SEC Proposes to Expand Beneficial Ownership Reporting

The SEC proposed amendments to rules governing beneficial ownership reporting under SEA Sections 13(d) ("Reports by Persons Acquiring More Than Five per Centum of Certain Classes of Securities") and 13(g) ("Statement of Equity Security Ownership").

The proposed amendments would (i) accelerate filing deadlines for Schedules 13D and 13G beneficial ownership reports, (ii) expand the application of Regulations 13D and 13G to certain derivative securities, (iii) clarify the circumstances in which two or more persons have formed a "group" that would be subject to the beneficial ownership reporting obligations, (iv) exempt certain persons from being subject to regulation as a "group" and (v) require the filing of Schedules 13D and 13G to be done through a "structured, machine-readable data language."

The SEC stated that the proposed rules "would improve transparency and provide more timely information for shareholders and the market."

Proposed Amendments

The SEC proposed amendments include, among other things:

• New Schedule 13D and 13G Filing Deadlines:

  • Amend Rule 13d-1(a) requiring the filing of Schedule 13D within five days after the acquisition date.

  • Amend Rules 13d-1(b) and (d) requiring Qualified Institutional Investors ("QIIs") and Initial Exempt Investors to file the initial Schedule 13G within five business days after the end of the month in which beneficial ownership exceeds 5% of a covered class.

  • Amend the filing deadline to five days under Rule 13d-1(c) after the date when the person is obligated to file an initial Schedule 13G.

  • Amend Rule 13d-2(c) to require that QIIs file an amendment to their Schedule 13G within five days after the date on which their beneficial ownership exceeds 10% of a covered class, rather than the current requirement of 10 days after the end of the month.

• Regulation of Certain Derivative Securities:

  • Amend Rule 13d-3 to incorporate a new proposed rule 13d-3(e)(1) to provide that a holder of cash-settled derivative securities, other than security-based swaps, will be deemed a beneficial owner of equity securities in a covered class referenced by the derivative security if such person holds the derivative security with the purpose of influencing the issuer's control of the given class of equity securities.

• Clarification of Group Formation and Related Exemptions:

  • The proposals seems to expand the definition of group very substantially by providing that if one person discloses to another person that the firm will make a Schedule 13D filing and those does so, those two persons are deemed to have formed a group, even in the absence of an agreement to act in concert. A limited exception is provided in the case of transactions between an investor and a financial institution entering into an agreement as to a derivative security.

• Structured Data Requirements for Schedules 13D and 13G:

  • Require that all disclosures except for exhibits to the Schedules be filed using XML-based language. Disclosures that fall under this requirement include "quantitative disclosures, textual narratives, and identification checkboxes."

Comments on the proposed amendments will remain open for 60 days following publication of the proposing release on the SEC's website on April 11, 2022, or for 30 days following publication of the proposing release in the Federal Register - whichever is later.

Commissioner Statements

SEC Chair Gary Gensler supported the proposal, saying that it would "reduce information asymmetries and promote transparency, thereby lowering risk and illiquidity." He noted the "rapidity of current markets and technologies" as a reason for updating those old rules.

SEC Commissioner Hester M. Peirce dissented. She stated that the proposal does not adequately contend with market realities today or "the balance embodied in Section 13(d) of the Exchange Act." She questioned the justification of technological advancements as a reason to shorten the timeframe by noting that the initial reasons for Congress's enactment of Section 13(d) was for the purposes of balancing the need for shareholders to know of changes in control against the benefit of allowing the party seeking to engage in changes of control to keep that information private. She also stated that the SEC "paints the [investor] as a victim" and that disparities in information "make markets function." She argued the importance of encouraging investors to seek out information to find undervalued companies, noting that information asymmetries are a feature of U.S. capital markets. Further, she contended that there is not sufficient justification for expanding the definition of beneficial ownership to cover certain cash-settled derivative transactions, given that such securities "convey" neither "ownership" nor "voting rights."