Proposed Changes to Beneficial Ownership Reporting

0

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

  • Accelerate the production deadlines for Annexes 13D and 13G.

  • Certain holders of cash-settled derivatives are deemed beneficial owners[1] of the “covered class” reference.[2]

  • Clarify the circumstances in which two or more people have formed a “group” that would be subject to beneficial ownership reporting requirements.

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

context

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

The deadlines for filing a first Schedule 13D or Schedule 13G have not been updated since 1968 and 1977, respectively. The SEC believes that current filing deadlines do not translate into timely disclosure of information by current market standards, and therefore create a potentially 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 ST accelerate the filing deadlines for Schedules 13D and 13G and also extend the time within the business day in which filings should be done as follows:

Deadline for filing

Current Annex 13D

Proposed Schedule 13D

Current schedule 13G

Proposed Annex 13G

Initial deposit deadline

Within 10 days of acquiring more than 5% beneficial ownership or losing eligibility for filing on Schedule 13G.

Within 5 days of acquiring more than 5% beneficial ownership or losing eligibility for filing on Schedule 13G.

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

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

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

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

Deadline for filing amendments

Immediately after the trigger event.

Within one business day of the triggering event.

All Schedule 13G filers:
45 days after the end of the calendar year of the year in which a change occurred.

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

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

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

Passive investors: Quickly 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 an increase or decrease of 5% beneficial ownership.

Filing deadline

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

Existing rules on beneficial ownership do not include holders of cash-settled derivative securities as these instruments generally do not confer voting or investment power over the equity securities of the Reference Hedged Class.[6] The Proposed Amendments would add a new paragraph (e) to Rule 13d-3, which sets out the circumstances under which a holder of a cash-settled derivative security will be “deemed” to be the beneficial owner of the Reference Equity Securities, and also describes 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 treat the holder of a cash-settled derivative security (other than a security-based swap) as the beneficial owner of the hedged class equity securities referenced by the derivative security if that person has for the purpose or effect of changing or affecting the control of the issuer of that 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 who actually own more than 10% of an issuer’s securities are required to file ownership statements with the SEC on Forms 3, 4, and 5, and are also subject to liability. in the event of short-term profit and prohibitions on short selling.

Treatment of two or more people acting as a group

Proposed amendments to Rule 13d-5 would expand 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. These people will be treated as a group if they act in concert towards a common goal, as determined by the facts and the circumstances, whether or not there is an agreement between the individuals. By expanding the scope of the “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 say is consistent with 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 definition of “group”. These exemptions apply to investors communicating with each other that do not have the purpose or effect of changing or influencing control of the issuer or investors and financial institutions that enter into certain agreements governing the terms of derivative securities.

Data requirements for Annexes 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 is proposing that Schedules 13D and 13G disclosures use structured, human-readable data language. machine, similar to formatting already used for some EDGAR filings, such as beneficial ownership reports under Section 16 on Forms 3, 4, and 5.

And after

If passed, the SEC’s proposed amendments will significantly alter the beneficial ownership reporting framework. In accordance with the SEC’s most recent rule proposals, the public comment period will remain open for 60 days after the proposed release is posted on the SEC’s website or 30 days after the proposed release is posted on the Federal Register, whichever is longer. Companies that support or oppose the SEC’s proposed changes are encouraged to submit comments to the SEC and should contact an attorney for assistance.

[1] Generally, a “beneficial owner” of a security includes “any person who, directly or indirectly, by contract, arrangement, understanding, relationship or otherwise, has or sharing: (1) [v]voting power which includes the power to vote or direct the vote of that security; and/or, (2) [i]investment power which includes the power to dispose of or direct the disposition of such a 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 class of equity securities with voting rights registered under section 12 of the Foreign Exchange Act.

[3] QIIs are Institutional Investors eligible to report on Schedule 13G, instead of Schedule 13D and based on Rule 13d-1(b), including, but not limited to, a registered broker or dealer, a insurance company, a registered investment company and a registered investment adviser.

[4] “Exempt Investors” are persons beneficially owning more than 5% of a Covered Class at the end of the calendar year, but who have not acquired beneficial ownership subject to Article 13(d).

[5] “Passive Investors” are beneficial owners of more than 5% but less than 20% of a Covered Class who can certify under Section 10 of Schedule 13G that they have not acquired and do not hold the securities in question for the purpose or the effect of modifying or influencing the control of the issuer of these securities and that they have not acquired the securities within the framework of or as a participant in a transaction having such an object or effect.

[6] In certain circumstances, as determined by existing Rule 13d-3, investors in securities swaps may be the beneficial owners of a hedged class. To the extent that a holder of a securities swap holds such a non-cash-only security, the person could be considered a beneficial owner under Rule 13d-3(d)(1). Additionally, if a security-based swap is used as part of a plan or scheme to evade beneficial ownership reporting, the person could be considered a beneficial owner as described in Rule 13d. -3(b). Finally, if the holder of a securities swap directly or indirectly holds the power to direct a counterparty how to vote or dispose of shares of a hedged class used as a reference security, that person may be a beneficial owner as provided Rule 13d-3(a).

Share.

Comments are closed.