It was a big news week with the SEC last week. It adopted two major proposals - the Modernisation of Beneficial Ownership Reporting and the Short Sale Disclosure Reforms - officially amending the rules governing beneficial ownership reporting and, for the first time, introducing a short sale disclosure rule in the United States.
Did we already mention this was big news? The importance of these changes cannot be overstated - prior to last week’s changes, the deadlines for filing the initial Schedule 13D and Schedule 13G had not been updated since 1968 and 1977, respectively. Firms as well as qualified institutional investors face big changes and, as with so many pieces of regulation, are also left with a raft of questions and concerns.
What’s New
The changes to Beneficial Ownership reporting would do four things:
- Accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports
- Expand the application of Regulation 13D-G to certain derivative securities
- Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations
- Require that Schedules 13D and 13G be filed using a structured, machine-readable data language
The New Exchange Act Rule 13f-2 and the corresponding Form SHO will likewise require certain institutional investment managers to report short sale related information to the SEC on a monthly basis.
What once worked simply won’t anymore
The changes not only alter the frequency in which managers are required to report, but the structure and scope as well - a direct result of a call for greater transparency by the SEC. This naturally has an impact on the process in which reports are made, affecting the operational efficiency and approach of compliance teams. The knock on effects of the changes are applicable to several areas.
Data: While certain managers investing globally will have experience reconciling position data for short filings, there exists a sect of managers investing domestically that won’t. Without experience managing and manipulating this information, the process quickly becomes sloppy and prone to mistakes. Furthermore, the dissolution of the readable HTML form for disclosure means that managers must submit filings in the XML format. Building this file and readying it for submission isn't easy, and requires time and expertise to manage.
Scope: Managers will now be required to include details of all derivative contracts in Schedule 13D filings, even derivatives that were not included in the beneficial ownership calculation. This broadens the scope for inclusion substantially, and means that the wider and more diverse holdings are, the more will be in scope.
Risk: The new requirements also mean that, at the end of the day, more data is going out and being submitted on the EDGAR portal. There have been breaches before so the onus to stay secure remains front and centre.
These concerns and the concerns sure to develop as we march toward dates to comply all carry water - the alternative is missed, late, and incorrectly made filings. When you consider the record number of fines administered by the SEC in 2022 to the tune of more than $6bn dollars, it’s hard to imagine leniency by the world’s most visible regulator.
