Understanding the SEC's Proposed Changes

Screenshot 2022-08-10 at 18.22.59

The Evolving World of Shareholding Disclosure

Largest Regulatory Changes by the SEC in Decades 

In what has been a busy 2022 for the SEC, investors will soon likely face shorter timelines and increased frequency for Section 13G and 13D disclosures, as well as grapple with the introduction of the first US short-selling requirements. 

image (8)

Overview of The Proposed Changes

Earlier this year, 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). 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 criticized due to modern-day advancements in technology. In current standing, an investor can currently withhold marketing moving 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.

Screenshot 2022-08-10 at 18.23.48

Beneficial Ownership Reporting

On February 10th, the SEC Proposed rule amendments to the Exchange Act Sections 13(g) and 13(d) that will subsequently change reporting obligations for investors. In scope are both timelines and volume of disclosures. A full review of the proposed changes can be found here - SEC Proposes Amendments to 13G and 13D Beneficial Ownership Reporting

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.

Screenshot 2022-08-10 at 18.23.21

Short Sale Disclosures

On February 25th the SEC announced that it voted to propose a new exchange rule, 13f-2, which will require certain institutional investment managers to report short sale related information to the commission on a monthly basis.

What is the change ?

Managers that meet or exceed either (1) a gross short position in the equity security with a US dollar value of $10 million or more at the close of any settlement date during the calendar month, or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5% or more, would be required to report information to the SEC within 14 days after month end. Short sale data would be aggregated and made available to the public. 

For a comprehensive overview of exactly what is in scope under 13f-2, consider the fact sheet shared by the SEC on the new proposed rule

Why now?

The proposal is one of many to be considered by the SEC this year, and part of a wider push to increase disclosures and transparency within the US market. This change would be considered one of the largest regulatory changes by the SEC in decades. This particular action is seen as part of the SECs response to the short sale craze of GameStop which saw the stock move from $5 in October 2020 to over $400 in January 2021, partly due to a short squeeze.

"Proposed Rule 13f-2 would make aggregate data about large short positions available to the public for individual equity securities. This would provide the public and market participants with more visibility into the behavior of large short sellers. The raw data reported to the Commission on a new Form SHO would help us to better oversee the markets and understand the role short selling may play in market events. It's important for the public and the Commission to know more about this important market, especially in times of stress or volatility." - Gary Gensler, SEC Chair

Monitoring Changes with FundApps

Dave Polonsky, Head of FundApps North America, gives an overview of the proposed SEC changes, what they mean, and what's next, below:


Screenshot 2022-08-12 at 14.30.57

Looking for more information?