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SEC Proposes Significant Revisions to Beneficial Ownership Reporting Rules

Introduction

On February 10, 2022, the Securities and Exchange Commission (SEC) announced a set of proposed changes to the rules governing beneficial ownership reporting, pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. These suggested modifications, which are yet to be finalized but are listed in the final rule stage on the SEC's Regulatory Agenda, are intended to update and enhance the existing beneficial ownership reporting framework, and are expected to be concluded by October. The proposed amendments encompass several key areas including filing deadlines, application of regulation, and filing procedures.

Acceleration of Filing Deadlines

Under the current system, Section 13(d)(1) of the Exchange Act mandates a ten-day window for filing a disclosure statement following an acquisition of over 5% of a covered class of securities. This has remained unchanged for over 50 years. The proposed amendments seek to reduce this period to five calendar days. Moreover, when eligibility to file Schedule 13G is lost, such as when there is an attempt to change or influence company control or ownership increases to 20% or more, the filing deadline would also be shortened from 10 to 5 days.

Another noteworthy proposed amendment is that all changes to Schedule 13D must be reported within one business day following the material change, replacing the current need for "prompt" reporting after a triggering event. Such acceleration necessitates more proactive planning on the part of filers, significantly impacting affiliates, insiders, and shareholders looking to effect changes in company management.

Adjustments to Schedule 13G

The SEC is also proposing amendments to the Schedule 13G filing deadlines. Presently, a Qualified Institutional Investor (QII) only needs to file Schedule 13G if it owns over 5% at the year-end, which must be completed within 45 days of the end of that year. If the QII surpasses 10% ownership as of the end of a calendar month, a Schedule 13G must be filed within 10 days of the month’s end.

The proposed revisions call for the filing deadlines to be shortened to 5 business days after the month’s end, in which beneficial ownership first exceeds 5% for QIIs and Exempt Investors, and within 5 days for Passive Investors after acquiring beneficial ownership of over 5%. Additionally, amendments to Schedule 13G would be due within 5 business days after the month’s end in which a reportable change occurs or within 5 days when a person’s ownership increases to over 10% and thereafter when there is a change of more than 5%.

Extension of Filing Deadline

Another proposed change involves extending the cut-off time for filing from 5:30 p.m. EST to 10:00 p.m. EST, providing filers with additional flexibility in meeting filing requirements.

Expansion of Regulation 13D-G

The SEC also intends to extend the application of Regulation 13D-G to certain derivative securities. Currently, holders of derivative securities that are settled exclusively in cash do not have rights or entitlements with respect to the reference security and therefore are not included in beneficial ownership calculations. The SEC's proposal seeks to change this, viewing these holders as having the incentive and ability to influence company control.

Changes to Group Formation

The amendments also seek to clarify the conditions under which two or more persons are deemed to have formed a "group" subject to beneficial ownership reporting obligations. Under the proposed amendments, the concept of a group would be modified to remove any suggestion that an explicit or implicit agreement among group members is necessary for group formation. The proposed changes also offer new exemptions to persons involved in certain ordinary course business transactions, non-profits, and creditors in specified situations, aiming to prevent unwarranted or unjustifiable group designations. This amendment aims to provide a more nuanced approach in determining "group" formations and should alleviate concerns of inadvertent group formation under Section 13(d).

Electronic Submission

To modernize the submission process, the SEC has proposed the adoption of mandatory electronic filing for beneficial ownership reports. This will not only streamline the filing process but also accelerate the dissemination of information to the public.

Broader Definitions

Under the proposed amendments, the SEC is seeking to broaden the definition of "beneficial ownership" to include not only voting or investment power but also any contractual rights that provide the ability to affect these powers. This broadened definition reflects the SEC's recognition of complex financial instruments and arrangements that have evolved since the original rules were put in place.

Exemptions

The SEC has proposed exemptions for certain communications made in the normal course of business, such as communications between an issuer and its shareholders that do not involve efforts to change or influence control of the issuer. This amendment could provide some comfort for those worried about triggering beneficial ownership filing obligations through routine communications.

Potential Implications

If these changes are adopted, they will have significant implications for all parties required to file beneficial ownership reports, including hedge funds, activists, institutional investors, and other large shareholders. The tighter reporting deadlines and broader definitions could increase both the complexity and urgency of compliance with beneficial ownership reporting requirements.

Conclusion

While the SEC's proposed changes to beneficial ownership reporting rules seek to modernize and enhance the existing regulatory framework, they also pose new challenges and obligations for parties involved in securities transactions. Stakeholders should closely monitor the progress of these proposed amendments and may want to consider commenting on them during the SEC's public comment period. The potential ramifications of these changes underscore the importance of having a well-planned strategy for managing and reporting beneficial ownership.