SEC Publishes Final Amendments to Regulation 13D-G

In an effort to modernize beneficial ownership reporting requirements, the U.S. Securities and Exchange Commission (the “SEC”) has adopted amendments to Regulation 13D-G that significantly shorten filing deadlines for the disclosure of beneficial ownership of publicly traded equity securities. The SEC has also issued guidance regarding cash-settled derivative securities and the circumstances under which a group is formed under the regulation. The amendments follow a recent SEC enforcement sweep resulting from its review of beneficial ownership filing delinquencies. 

The amendments are effective 90 days after they are published in the Federal Register, which is likely to be soon. However, beneficial owners do not need to comply with the new Schedule 13G deadlines until September 30, 2024. 

Key takeaways

• Initial Schedule 13D filing deadline shortened from 10 calendar days to 5 business days
• Schedule 13D amendments must be filed within 2 business days
• Initial Schedule 13G and amendments must be filed 45 days after the end of every quarter (rather than after the end of each year)
• Filing cut-off times pushed back from 5:30 pm to 10 pm ET
• Guidance on when holders of cash-settled derivatives are deemed beneficial holders
• Guidance on when a group is formed
• Schedules 13D and 13G must be provided in a structured data format

Background

Under Sections 13(d) and 13(g) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), persons or groups who own or acquire beneficial ownership of more than 5% of certain classes of equity securities registered under the Exchange Act are required to file beneficial ownership reports with the SEC. Generally, if Section 13(d) is triggered, a person must file a Schedule 13D unless they are eligible to use Schedule 13G. Schedule 13G, a shorter form requiring less disclosure than Schedule 13D, is available to: 

• Qualified institutional investors (“QIIs”) acquiring securities in the ordinary course of business and not with the purpose or effect of changing or influencing control of the issuer, or in a transaction with such purpose or effect;
• Passive investors that did not acquire and do not hold the securities for the purpose or effect of changing or influencing control or of the issuer and own less than 20% of a covered class of securities; and
• Exempt investors, which are beneficial owners of more than 5% of a covered class of securities that have not made an acquisition of beneficial ownership subject to Section 13(d).

Shortened filing deadlines for Schedules 13D and 13G

The amendments make the following changes to the Schedule 13D and 13G filing deadlines: 

For purposes of determining the filing deadline under the amendments, the first day in the respective day count is the day after the date of the triggering event (rather than the date of the triggering event).

As defined in the amendments, “business day” means any day, other than Saturday, Sunday or a US Federal holiday, from 12:00 am to 11:59 pm ET. However, even though the definition of “business day” encompasses an entire day, a Schedule 13D or 13G must be submitted by 10:00 pm ET to be deemed filed on that day.

Under both the current and amended rules, an acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities is material for the purposes of determining a material change. Acquisitions or dispositions of less than that amount may be material, depending upon the facts and circumstances. 

Beneficial ownership 

In the adopting release, the SEC also addresses whether holders of cash-settled derivatives should be deemed beneficial owners and the standard for determining whether a group is formed under Regulation 13D-G. 

Cash-settled derivatives

Historically, holding derivatives that, by their terms, entitle the holder to nothing more than economic exposure to a covered class of security has not been considered sufficient to constitute beneficial ownership under Regulation 13D-G. Rule 13d-3 has been criticized, however, for failing to explicitly address the circumstances in which an investor in a cash-settled derivative may influence or control an issuer by pressuring a counterparty to make certain decisions regarding the voting and disposition of substantial blocks of securities. 

In its proposal, the SEC had considered expanding the definition of beneficial ownership under Regulation 13D-G to explicitly include certain holders of a cash-settled derivative securities, other than security-based swaps (“SBS”). Ultimately, however, the SEC opted not to amend the definition and instead determined the guidance provided in its 2011 release regarding beneficial ownership of SBS provides sufficient clarity. 

As set out in the adopting release, although non-SBS derivative securities settled exclusively in cash generally represent only an economic interest, discrete facts and circumstances could arise where the holder of these securities may have voting or investment power or otherwise could be deemed to be a beneficial owner, as described below: 

• If a non-SBS cash-settled derivative security provides its holder, directly or indirectly, with exclusive or shared voting or investment power over the reference covered class of security through a contractual term of the derivative security or otherwise, the holder of that derivative security may become a beneficial owner of the reference covered class of security.
• If a non-SBS cash-settled derivative security is acquired with the purpose or effect of divesting its holder of beneficial ownership of the reference covered class of security or preventing the vesting of that beneficial ownership as part of a plan or scheme to evade the Section 13(d) or 13(g) reporting requirements, the derivative security may be viewed as a contract, arrangement, or device within the meaning of those terms in Rule 13d-3(b). The holder of such cash-settled derivative, therefore, may be deemed a beneficial owner.
• A person is deemed a beneficial owner of an equity security if the person (i) has a right to acquire beneficial ownership of the equity security within 60 days or (ii) acquires the right to acquire beneficial ownership of the equity security with the purpose or effect of changing or influencing the control of the issuer of the equity security, or in connection with or as a participant in any transaction having such purpose or effect, regardless of when the right is exercisable. If such a right originates in a derivative security that is nominally “cash-settled” or from an understanding in connection with that derivative security, the holder of such cash-settled derivative security may be deemed a beneficial owner.

To further clarify the disclosure requirements with respect to cash-settled derivative securities, the SEC amended Item 6 of Schedule 13D to remove any implication that a person is not required to disclose interests in all derivative securities that use a covered class as a reference security. 

Formation of a group

Under current Regulation 13D-G, whenever two or more people “agree” to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed by this agreement is deemed to have acquired beneficial ownership of all of the equity securities of the issuer that are beneficially owned by any member of the group as of the date they agree to form the group, and the group must report its common ownership if its  ownership exceeds the applicable reporting threshold. 

The SEC had proposed several amendments to the rules relating to group formation, most of which it chose to issue as guidance instead of adopting rule changes. 

Under the proposal, the SEC would have removed references to an agreement in Regulation 13D-G to make it clear that the determination as to whether two or more persons are acting as a group does not depend solely on the presence of an express or implied agreement, and that, subject to the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities are sufficient to constitute the formation of a group. The SEC did not adopt these changes, and instead has provided guidance that whether two or more persons have formed a group for purposes of Section 13 depends on a determination of whether they acted together for the purpose of acquiring, holding, or disposing of securities of an issuer. The determination depends on an analysis of all the relevant facts and circumstances and not solely on the presence of absence of an express agreement, as two or more persons may take concerted action or agree informally. To determine that a group has been formed, the evidence must show, at a minimum, indicia (such as an informal arrangement or coordination in furtherance) of a common purpose to acquire, hold, or dispose of securities of an issuer. If two or more persons took similar actions, that fact is not conclusive in and of itself that a group has been formed. 

The SEC also declined to adopt a proposal that would have exempted certain investor communications from causing the formation of a group. It also did not adopt a proposal regarding the formation of a group in the event a person shares information to cause another to purchase securities. Instead, the adopting release provides guidance stating that if a beneficial owner required to file a Schedule 13D intentionally communicates to other market participants (including investors) that such a filing will be made (to the extent this information is not yet public) with the purpose of causing such persons to make purchases in the same covered class, and one or more of the other market participants make purchases in the same covered class as a direct result of that communication, the beneficial owner and any of those market participants could potentially become subject to regulation as a group. 

The adopting release also contains other guidance, in the form of questions and responses, regarding shareholder engagement activities, including stating that a group is not formed merely because two or more shareholders communicate with each other regarding an issuer or its securities, engage in discussions with an issuer’s management (without taking other action) or jointly submit non-binding shareholder proposals. The questions and answers are available here.  

Structured data requirement

The SEC is also requiring that Schedules 13D and 13G be filed using a structured, machine-readable data language, beginning December 18, 2024. All Schedule 13D and 13G disclosures (including quantitative disclosures, textual narratives, and identification checkboxes) will have to be filed using an XML-based language to make it easier for investors and markets to analyze information in the schedules. The requirement will not apply to the exhibits to the Schedules 13D and 13G.

Delivery of reports to issuers 

The amendments also rescind in its entirety Rule 13d-7, which requires a copy of Schedules 13D and 13G to be sent to the issuer of the security at its principal executive office by registered or certified mail. 

SEC enforcement and private litigation

These major changes to Regulation 13D-G follow recent SEC enforcement action as part of an ongoing initiative to investigate beneficial ownership disclosure violations. In September 2023, the SEC announced charges against a number of officers, directors, and major shareholders of public companies for Schedule 13D-G and Form 4 filing delinquencies. In connection with this announcement, the SEC emphasized that it would continue to bring enforcement actions for violations of beneficial ownership reporting violations. The SEC is also investigating Elon Musk regarding his 2022 purchases of Twitter stock, likely related to his late Schedule 13D disclosures in connection with his acquisition of Twitter. 

Late Schedule 13D filings could also be the subject of private securities litigation. Recently, a Southern District of New York court refused to dismiss claims by former Twitter shareholders brought against Musk for breach of Section 13(d). Among other things, the plaintiffs allege that Musk was 11 days late in filing a Schedule 13D disclosing his more than 5% stake in Twitter, and the delay allowed him to continue to acquire Twitter shares at artificially low prices and to continue his takeover campaign free of public scrutiny. 

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We will continue to monitor developments in these areas and encourage you to contact us if you have any questions.