In early 2022, the Securities and Exchange Commission (SEC) proposed several significant changes to Regulations 13D and 13G, which require certain persons to disclose their beneficial ownership of equity securities. These changes seek to improve the transparency and timeliness of beneficial ownership reporting and to make it easier for investors to access and understand this information.
Increased threshold for filing a Schedule 13D
One of the most significant proposed changes is a shortening of the deadline for filing Schedule 13D reports. Currently, investors have 10 days to file a Schedule 13D after they acquire 5% or more of a company's outstanding shares. The SEC proposes to shorten this deadline to five days.
The SEC also proposes making the reporting requirements more consistent between Schedule 13D and Schedule 13G. Schedule 13D reports must be filed by investors who acquire 5% or more of a company's outstanding shares, while Schedule 13G reports must be filed by investors who acquire 10% or more of a company's outstanding shares. The SEC proposes requiring investors who file a Schedule 13G to disclose the same information as those who file a Schedule 13D (except for their investment intent and plans for the company, discussed below).
Requirement to disclose investment intent and plans for the company
Another significant change is the requirement for filers to disclose their investment intent and plans for the company. This includes disclosing whether the filer intends to acquire additional company securities, seek control of the company, or engage in any other significant activities.
The SEC believes this disclosure requirement will help investors better understand large shareholders' motivations and make more informed investment decisions.
Expanded definition of "group"
The SEC has also proposed to expand the definition of "group" to include certain persons who act together for the purpose of acquiring, holding, voting, or disposing of equity securities. This means that certain investors who would previously have been considered separate entities may now be considered to be a single group for the purposes of Regulation 13D.
The SEC believes that this change is necessary to prevent investors from circumventing the beneficial ownership reporting requirements. However, some critics argue that the change could be overly broad and could capture investors who are not acting in concert.
Clarified disclosure requirements for derivative securities
The SEC has also clarified the disclosure requirements for derivative securities. This includes requiring filers to disclose certain information about their derivative positions, such as the type of derivative, the underlying security, and the position's notional value.
The SEC believes this disclosure requirement will help investors better understand the risks associated with derivative securities.
Filing using a structured, machine-readable data language
Finally, the SEC has required Schedules 13D and 13G to be filed using a structured, machine-readable data language. This change is intended to make it easier for investors and other market participants to access and analyze beneficial ownership data.
Additional considerations
In addition to its regulatory focus, the SEC has been increasing its enforcement of beneficial ownership reporting requirements. In recent years, the SEC has brought more enforcement actions against investors and companies for violations of Regulations 13D and 13G than in the past, indicating that the SEC is cracking down on delinquent reports of beneficial ownership.
The proposal generated significant public comment before the April 22, 2022, deadline, with the Commission voting to reopen the comment period to June 2022. Two members of the Commission voted against the proposal in February of 2022, and Commissioner Hester Pierce published a dissenting statement. Peirce wrote that the proposed changes "fail to contend fully with the realities of today's markets or the balance embodied in Section 13(d) of the Exchange Act." She argued that the proposed amendments acknowledge some challenges but only partially grapple with or consistently resolve them.
Commissioner Peirce acknowledged that Congress intended the Williams Act authorizing Section 13(d) to balance shareholders' interest in learning of potential changes in corporate control with the benefit of allowing the party seeking to engage in a change in control of the company to keep that information private. However, she argued that the proposed changes are inconsistent with this balance. She wrote that shortening the ten-day reporting window to five days is unjustified and will make it more difficult for companies to attract capital. She also argued that the requirement to disclose investment intent and plans for the company is unnecessary and that it will give certain investors an unfair advantage. Many of the comments from the industry, particularly asset managers and even some academics, fell along those same lines of reasoning.
The Commission has not yet finalized the proposal, but the SEC's stated date for final action, April 2023, has passed. The industry is closely watching the SEC's agenda, with final action overdue.