An Overview
On February 10th, the Securities and Exchange Commission of the United States proposed rule amendments that will change the basis of beneficial ownership reporting under the Exchange Act Sections 13(d) and 13(g). These proposals are up for consultation for the next 60 days. This is a pivotal moment in regulatory reporting as the beneficial ownership filing rules for 13(d) and 13(g) haven’t been updated since 1968 and 1977, respectively. The fact that no amendments were made was highly criticised due to modern-day advancements in technology. For example, an investor can currently withhold material market information for 10 days! The proposal spans across timelines, cash-settled derivatives, the definition of a “group”, derivatives with covered classes as the underlying, and the format of the form itself.
Schedule 13(d) Timeline
Currently, for Schedule 13(d), the initial filing deadline must be made within 10 days after acquiring beneficial ownership of more than 5% or losing eligibility to file on Schedule 13(g). The proposed changes will shorten that timeline to 5 days. Any amendments will now need to be made within 1 business day after the triggering event. The filing cut-off time has also been proposed to be extended to 10 pm EST; it is currently 5:30 pm EST - this applies to both Schedule 13(g) and 13(d) disclosures.
Schedule 13(g) Timeline
For “Qualified Institutional Investors” and “Exempt Investors”, the proposed amendments will shorten the initial filing deadline from 45 days after year-end to 5 business days after month-end for those investors who beneficially own more than 5%. For other filers, such as “Passive Investors”, the proposed amendments will shorten the initial filing deadline from 10 days to 5 days. In addition, for all Schedule 13(g) filers, the proposal will shorten the deadline for material amendments from 45 days after the year the change occurred to 5 business days after the month in which a material change occurred. “Qualified Institutional Investors” currently need to disclose within 10 days after month-end in which beneficial ownership exceeds 10% or as of month-end, there was a 5% increase/decrease in beneficial ownership. This has been shortened to 5 days. Currently, “Passive Investors” will need to disclose promptly after the aforementioned circumstance; however, this has been clarified to be 1 business day.
Cash-settled Derivatives
Timelines aren’t the only things that are changing! Holders of certain cash-settled derivatives will be deemed to be beneficial owners of the underlying equity instrument if the purpose is to change or influence the control of the issuer. This amendment does not include security-based swaps.
Definition of a “Group”
In addition to these changes, the definition of “forming a group” has been clarified. The proposal removes implications that an agreement among group members is needed to form a group. This includes those who disclose to any other person in advance a Schedule 13(d) needs to be filed, and in turn, the other person acquires the securities for which the Schedule 13(d) was filed (“tipper-tippee” relationships). Under the new proposal, those people will be deemed to have formed a group. Where 2 or more persons communicate and consult with one another with an issuer without concern is also considered to have formed a group. Moreover, those who enter into an agreement governing derivative securities will also be subject to regulation as a group with respect to the underlying issuer.
Derivatives with Covered Classes as Underlying
For Schedule 13(d), disclosure is currently not needed for derivative securities that use a covered class as the referenced security. This is set to change under the proposal. All derivative securities, including cash-settled derivative securities that use the issuer’s equity security as the underlying, are now subject to disclosure.
New Disclosure Format
We aren’t done yet! The proposal will also introduce a new way of filing disclosures. Both Schedules 13(g) and 13(d) will need to be filed using a structured, machine-readable data language - disclosures will need to be filed using an XML-based language. Only the exhibits to both Schedules will be untouched. If the proposal is passed, having an automated solution - like the one FundApps offers - will save you the stress of the shortened deadlines, new forms, security selection, and new definitions.
Transparency with our clients and the ability to quickly adapt to regulatory changes have always been key features of our service at FundApps and are among the reasons we continue to be trusted with their Shareholding Disclosure automation.
Contact us today to see how our automated Shareholding Disclosure service can ensure that you remain compliant with these regulatory changes.
