June 25, 2022

Volume XII, Number 176

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June 24, 2022

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June 23, 2022

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SEC Proposes Changes to Beneficial Ownership Reporting

On February 10, 2022, the Securities and Exchange Commission (SEC) proposed various amendments to Regulation 13D-G to modernize the beneficial ownership reporting requirements. The proposed rule changes would:

  • Accelerate the filing deadlines for Schedules 13D and 13G.

  • Deem certain holders of cash-settled derivative securities beneficial owners[1] of the reference “covered class.”[2]

  • Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations.

  • Require Schedules 13D and 13G be filed using a structured, machine-readable data language.

Background

These proposed rules are intended to modernize and enhance the operation of the current rules by requiring more timely disclosure while minimizing the burden on the reporting shareholders.

The deadlines for filing an initial Schedule 13D or Schedule 13G have not been updated since 1968 and 1977, respectively. The SEC believes that the current filing deadlines do not result in the timely dissemination of information by today’s market standards, and therefore create potential harmful information asymmetry between beneficial owners and other shareholders.

Proposed Changes to Schedules 13D and 13G Filing Deadlines

Proposed amendments to Rules 13d-1 and 13d-2 of the Exchange Act and Rules 13 and 201 of Regulation S-T accelerate the filing deadlines for Schedules 13D and 13G and also extend the time frame within the business day in which filings must be made, as follows:

Filing Deadline

Current Schedule 13D

Proposed Schedule 13D

Current Schedule 13G

Proposed Schedule 13G

Initial Filing Deadline

Within 10 days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G.

Within 5 days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13G.

QIIs[3] & Exempt Investors:
45 days after calendar year-end of the year in which beneficial ownership exceeds 5%.

QIIs & Exempt Investors:[4]
5 business days after month-end of the month in which beneficial ownership exceeds 5%.

Passive Investors:[5] Within 10 days after acquiring beneficial ownership of more than 5%.

Passive Investors:
Within 5 days after acquiring beneficial ownership of more than 5%.

Amendment Filing Deadline

Promptly after the triggering event.

Within 1 business day after the triggering event.

All Schedule 13G Filers:
45 days after calendar year-end of the year in which any change occurred.

All Schedule 13G Filers:
5 business days after month-end of the month in which a material change occurred.

QIIs:
10 days after month-end of the month in which beneficial ownership exceeded 10% or there was, as of the month-end, a 5% increase or decrease in beneficial ownership.

QIIs:
5 days after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.

Passive Investors: Promptly after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.

Passive Investors:
1 business day after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.

Filing “Cut-Off” Time

5:30 p.m. Eastern Time.

10:00 p.m. Eastern Time.

All Schedule 13G Filers:
5:30 p.m. Eastern Time.

All Schedule 13G Filers:
10:00 p.m. Eastern Time.

 

Regulation of Cash-Settled Derivative Securities

The existing beneficial ownership rules ordinarily do not include holders of cash-settled derivative securities since such instruments typically do not convey voting or investment power over any equity securities in the reference covered class.[6] The proposed amendments would add new paragraph (e) to Rule 13d-3, which sets forth the circumstances under which a holder of a cash-settled derivative security will be “deemed” the beneficial owner of the reference equity securities, and also describe how to calculate the number of reference equity securities that a holder of a cash-settled derivative will be deemed to beneficially own. Specifically, the proposed amendment would deem a holder of a cash-settled derivative security (other than a security-based swap) the beneficial owner of equity securities in the covered class referenced by the derivative security if that person has the purpose or effect of changing or influencing the control of the issuer of such class of equity securities, or in connection with or as a participant in any transaction having such purpose or effect.

This proposed expansion of the meaning of “beneficial ownership” could also increase the number of persons subject to the reporting and liability provisions under Section 16 of the Exchange Act. Under Section 16, persons beneficially owning more than 10% of an issuer’s securities are required to file ownership reports with the SEC on Forms 3, 4, and 5, and are also subject to short-swing profit liability and short-sale prohibitions.

Treatment of Two or More Persons Who Act as a Group

The proposed amendments to Rule 13d-5 would broaden the definition of “group” and clarify the treatment of two or more persons who act as a group when acquiring, holding, or disposing of securities. Such persons will be treated as a group if they act in concert toward a common goal, as determined by the facts and circumstances, regardless of whether there is an agreement between the individuals. By broadening the scope of “group,” the SEC intends to prevent investors from coordinating to circumvent the 5% threshold in Rule 13d-5 and Sections 13(d) and 13(g), which they believe is consistent with the legislative history.

In addition, the proposed amendments would also provide exemptions allowing investors to communicate with each other, engage with issuers, and execute transactions without triggering the proposed “group” definition. These exemptions apply to investors communicating with one another who do not have the purpose or effect of changing or influencing control of the issuer or investors and to financial institutions that enter into certain agreements governing the terms of derivative securities.

Data Requirements for Schedules 13D and 13G

To make it easier for investors and markets to access, compile, and analyze information disclosed on Schedules 13D and 13G, the SEC proposes that disclosures on Schedules 13D and 13G use a structured, machine-readable data language, similar to formatting already used for certain EDGAR filings, such as Section 16 beneficial ownership reports on Forms 3, 4, and 5.

What’s Next

If adopted, the SEC’s proposed amendments will significantly change the beneficial ownership reporting framework. Consistent with the SEC’s most recent rule proposals, the public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. Companies that support or oppose the SEC’s proposed changes are encouraged to submit comments to the SEC and should reach out to counsel for assistance in doing so.

[1] Generally, a “beneficial owner” of a security includes “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (1) [v]oting power which includes the power to vote, or to direct the voting of, such security; and/or, (2) [i]nvestment power which includes the power to dispose, or to direct the disposition of, such security.”

 

[2] A “covered class” is a class of equity securities described in Section 13(d)(1) of the Exchange Act and Rule 13d-1(i) and generally means, with limited exceptions, a voting class of equity securities registered under Section 12 of the Exchange Act.

[3] QIIs are the institutional investors qualified to report on Schedule 13G, in lieu of Schedule 13D and in reliance upon Rule 13d-1(b), including, among others, a registered broker or dealer, an insurance company, a registered investment company, and a registered investment adviser.

[4] “Exempt Investors” are persons holding beneficial ownership of more than 5% of a covered class at the end of the calendar year, but who have not made an acquisition of beneficial ownership subject to Section 13(d).

[5] “Passive Investors” are beneficial owners of more than 5% but less than 20% of a covered class who can certify under Item 10 of Schedule 13G that they did not acquire and do not hold the subject securities for the purpose or effect of changing or influencing the control of the issuer of such securities and that they did not acquire the securities in connection with or as a participant in any transaction having such purpose or effect.

[6] Under certain circumstances as determined under current Rule 13d-3, investors in security-based swaps may be beneficial owners of a covered class. To the extent that a holder of a security-based swap owns such security not exclusively settled in cash, the person could be viewed as a beneficial owner under Rule 13d-3(d)(1). In addition, if a security-based swap is used as part of a plan or scheme to evade beneficial ownership reporting, the person could be deemed a beneficial owner as described in Rule 13d-3(b). Finally, if the holder of a security-based swap directly or indirectly holds the power to direct a counterparty how to vote or dispose of shares in a covered class used as a reference security, that person can be a beneficial owner as provided in Rule 13d-3(a).

© 2022 Jones Walker LLPNational Law Review, Volume XII, Number 48
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About this Author

Alexandra Clark Layfield Corporate Attorney Jones Walker Law Firm
Partner

Alexandra Layfield joined Jones Walker's Corporate & Securities Practice Group in 2008. Ms. Layfield's practice is exclusively transactional, concentrating principally on the areas of securities law, mergers and acquisitions, general corporate law and corporate governance matters. Alexandra Layfield is a partner in the Corporate Practice Group.

At Jones Walker, she leads the firm’s corporate, securities and executive compensation team. Alex serves as outside corporate and securities counsel for public companies, including acting as boardroom...

225-248-2030
Kelly Simoneaux, Jones Walker Law Firm, New Orleans, Corporate and Securities Law Attorney
Partner

Kelly Simoneaux is a partner in Jones Walker LLP’s Corporate & Securities Practice Group. Her practice focuses primarily on the corporate, tax, and securities aspects of executive compensation.

Ms. Simoneaux has extensive experience counseling public and private clients on a variety of compensation related matters, including: advising boards and management on equity-based and other incentive plans and arrangements (including annual bonus plans, stock option and restricted stock plans, phantom equity plans, and employee stock purchase plans...

504-582-8326
Emily Gauthier Corporate Attorney Jones Walker Baton Rouge, LA
Associate

Emily Gauthier is an associate in the Corporate Practice Group.

Emily represents public and private companies in a variety of corporate and commercial law matters. Her practice focuses on securities offerings and mergers and acquisitions. She advises on corporate governance matters and the disclosure and reporting requirements of securities laws and capital markets, including the review of proxy statements; annual, quarterly, and current reports; and other SEC filings.

While earning her law degree, Emily served as articles editor of the Louisiana Law Review and as a...

225-248-2029
Associate

Rachel represents private and public companies, institutional investors, and other firm clients in a wide range of corporate and commercial law matters.

While earning her law degree, Rachel served as a competitor on the Vis International Commercial Arbitration Moot Court team, where she was recognized for her oral argument skills at the national competition. Rachel also served as managing editor of the Tulane Journal of International and Comparative Law and president of the International Law Society. In her final year of law school,...

504-582-8192
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