Financial Associations Raise Concerns on Expanded Beneficial Ownership Reporting
Commentary by Josh La Grange
In submitted comments, financial associations raised concerns about the SEC's proposed amendments to rules governing beneficial ownership. As previously covered, the proposal will amend 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").
Council of Institutional Investors ("CII")
CII's comments focused on proposed Rule 13d-6(c) which is intended "to clarify and affirm operation of Rules 13D and 13G in order to permit investors, such as CII member funds, to communicate and consult with each other, jointly engage issuers and execute certain transactions without being subject to regulation as a group."
CII pointed out ambiguities in the text and argued that any revisions should not discourage communications such as "Vote No" campaigns. Further, CII suggested that the exemption under Rule 13d-6(c) should be amended to make it clear that it is available only to shareholders who wish to engage with other shareholders as to the need for new management, and not to those who seek to influence or change control of the board.
Investment Adviser Association ("IAA")
The IAA made the following recommendations to Rules 13D and 13G to support the SEC's goal of transparency while limiting regulatory burdens and unintended consequences:
- Filing deadlines: The IAA proposed changing the filing deadline for Schedule 13D and 13G from five calendar days after the relevant event to five business days in order to address operational challenges that would hinder accurate and complete reporting.
- Treatment of cash-settled derivatives: The IAA opposed provisions treating a beneficial holder of certain cash-settled derivative securities as if he held those securities directly. The IAA asserted that this is already addressed in the current Rule 13d-3(b) and is unnecessary.
- Definition of a group: The IAA stated that the SEC's proposed broadening of the definition of a group would chill shareholder engagement. The IAA stated that the proposed definition would run the risk of inadvertent group formation and that clearer parameters are needed.
SIFMA
SIFMA stated that, while it supports the SEC's goal to create more transparency and modernize the rules governing beneficial ownership, the proposed rules go beyond this, making "sweeping changes to a regulation that has historically functioned well," and that the changes would be "complicated and costly." SIFMA focused on the expansion of the definition of "group." SIFMA urged the SEC not to expand the definition, saying that the potential expansion would exceed the statutory language.
SIFMA Asset Management Group ("SIFMA AMG")
SIFMA AMG stated that it is not convinced that "there is a significant problem to be addressed[.]" SIFMA AMG argued that the proposed rules would make the definition of a group unclear and that there is no evidence for the need to expand the definition at all, and called the accelerated filing deadlines "unreasonable and unwarranted[.]"
Alternative Investment Management Association ("AIMA")
AIMA argued that many market participants will be negatively impacted by the proposed rules changes. AIMA suggested that the SEC (i) keep the current reporting deadlines for Schedules 13D and 13G, (ii) not treat the holders of cash-settled derivatives as beneficial owners of the underlying security and (iii) maintain the current definition of "group."
Investment Company Institute ("ICI")
ICI recommended, among other things, that the SEC (i) extend any compliance dates in any rule changes to ensure that market participants have adequate time to implement the changes, (ii) reconsider the expansion of the definition of a "group" as this expansion would depart from "the legislative history and case law of Sections 13(d) and 13(g) and would completely undermine the SEC's proposed exemptions in proposed Rule 13d-6(c) and (d)" and (iii) reconsider its position on proposed new Rule 13d-3(e) because the rule, if implemented, would "inadvertently apply to a broader range of situations than the SEC intended."
Commentary
It's striking how many of these comments, particularly in respect of the "group" issue, are just pleading for some useable degree of clarity. The existing "group" rule was initially put in place (some 45 years ago) to add focus to statutory language that courts had already noted was not a model of clarity. Even though that 1970s rulemaking process followed a public fact-finding investigation, the rules initially adopted by the SEC were sufficiently flawed to lead to a flood of requests for staff guidance, ultimately causing the SEC to delay, re-propose and then finally re-adopt those rules over a span of three years.
As these and other comments make clear, the investors and advisors who would actually need to apply these rules on a day-to-day basis are struggling to understand what the SEC means to say with the "group" proposal (let alone what specific problem the SEC is trying to solve on that front). Between the lack of clarity highlighted by these comments, on the one hand, and the other comments regarding the procedural aspects of the current rulemaking agenda, on the other hand, one wonders whether there'd be some value in revisiting the lessons from that 1970s rulemaking process.
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