United States: SEC Adopts Amendments To Rules Governing Beneficial Ownership Reporting

On October 10, 2023, the Securities and Exchange Commission (the "SEC") adopted rule amendments (the "Final Rules") for investors required to file beneficial ownership reports under the Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Final Rules accelerate deadlines for Schedules 13D and 13G filings, clarify Schedule 13D disclosure requirements, and require Schedule 13D and 13G filings be made using structured, machine-readable data language.

Additionally, the adopting release provides guidance regarding the legal standard governing when two or more persons may be considered a group for purposes of determining whether the beneficial ownership threshold had been met and how an investor's use of certain cash-settled derivative securities may result in treatment as a beneficial owner.

This client advisory summarizes and offers compliance guidance of the Final Rules which can be found here. The SEC's Fact Sheet can be found here.

Updated Schedule 13D and 13G Filing Deadlines

The Final Rules shorten several filing deadlines relating to initial and amendment filings of Schedules 13D and 13G. Under the Final Rules, reporters will have to file an initial Schedule 13D within five (5) business days after (i) acquiring beneficial ownership of more than 5% of a covered class of securities or (ii) losing eligibility to report on Schedule 13G. Amendments to Schedule 13D will be required to be filed within two (2) business days after the date a material change occurs. A "material change" is any acquisition or disposition of beneficial ownership by 1% or more of a covered class of securities. Depending on the facts and circumstances, an acquisition or disposition of less than 1% may still be considered material.

Qualified Institutional Investors ("QIIs") will have to file initial Schedule 13Gs within forty-five (45) calendar days after the end of the calendar quarter in which their beneficial ownership first exceeds 5% of a covered class. However, if a QII's beneficial ownership exceeds 10% of a covered class prior to the end of the calendar quarter, it will have to file an initial Schedule 13G within five (5) business days after the end of the first month in which its beneficial ownership exceeds 10%. Additionally, QIIs will have to file amendments within five (5) business days after the end of the month in which beneficial ownership exceeds 10% or deviates by more than 5%.

Exempt Investors will have to file an initial Schedule 13G within forty-five (45) calendar days after the end of the calendar quarter in which beneficial ownership first exceeds 5% of a covered class.

Passive Investors will have to file initial Schedule 13Gs within five (5) business days after acquiring beneficial ownership of more than 5% of a covered class. Additionally, Passive Investors will have to file amendments within two (2) business days after the date their beneficial ownership exceeds 10% or deviates by more than 5%.

All Schedule 13G filers will be required to file amendments within forty-five (45) calendar days after the end of the quarter in which a material change occurs.

Below is a chart summarizing the current and new filing deadlines:

Additionally, the filing cut-off time for Schedules 13D and 13G to receive the "as of" filing date will be extended from 5:30 p.m. eastern time to 10 p.m. eastern time.

Schedule 13D Disclosure Requirements

To clarify the disclosure requirements and eliminate ambiguity regarding the scope of disclosure with respect to cash-settled derivative securities, and derivative securities broadly, the Final Rules amend Item 6 of Schedule 13D to remove any implication that a person is not required to disclose interests in derivative securities that use a covered class as a reference security.

Structured Data Requirement

Currently, Schedules 13D and 13G are not machine-readable because the EDGAR Filer Manual requires the disclosures to be filed as unstructured data languages: HTML or ASCII. The Final Rules will require that the schedules be filed using 13D/G-specific XML.

SEC Guidance

Rather than adopting new rules, the SEC provided guidance on two topics: (i) the legal standard governing when two or more persons may be considered a group for purposes of determining whether the beneficial ownership threshold had been met and (ii) how an investor's use of certain cash-settled derivative securities may result in treatment as a beneficial owner.

Formation of a Group

Sections 13(d)(3) and 13(g)(3) of the Exchange Act both state that when two or more persons act as a group for the purpose of acquiring, holding, or disposing of securities of an issuer, the group is deemed to be a person. However, "group" is not explicitly defined in the Exchange Act or the rules promulgated thereunder. Rather, the SEC makes a determination as to whether a group has been formed based on an analysis of all the relevant facts and circumstances, and an express agreement is not required.

To clarify the current legal standard for determining when a group exists, the SEC answered a series of questions within the Release. Notably, the SEC stated that they would not find that a group has been formed when two or more shareholders:

• Communicate with each other regarding an issuer or its securities without taking further actions;
• Engage in discussions with an issuer's management without taking further actions;
• Jointly make recommendations to an issuer regarding the structure and composition of the issuer's board of directors where (1) no discussion of individual directors or board expansion occurs and (2) no commitments are made among the shareholders regarding the potential withholding of their votes for or voting against management's director candidates; or
• Jointly submit a non-binding shareholder proposal to an issuer pursuant to Rule 14a-8 for presentation at an annual meeting of shareholders.

A group will also not be deemed to have been formed solely on the basis that:

• A shareholder and an activist investor seeking support for its proposals communicate without committing to a course of action; or
• A shareholder announces or communicates their intention to vote in favor of an unaffiliated activist investor's director nominees.

However, if a beneficial owner that is or will be required to file under Section 13(d): (1) intentionally communicates to other market participants that such a filing will be made, (2) with the purpose of causing such persons to make purchases in the same class, and (3) one or more market participants make purchases in the same covered class as a direct result of that communication, the beneficial owner and market participants will be treated as a group.

In addition to this guidance, the SEC adopted Final Rules stating that groups regulated under Sections 13(d) and 13(g) shall be deemed to acquire additional equity securities acquired by any member of the group after the group's formation, with a carve out for intra-group transfers.

Applicability of Rule 13d-3 to Cash-Settled Derivative Securities

When determining the applicability of Rule 13d-3 to cash-settled derivative securities, the SEC looks to the analytical framework discussed in their July 16, 2011 Security-Based Swaps Release. Reporting of beneficial ownership may be required in cases where cash-settled derivative securities (1) confer, directly or indirectly, voting or investment power, (2) are used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to evade the reporting requirements, or (3) grant rights to acquire an equity security within sixty (60) days or with the purpose or effect of changing or influencing the control of the issuer.

Compliance - Timing

Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024. Compliance with the other rule amendments will be required upon the effective date of the Final Rules, which shall be 90 days after publication in the Federal Register.

Early, voluntary compliance with the structured data requirements is permitted starting December 18, 2023.

Attorneys in Kelley Drye's Corporate Practice Group are available to assist in navigating and preparing for compliance with the Final Rules. For more information, please contact your current Kelley Drye attorney or any member of the Corporate Practice Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.