specifying a deadline for Schedule 13D amendments is intended to remove any uncertainty as to the date a filing is due and to ensure consistency and uniformity in filings.

Schedule 13G

Passive Investors

Any person who would otherwise be required to file a Schedule 13D may instead file a “short-form” beneficial ownership statement on Schedule 13G if that person: (1) has not acquired the securities with the purpose or effect of changing or influencing the control of the issuer; (2) is not a qualified institutional investor (as described below); and (3) is not, either directly or indirectly, a beneficial owner of 20% or more of the class of securities that is the subject of the Schedule 13G filing.

Under the prior rule, these “passive investors” were required to file an initial Schedule 13G within 10 days after crossing the 5% beneficial ownership threshold. Under the new rule, the SEC has accelerated this deadline to five business days.

Additionally, the SEC clarified the circumstances under which a passive investor is required to file an amendment to Schedule 13G. Passive investors were required to file an amendment upon the occurrence of “any change” in the facts previously reported in a Schedule 13G. Under the new rule, the SEC clarified that Schedule 13G now must be amended in the case of a “material” change in the facts previously reported, thus aligning the amendment triggers for Schedules 13D and 13G.^[2]

In addition to clarifying the circumstances under which an amendment to a Schedule 13G must be filed, the SEC also accelerated the corresponding filing deadline. Under the prior rule, amendments generally needed to be filed no later than 45 days after the end of the calendar year in which the triggering event occurred, and under the new rule amendments must now be filed within 45 days after the end of the calendar quarter in which the triggering event occurs.

Furthermore, under the prior rule, passive investors were required to file an amendment to Schedule 13G “promptly” upon exceeding 10% beneficial ownership of a covered class of securities or experiencing a 5% increase or decrease in beneficial ownership. Under the new rule, the SEC clarified that the deadline for a passive investor to file an amended Schedule 13G is two business days following the date their beneficial ownership exceeds 10% or they experience a 5% increase or decrease in beneficial ownership.

Exempt Investors

A person who qualifies as an “exempt investor” may file a Schedule 13G instead of a Schedule 13D. To qualify as an exempt investor, a person must not have made an acquisition subject to Section 13(d) of the Exchange Act. Exempt investors generally include persons that acquired all (or substantially all) of their covered securities prior to the issuer going public (i.e., registering the subject securities under the Exchange Act, whether in connection with an IPO, spin-off or other transaction) and persons that acquire no more than 2% of a class of covered securities within a 12‐month period.

Under the new rule, the SEC shortened the deadline to file an initial Schedule 13G from 45 days after the end of the calendar year to 45 days after the end of the calendar quarter, in each case in which beneficial ownership first exceeds 5%.

Additionally, the SEC applied the same materiality-based clarification for amendments and 45-day-following-calendar-quarter-end deadline for amendments to Schedule 13G to exempt investors as applied to passive investors.

Qualified Institutional Investors

A person may file a Schedule 13G if that person meets the so called “qualified institutional investor” definition by: (1) acquiring the securities in the ordinary course of business and not with the purpose or effect of changing or influencing the control of the issuer; (2) promptly notifying any other person (or group) on whose behalf it holds securities exceeding 5% of the class of equity securities of any acquisition or transaction on behalf of that other person that might be reportable by that person under Section 13(d); and (3) being an institutional investor, such as a broker-dealer, a bank, an insurance company, a qualified employee benefit plan or pension fund or a registered investment company or investment advisor.

Under the prior rule, qualified institutional investors who beneficially owned more than 5% but not more than 10% of a covered class of securities were required to file an initial Schedule 13G no later than 45 days after the end of the calendar year, and qualified institutional investors who beneficially owned a stake greater than 10% of a covered class of securities were required to file an initial Schedule 13G within 10 days after the end of the month, in each case, in which the applicable beneficial ownership threshold was crossed.

Under the new rule, a qualified institutional investor who beneficially owns more than 5% but not more than 10% of a covered class of securities must file an initial Schedule 13G no later than 45 days after the end of the calendar quarter in which the beneficial ownership threshold was crossed. For qualified institutional investors who beneficially own a stake greater than 10% of a covered class of securities, the deadline was accelerated to five business days following the end of the month in which the 10% threshold was crossed.

Additionally, the SEC applied the same materiality-based clarification for amendments and 45-day-following-calendar-quarter-end deadline for amendments to Schedule 13G to qualified institutional investors as described above with respect to passive investors and exempt investors.

Furthermore, for qualified institutional investors whose beneficial ownership exceeds 10% or who experience a greater than 5% increase or decrease in beneficial ownership, an amendment to Schedule 13G must now be filed within five business days after the end of the month in which the triggering event occurs. Under the prior rule, the deadline was 10 days following the end of the month in which the triggering event occurred.

Filing Cut-Off Time

To relieve the burden placed on filers by the newly accelerated filing deadlines for Schedules 13D and 13G, the SEC extended the cut-off time by which filers must make submissions to the SEC’s EDGAR electronic filing system. Filers were previously required to commence transmission no later than 5:30 p.m. Eastern time in order to obtain a same-day filing date. The new rules extend this filing cut-off to 10:00 p.m. Eastern time, aligning the cut-off time for Section 13 filings with the cut-off for filings made under Section 16 of the Exchange Act and Rule 144.

Treatment of Cash-Settled Derivatives

Disclosure of Cash-Settled Derivatives in Schedule 13D

The prior rule required 13D filers to disclose, in Item 6 of Schedule 13D, any contracts, arrangements, understandings or relationships with respect to any securities of the issuer, and included a non-exhaustive list of types of disclosable contracts that mentioned puts and calls (among other contract types) but did not expressly refer to security-based swaps or other derivatives that used the issuer’s securities as reference securities.

The final rule revised Item 6 of Schedule 13D to add precisely such a reference, which the SEC noted will now explicitly require disclosure of cash-settled security-based swaps and other derivatives settled exclusively in cash. This revision will not result in cash-settled derivatives, as such, being required to count toward the beneficial ownership threshold determination that triggers the filing of a Schedule 13D. It will, however, remove any ambiguity about the need to disclose purely synthetic positions under Item 6 once a Schedule 13D has otherwise been triggered by virtue of crossing the relevant beneficial ownership threshold without counting those purely synthetic positions.

Beneficial Ownership of Reference Securities of Cash-Settled Derivatives

The SEC did not adopt a proposed addition to Rule 13d-3 that would have treated a holder of a cash-settled derivative security (other than a security-based swap) as the beneficial owner of the equity securities in the covered class referenced by the cash-settled derivative security if such person held the cash-settled derivative security with the purpose or effect of changing or influencing the control of the issuer of the class of equity securities, or in connection with or as a participant in any transaction having that purpose or effect. Instead, the SEC decided to issue guidance on the applicability of existing Rule 13d-3 to cash-settled derivative securities (other than security-based swaps), similar to the guidance the SEC provided in its 2011 release on security-based swaps and provided a framework for analyzing whether holders of cash-settled securities may be deemed beneficial owners of the reference class of securities.

The guidance, which we summarize below, is largely consistent with market understanding regarding the treatment of cash-settled derivatives for purposes of beneficial ownership reporting. It is worth noting that the SEC has not yet acted on its proposed separate disclosure requirements for security-based swaps from last year. While some of the impetus behind that proposal was a desire for greater transparency for credit default swaps, the proposal also contemplated mandatory disclosure of security based swaps for equity securities based on dollar and percentage thresholds.

In its new guidance on the treatment of cash-settled derivatives for beneficial ownership reporting, the SEC acknowledged that non-security-based swap derivative securities settled exclusively in cash generally represent only an economic interest in the issuer (and not a control interest) but noted that facts and circumstances can arise where a holder of such derivatives could be deemed a beneficial owner of the reference class of securities under Rule 13d-3 (and thus potentially have a control interest). As a result, the adopting release provides that a holder of a cash-settled derivative may become the beneficial owner of the reference class of securities under three different scenarios:

• to the extent the derivative provides its holder, directly or indirectly, with exclusive or shared voting or investment power over the reference class of securities through a contractual term of the derivative or otherwise;

• to the extent the derivative is acquired with the purpose or effect of divesting its holder of beneficial ownership of the reference class of securities or preventing the vesting of that beneficial ownership as part of a plan or scheme to evade the beneficial ownership reporting requirements; or

• if the derivative, although nominally cash-settled, gives rise to a right to acquire beneficial ownership of the reference security within 60 days (or at any time if the right to acquire was itself acquired with the purpose or effect of changing or influencing the control of the issuer), whether pursuant to its terms or pursuant to an understanding in connection with that derivative.

Section 13 “Groups”

Group Formation

Under Sections 13(d)(3) and 13(g)(3) of the Exchange Act, two or more persons who “act as” a partnership, syndicate or other “group” for purposes of acquiring, holding or disposing of securities of an issuer are treated as a “person” who, if the applicable beneficial ownership threshold is met, will be subject to the reporting obligations of Section 13. Rule 13d-5(b) provides that when two or more persons “agree to act together” for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby is deemed to have acquired beneficial ownership (as of the date of such agreement), of all equity securities of that issuer beneficially owned by any member of the group.

The SEC had originally proposed to amend Rule 13d-5(b) by replacing the reference to an “agreement” with a reference to acting “as a group” within the meaning of the statute and by specifying that tipping off another person about an impending Schedule 13D filing formed a group between the filing person and the other person. In addition, the original proposal would have created an exemption from group status in a new Rule 13d-6(c) for concerted actions, including, among other things, engagement with other investors or the issuer, provided relevant communications had no control purpose or effect and there was no obligation to take the concerted actions.

In lieu of these amendments, the SEC decided to provide interpretive guidance on group formation in the adopting release. In issuing its guidance, the SEC specifically took note of commenters’ concerns that its proposed amendments to Rule 13d-5(b), combined with the negative implications of the proposed exemption in Rule 13d-6(c), could have chilled shareholder engagement, with shareholders unable to communicate with each other or an issuer’s management without forming a group.

Under the SEC’s guidance, whether two or more persons have formed a “group” depends on whether they acted together for the purpose of acquiring, holding or disposing of securities of an issuer. This requires an analysis of the relevant facts and circumstances but does not hinge on the presence or absence of an express agreement, meaning two or more persons may take concerted action or agree informally and still form a group for these purposes. The evidence must show, however, at a minimum, indicia (such as an informal arrangement or coordination in furtherance) of a common purpose to acquire, hold or dispose of securities of an issuer. The guidance helpfully clarifies that the fact that two or more persons took similar actions is not conclusive in and of itself that a group has been formed.

The SEC provided the following examples of common shareholder engagement situations to further clarify when a group is not formed:

• two or more shareholders communicate with each other regarding 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 against individual directors in uncontested elections without taking any other actions;

• two or more shareholders engage in discussions with an issuer’s management without taking any other actions;

• shareholders jointly make recommendations to an issuer in the context of a discussion that does not involve an attempt to convince the board of the issuer to take specific actions through a change in the existing board membership or bind the board to take action;

• shareholders jointly submit a non-binding shareholder proposal to an issuer pursuant to Rule 14a-8 for presentation at a meeting of shareholders;

• an activist investor seeking support for its proposals to an issuer’s board or management engages with another shareholder without the shareholder consenting or committing to a course of action; or

• a shareholder announces or communicates its intention to vote in favor of an unaffiliated activist investor’s director nominees.

In contrast, the adopting release states that a group may potentially be formed by intentionally tipping off other market participants about one’s own impending Schedule 13D filing with the intention of causing them to make purchases in the same covered class, if the other market participants in fact make purchases in the same covered class as a direct result of the tip.

Acquisition of Additional Securities by Group Members

The final rule provides that if any member of a group subject to reporting obligations becomes the beneficial owner of additional equity securities in a class at any time after the formation of the group (including acquisitions on the same day the group was formed), then the group will be deemed to have acquired beneficial ownership of those securities, and the securities will be subject to the group’s reporting obligations under Section 13.

Intra-Group Sales or Transfers

The final rule also provides that a group will not be considered to have acquired beneficial ownership of additional equity securities if a member of the group becomes a beneficial owner of the securities through a sale or transfer from another member of the same group, including intra-group transfers on the same day but after the time the group was formed.

Derivative Securities

The SEC declined to adopt the originally proposed Rule 13d-6(d), which would have deemed persons entering into derivatives in the ordinary course of their business not to have formed a group so long as the relevant agreement was not entered into with the purpose or effect of changing or influencing control of the issuer. In explaining this proposed rule as unnecessary, the SEC noted that since cash-settled derivatives originate with persons other than the issuer and simply reference a class of the issuer’s securities and typically do not confer on their holders any rights in respect of the issuer, they are not “securities of an issuer.” Absent circumstances in which the holder of a cash-settled derivative that did not originate with the issuer could become the beneficial owner of the reference security, there can be no group formed under Sections 13(d)(3) or 13(g)(3).

Further, the SEC noted that a financial institution that enters into an agreement with an investor regarding the terms of a derivative security in the ordinary course of business through an arm’s-length transaction solely for commercial purposes would not be considered to have formed a group with the investor absent other indicia of group status such as agreements to vote or other factors. This is the case, the SEC added, even though the financial institution may in practice hedge its exposure under the derivative by purchasing the reference securities and holding them for the duration of the agreement, provided it does so on its own initiative and not at the direction of the investor or otherwise on the investor’s behalf.

Structured Data Requirement

Currently, Schedules 13D and 13G are filed electronically on EDGAR in unstructured data formats that are not machine-readable. To improve the accessibility and usability of these disclosures by the market, the final rule adopted by the SEC requires that reports on Schedules 13D and 13G be filed using a structured, machine-readable data language similar to the current requirement for filings under Section 16 of the Exchange Act and Form 13F.

Under the final rule, all disclosures, including textual narratives, data and identification checkboxes, must be structured in the new 13D/G-specific data language. Exhibits to the Schedules may continue to use unstructured data formats. Filers may submit filings directly through EDGAR in the new structured data format or may use a new web-based reporting application developed by the SEC to directly create and file reports.

Voluntary compliance with the new structured data requirement will begin on December 18, 2023, with mandatory compliance beginning on December 18, 2024.

Conclusion

The adoption of the final rule and related guidance reflect the culmination of a decades-long process of advocacy for the modernization of beneficial ownership reporting. Investors who are or may be subject to Section 13 should evaluate their processes and procedures to ensure they are ready to comply with the accelerated filing deadlines. In addition, investors will want to review their existing shareholder engagement practices and the use and disclosure of derivative securities in light of the new SEC guidance on group formation and cash-settled derivatives, although guidance on the latter largely reflects existing market understanding.