Home/Federal/Federal Register/2022-03222

Proposed Rule2022-03222

Modernization of Beneficial Ownership Reporting

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

March 10, 2022

Issuing agencies

Securities and Exchange Commission

Abstract

The Securities and Exchange Commission ("Commission") is proposing to amend certain rules that govern beneficial ownership reporting. The proposed amendments would modernize the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G. The proposed amendments also would deem holders of certain cash-settled derivative securities as beneficial owners of the reference equity securities and clarify the disclosure requirements of Schedule 13D with respect to derivative securities. In addition, the proposed amendments would clarify and affirm the operation of the regulation as applied to two or more persons that form a group under the Securities Exchange Act of 1934, and provide new exemptions to permit such persons to communicate and consult with each other, jointly engage issuers and execute certain transactions without being subject to regulation as a group. We also are proposing to amend provisions regarding the date on which Schedules 13D and 13G filings are deemed to have been made. Finally, we are proposing to require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

Full Text

<html>
<head>
<title>Federal Register, Volume 87 Issue 47 (Thursday, March 10, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 47 (Thursday, March 10, 2022)]
[Proposed Rules]
[Pages 13846-13899]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03222]

[[Page 13845]]

Vol. 87

Thursday,

No. 47

March 10, 2022

Part III

Securities and Exchange Commission

-----------------------------------------------------------------------

17 CFR Parts 232 and 240

Modernization of Beneficial Ownership Reporting; Proposed Rule

Federal Register / Vol. 87 , No. 47 / Thursday, March 10, 2022 /
Proposed Rules

[[Page 13846]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232 and 240

[Release Nos. 33-11030; 34-94211; File No. S7-06-22]
RIN 3235-AM93

Modernization of Beneficial Ownership Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing to amend certain rules that govern beneficial ownership
reporting. The proposed amendments would modernize the filing deadlines
for initial and amended beneficial ownership reports filed on Schedules
13D and 13G. The proposed amendments also would deem holders of certain
cash-settled derivative securities as beneficial owners of the
reference equity securities and clarify the disclosure requirements of
Schedule 13D with respect to derivative securities. In addition, the
proposed amendments would clarify and affirm the operation of the
regulation as applied to two or more persons that form a group under
the Securities Exchange Act of 1934, and provide new exemptions to
permit such persons to communicate and consult with each other, jointly
engage issuers and execute certain transactions without being subject
to regulation as a group. We also are proposing to amend provisions
regarding the date on which Schedules 13D and 13G filings are deemed to
have been made. Finally, we are proposing to require that Schedules 13D
and 13G be filed using a structured, machine-readable data language.

DATES: Comments should be received on or before April 11, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or

Paper Comments

<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-06-22. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
submitted comments on its website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). Typically, comments also are available for website
viewing and printing in the Commission's public reference room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Operating conditions may limit access to
the Commission's public reference room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information. You should
submit only information that you wish to make publicly available.
Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Nicholas Panos, Senior Special
Counsel, and Valian Afshar, Special Counsel, in the Office of Mergers
and Acquisitions, Division of Corporation Finance, at (202) 551-3440,
U.S. Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR
240.13d-1 (``Rule 13d-1''), 17 CFR 240.13d-2 (``Rule 13d-2''), 17 CFR
240.13d-3 (``Rule 13d-3''), 17 CFR 240.13d-5 (``Rule 13d-5''), 17 CFR
240.13d-6 (``Rule 13d-6'') and 17 CFR 240.13d-101 (``Rule 13d-101''),
under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.]
(``Exchange Act'').\1\ We also are proposing amendments to 17 CFR
232.13 (``Rule 13 of Regulation S-T'') and 17 CFR 232.201 (``Rule 201
of Regulation S-T'') under 17 CFR part 232 (``Regulation S-T'').\2\
---------------------------------------------------------------------------

\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a of the United States Code, at which the Exchange Act is
codified, and when we refer to rules under the Exchange Act, or any
paragraph of these rules, we are referring to title 17, part 240 of
the Code of Federal Regulations [17 CFR part 240], in which these
rules are published.
\2\ Unless otherwise noted, when we refer to Regulation S-T, or
any paragraph of the rules thereunder, we are referring to title 17,
part 232 of the Code of Federal Regulations [17 CFR part 232], in
which these rules are published.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Discussion of the Proposed Amendments
A. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and
201 of Regulation S-T To Revise Filing Deadlines and Filing Date
Assignment
1. Rule 13d-1(a)
2. Rules 13d-1(e), (f) and (g)
3. Rules 13d-1(b), (c) and (d)
4. Rules 13d-2(a) and (b)
5. Rules 13d-2(c) and (d)
6. Rules 13(a)(4) and 201(a) of Regulation S-T
B. Proposed Amendment to Rule 13d-3 To Regulate the use of Cash-
Settled Derivative Securities
1. Background
2. Proposed Amendment
C. Proposed Amendments to Rule 13d-5 To Affirm Its Application
and Operation
1. Background
2. The Commission's View of Group Formation
3. Proposed Amendments
D. Proposed Amendments to Rule 13d-6 To Create Certain
Exemptions
1. Background
2. Proposed Amendments
E. Proposed Amendments to Schedule 13D To Clarify Disclosure
Requirements Regarding Derivative Securities
1. Background
2. Proposed Amendments
F. Proposed Structured Data Requirements for Schedules 13D and
13G
1. Background
2. Proposed Amendments
G. Implications of the Proposed Amendments on Section 16
III. Economic Analysis
A. Introduction
B. Economic Baseline
1. Current Regulatory Framework
2. Affected Parties
C. Potential Benefits and Costs of the Proposed Amendments
1. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and
201 of Regulation S-T
2. Proposed Amendment to Rule 13d-3
3. Proposed Amendments to Rules 13d-5 and 13d-6
4. Proposed Amendments to Item 6 of Schedule 13D
5. Proposed Structured Data Requirement for Schedules 13D and
13G
D. Anticipated Effects on Efficiency, Competition and Capital
Formation
E. Reasonable Alternatives
1. Alternative Filing Deadlines
2. Tiered Approach and Purchasing Moratorium
3. Consolidate Beneficial Ownership Reporting
4. Section 16 Rule Amendment
5. Modify Scope of Structured Data Requirement
F. Request for Comment
IV. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments to Rules 13d-2, 13d-3, 13d-5 and 13d-101
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Certification

[[Page 13847]]

VII. Statutory Authority

I. Introduction

We are proposing comprehensive changes to 17 CFR 240.13d-1 through
240.13d-102 (``Regulation 13D-G'') and Regulation S-T to modernize the
beneficial ownership reporting requirements and improve their operation
and efficacy. Specifically, we are proposing to: (1) Revise the current
deadlines for Schedule 13D and Schedule 13G filings; (2) amend Rule
13d-3 to deem holders of certain cash-settled derivative securities as
beneficial owners of the reference covered class; (3) align the text of
Rule 13d-5, as applicable to two or more persons who act as a group,
with the statutory language in Sections 13(d)(3) and (g)(3) of the
Exchange Act; and (4) set forth the circumstances under which two or
more persons may communicate and consult with one another and engage
with an issuer without concern that they will be subject to regulation
as a group with respect to the issuer's equity securities. We also are
proposing certain related technical changes to Regulation S-T in
connection with these proposed amendments. Finally, we are proposing to
require that Schedules 13D and 13G be filed using a structured,
machine-readable data language.
To address concerns that the current deadlines for Schedule 13D and
Schedule 13G filings are creating information asymmetries in today's
market, we are proposing to:
<bullet> Revise the Rule 13d-1(a) filing deadline for the initial
Schedule 13D to five days \3\ after the date on which a person acquires
more than 5% of a covered class of equity securities; \4\
---------------------------------------------------------------------------

\3\ Consistent with the current ``10-day'' deadline in Rule 13d-
1(a), the proposed ``five-day'' deadline for filing the initial
Schedule 13D would be measured in calendar days. If the last day of
the initial Schedule 13D deadline falls on a Federal holiday, a
Saturday or a Sunday, then such filing may be made on the next
business day thereafter. 17 CFR 240.0-3 (``[I]f the last day on
which [a filing] can be accepted as timely filed falls on a
Saturday, Sunday or holiday, such [filing] may be [made] on the
first business day following.''). Any reference to ``days'' in
either this release or any of our proposed amendments means
``calendar days,'' and any reference to ``business days'' means
``business days,'' as we are proposing to define that term. See
infra note 5 for a discussion of our proposed definition of
``business days.''
\4\ As used in this release, a ``covered class'' is a class of
equity securities described in Section 13(d)(1) of the Exchange Act
and Rule 13d-1(i) and generally means, with limited exception, a
voting class of equity securities registered under Section 12 of the
Exchange Act.
---------------------------------------------------------------------------

<bullet> Amend Rules 13d-1(e), (f) and (g) to shorten the filing
deadline for the initial Schedule 13D required to be filed by certain
persons who forfeit their eligibility to report on Schedule 13G in lieu
of Schedule 13D to five days after the event that causes the
ineligibility;
<bullet> Revise the filing deadline under Rule 13d-2(a) for
amendments to Schedule 13D to one business day \5\ after the date on
which a material change occurs;
---------------------------------------------------------------------------

\5\ The term ``business day'' is not defined in Section 13(d) or
13(g) or any rule of Regulation 13D-G. Accordingly, we are proposing
to define ``business day'' for purposes of Regulation 13D-G to mean
any day, other than Saturday, Sunday or a Federal holiday, from 6
a.m. to 10 p.m. eastern time.
---------------------------------------------------------------------------

<bullet> Amend Rules 13d-1(b) and (d) to shorten the deadline for
the initial Schedule 13G filing for Qualified Institutional Investors
(``QIIs'') \6\ and Exempt Investors \7\ to within five business days
after the last day of the month in which beneficial ownership first
exceeds 5% of a covered class;
---------------------------------------------------------------------------

\6\ The institutional investors qualified to report on Schedule
13G, in lieu of Schedule 13D and in reliance upon Rule 13d-1(b),
include a broker or dealer registered under Section 15(b) of the
Exchange Act, a bank as defined in Section 3(a)(6) of the Exchange
Act, an insurance company as defined in Section 3(a)(19) of the
Exchange Act, an investment company registered under Section 8 of
the Investment Company Act of 1940, an investment adviser registered
under Section 203 of the Investment Advisers Act of 1940, a parent
holding company or control person (if certain conditions are met),
an employee benefit plan or pension fund that is subject to the
provisions of the Employee Retirement Income Security Act of 1974, a
savings association as defined in Section 3(b) of the Federal
Deposit Insurance Act, a church plan that is excluded from the
definition of an investment company under Section 3(c)(14) of the
Investment Company Act of 1940, non-U.S. institutions that are the
functional equivalent of any of the institutions listed in Rules
13d-1(b)(1)(ii)(A) through (I), so long as the non-U.S. institution
is subject to a regulatory scheme that is substantially comparable
to the regulatory scheme applicable to the equivalent U.S.
institution, and related holding companies and groups (collectively,
``Qualified Institutional Investors'' or ``QIIs''). 17 CFR 240.13d-
1(b)(1)(ii).
\7\ The term ``Exempt Investor'' as used in this release refers
to persons holding beneficial ownership of more than 5% of a covered
class at the end of the calendar year, but who have not made an
acquisition of beneficial ownership subject to Section 13(d). For
example, persons who acquire all their securities prior to the
issuer registering the subject securities under the Exchange Act are
not subject to Section 13(d) and persons who acquire not more than
two percent of a covered class within a 12-month period are exempted
from Section 13(d) by Section 13(d)(6)(B), but in both cases are
subject to Section 13(g). Section 13(d)(6)(A) exempts acquisitions
of subject securities acquired in a stock-for-stock exchange that is
registered under the Securities Act of 1933.
---------------------------------------------------------------------------

<bullet> Amend the deadline in Rule 13d-1(c), which permits Passive
Investors \8\ to file an initial Schedule 13G in lieu of Schedule 13D
within 10 days after acquiring beneficial ownership of more than 5% of
a covered class, to five days after the date of such an acquisition;
---------------------------------------------------------------------------

\8\ The term ``Passive Investors'' as used in this release
refers to beneficial owners of more than 5% but less than 20% of a
covered class who can certify under Item 10 of Schedule 13G that the
subject securities were not acquired or held for the purpose or
effect of changing or influencing the control of the issuer of such
securities and were not acquired in connection with or as a
participant in any transaction having such purpose or effect. These
investors are ineligible to report beneficial ownership pursuant to
Rules 13d-1(b) or (d) but are eligible to report beneficial
ownership on Schedule 13G in reliance upon Rule 13d-1(c).
---------------------------------------------------------------------------

<bullet> Revise the filing deadlines required for amendments to
Schedule 13G in Rule 13d-2(b) to five business days after the end of
the month in which a reportable change occurs;
<bullet> Amend Rule 13d-2(c) to shorten the filing deadline for
Schedule 13G amendments filed pursuant to that provision to five days
after the date on which beneficial ownership first exceeds 10% of a
covered class, and thereafter upon any deviation by more than 5% of the
covered class, with these requirements applying if the thresholds were
crossed at any time during a month; and
<bullet> Amend Rule 13d-2(d) to revise the filing deadline for
Schedule 13G amendments filed pursuant to that provision from a
``promptly'' standard to one business day after the date on which
beneficial ownership exceeds 10% of a covered class, and thereafter
upon any deviation by more than 5% of the covered class.
In addition, instead of an amendment obligation arising for
Schedule 13G filers upon the occurrence of ``any change'' in the facts
previously reported regardless of the materiality of such change, we
are proposing to revise Rule 13d-2(b) to require that an amendment to a
Schedule 13G be filed only if a ``material change'' occurs. Further, we
are proposing to amend Rule 13(a) of Regulation S-T to permit Schedules
13D and 13G, and any amendments thereto, that are submitted by direct
transmission on or before 10 p.m. eastern time on a given business day
to be deemed to have been filed on the same business day. This
amendment would provide additional time for beneficial owners to
prepare and submit their Schedule 13D or Schedule 13G filings.\9\
---------------------------------------------------------------------------

\9\ See Rule 13(a)(2) of Regulation S-T. We also are proposing
to amend Rule 201(a) of Regulation S-T to make the temporary
hardship exemption set forth in that rule--which applies to
unanticipated technical difficulties preventing the timely
preparation and submission of an electronic filing--unavailable to
Schedules 13D and 13G, including any amendments thereto.
---------------------------------------------------------------------------

The following table summarizes the changes we are proposing, as
described more fully in Section II.A:

[[Page 13848]]

----------------------------------------------------------------------------------------------------------------
Current Schedule Proposed New Current Schedule Proposed New
Issue 13D Schedule 13D 13G Schedule 13G
----------------------------------------------------------------------------------------------------------------
Initial Filing Deadline......... Within 10 days Within five days QIIs & Exempt QIIs & Exempt
after acquiring after acquiring Investors: 45 Investors: Five
beneficial beneficial days after business days
ownership of more ownership of more calendar year-end after month-end
than 5% or losing than 5% or losing in which in which
eligibility to eligibility to beneficial beneficial
file on Schedule file on Schedule ownership exceeds ownership exceeds
13G. Rules 13d- 13G. Rules 13d- 5%. Rules 13d- 5%. Rules 13d-
1(a), (e), (f) 1(a), (e), (f) 1(b) and (d). 1(b) and (d).
and (g). and (g).
Passive Investors: Passive Investors:
Within 10 days Within five days
after acquiring after acquiring
beneficial beneficial
ownership of more ownership of more
than 5%. Rule 13d- than 5%. Rule 13d-
1(c). 1(c).
Amendment Triggering Event...... Material change in No amendment All Schedule 13G All Schedule 13G
the facts set proposed--materia Filers: Any Filers: Material
forth in the l change in the change in the change in the
previous Schedule facts set forth information information
13D. Rule 13d- in the previous previously previously
2(a). Schedule 13D). reported on reported on
Rule 13d-2(a). Schedule 13G. Schedule 13G.
Rule 13d-2(b). Rule 13d-2(b).
QIIs & Passive QIIs & Passive
Investors: Upon Investors: No
exceeding 10% amendment
beneficial proposed--upon
ownership or a 5% exceeding 10%
increase or beneficial
decrease in ownership or a 5%
beneficial increase or
ownership. Rules decrease in
13d-2(c) and (d). beneficial
ownership. Rules
13d-2(c) and (d).
Amendment Filing Deadline....... Promptly after the Within one All Schedule 13G All Schedule 13G
triggering event. business day Filers: 45 days Filers: Five
Rule 13d-2(a). after the after calendar business days
triggering event. year-end in which after month-end
Rule 13d-2(a). any change in which a
occurred. Rule material change
13d-2(b). occurred. Rule
13d-2(b).
QIIs: 10 days QIIs: Five days
after month-end after exceeding
in which 10% beneficial
beneficial ownership or a 5%
ownership increase or
exceeded 10% or decrease in
there was, as of beneficial
the month-end, a ownership. Rule
5% increase or 13d-2(c).
decrease in
beneficial
ownership. Rule
13d-2(c).
Passive Investors: Passive Investors:
Promptly after One business day
exceeding 10% after exceeding
beneficial 10% beneficial
ownership or a 5% ownership or a 5%
increase or increase or
decrease in decrease in
beneficial beneficial
ownership. Rule ownership. Rule
13d-2(d). 13d-2(d).
Filing ``Cut-Off'' Time......... 5:30 p.m. eastern 10 p.m. eastern All Schedule 13G All Schedule 13G
time. Rule time. Rule Filers: 5:30 p.m. Filers: 10 p.m.
13(a)(2) of 13(a)(4) of eastern time. eastern time.
Regulation S-T. Regulation S-T. Rule 13(a)(2) of Rule 13(a)(4) of
Regulation S-T. Regulation S-T.
----------------------------------------------------------------------------------------------------------------

We also are proposing to add new paragraph (e) to Rule 13d-3 to
deem holders of certain cash-settled derivative securities as
beneficial owners of the reference covered class. Holders of derivative
securities settled exclusively in cash do not have enforceable rights
or any other entitlements with respect to the reference security under
the terms of the agreement governing the derivative. Under certain
circumstances described more fully below, however, holders of such
derivative securities may have both the incentive and ability to
influence or control the issuer of the reference securities.
Accordingly, the proposed amendment would ``deem'' holders of such
derivative securities to beneficially own the reference securities just
as if they held such securities directly.
The new means of determining who is a beneficial owner proposed in
Rule 13d-3(e) would be applied separately from, and in addition to,
Rules 13d-3(a) and (b), which provisions may, depending upon the facts
and circumstances, apply independently from proposed Rule 13d-3(e) to
persons who purchase or sell cash-settled derivatives. The application
of proposed Rule 13d-3(e) would be limited to those persons who hold
cash-settled derivatives in the context of changing or influencing
control of the issuer of the reference security. By contrast, security-
based swaps, as defined by Exchange Act Section 3(a)(68) and the rules
and regulations thereunder, would not be included among the derivative
securities covered by proposed Rule 13d-3(e).
We are proposing amendments that would align the text of Rule 13d-
5, as applicable to two or more persons who act as a group, with the
statutory language in Sections 13(d)(3) and (g)(3) of the Exchange
Act.\10\ By conforming the rule text to Sections 13(d)(3) and 13(g)(3),
the proposed amendments to Rule 13d-5 are intended to remove the
potential implication that an express or implied agreement among group
members is a necessary precondition to the formation of a group under
those provisions of the Exchange Act and, by extension, Regulation 13D-
G.\11\ In connection with those proposed amendments, we also are
proposing to add a new provision in Rule 13d-5 that would affirm that
if a person, in advance of filing a Schedule 13D, discloses to any
other person that such filing will be made and such other person
acquires securities in the covered class for which the Schedule

[[Page 13849]]

13D will be filed, then those persons are deemed to have formed a group
within the meaning of Section 13(d)(3).
---------------------------------------------------------------------------

\10\ See 15 U.S.C. 78m(d)(3) and (g)(3) (``When two or more
persons act as a . . . group for the purpose of acquiring, holding,
or disposing of securities of an issuer, such . . . group shall be
deemed a `person' for the purposes of this subsection.''). The
determination of whether two or more persons act as a group under
these statutory provisions depends upon the particular facts and
circumstances and may vary on a case-by-case basis.
\11\ Further, to reinforce that Rule 13d-5, which is currently
titled ``Acquisition of securities,'' is intended to set forth the
circumstances under which an acquisition is deemed to occur for
purposes of Section 13(d)(1) and Rule 13d-1, we also propose to
delete Rule 13d-5(b)(2)--which provides that, under certain
conditions, a group shall not be deemed to have made an acquisition
if persons take concerted action to make purchases in a covered
class directly from an issuer--and to redesignate it as new Rule
13d-6(b). Rule 13d-6, titled ``Exemption of certain acquisitions,''
exempts certain acquisitions from the scope of Section 13(d).
Because Rule 13d-5(b)(2) operates as the equivalent of an exemption,
moving Rule 13d-5(b)(2) to Rule 13d-6 would harmonize the subject
matter of those rules.
---------------------------------------------------------------------------

In addition, we are proposing amendments that would revise Rule
13d-6 to set forth additional exemptions from Sections 13(d) and (g).
Specifically, new Rule 13d-6(c) would set forth the circumstances under
which two or more persons may communicate and consult with one another
and engage with an issuer without concern that they will be subject to
regulation as a group with respect to the issuer's equity securities.
New Rule 13d-6(d) would set forth the circumstances under which two or
more persons may enter into an agreement governing a derivative
security in the ordinary course of business without concern that they
will become subject to regulation as a group with respect to the
derivative's reference equity securities. These two exemptions are
designed to provide greater certainty regarding the application of
Sections 13(d)(3) and (g)(3), while ensuring that the proposed
amendments to Rules 13d-3 and 13d-5 will not have a chilling effect on
shareholder communications or engagement or impair certain financial
institutions' capacity to execute strictly commercial transactions in
the ordinary course of their business.
In addition, we are proposing amendments that would revise Schedule
13D to clarify the disclosure requirements with respect to derivative
securities held by a person reporting on that schedule. Specifically,
we are proposing to amend Item 6 to Schedule 13D, codified at Rule 13d-
101, 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. This proposed amendment is intended to
eliminate any ambiguity regarding the scope of the disclosure
obligations of Item 6 of Schedule 13D as to derivative securities,
including with respect to derivatives not originating with the issuer,
such as cash-settled options not offered or sold by the issuer and
security-based swaps.
Finally, we are proposing to require that Schedules 13D and 13G be
filed using a structured, machine-readable data language. Specifically,
we are proposing to require that all disclosures, including
quantitative disclosures, textual narratives, and identification
checkboxes, on Schedules 13D and 13G to be filed using an XML-based
language to make it easier for investors and markets to access, compile
and analyze information that is disclosed on Schedules 13D and 13G.
Only the exhibits to Schedules 13D and 13G would remain unstructured.
We invite and encourage interested parties to submit comments on
any aspect of the proposed rule amendments. When commenting, please
include the reasoning in support of your position or recommendation and
provide any supporting documentation or data.

II. Discussion of the Proposed Amendments

A. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and 201 of
Regulation S-T To Revise Filing Deadlines and Filing Date Assignment

We are proposing a series of amendments that would revise the
deadlines for filing the initial and amended beneficial ownership
reports on Schedules 13D and 13G and expanding the timeframe within a
given business day in which such filings may be timely made.
Specifically, we are proposing amendments to the following rules:
<bullet> Rule 13d-1(a) to shorten the filing deadline for the
initial Schedule 13D;
<bullet> Rules 13d-1(e), (f), and (g) to shorten the filing
deadlines for the initial Schedule 13D for certain persons who forfeit
their eligibility to report on Schedule 13G in lieu of Schedule 13D;
<bullet> Rules 13d-1(b), (c), and (d) to shorten the filing
deadlines for the initial Schedule 13G;
<bullet> Rules 13d-2(a) and (b) to revise the filing deadline for
amendments to Schedule 13D and Schedule 13G, respectively, and to align
the legal standard that dictates when amendments to Schedule 13G are
required with the relevant statutory provision;
<bullet> Rules 13d-2(c) and (d) to revise the filing deadlines for
certain other amendments to Schedule 13G; and
<bullet> Rules 13(a) and 201(a) of Regulation S-T to revise the
time by which Schedule 13D and 13G filings, including amendments
thereto, must be submitted on a given business day in order to be
deemed to have been filed on the same business day and to make a
temporary hardship exemption unavailable to those filings.
These proposed amendments are discussed in more detail below.
1. Rule 13d-1(a)
a. Background
Section 13(d)(1) of the Exchange Act requires a disclosure
statement to be filed ``within ten days after [an] acquisition [of more
than 5% of a covered class] or within such shorter time as the
Commission may establish by rule.'' \12\ Consistent with this
provision, Rule 13d-1(a) sets forth the 10-day filing deadline for the
initial Schedule 13D.\13\ Although the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (``Dodd-Frank Act'') amended
Section 13(d)(1) to grant the Commission the authority to shorten the
deadline for filing the initial Schedule 13D,\14\ the 10-day deadline
has not been updated since it was enacted more than 50 years ago.\15\
---------------------------------------------------------------------------

\12\ 15 U.S.C. 78m(d)(1).
\13\ 17 CFR 240.13d-1(a) (requiring that a Schedule 13D be filed
``within 10 days after the acquisition'' of beneficial ownership of
more than 5% of a covered class).
\14\ Public Law 111-203, 124 Stat. 1900 929R(a)(1)(A) (2010).
\15\ Section 13(d)(1) of the Exchange Act was enacted by the
Ninetieth Congress in 1968 through the approval of Senate Bill 510.
---------------------------------------------------------------------------

Technological advances since 1968, such as the ability to submit
filings electronically through the Commission's Electronic Data
Gathering, Analysis and Retrieval (``EDGAR'') system and the use of
modern information technology in today's financial markets, have led to
calls for a reassessment of the 10-day initial filing deadline,\16\
while others disagree that such advances warrant any change to the
deadline.\17\ For example,

[[Page 13850]]

the Commission currently requires all Schedule 13D filings to be
submitted electronically through its EDGAR system.\18\ Mandated
electronic submissions relieve filers of the need to arrange for
delivery in-person or through the U.S. mails. Furthermore, given the
advances in the information technologies used by market professionals
today, less time is needed to compile the necessary data and prepare
and transmit the Schedule 13D to the Commission than was required in
1968.
---------------------------------------------------------------------------

\16\ See, e.g., Leo E. Strine, Jr., Who Bleeds When the Wolves
Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our
Strange Corporate Governance System, 126 Yale L.J. 1870, 1895, 1960-
61 (2017) (describing the ``disclosure regime under Section 13 of
the Securities Exchange Act'' as ``antiquated'' and stating that
``[i]t seems entirely clear to me that the idea of Section 13 was
that an investor should come public as soon as reasonably possible
after hitting the 5% threshold and that the reporting deadline was
due to what it took to type up, proof, and deliver to Washington the
required filing in 1968, when word processors and electronic filing
with a button push did not exist''); David Benoit, Congress Asked to
Act on Activist Investor Disclosures, The Wall Street Journal (Apr.
15, 2015), <a href="https://www.wsj.com/articles/congress-asked-to-act-on-activist-investor-disclosures-1429107089">https://www.wsj.com/articles/congress-asked-to-act-on-activist-investor-disclosures-1429107089</a> (noting that Citizens for
Responsibility and Ethics in Washington, the Government
Accountability Project and New Rules for Global Finance sent a
letter to members of Congress requesting that the Schedule 13D
filing deadline be shortened from 10 days to one day); Adam O.
Emmerich et al., Fair Markets and Fair Disclosure: Some Thoughts on
the Law and Economics of Blockholder Disclosure, and the Use and
Abuse of Shareholder Power, 3 Harv. Bus. L. Rev. 135, 143 (2013)
(noting that the 10-day Schedule 13D filing deadline reflected
``commercial and technological realities that existed in 1968,
[which] would have included the time required to mail the Schedule
13D to the SEC's office''); letter from Wachtell, Lipton, Rosen &
Katz to Elizabeth M. Murphy, Sec'y, U.S. Sec. & Exch. Comm'n (Mar.
7, 2011) (``Wachtell Petition'') at 1-7, available at <a href="http://www.sec.gov/rules/petitions/2011/petn4-624.pdf">http://www.sec.gov/rules/petitions/2011/petn4-624.pdf</a> (petitioning the
Commission to propose amendments to the beneficial ownership
reporting rules to, among other things, shorten the Schedule 13D
filing deadline from 10 days to one business day).
\17\ See, e.g., Lucian A. Bebchuk et al., Pre-Disclosure
Accumulations by Activist Investors: Evidence and Policy, 39 J.
Corp. L. 1, 14-17 (2013) (noting that the authors ``are not familiar
. . . with any research establishing [the] claim'' that
technological developments and changes in the capital markets since
1968 have rendered the 10-day Schedule 13D filing deadline
obsolete); Ronald Gilson and Jeffery Gordon, The Agency Costs of
Agency Capitalism: Activist Investors and the Revaluation of
Governance Rights, 113 Colum. L. Rev. 863, 904 (2013) (explaining
that shortening the deadline would ``reduce the economic stake that
an activist shareholder can accumulate before mandatory disclosure
of its holding drives up the price of the target company's stock''
which would cause the ``activist sector [to] shrink, fewer firms
[to] be identified as targets for strategic initiatives, and the
activists [to] reduce costly campaign efforts''); Lucian A. Bebchuk
and Robert J. Jackson Jr., The Law and Economics of Blockholder
Disclosure, 2 Harv. Bus. L. Rev. 39, 44-47 (2012) (noting that
Schedule 13D's 10-day filing deadline ``reflects a careful balance
that Congress struck, after extensive debate, between the need to
provide information to investors and the importance of preserving
the governance benefits associated with outside blockholders'').
\18\ In mandating that all Schedules 13D and 13G be filed
electronically, the Commission reasoned that such a transition was
necessary to facilitate ``more rapid dissemination of, and easier
access to, financial and other material information . . . than under
our current paper filing system'' while also citing to ``increased
efficiencies in the filing process, which will significantly reduce
the filing time required under traditional methods of paper
delivery.'' See Rulemaking for EDGAR System, Release No. 34-35113
(Dec. 19, 1994) [59 FR 67752 (Dec. 30, 1994)]; Mandated EDGAR Filing
for Foreign Issuers, Release No. 34-45922 (May 14, 2002) [67 FR
36678 (May 24, 2002)].
---------------------------------------------------------------------------

The 10-day filing deadline raises concerns that material
information about potential change of control transactions is not being
disseminated to the public in a manner that would be considered timely
in today's financial markets. The delay in reporting this material
information contributes to information asymmetries that could harm
investors.\19\ In enacting Section 13(d), including its original
mandate of a 10-day filing deadline in 1968, Congress considered the
need to strike an appropriate balance between, on the one hand,
providing adequate disclosures to investors and, on the other hand, not
unduly burdening those engaging in change of control transactions.\20\
In 2010, Congress reassessed the 10-day deadline established in 1968
and subsequently amended Section 13(d) to authorize the Commission to
shorten the 10-day deadline.\21\ This grant of statutory authority by
Congress to establish a shorter deadline clearly indicates that the
current 10-day deadline is not immutable and that the Commission is
empowered to shorten that deadline to address the needs of today's
investors and other market participants, particularly in light of the
technological advancements and other developments in the financial
markets that have occurred since 1968.\22\ In reassessing whether or
not the current 10-day deadline still serves the primary purposes of
Section 13(d), which are to provide information to the public and the
subject issuer about accumulations of a covered class by persons who
had the potential to change or influence control of such issuer \23\
and to regulate rapid accumulations of beneficial ownership that
occurred within a short period of time,\24\ we have determined that an
amendment to Rule 13d-1(a) is needed to adequately support those
regulatory objectives.
---------------------------------------------------------------------------

\19\ See, e.g., John C. Coffee, Jr. and Darius Palia, The Wolf
at the Door: The Impact of Hedge Fund Activism on Corporate
Governance, 41 J. Corp. L. 545, 597 (2016) (``[T]he gains that
activists make in trading on asymmetric information--before the
Schedule 13D's filing--come at the expense of selling shareholders.
. . . Disclosure that is delayed ten days enables activists to
profit from trading on asymmetric information over that period . . .
.''); Adam O. Emmerich et al., supra note 17, at 142-46 (``[N]othing
in the words or legislative history of the Williams Act suggests
that the ten-day disclosure window established in 1968 was designed
to allow activists to accumulate large stakes at discounted prices,
unbeknownst to and to the detriment of counterparties and the
market. To the contrary, the purpose of the Williams Act was to
promptly arm market participants with information concerning
potential changes in corporate control in order to allow them to
make more informed investment decisions. The stealth accumulations
at below-market prices . . . transfer value from public investors to
activists . . . .''); Wachtell Petition, supra note 17, at 3
(``[T]he ten-day [Schedule 13D] reporting lag leaves a substantial
gap after the reporting threshold has been crossed during which the
market is deprived of material information and creates incentives
for abusive tactics on the part of aggressive investor prior to
making a filing.''). But see, e.g., Ronald J. Gilson and Jeffrey N.
Gordon, The Agency Costs of Agency Capitalism: Activist Investors
and the Revaluation of Governance Rights, 113 Colum. L. Rev. 863,
907-09 (2013) (``A shareholder's decision to sell results either
from liquidity needs or the shareholder's reservation price for the
security in question. Any asymmetry of information involved in the
transaction arises from the activist's private information about its
own intentions, which may include a forecast as to the likely target
firm response. Why does the selling shareholder have an entitlement
to share in the value of information created by the analysis of
other investors?''); Lucian A. Bebchuk et al., supra note 17, at 17-
19 (contending that shortening the Schedule 13D filing deadline
``would carry significant costs for public-company shareholders''
because ``requiring activist investors to disclose their ownership
in public companies more quickly will reduce these investors'
returns--thereby reducing the incidence and magnitude of outside
blockholdings in large public companies''); Lucian A. Bebchuk and
Robert J. Jackson Jr., supra note 17, at 47-51 (describing the
``substantial body of empirical evidence that is consistent with the
view that outside blockholders improve corporate governance and
benefit public investors'' and noting that shortening the Schedule
13D filing deadline could ``reduce the returns to outside
shareholders considering acquiring a block and, in turn, . . .
result in a reduction in the incidence and size of outside
blocks'').
\20\ See, e.g., Full Disclosure of Corporate Equity Ownership
and in Corporate Takeover Bids: Hearing on S. 510 Before the
Subcomm. on Securities of the S. Comm. on Banking and Currency, 90th
Cong. 1 (1967) (statement of Manuel F. Cohen, Chairman, Securities
and Exchange Commission) (``It must be emphasized again that in
establishing requirements which will make this important information
available to stockholders, we must be careful not to tip the scales
to favor either incumbent management or those who would seek to oust
them. We believe that the provisions of the present bill . . .
reflect an appropriate balance among competing interests which, at
the same time, will fulfill the need of public stockholders to be
fully informed about the control and potential control of the
company in which they have invested.''); H.R. Rep. No. 1711, at 4
(1968) (``The bill avoids tipping the balance of regulation either
in favor of management or in favor of the person making the takeover
bid. It is designed to require full and fair disclosure for the
benefit of investors while at the same time providing the offeror
and management equal opportunity to fairly present their case.'');
S. Rep. No. 550, at 3 (1968) (same); see also infra note 35 and
accompanying text.
\21\ See supra note 14 and accompanying text.
\22\ At the same time, however, we recognize significant state
law changes have occurred since the enactment of the Williams Act
that have resulted in legal impediments being imposed upon
blockholders in the market for corporate control. See Lucian A.
Bebchuk and Robert J. Jackson Jr. supra note 17, at n.54 and
accompanying text. These state law impediments have decreased the
incidence of hostile takeover bids and, as a result, ``active
outside blockholders filing a Schedule 13D are commonly not expected
to seek to acquire control, but rather to monitor and engage with
management and fellow shareholders.'' Id. at 56.
\23\ See Reporting of Beneficial Ownership in Publicly-Held
Companies, Release No. 34-26598 (Mar. 14, 1989) [54 FR 10552 at text
accompanying n.20 (Mar. 14, 1989)] (``Section 13(d) was intended to
provide information to the public and the subject company about
accumulations of its equity securities in the hands of persons who
then would have the potential to change or influence control of the
issuer.'') (citing S. Rep. No. 550, 90th Cong., 1st Sess. 7 (1967);
H.R. Rep. No. 1711, 90th Cong., 2nd Sess. 8 (1968); Hearings on S.
510 before the Subcomm. on Securities of the Senate Comm. on Banking
and Currency, 90th Cong., 1st Sess. (1967)).
\24\ H.R. Rep. No. 90-1711 (1968) (``The purpose of section
13(d) is to require disclosure of information by persons who have
acquired a substantial interest, or increased their interest in the
equity securities of a company by a substantial amount, within a
relatively short period of time.''); see also Filing and Disclosure
Requirements Relating to Beneficial Ownership, Release No. 34-17353
(Dec. 4, 1980) [45 FR 81556 at text accompanying n.5 (Dec. 11,
1980)] (``The legislative history of [Section 13(d)] indicates that
it was intended to provide information to the public and the
affected issuer about rapid accumulations of its equity securities
by persons who would then have the potential to change or influence
control of the issuer.'') (citing S. Rep. No. 550, 90th Cong., 1st
Sess. 7 (1967); Hearings on S.510 before the Subcomm. on Securities
of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess.
(1967)).

---------------------------------------------------------------------------

[[Page 13851]]

b. Proposed Amendments
We believe the 10-day filing deadline for the initial Schedule 13D
filing should be revised in light of advances in technology and
developments in the financial markets. Our proposal to shorten the
initial filing deadline for Schedule 13D is consistent with previous
Congressional and Commission efforts to accelerate public disclosures
of material information to the market.\25\ For example, when the
Commission accelerated the deadlines for issuers to submit their
periodic reports, it reasoned that ``[s]ignificant technological
advances over the last three decades have both increased the market's
demand for more timely corporate disclosure and the ability of
companies to capture, process and disseminate this information.'' \26\
---------------------------------------------------------------------------

\25\ For example, the Sarbanes-Oxley Act of 2002 amended Section
16(a) to require that change of beneficial ownership reports under
Section 16(a) of Exchange Act be filed by officers, directors and
beneficial owners of more than 10% of a covered class ``before the
end of the second business day following the day on which the
subject transaction has been executed.'' On August 27, 2002, the
Commission adopted amendments to implement the accelerated deadline
for Form 4 filings. See Ownership Reports and Trading by Officers,
Directors and Principal Security Holders, Release No. 34-46421 (Aug.
27, 2002) [67 FR 56461 (Sept. 3, 2002)]. On March 16, 2004, the
Commission amended Form 8-K to generally require that such filings
be made within four business days of a triggering event. In adopting
the accelerated timeline, the Commission explained the amended
requirement ``should enhance investor confidence in the financial
markets.'' Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date, Release No. 34-49424 (Mar. 16, 2004)
[69 FR 15593 at 15611 (Mar. 25, 2004)]. The Commission further
explained that ``[t]he requirement of enhanced, timely disclosure
should raise investors' expectations regarding the amount and timing
of information that reporting companies must make available to the
public'' and that ``[c]onfidence in the expectation of such enhanced
disclosure should provide more certainty to those investors that
they are making investment decisions in a more transparent market,
which should reduce market volatility as a result of uncertainty of
the availability of accurate timely information about public
companies.'' Id.
\26\ Acceleration of Periodic Report Filing Dates and Disclosure
Concerning website Access to Reports, Release No. 34-46464 (Sept. 5,
2002) [67 FR 58479 (Sept. 16, 2002)]. We recognize that these
accelerated deadlines applied to periodic filings made by issuers,
whereas Sections 13(d) and (g) relate to filings made by investors.
We also recognize that the acceleration of these deadlines was
prompted, in part, by Section 409 of the Sarbanes-Oxley Act of 2002,
which ``added Section 13(l) of the Exchange Act . . . [to] require[
] disclosure on a rapid and current basis of such additional
information concerning material changes in the financial condition
or operations of the issuer,'' id. at n.15 and accompanying text
(emphasis added), whereas no such ``rapid and current'' language
exists in Sections 13(d) and 13(g). Nonetheless, the technological
advances that have increased both the market's demand for more
timely disclosure and the ability of issuers to file more rapidly
are equally applicable to the information disclosed on Schedule 13D
and available to investors making Schedule 13D filings. For example,
Congress recognized the market's demand for more timely disclosure
of non-issuer filings by accelerating deadline for Section 16
filings in the Sarbanes-Oxley Act. See supra note 25. As such, we
believe that these technological advances also support accelerating
the initial Schedule 13D filing deadline.
---------------------------------------------------------------------------

The Commission has long recognized the benefits of more expedient
reporting, stating, for example, that ``a lengthy delay before . . .
information becomes available makes the information less valuable to
investors.'' \27\ Nonetheless, the deadline for filing an initial
Schedule 13D has remained unchanged for over 50 years.\28\ We continue
to appreciate the need for a balance to be struck between the
requirement that material information be timely disseminated and the
competing interest that undue burdens not be imposed in the change of
control context.\29\ We recognize the chilling effect that a shortening
of the initial Schedule 13D filing deadline could have on a
shareholder's ability and incentive to effect changes at companies that
may benefit all shareholders, particularly where the shortened deadline
may increase the costs and reduce the incentives for those shareholders
attempting such change of control efforts.\30\ We do not believe,
however, that a shortening of the deadline would unduly disrupt that
balance, as many Schedule 13D filers currently do not avail themselves
of the full 10-day filing period.\31\ In recognition of the need to
strike the appropriate balance between these interests, however, we
also solicit public comment on this point in Section III.F below.
---------------------------------------------------------------------------

\27\ Id.; see also H.R. Rep. 90-550 (1967) (``The persons
seeking control, however, have information about themselves and
about their plans which, if known to investors, might substantially
change the assumptions on which the market price is based. The bill
is designed to make relevant facts known so that shareholders have a
fair opportunity to make their decision.'').
\28\ Although the initial Schedule 13D deadline has not been
changed, the idea of shortening the deadline for beneficial
ownership reports has been previously recommended. For example,
then-Chairman David S. Ruder recommended to Congress that the filing
deadline for an initial beneficial ownership report be reduced from
ten days to five business days and that the filing person be
prohibited from acquiring additional securities until the filing was
made. See Statement of David S. Ruder, Chairman of the Securities
and Exchange Commission, Before the House Subcommittee on
Telecommunications and Finance, Sept. 17, 1987; Statement of Charles
C. Cox, Acting Chairman of the Securities and Exchange Commission,
Before the Senate Committee on Banking, Housing and Urban Affairs,
June 23, 1987 (``[The] Commission could also support legislation to
require that a Schedule 13D be filed within five business days of
crossing the 5 percent threshold, and that a prohibition on further
purchases be imposed until the filing requirement is satisfied.'').
\29\ See supra note 20 and accompanying text; see also 113 Cong.
Rec. 24,664 (1967) (noting that ``takeover bids should not be
discouraged, since they often serve a useful purpose by providing a
check on entrenched but inefficient management'') (statement of Sen.
Harrison A. Williams, Jr.).
\30\ Academic research indicates that large blockholders may
improve the share price and the corporate governance of the
companies in which they invest, and these benefits are enjoyed by
all of the company's shareholders. See infra Section III.C.b.i. This
research also suggests that if the initial Schedule 13D filing
deadline is shortened, it could reduce the profitability of such
investments to large blockholders, making them less inclined to make
those investments or engage with the companies in ways that produce
such share price and corporate governance benefits. Id.
\31\ See infra notes 203-205 and accompanying text (noting that
22.97% of the initial Schedule 13D filings in the data set were
filed on the 10th day).
---------------------------------------------------------------------------

As noted above, Rule 13d-1(a) currently requires the initial
Schedule 13D to be filed within 10 days after the date on which a
person acquires beneficial ownership of more than 5% of a covered
class.\32\ We are proposing to amend Rule 13d-1(a) to require a
Schedule 13D to be filed within five days after the date of such
acquisition. For purposes of determining the filing deadline under this
proposed amendment, the Commission must receive the filing on the fifth
day after the date of the acquisition in order for the filing to be
considered timely. Under the current rules, the Commission would have
to receive that filing on or before 5:30 p.m. eastern time on the due
date.\33\ As described in Section II.A.6

[[Page 13852]]

below, however, we also are proposing to extend that cut-off time to 10
p.m. eastern time for Schedule 13D and 13G filings, including
amendments thereto.\34\
---------------------------------------------------------------------------

\32\ Failure to comply with this deadline, as well as other
deadlines for beneficial ownership filings, could lead to
significant penalties. Under Section 21 of the Exchange Act, the
Commission has the authority to investigate and enforce violations
of Section 13(d)(1) and Rule 13d-1(a), and may seek to impose
various remedies for late filings, such as injunctive relief, cease-
and-desist orders or civil monetary penalties. The Commission also
may assert and refer criminal violations for prosecutions under
Section 32(a) of the Exchange Act. Importantly, no state of mind
requirement exists for violations of Section 13(d)(1) and
corresponding Rule 13d-1(a). See SEC v. Levy, 706 F. Supp. 61, 63-69
(D.D.C. 1989) (holding a defendant liable notwithstanding the
defendant's assertion that his attorney ``misinformed defendant
about his obligation to disclose'' information on Schedule 13D
because scienter is not an element of such violations). In addition,
a Schedule 13D filing obligation is not dependent on the investor
intending to gain control of the company, but instead is based on a
numerical beneficial ownership threshold. See SEC v. Savoy Indus.,
Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978) (``Indeed, the plain
language of section 13(d)(1) gives no hint that intentional conduct
need be found, but rather, appears to place a simple and affirmative
duty of reporting on certain persons. The legislative history
confirms that Congress was concerned with providing disclosure to
investors, and not merely with protecting them from fraudulent
conduct.''); see also Oppenheimer & Co., Inc., 47 SEC 286, 1980 WL
26901, at *1-2 (May 19, 1980) (``We have previously held that the
failure to make a required report, even though inadvertent,
constitutes a willful violation.'').
\33\ See Rule 13 of Regulation S-T, titled ``Date of filing;
adjustment of filing date.'' 17 CFR 232.13. Rule 13(a)(2) provides
that ``all filings submitted by direct transmission commencing on or
before 5:30 p.m. [eastern time] shall be deemed filed on the same
business day, and all filings submitted by direct transmission
commencing after 5:30 p.m. [eastern time] shall be deemed filed as
of the next business day.'' Id.
\34\ See infra Section II.A.6.
---------------------------------------------------------------------------

In proposing to establish new timeframes for filing reports, we are
mindful of the need to balance the market's demand for timely
information against the administrative burden placed upon a filer to
adequately and accurately prepare that information. We also recognize
that when enacting Section 13(d)(1), Congress considered the interests
of both issuers of securities and the large shareholders who sought to
exert influence or control over issuers, and took an even-handed
approach.\35\ The proposed five-day deadline reflects our attempt to
maintain that balance and similarly undertake an even-handed approach,
especially when compared with considerably shorter initial filing
deadlines some parties have recommended.\36\ However, in light of the
technological advances and the rapid pace with which trading activities
and large accumulations of beneficial ownership can occur in the
financial markets today as compared to when the deadline was enacted in
1968, we are concerned that the current delay in reporting market-
moving information on Schedule 13D raises investor protection
concerns.\37\ Under current Rule 13d-1(a), large shareholders may
acquire more shares without contemporaneously disclosing their
beneficial ownership during the 10-day period that follows the date
that a Schedule 13D filing obligation arises. Although the 10-day
period may facilitate opportunities for certain shareholders to acquire
stakes large enough to incentivize them to engage in corporate activism
that could benefit all shareholders,\38\ the informational imbalance
between a buyer and seller during that period may result in
transactions being consummated based on mispriced securities.\39\
---------------------------------------------------------------------------

\35\ In discussing the Williams Act, one Senator stated that
``the committee has carefully weighed both the advantages and
disadvantages to the public of the cash tender offer. We have taken
extreme care to avoid tipping the scales either in favor of
management or in favor of the person making the takeover bids. S.
510 is designed solely to require full and fair disclosure for the
benefit of investors.'' 113 Cong. Rec. S12557 (daily ed. Aug. 30,
1967) (statement of Sen. Harrison A. Williams, Jr.). The Senator
further stated that ``[t]he bill will at the same time provide the
offeror and management with equal opportunity to present their
case.'' Id.; see also Full Disclosure of Corporate Equity Ownership
and in Corporate Takeover Bids: Hearing on S. 510 Before the
Subcomm. on Securities of the S. Comm. on Banking and Currency, 90th
Cong. 1 (1967) (statement of Manuel F. Cohen, Chairman, Securities
and Exchange Commission) (``But the principal point is that we are
not concerned with assisting or hurting either side. We are
concerned with the investor who today is just a pawn in a form of
industrial warfare.'').
\36\ See, e.g., supra note 17.
\37\ The Commission has long recognized that additional
purchases made after a filing obligation arises under Section
13(d)(1) and corresponding Rule 13d-1(a) constitutes a ``disclosure
gap [that] may deprive security holders of a fair opportunity to
adjust their evaluation of the securities of a company with respect
to [a] potential change in control . . . .'' Report of the
Securities and Exchange Commission on Beneficial Ownership Reporting
Requirements pursuant to Section 13(h) of the Securities Exchange
Act of 1934 (June 27, 1980); see also supra note 17. Following a
review of the effectiveness of Section 13(d) conducted more than
four decades ago, the Commission evaluated the then ``increasingly
prevalent practice of [large blockholders] acquiring additional
securities of [a covered] class during the 10-day period after the
acquisition which results in the beneficial ownership of more than 5
percent and before the disclosure statement is required to be, and
normally is, filed . . . .'' Securities and Exchange Commission
Report on Tender Offer Laws, Printed for the use of the Committee on
Banking, Housing and Urban Affairs--United States Senate (Mar.
1980). The Commission provided multiple illustrative examples in
which ``the existing notification system often does not provide
shareholders with relevant information in a timely manner.'' Id.
\38\ See supra notes 17 and 19.
\39\ H.R. Rep. 90-1711 (1968) (``But where no information is
available about persons seeking control, or their plans, the
shareholder is forced to make a decision on the basis of a market
price which reflects evaluation of the company based on the
assumption that the present management and its policies will
continue.'').
---------------------------------------------------------------------------

Congress enacted Section 13(d) as a means of requiring timely
disclosures needed for informed investment decisions that ultimately
could contribute to the accurate valuation of securities.\40\ The
proposed shortening of the initial Schedule 13D filing deadline is
consistent with those legislative objectives while holding the
potential to benefit investors and improve the efficiency of U.S.
capital markets. Market-moving information, such as the accumulation of
a significant equity stake,\41\ would be made available more quickly,
improving opportunities for more efficient and more accurate price
discovery.\42\ In addition to more closely aligning the initial
Schedule 13D filing deadline with the reporting deadline on Form 8-K
for issuers and Form 4 for officers, directors and beneficial owners of
more than 10% of a covered class, a shorter filing deadline for the
initial Schedule 13D also would be consistent with the filing deadlines
for similar beneficial ownership reports in foreign jurisdictions.\43\
The increase in transparency and corresponding assurance given to
investors that transactions are not being made based on mispriced
securities caused by a prolonged lag in the dissemination of market-
moving information should increase investor confidence. By increasing
the certainty offered to shareholders that their trades are not being
made on the basis of incomplete or outdated information, the proposed
amendment to Rule 13d-1(a) could in turn enhance market efficiency and
liquidity.
---------------------------------------------------------------------------

\40\ See GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d. Cir.
1971), cert. denied, 406 U.S. 910 (1972) (noting that without prompt
disclosure, ``investors cannot assess the potential for changes in
corporate control and adequately evaluate the company's worth'').
\41\ The materiality of such information is supported by
academic literature indicating that economically significant price
changes occur in response to news about changes in corporate
control, including the filing of a Schedule 13D. See infra note 215
and accompanying text.
\42\ See Takeover Bids: Hearing on H.R. 14475 and S. 510 Before
the H. Subcomm. on Commerce and Finance of the H. Comm. on
Interstate and Foreign Commerce, 90th Cong. 10 (1968) (statement of
Manuel F. Cohen, Chairman, Securities and Exchange Commission)
(``Now it is argued by some that the basic factor which influences
shareholders to accept a tender offer is the adequacy of the price.
But, I might ask, how can an investor evaluate the adequacy of the
price if he cannot assess the possible impact of a change in
control? Certainly without such information he cannot judge its
adequacy by the current or recent market price. That price
presumably reflects the assumption that the company's present
business, control and management will continue. If that assumption
is changed, is it not likely that the market price might change?'').
The potential gains in market efficiency and price discovery that
could be achieved with a shorter initial reporting deadline,
however, could be offset by the costs imposed upon shareholders who
seek to influence or change management. See supra note 38 and
accompanying text.
\43\ For example, Australia requires disclosure of any position
of 5% or more within two business days if any transaction affects or
is likely to affect control or potential control of the issuer. See
Corporations Act 2001 (Cth) sec. 671B (Austl.). The United Kingdom
imposes a two-trading-day deadline for disclosure of acquisitions in
excess of 3% of an issuer's securities. See Disclosure Rules and
Transparency Rules, Ch. 5 (U.K.). Germany requires a report
``immediately,'' but in no event later than four days after crossing
the acquisition threshold. See Securities Trading Act, Sept. 9,
1998, BGBL. I at 2708, as amended, pt. 5 (Ger.). Hong Kong
securities laws require a report within three business days of the
acquisition of a ``notifiable interest'' under the law. See Part XV
of the Securities and Futures Ordinance (promulgated by the
Securities and Futures Commission, effective Apr. 1, 2003) (H.K.).
This comparative analysis suggests that a shortened deadline is
workable based on the experience of these foreign jurisdictions. We
note, however, that this comparative analysis may be imperfect given
the relevant differences in the legal systems in the U.S. and these
foreign jurisdictions, including anti-takeover devices that are
legal under certain states' corporate laws (e.g., low-threshold
poison pills that are permitted under Delaware law) that may not be
legal in these foreign jurisdictions.

---------------------------------------------------------------------------

[[Page 13853]]

Request for Comment
1. Should we amend Rule 13d-1(a) as proposed?
2. How has the market for corporate control changed since the
enactment of the Williams Act? To the extent those changes are
significant, how should we consider them in our analysis of shortening
the reporting window?
3. Should we amend Rule 13d-1(a), but have the initial Schedule 13D
due within a different number of days than proposed (e.g., five
business days rather than five days) after the date of acquisition?
Should we use business days instead of days for purposes of the Rule
13d-1(a) deadline for the initial Schedule 13D filing?
4. Rather than shorten the deadline under Rule 13d-1(a) in all
instances, should we offer a tiered approach, such as maintaining the
10-day deadline for acquisitions of greater than 5% but no more than
10% while instituting a shorter deadline if beneficial ownership
exceeds 10%? Should a person who ``stands still'' (i.e., chooses to
make no further acquisitions of beneficial ownership) after crossing
the 5% threshold be subject to a longer filing deadline than those
persons who continue to make acquisitions after crossing the 5%
threshold? If so, how much extra time to file should such person be
given? In addition, if a tiered deadline is recommended, should any
limit be placed upon the amount that can be acquired during the day on
which the 5% threshold is crossed? If any acquisition limits should be
imposed on the day the 5% threshold is crossed under a scenario where
we move to adopt tiered deadlines, what should be the maximum amount
that a person could acquire and still be eligible for an extended
filing deadline?
5. Should the deadline for the initial Schedule 13D filing vary
based on a particular characteristic of the issuer (such as its market
capitalization or trading volume)? If so, please explain the
justification for why the deadline for reporting beneficial ownership
in certain types of issuers should be either shorter or longer based on
any such characteristic.
6. Would the costs associated with preparing and filing an initial
Schedule 13D within the proposed five-day deadline substantially differ
from current costs of filing, and if so, why?
7. Would the proposed amendments improve price discovery of a
covered class, and, in turn, reinforce investors' confidence in the
integrity of the capital markets?
8. Are there costs other than routine filing and preparation costs
that we should consider in setting the initial Schedule 13D filing
deadline, and if so, what are those costs and can they be quantified?
For example, would shortening the deadline necessarily limit the amount
of a covered class that a beneficial owner could acquire before the
initial Schedule 13D filing is due? If so, please identify such limit
or limitations. To the extent that any limit or limitations exist on
the amount of beneficial ownership in a covered class that can be
acquired on the same day on which the 5% reporting threshold is
crossed, how would any such limit or limitations impose actual or
anticipated costs upon shareholders in the covered class, including
those who would be acquiring reportable positions for the first time?
9. Other than administrative burden or liquidity concerns, what
other potential drawbacks should be considered in setting a new filing
deadline? For example, would there be observable decreases in
shareholder activism?
10. As a means of offsetting any incremental cost increases
associated with the proposed change, should we amend Schedule 13D,
codified at Rule 13d-101, to include pre-populated disclosure fields
under each line item disclosure requirement that reduce the amount of
narrative that the filer would be required to prepare and review? For
example, rather than requiring filers to describe any plans or
proposals that would result in the issuer undertaking an extraordinary
transaction (e.g., a sale or transfer of a material amount of assets of
the issuer or any of its subsidiaries), such a transaction type would
be listed along with a box that could be ``checked'' by the filer to
indicate the existence of any plan or proposal for the issuer to engage
in such a transaction.
11. Have any change of control transactions followed large
accumulations of beneficial ownership that occurred after the 5%
threshold was crossed but before the initial Schedule 13D was filed,
and if so, what were those transactions?
12. Is there evidence of shareholder harm that occurred as a result
of purchases made by a large shareholder after the 5% threshold was
crossed but before the Schedule 13D was filed? If so, please describe
the impact of such accumulations (including any quantifiable harms).
13. Have any corporate actions been prevented from occurring, or
been forced to occur, as a result of the current 10-day filing deadline
for an initial Schedule 13D? If so, what were those instances and how
did the delay in reporting interfere with or otherwise impact the
normal operation of the corporation? For example, were any issuers
coerced or pressured to execute a settlement agreement or undertake a
buyback of their securities as a direct consequence of the initially
undisclosed amount of a covered class acquired once the 5% threshold
was crossed? Aside from transactions that occur based upon an imbalance
of information, are there any other specific difficulties that arise
from information asymmetries in the days leading up to a Schedule 13D
filing?
14. Shares purchased during the 10-day window in advance of a
Schedule 13D filing are purchased from shareholders who already have
made the decision to exit or reduce their investment. It is possible
that some or all of those shareholders would have sold their shares
regardless of whether a Schedule 13D had been filed earlier. Is there
evidence that a Schedule 13D filing impacts the liquidity of an
issuer's shares or otherwise indicates that a Schedule 13D filing
impacts shareholders' decisions to sell their shares?
2. Rules 13d-1(e), (f), and (g)
a. Background
Rules 13d-1(e), (f), and (g) were adopted in 1998.\44\ Those rules
are designed to ensure that initial Schedule 13D filing obligations are
identical, regardless of whether the beneficial owners were previously
eligible to file a Schedule 13G in lieu of the Schedule 13D.
Specifically, Rules 13d-1(e), (f), and (g) set forth the initial
Schedule 13D filing obligations for investors who are no longer
eligible to rely upon Rule 13d-1(b) \45\ or (c).\46\ Rules 13d-1(b) and
(c) permit investors to file a comparatively abbreviated Schedule 13G
in lieu of the longer-form Schedule 13D and to have more time to make
amended filings.
---------------------------------------------------------------------------

\44\ Amendments to Beneficial Ownership Reporting Requirements,
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
\45\ 17 CFR 240.13d-1(b).
\46\ 17 CFR 240.13d-1(c).
---------------------------------------------------------------------------

Rule 13d-1(e) applies to persons who have been filing a Schedule
13G in lieu of Schedule 13D in reliance upon either Rule 13d-1(b) or
(c). Rules 13d-1(b) and (c) both provide that a person may not rely on
those provisions if he or she beneficially owns the relevant equity
securities with the purpose or effect of changing or influencing the
control of the issuer. Institutional and non-institutional beneficial
owners who are unable to certify that they do not hold beneficial
ownership with the intent to change or influence control of the issuer

[[Page 13854]]

or in connection with any transaction that would have such purpose or
effect, as described more fully under Item 10 of Schedule 13G, or
certain institutional investors that also acquire or hold beneficial
ownership outside of the ordinary course of business are considered to
have, for purposes of this release, a ``disqualifying purpose or
effect.'' \47\ Rule 13d-1(e)(1) currently requires that such persons
file their initial Schedule 13D within 10 days of losing their Schedule
13G eligibility because they beneficially own a covered class with a
disqualifying purpose or effect.
---------------------------------------------------------------------------

\47\ Whether investors are engaged in activity with the purpose
or effect of changing or influencing control of an issuer, and thus
holding beneficial ownership with a disqualifying purpose or effect,
ordinarily is a determination that would be based upon the specific
facts and circumstances. For that reason, the Commission has not
provided extensive guidance on this issue. The Commission has
previously opined that most solicitations in support of a proposal
specifically calling for a change of control of the company (e.g., a
proposal to seek a buyer for the company or a contested election of
directors or a sale of a significant amount of assets or a
restructuring of a corporation) would clearly have that purpose and
effect. For a more expansive discussion of the Commission's
reasoning and factors to consider when making this determination,
see Amendments to Beneficial Ownership Reporting Requirements,
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
---------------------------------------------------------------------------

Similarly, Rule 13d-1(f) applies to persons who have been filing a
Schedule 13G in lieu of Schedule 13D in reliance on Rule 13d-1(c). Rule
13d-1(c) provides that persons may not rely on that provision if they
beneficially own 20% or more of a covered class. Rule 13d-1(f)(1)
currently requires that such persons file their initial Schedule 13D
within 10 days of losing their Schedule 13G eligibility because they
beneficially own 20% or more of a covered class.
Finally, Rule 13d-1(g) applies to persons who have been filing a
Schedule 13G in lieu of Schedule 13D in reliance upon Rule 13d-1(b).
Only QIIs may rely on Rule 13d-1(b). Further, in order to rely on Rule
13d-1(b), a QII must beneficially own the relevant equity securities in
the ordinary course of its business. Rule 13d-1(g) currently requires
that such persons either file their initial Schedule 13D or amend their
Schedule 13G to indicate that they are now relying on Rule 13d-1(c)
(assuming they are eligible to rely on that rule) within 10 days of
losing their Schedule 13G eligibility under Rule 13d-1(b) because they
either no longer are a QII or no longer beneficially own the relevant
equity securities in the ordinary course of their business.
Rules 13d-1(e), (f), and (g) operate as regulatory safeguards that
reestablish the application of Rule 13d-1(a) to beneficial owners who
previously relied on Rule 13d-1(b) or (c) to indefinitely suspend
application of Rule 13d-1(a) and its attendant 10-day initial Schedule
13D filing deadline. Under Rules 13d-1(e), (f), and (g), beneficial
owners ``shall immediately become subject to'' Rules 13d-1(a) and 13d-
2(a), which provisions are reinstated anew with respect to those
persons the moment they become ineligible to rely upon Rules 13d-1(b)
and (c). Due to the importance of Schedule 13D's disclosure
requirements and the regulatory purposes served by the timely
dissemination of that material information, we have preliminarily
concluded that no compelling reason exists to treat persons who become
ineligible to file on Schedule 13G differently from persons who
initially have no option other than to file on Schedule 13D.
b. Proposed Amendments
For largely the same reasons that we are proposing to amend Rule
13d-1(a) to shorten the initial Schedule 13D filing deadline
thereunder, we also are proposing to amend the initial Schedule 13D
filing deadline under Rules 13d-1(e)(1), (f)(1), and (g). Specifically,
we are proposing to make conforming revisions to Rules 13d-1(e), (f),
and (g) so that the Schedule 13D required to be filed by persons who
initially elected to report beneficial ownership on Schedule 13G but
subsequently lost their eligibility are treated no differently from
persons who make a Schedule 13D their initial filing. Accordingly, we
propose to amend Rules 13d-1(e), (f), and (g) to make the required
Schedule 13D--or, in the case of Rule 13d-1(g), the amendment to
Schedule 13G indicating that the filer is now relying on Rule 13d-1(c),
if applicable--due no later than five days after the date on which the
person became ineligible to report on Schedule 13G.
Request for Comment
15. Given the proposed amendment to Rule 13d-1(a), should we make
conforming changes to Rules 13d-1(e), (f), and (g) as proposed?
16. Should we amend Rules 13d-1(e), (f), and (g) but have the
initial Schedule 13D due within a different number of days than
proposed (e.g., five business days rather than five days)? Should we
use business days instead of days for purposes of the deadlines in
Rules 13d-1(e), (f), and (g)?
17. Are there any reasons why Schedule 13G filers submitting an
initial Schedule 13D pursuant to Rules 13d-1(e), (f), and (g) should be
required to file on a different timetable from those investors who file
an initial Schedule 13D pursuant to the deadline in the proposed
amendment to Rule 13d-1(a)?
18. Rather than make conforming changes to Rules 13d-1(e), (f), and
(g), should the Commission rescind Schedule 13G and rely on Section
13(g)(5) of the Exchange Act to consolidate beneficial ownership
reporting on a single form, Schedule 13D, with different disclosure
requirements applicable to beneficial owners who can certify that they
did not acquire and do not hold the beneficial ownership with a
disqualifying purpose or effect?
19. With respect to the proposed amendment to Rule 13d-1(g), if a
filer who is no longer eligible to rely on Rule 13d-1(b) may instead
rely on Rule 13d-1(c), should the deadline for filing an amended
Schedule 13G in this instance differ from the deadline for filing an
initial Schedule 13D pursuant to Rule 13d-1(g) given that the filer
would continue to be able to certify that it does not hold beneficial
ownership with a disqualifying purpose or effect? Would five business
days after the month-end in which such change occurred be appropriate
and consistent with our proposed change to Rule 13d-2(b)?
3. Rules 13d-1(b), (c), and (d)
a. Background
Section 13(g) was added to the Exchange Act in 1977.\48\ Congress
enacted Section 13(g) to address the absence of beneficial ownership
reporting by persons who had accumulated large amounts of stock in a
public issuer but who were not required to file a beneficial ownership
report under Section 13(d).\49\ Section 13(g) was intended to
``supplement the current statutory scheme by providing legislative
authority for certain additional disclosure requirements that in some
cases could not be imposed administratively.'' \50\ Beneficial owners
who currently report on Schedule 13G pursuant to Section 13(g) and
corresponding Rule 13d-1(d) are not subject to Section 13(d) because
they either made an exempt acquisition or an acquisition otherwise not
covered by the statute. Section 13(d), in contrast to Section 13(g),
applies only to beneficial owners who make non-exempt acquisitions of
more than 5% of a

[[Page 13855]]

covered class. Section 13(g) was intended to close this gap.
---------------------------------------------------------------------------

\48\ Domestic and Foreign Investment Improved Disclosure Act of
1977, Public Law 95-214, sec. 203, 91. Stat. 1494.
\49\ S. Rep. No. 114, 95th Cong. 1st Sess. 13 (1977).
\50\ S. Rep. No. 95-114, at 13 (1977), reprinted in 1977 U.S.
Code Cong. & Admin. News. 4098, 4111.
---------------------------------------------------------------------------

In response to the enactment of Section 13(g), the Commission
adopted Schedule 13G to serve two purposes: (1) Provide an optional
short form disclosure statement for certain persons subject to Section
13(d); and (2) provide a mandatory disclosure statement for persons
subject to Section 13(g).\51\ Together with Section 13(d), Section
13(g) was intended to provide a ``comprehensive disclosure system of
corporate ownership'' applicable to all persons who are the beneficial
owners of more than 5% of a covered class.\52\
---------------------------------------------------------------------------

\51\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 (Apr.
28, 1978)].
\52\ Id. at 18486; see also Senate Report No. 114, 95th Cong.
lst Sess. 14 (1977).
---------------------------------------------------------------------------

The deadline for the initial Schedule 13G filing depends on whether
the person is a QII, Exempt Investor or Passive Investor. Rule 13d-1(b)
currently provides that a QII must file an initial Schedule 13G only if
such QII beneficially owns more than 5% of a covered class at the end
of a calendar year.\53\ A person relying upon Rule 13d-1(b) is
obligated under current Rule 13d-1(b)(2) to file a Schedule 13G
``within 45 days after the end of the calendar year in which the person
became obligated'' to report beneficial ownership. If the QII
beneficially owns more than 10% of a covered class as of the last day
of any month, then the initial Schedule 13G must be filed within 10
days after the end of that month. A QII relying on Rule 13d-1(b),
therefore, may have beneficial ownership in excess of 5% during the
calendar year without incurring a filing obligation unless the QII
beneficially owns more than 10% of a covered class at the end of any
month during the calendar year.
---------------------------------------------------------------------------

\53\ First adopted as Rule 13d-5 in 1977 and subsequently
redesignated as Rule 13d-1(b)(1) in 1978, the predecessor to current
Rule 13d-1(b)(2) established that an institution eligible to report
on the newly adopted Schedule 13G had until 45 days after the end of
the calendar year to report beneficial ownership to the extent the
amount held exceeded 5% at the end of the last day of the calendar
year. See Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at
18486 (Apr. 28, 1978)] (explaining that ``the first provision in new
Rule 13d-1(b) has been added to make clear that the obligation to
file a Schedule 13G need be determined only on the last day of the
calendar year'' and that ``filing [a] Schedule 13G to disclose a
beneficial ownership interest of more than five but not more than
ten percent will be required forty-five days after the end of the
calendar year''); see also Adoption of Beneficial Ownership
Disclosure Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR
12342 (Mar. 3, 1977)] (describing the Commission's adoption of new
Rule 13d-5 and related new Form 13D-5, which permitted brokers,
dealers, banks, investment companies, investment advisers, and
employee benefit plans to utilize an abbreviated disclosure notice).
---------------------------------------------------------------------------

Rule 13d-1(d),\54\ as with Rule 13d-1(b), imposes an initial
Schedule 13G filing deadline of 45 days after the end of the calendar
year, but only for investors who have become beneficial owners without
having made an acquisition recognized under Section 13(d)(1). Given
that these investors did not make the requisite acquisition that would
have subjected them to Section 13(d), the Commission has previously
referred to this type of beneficial owner as an ``Exempt Investor.''
Unlike the QIIs and Passive Investors--discussed below, in the context
of Rule 13d-1(c)--who file a Schedule 13G in lieu of Schedule 13D and
at all times remain subject to Section 13(d), Exempt Investors are
subject to Section 13(g) at the time their initial filing obligation
arises. Exempt Investors reporting pursuant to Rule 13d-1(d) today may
include persons such as founders of companies and early investors in an
issuer's class of equity securities who made their acquisition before
the class was registered under Section 12 of the Exchange Act.\55\
These beneficial owners may continue to influence or control the
issuer. Accordingly, the Commission has emphasized that the disclosures
required under Section 13(g) are obtained in connection with the
overall regulatory purposes served by Section 13(d).\56\
---------------------------------------------------------------------------

\54\ 17 CFR 240.13d-1(d).
\55\ The Commission has explained that certain ``persons who are
not required to file under Rule 13d-1(a) . . . would be required to
file a Schedule 13G pursuant to the amendments herein proposed.''
Filing and Disclosure Requirements Relating to Beneficial Ownership,
Release No. 34-14693 (Apr. 21, 1978) [43 FR 18501 at 18502 (Apr. 28,
1978)]. Such persons may include ``persons who acquired not more
than two percent of a class of securities within a twelve month
period, who are exempt from Rule 13d-1(a) by Section 13(d)(6)(B).''
Id. The Commission also stated that ``Regulation 13D-G . . . would
require any person `otherwise' not required to report pursuant to
Section 13(d), but who is a beneficial owner of more than five
percent of a specified class of equity securities to report on
Schedule 13G.'' Id.
\56\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at
18486 (Apr. 28, 1978)] (stating that ``the enactment of [S]ection
13(g) has rendered moot the issue of whether obtaining'' disclosure
from institutional investors in the ordinary course of their
business and without any control intent ``under [S]ection 13(d)(5)
is within the primary purpose of [S]ection 13(d)''). The Commission
also emphasized ``the importance of disclosing to the public the
location of rapidly accumulated blocks of stock, even though they
have been acquired not with the purpose or with the effect of
changing or influencing control'' as a predicate for its position.
Id.
---------------------------------------------------------------------------

Finally, Rule 13d-1(c) was adopted by the Commission on January 12,
1998.\57\ The rulemaking created a new class of investor, commonly
referred to as ``Passive Investors,'' eligible to report on a Schedule
13G in lieu of the Schedule 13D that is otherwise required to be filed
given that the person has made an acquisition subject to Section 13(d).
Passive Investors are required under current Rule 13d-1(c) to file a
Schedule 13G within 10 days after acquiring beneficial ownership of
more than 5% of a covered class. Passive Investors electing to report
on Schedule 13G in lieu of Schedule 13D are required under current Rule
13d-1(c) to file within 10 days after acquiring beneficial ownership of
more than 5% of a covered class. A person is only eligible to file on
Schedule 13G under Rule 13d-1(c) if such person is not seeking to
acquire or influence control of an issuer and beneficially owns less
than 20% of a covered class. Persons unable or unwilling to certify
under Item 10 of Schedule 13G that they do not have a disqualifying
purpose or effect because, for example, the possibility exists that
they may seek to exercise or influence control, are ineligible to file
a Schedule 13G and must instead file a Schedule 13D.
---------------------------------------------------------------------------

\57\ Amendments to Beneficial Ownership Reporting Requirements,
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
---------------------------------------------------------------------------

b. Proposed Amendments
We believe that the current initial Schedule 13G filing deadlines
for all three types of Schedule 13G filers warrant reassessment. The
current initial Schedule 13G filing deadlines' length and manner of
applicability to QIIs and Exempt Investors together could, in certain
circumstances, frustrate the purposes of Section 13(d) and Section
13(g). Investors reporting pursuant to current Rules 13d-1(b) and (d)
may avoid beneficial ownership reporting by selling down their
positions before the end of the calendar year, and, in the case of
QIIs, selling down before the end of a month if ownership exceeds 10%.
Amendments to the filing deadlines for initial Schedule 13G submissions
required to be made by QIIs and Exempt Investors may therefore be
needed to improve transparency consistent with the intent of Congress
when enacting Section 13(d) and Section 13(g). The existing deadlines
and manner of applicability not only could give rise to a gap in
reporting for persons who possess the potential to change control of an
issuer--or, in the case of Exempt Investors, may already control an
issuer--but also risk devaluing the importance of the disclosures when

[[Page 13856]]

made, if made at all.\58\ The very gap in reporting that Congress
sought to close by enacting Section 13(g) may now be effectively just
as wide given that large, undisclosed accumulations could be occurring
and may be reported considerably later than is useful to investors and
the market, if reported at all.\59\
---------------------------------------------------------------------------

\58\ See infra note 221 and accompanying text (noting the
importance to the market of information regarding beneficial
ownership, regardless whether it is disclosed on Schedule 13D or
13G, based on evidence that the initial filing of Schedule 13G, like
that of Schedule 13D, generates a positive stock price reaction,
albeit smaller in magnitude).
\59\ See, e.g., Kristin Giglia, A Little Letter, a Big
Difference: An Empirical Inquiry into Possible Misuse of Schedule
13G/13D Filings, 116 Colum. L. Rev. 105, 115-16 (2015) (explaining
that the availability of Schedule 13G may allow investors to
``intentionally structure their acquisition strategies to exploit
the gaps created by the current reporting regime, to their own
short-term benefit and to the overall detriment of market
transparency and investor confidence'' (internal quotations
omitted)); In the Matter of Perry Corp., Release No. 34-60351 (July
21, 2009) (illustrating how an institutional investor improperly
relied upon Rule 13d-1(b) to defer reporting its beneficial
ownership of nearly 10% of a covered class). QIIs in particular may
be able to amass sizeable amounts of beneficial ownership without
reporting such positions. Rule 13d-1(b)(2) provides in relevant part
that ``it shall not be necessary to file a Schedule 13G unless the
percentage of [a covered class] beneficially owned as of the end of
the calendar year is more than five percent.'' As such, a QII may
beneficially own in excess of 5% of a covered class for the entire
year, sell down its position to 5% or below on the last day of the
calendar year and bypass having to report at all under the current
regulatory framework assuming that its beneficial ownership
continues to be held in the ordinary course of business, without a
disqualifying purpose or effect, and does not exceed 10% of a
covered class.
---------------------------------------------------------------------------

In addition, at the time Rule 13d-1(c) was first adopted, Passive
Investors may not have had reasonable access to advanced technologies
to make more immediate filings possible. Consistent with our
justification for proposing to shorten the initial Schedule 13D filing
deadline under Rule 13d-1(a), we believe Passive Investors today not
only have gained valuable experience complying with these reporting
provisions, but also have ready access to the necessary filing
technology. As such, while the 10-day filing deadline in Rule 13d-1(c)
may have been appropriate in 1998, technological advancements in the
intervening two decades, as well as our proposed amendment to the
analogous filing deadline in Rule 13d-1(a), support a reconsideration
and recalibration of that deadline.
Accordingly, we propose to amend Rules 13d-1(b) and (d) to shorten
the filing deadline for the initial Schedule 13G to be filed by QIIs
and Exempt Investors to five business days \60\ after the end of the
month in which beneficial ownership exceeds 5% of a covered class. The
proposed acceleration of these deadlines is expected to result in more
timely disclosures while minimizing any additional burdens. We believe
that these investors should already have well-established compliance
systems in place to monitor Schedule 13G ownership levels to determine
whether filing obligations have been triggered. For example, compliance
operations at QIIs currently need to monitor beneficial ownership
levels at least on a monthly basis in case their holdings exceed more
than 10% at the end of the month and trigger an initial Schedule 13G
filing pursuant to Rule 13d-1(b)(2). Similarly, Exempt Investors
already need to monitor the level of their beneficial ownership
continuously or periodically to ensure that the amount of their
beneficial ownership does not unintentionally exceed 2% in a 12-month
period and trigger application of Section 13(d).\61\
---------------------------------------------------------------------------

\60\ Our proposed definition of ``business day'' would be
consistent with how that term is defined under other rule provisions
adopted under the Exchange Act, such as 17 CFR 240.14d-1 (``Rule
14d-1(g)(3)''), which defines the term ``business day'' to mean
``any day, other than Saturday, Sunday or a Federal holiday, and
shall consist of the time period from 12:01 a.m. through 12:00
midnight Eastern time.'' Unlike Rule 14d-1(g), which defines the
term for purposes of Regulations 14D and 14E, the proposed
amendments to Rules 13d-1 and 13d-2 that use the term ``business
day'' are indifferent as to whether or not the date of the event
that triggers a Schedule 13D or Schedule 13G filing obligation falls
on a Saturday, Sunday or Federal holiday versus a business day. For
example, under the proposed amendments to Rules 13d-1(b) and (d),
the initial Schedule 13G would be due the fifth business day after
the last day of the month in which beneficial ownership exceeds 5%
of a covered class. In addition, as stated at the outset of
Regulation 13D-G, Regulation S-T governs the preparation and
submissions of filings in electronic format and should be read in
conjunction with the rules contained within Regulation 13D-G,
including Rules 13d-1 and 13d-2.
\61\ Exempt Investors can jeopardize their eligibility to report
on Schedule 13G by voluntarily or involuntarily making an
acquisition, or acquisitions, by purchase or otherwise as determined
under Rule 13d-5(a), that exceed(s) 2% of a covered class in a
consecutive 12-month period and thus render unavailable the Section
13(d)(6)(B) exemption.
---------------------------------------------------------------------------

Given the proposal to shorten the initial reporting deadline to
five business days after the end of the month, the current provision of
Rule 13d-1(b)(2) that operates to accelerate that initial filing
deadline if beneficial ownership exceeds 10% at the end of any month
would be unnecessary in light of Rule 13d-2(c)'s overlapping Schedule
13G amendment requirement.\62\ Accordingly, we propose to further amend
Rule 13d-1(b)(2) to delete the language that imposes an initial
reporting obligation on QIIs after exceeding 10% of a covered class.
---------------------------------------------------------------------------

\62\ Specifically, current Rule 13d-2(c) would still require
QIIs to file an amendment to their Schedule 13G within 10 days after
the end of the first month in which their beneficial ownership
exceeds 10% of a covered class, calculated as of the last day of the
month. If the proposed amendment to Rule 13d-2(c) is adopted,
however, QIIs would be required to make such disclosure within five
days after the date on which the person's direct or indirect
beneficial ownership exceeds 10%.
---------------------------------------------------------------------------

We also are proposing to amend the filing deadline in Rule 13d-1(c)
to five days after the date the person becomes obligated to file an
initial Schedule 13G and amendment thereto, respectively, under those
two provisions. We believe it is appropriate to amend the initial
Schedule 13G filing deadline in Rule 13d-1(c) to match the proposed
initial Schedule 13D filing deadline in Rule 13d-1(a) in order to
maintain the historical regulatory consistency between the deadlines in
Rules 13d-1(c) and (a) and to facilitate the overall goal of increasing
transparency in beneficial ownership.
Request for Comment
20. Should we amend Rules 13d-1(b), (c), and (d) as proposed?
21. Should we amend Rules 13d-1(b) and (d) but require a different
deadline for an initial Schedule 13G filing than we proposed? For
example, should we require a shorter or longer deadline than our
proposed deadline of within five business days after the end of the
month in which beneficial ownership exceeded 5% in a covered class?
Alternatively, should the deadline be expressed in days rather than
business days to conform to the proposed deadlines in Rules 13d-1(a),
(e), (f), and (g)?
22. Do costs other than routine filing and preparation costs exist
that we should consider in setting the initial Schedule 13G filing
deadlines? If any such costs exist, please identify and quantify to the
extent practicable. For example, would shorter deadlines inhibit
beneficial owners' opportunities to verify the number of outstanding
securities of a covered class for purposes of determining whether their
beneficial ownership exceeds 5%? Such verification could include any
internal processes that a beneficial owner may have in place to
independently corroborate the accuracy of the number of shares
disclosed in an issuer's most recent annual, quarterly or current
report notwithstanding the absence of such an affirmative obligation
under Rule 13d-1(j).\63\
---------------------------------------------------------------------------

\63\ Rule 13d-1(j) provides that a beneficial owner may rely
upon information in an issuer's most recent periodic or current
report unless the beneficial owner knows or has reason to believe
that the information contained in the report is inaccurate. 17 CFR
240.13d-1(j).

---------------------------------------------------------------------------

[[Page 13857]]

23. Our proposed amendment to Rule 13d-1(b)(2) would only require
QIIs to determine the amount of their beneficial ownership as of the
last day of a month for purposes of their initial Schedule 13G filing
obligation under that rule. Should QIIs be required to determine the
amount of their beneficial ownership as of any day during a month
rather than only as of the last day of a month, and if so, what
practical challenges or other burdens are associated with monitoring
the level of beneficial ownership on a daily basis?
24. Should we treat the initial Schedule 13G reporting deadline
applicable to QIIs differently from the deadline applicable to Exempt
Investors, and if so, why? For example, would any ``front running''
concerns exist with the proposed amendments for reporting deadlines
applicable to QIIs?
25. Section 13(g)(5) requires the Commission to ``achieve
centralized reporting of information regarding ownership'' and ``avoid
unnecessarily duplicative reporting.'' As a means of pursuing these
goals, should the Commission eliminate Schedule 13G and consolidate
beneficial ownership reporting into one form, Schedule 13D? Under this
alternative, beneficial owners that previously would have been eligible
to report on Schedule 13G could, for example, be required to satisfy
less burdensome disclosure requirements on a new, consolidated form.
26. Although Passive Investors certify that they did not acquire
and do not hold beneficial ownership with a disqualifying purpose or
effect, they are currently required to file their initial Schedule 13G
by the same deadline as Schedule 13D filers. If we adopt our proposed
amendment to the initial Schedule 13D filing deadline under Rule 13d-
1(a), are there any reasons why we should not make a corresponding
change to the initial Schedule 13G filing deadline under Rule 13d-1(c)
given that the same technological advancements equally enable Passive
Investors to make a Schedule 13G filing on an accelerated basis?
4. Rules 13d-2(a) and (b)
a. Background
Section 13(d)(2) requires that an amendment must be filed to the
statement required under Section 13(d)(1) if any material change occurs
in the facts set forth in the statement filed, but does not identify a
specific deadline by which such amendment must be filed. Instead, Rule
13d-2(a) provides, as its predecessor Rule 13d-2 did when first adopted
in 1968,\64\ that such amendment must be filed with the Commission
``promptly.'' \65\ The initial adopting release did not provide an
explanation as to why ``promptly,'' as opposed to a specified deadline,
was chosen. As a factual matter, the ``promptly'' standard may, under
certain conditions, allow for more time to report a complex disclosure
issue or material development based on an involuntary change in
circumstances that nevertheless triggers an amendment obligation. The
obligation to file an amendment under current Rule 13d-2(a) is not
limited to acquisitions. Instead, changes in the disclosure narrative
that are material also have to be reported in an amendment, as do
material changes in the level of beneficial ownership caused by an
involuntary change in circumstances, such as a reduction in the amount
of beneficial ownership caused solely by an increase in the number of
shares outstanding.\66\
---------------------------------------------------------------------------

\64\ Acquisitions, Tender Offers, and Solicitations, Release No.
34-8370 (July 30, 1968) [33 FR 11015 (Aug. 2, 1968)].
\65\ 17 CFR 240.13d-2(a).
\66\ See id. (requiring an amendment ``[i]f any material change
occurs in the facts set forth in the Schedule 13D'' including ``any
material increase or decrease in the percentage of the class
beneficially owned'').
---------------------------------------------------------------------------

Section 13(g)(2) requires that an amendment be filed to the
statement required under Section 13(g)(1) if any material change occurs
in the facts set forth in the statement filed, but like Section
13(d)(2), does not identify a deadline by which such amendment must be
filed. Rule 13d-2(b), however, does specify a deadline and provides
that for all persons who report beneficial ownership on Schedule 13G,
an amendment shall be filed ``within forty-five days after the end of
each calendar year if, as of the end of the calendar year, there are
any changes in the information reported in the previous filing on that
Schedule [13G].''
b. Proposed Amendments
We propose to amend Rule 13d-2(a) to require that all amendments to
Schedule 13D be filed within one business day after the material change
that triggers the amendment obligation. This change from the current
``promptly'' standard would establish a specified filing deadline,
remove any uncertainty as to the date on which an amendment is due and
help ensure that beneficial owners amend their filings in a more
uniform and consistent manner. In light of the technological advances
discussed in Section II.A.1 above, and for many of the same reasons we
are proposing to shorten the initial Schedule 13D filing deadline, we
do not believe that requiring Schedule 13D amendments to be filed
within one business day after the date on which a material change
occurs will place those filers at a disadvantage.\67\ Further, because
an amendment to a Schedule 13D only requires that the material change
be reported and not a complete set of new narrative responses to each
of the disclosure form's individual line items,\68\ those amendments
should present a lower administrative burden than the initial Schedule
13D filing.
---------------------------------------------------------------------------

\67\ Our proposed amendment also would be consistent with the
Commission's existing view that, under the current ``promptly''
standard in Rule 13d-2(a), ``[a]ny delay beyond the date the filing
reasonably can be filed may not be prompt'' and that an amendment to
a Schedule 13D reasonably could be filed in as little as one day
following the material change. In re Cooper Laboratories, Release
No. 34-22171 (June 26, 1985).
\68\ Under Rule 13d-2(a), the Schedule 13D filer only has an
obligation to ``file or cause to be filed with the Commission an
amendment disclosing that [material] change.'' See also 17 CFR
240.12b-15, titled ``Amendments,'' which explains that
``[a]mendments filed pursuant to this section must set forth the
complete text of each item as amended.''
---------------------------------------------------------------------------

We also are proposing to amend Rule 13d-2(b) to require a Schedule
13G to be amended within five business days of the end of the month in
which a material change occurs in the information previously reported.
Accelerating the deadline for amendments from the current standard of
45 days after the end of the calendar year would help ensure that the
information reported is timely and useful. In addition, this proposed
deadline would be consistent with the proposed five business day
deadline from the end of the month applicable to QIIs' and Exempt
Investors' initial Schedule 13G filing obligations arising under Rules
13d-1(b) and (d). To partially mitigate the time pressures resulting
from the reduction of the current 45-day deadline and the need to meet
these new deadlines, if adopted, we have proposed a ``business day''
standard in specifying the date on which the Schedule 13G filing would
be due after an event that triggers a reporting obligation.\69\
---------------------------------------------------------------------------

\69\ For a discussion of our proposed definition of ``business
day'' for purposes of Regulation 13D-G, see supra note 5.
---------------------------------------------------------------------------

We further believe the text of Rule 13d-2(b) regarding the legal
standard that triggers an amendment obligation should be conformed to
the statutory language. Sections 13(d)(2) and 13(g)(2) require such an
amendment if a ``material change'' occurs to the facts in the statement
previously filed. Unlike Sections 13(d)(2) and 13(g)(2), Rule

[[Page 13858]]

13d-2(b) does not include an express materiality qualifier for Schedule
13G amendments and simply requires an amendment for ``any change.'' At
the time Rule 13d-2(b) was adopted, however, the Commission stated that
there is a materiality standard inherent in the provisions governing
Schedule 13G filings. This inherent materiality standard is based on
the fact that any disclosure provided by a Schedule 13G filer, in light
of the infrequency of the reports and comparatively minimal statements
required to be made, is effectively material.\70\ Our proposed change
would, therefore, merely codify this view in the text of Rule 13d-2(b).
As such, we are proposing to amend Rule 13d-2(b) to substitute the term
``material'' in place of the term ``any'' to serve as the standard for
determining the type of change that will trigger an amendment
obligation under Rule 13d-2(b).
---------------------------------------------------------------------------

\70\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at
18489 (Apr. 28, 1978)] (stating the Commission's belief that because
``the information required by Schedule 13G has been reduced to the
minimum necessary to satisfy the statutory purpose, . . . a
materiality standard is inherent in those requirements'' and ``it is
unnecessary to further minimize it by the insertion of an express
materiality standard'').
---------------------------------------------------------------------------

Request for Comment
27. Should we amend Rules 13d-2(a) and (b) as proposed?
28. Should we amend the filing deadlines contained within Rules
13d-2(a) and (b) but specify filing deadlines other than the ones which
have been proposed? For example, should we specify a filing deadline of
two or three business days from the date of a material change for
Schedule 13D amendments and 10 or 15 business days from the end of the
month in which a material change occurs for Schedule 13G amendments?
Instead of using ``business day'' as the standard for calculating these
filing deadlines, should we instead use a certain number of days as we
have proposed for revisions to Rules 13d-1(a), (c), (e)(1), (f)(1), and
(g) and 13d-2(c)? Should all reporting deadlines for Schedule 13D and
Schedule 13G filings be uniformly expressed in days, the standard in
use now, or should we express the filing deadlines uniformly in terms
of business days?
29. Will the costs associated with preparing and filing an amended
Schedule 13D or Schedule 13G within the proposed deadlines
substantially differ from those costs now, and if so, why?
30. Should we amend the filing deadline in Rule 13d-2(b) as
proposed but instead retain the rule text that requires a Schedule 13G
amendment to be filed if ``any change'' exists in the information
previously reported, rather than a ``material change,'' as proposed?
Under this alternative, the changes reported would continue to be
viewed as material disclosures given their inherent materiality as the
Commission described in the release adopting Rule 13d-2(b).\71\
---------------------------------------------------------------------------

\71\ See supra note 70 and accompanying text.
---------------------------------------------------------------------------

5. Rules 13d-2(c) and (d)
a. Background
Rule 13d-2(c) governs the amendment obligation for QIIs whose
beneficial ownership exceeds 10% of a covered class. Under Rule 13d-
2(c), QIIs are required to file an amendment to their Schedule 13G
within 10 days after the end of the first month in which their
beneficial ownership exceeds 10% of a covered class, calculated as of
the last day of the month. Once across the 10% threshold, QIIs are
further required under current Rule 13d-2(c) to file additional
amendments 10 days after the first month in which they increase or
decrease their beneficial ownership by more than 5% of the covered
class, calculated as of the last day of the month.
Rule 13d-2(d) governs the amendment obligation for Passive
Investors whose beneficial ownership exceeds 10% of a covered class.
Under current Rule 13d-2(d), Passive Investors are required to
``promptly'' file an amendment to their Schedule 13G upon acquiring
greater than 10% of a covered class. Once across the 10% threshold,
Passive Investors are further required under current Rule 13d-2(d) to
file additional amendments ``promptly'' if they increase or decrease
their beneficial ownership by more than 5% of the covered class.
The amendment obligations arising under Rules 13d-2(c) and (d) are
in addition to the requirement in Rule 13d-2(b) that a Schedule 13G be
amended within 45 days after each calendar year end if, as of the end
of the calendar year, any changes occur to the information previously
reported on the Schedule 13G. As such, Rules 13d-2(c) and (d)
supplement the amendment obligation under Rule 13d-2(b), which only
arises if the person's beneficial ownership exceeds 5% of a covered
class at the end of a calendar year. To comply with Rules 13d-2(c) and
(d), QIIs and Passive Investors, depending on their beneficial
ownership levels, may have to amend their Schedule 13G filings more
frequently and do so throughout the year.
b. Proposed Amendments
In connection with our proposed amendment to Rule 13d-2(b), we are
proposing to amend Rule 13d-2(c) to require that QIIs file an amendment
to their Schedule 13G within five days after the date on which their
beneficial ownership exceeds 10% of a covered class, rather than the
current requirement of 10 days after the end of the month. Similarly,
once across the 10% threshold, QIIs would be required to file
additional amendments five days after the date on which they increase
or decrease their beneficial ownership by more than 5% of the covered
class, rather than the current requirement of 10 days after the end of
the month. These amendments, when considered in the context of our
proposed amendment to Rule 13d-2(b), preserve the utility of Rule 13d-
2(c) as a provision that provides the market with earlier notice of
QIIs' beneficial ownership exceeding 10% of a covered class and,
thereafter, upon their beneficial ownership of the covered class
increasing or decreasing by more than 5%. We believe the imposition of
such an accelerated deadline is appropriate in the context of our
proposed amendment to Rule 13d-2(c) because the high thresholds in that
rule--10% beneficial ownership of a covered class and any subsequent 5%
increase or decrease in beneficial ownership--warrant that the
amendment be rapidly disseminated to the market. Consistent with our
rationale for proposing to shorten the other deadlines, we believe QIIs
have access to the same technology as other Schedule 13D and 13G filers
to satisfy this deadline, especially given the size and sophistication
of the persons eligible to file as QIIs.
We also are proposing to amend Rule 13d-2(d) to change the
amendment filing deadline from the current ``promptly'' standard to one
business day after the date on which an amendment obligation arises. We
are proposing to amend the ``promptly'' standard used in Rule 13d-2(d)
for substantially the same reasons we are proposing to shorten the
filing deadline for the initial Schedule 13G \72\ and change the filing
deadline for Schedule 13D amendments.\73\
---------------------------------------------------------------------------

\72\ See supra Section II.A.3.
\73\ See supra Section II.A.4.
---------------------------------------------------------------------------

Request for Comment
31. Should we amend the filing deadlines in Rules 13d-2(c) and (d)
as proposed?

[[Page 13859]]

32. Should we amend the filing deadlines in Rules 13d-2(c) and (d)
but specify filing deadlines other than those we have proposed? For
example, should the deadline in Rule 13d-2(c) be expressed in business
days rather than days (and vice versa for the deadline in Rule 13d-
2(d))?
33. If we adopt our proposed amendment to Rule 13d-2(b), should we
retain Rule 13d-2(c)'s amendment obligation for QIIs as proposed? Or
does the proposed shortened filing deadline in Rule 13d-2(b) obviate
the need for Rule 13d-2(c)'s additional amendment obligation, even with
the proposed shorter filing deadline?
34. Should the amendment filing deadline applicable to Passive
Investors differ from the amendment filing deadline applicable to QIIs
and Exempt Investors, as well as persons who must make their initial
filing on Schedule 13D? If so, why?
6. Rules 13(a)(4) and 201(a) of Regulation S-T
a. Background
Regulation 13D-G states that Schedules 13D and 13G should be
prepared in accordance with Regulation S-T, which governs the
preparation and submission of documents filed electronically on the
Commission's EDGAR system. In accordance with 17 CFR 232.12, EDGAR
accepts electronic submissions Monday through Friday, except Federal
holidays, from 6 a.m. to 10 p.m. eastern time.\74\ Under Rule 13(a)(2)
of Regulation S-T, however, most filings not accepted by 5:30 p.m. will
not be credited with having been received by the Commission on that
business day.\75\ Instead, filings accepted after 5:30 p.m. but on or
before 10 p.m. will be reflected on EDGAR as having been received on
the next business day.\76\ Rule 13(a)(4) of Regulation S-T, however,
sets forth certain exceptions from that 5:30 p.m. ``cut-off'' time.
Specifically, it provides that certain filings--namely, Forms 3, 4 and
5 and Schedule 14N--``submitted by direct transmission on or before 10
p.m. [eastern time] shall be deemed filed on the same business day.''
\77\ Rule 13(a)(4), therefore, effectively extends the ``cut-off'' time
for these filings from 5:30 p.m. to 10 p.m.
---------------------------------------------------------------------------

\74\ 17 CFR 232.12(a). When we refer to ``eastern time'' in this
release, we mean eastern standard time or eastern daylight saving
time, whichever is currently in effect.
\75\ 17 CFR 232.13(a)(2).
\76\ Id.
\77\ 17 CFR 232.13(a)(4). Rule 13(a)(3) also provides the same
accommodation for registration statements or any post-effective
amendment thereto filed pursuant to Rule 462(b). See 17 CFR
232.13(a)(3).
---------------------------------------------------------------------------

In addition, Rule 201 of Regulation S-T and 17 CFR 232.202 (``Rule
202 of Regulation S-T'') address hardship exemptions from EDGAR filing
requirements, and Rule 13(b) of Regulation S-T addresses the related
issue of filing date adjustments. A filer may obtain a temporary
hardship exemption under Rule 201 of Regulation S-T if it experiences
unanticipated technical difficulties that prevent the timely submission
of an electronic filing by submitting a properly formatted paper copy
of the filing under cover of Form TH.\78\ Alternatively, instead of
pursuing a hardship exemption, a filer may request a filing date
adjustment under Rule 13(b) of Regulation S-T. This rule addresses
circumstances in which a filer attempts in good faith to file a
document with the Commission in a timely manner, but the filing is
delayed due to technical difficulties beyond the filer's control.\79\
In those instances, the filer may request a filing date adjustment.\80\
The staff may grant the request if it appears that the adjustment is
appropriate and consistent with the public interest and the protection
of investors.\81\
---------------------------------------------------------------------------

\78\ 17 CFR 232.201(a).
\79\ 17 CFR 232.13(b).
\80\ Id.
\81\ Id.
---------------------------------------------------------------------------

b. Proposed Amendments
We recognize the administrative challenges that could arise if we
accelerate the Schedules 13D and 13G filing deadlines. Specifically,
Schedule 13D and 13G filers would be required to prepare their filings
in a more compressed timeframe while maintaining the accuracy and
completeness of the information set forth in those filings. These
challenges would be more acute for filers located in different time
zones whose business hours do not overlap with the Commission's. In
addition, institutional filers with more complex business
organizations, including those with sub-advisory relationships common
in the investment management industry, may have difficulty assembling
all of the required data within the timeframe that will be necessary in
order to comply with the proposed filing deadlines. We also recognize
that if the proposed changes to those reporting deadlines are
implemented, under the current rules, a Schedule 13D or 13G must be
filed on and accepted by EDGAR by no later than 5:30 p.m. on a business
day on which such a report would be due in order to have the submission
be considered timely. We propose, therefore, to amend Rule 13(a)(4) of
Regulation S-T to provide that any Schedule 13D or Schedule 13G,
including any amendments thereto, submitted by direct transmission on
or before 10 p.m. eastern time on a given business day will be deemed
filed on the same business day.\82\ Conversely, any Schedule 13D or 13G
submission not accepted by 10 p.m. on its due date will be assigned a
filing date of the next business day, and for purposes of compliance
with the applicable reporting requirements, would be considered
late.\83\ Given the accelerated filing deadlines we propose for
Schedule 13D and 13G filings, we anticipate the proposed extension in
the ``cut-off'' time would ease filers' administrative burdens,
including those located in different time zones, by giving them an
additional four and a half hours during which they could timely file
their Schedules 13D and 13G.
---------------------------------------------------------------------------

\82\ Notwithstanding the proposed extension of the time period
in which accepted Schedule 13D and 13G filings may be made and still
be considered timely, filer support hours would not be extended.
Filer support would continue to remain available only until 6 p.m.
eastern time as is currently the case notwithstanding EDGAR's
availability for the submission of Section 16 filings through 10
p.m.
\83\ Once transmitted, a Schedule 13D or 13G submission will be
automatically processed by EDGAR and, if accepted by EDGAR,
immediately disseminated to the public. While filings will receive
an accession number upon transmission, the accession number only
confirms receipt of the submission, not that it was actually
accepted by EDGAR. Transmission without acceptance does not
constitute an official filing. Under 17 CFR 232.11, an ``official
filing'' means any filing that is received and accepted by the
Commission. At present, a transmission that has commenced on a given
business day will only receive that business day's filing date if
``accepted'' at or before 5:30 p.m., meaning that it has
successfully passed an acceptance review. An official filing has not
been made unless and until the filer receives an acceptance message
that includes a filing date. Accordingly, the filer is responsible
for ensuring a transmission commences early enough in the business
day to correct any errors in the transmittal process so that time-
sensitive filings can be accepted by the applicable deadline.
---------------------------------------------------------------------------

We also propose to amend Rule 201(a) of Regulation S-T to remove
the opportunity for a Schedule 13D or 13G filer to pursue a temporary
hardship exemption under that rule. This proposed treatment is
consistent with our treatment of Forms 3, 4, and 5, each of which has a
10 p.m. ``cut-off'' time under Rule 13(a)(4) of Regulation S-T and is
ineligible for a temporary hardship exemption under Rule 201(a) of
Regulation S-T. We are proposing to amend Rule 201(a) of Regulation S-T
to make temporary hardship exemptions unavailable to filers of
Schedules 13D and 13G because of: The relative ease of using the EDGAR
on-line filing system; the proposed extended 10 p.m. eastern

[[Page 13860]]

time filing deadline; the limited value to the public of paper filings;
and the availability of a filing date adjustment under the same
circumstances as a temporary hardship exemption would have been
available but for the proposed amendment.\84\
---------------------------------------------------------------------------

\84\ Filing date adjustments, as would have been true of
temporary hardship exemptions, should be few in number given the
relative ease with which filings are now made through EDGAR and the
strong public interest in timely and readily available disclosures
provided by Schedules 13D and 13G. As is also the case with other
forms required to be filed on EDGAR, our filing desk would not
accept in paper format any Schedule 13D or 13G filings except in the
highly unlikely event that the filing satisfies the requirements for
a continuing hardship exemption under Rule 202 of Regulation S-T.
Filing date adjustments may, however, be made if a filer is unable
to submit its Schedule 13D or 13G as a result of an EDGAR outage. In
such circumstances, if a filer attempts in good faith to file its
Schedule 13D or 13G in a timely manner but is delayed because of an
EDGAR outage, that filer may request a filing date adjustment under
Rule 13(b) of Regulation S-T on the grounds that such outage
constitutes technical difficulties beyond the filer's control. 17
CFR 232.13(b). Alternatively, the Commission may, under 17 CFR
232.15(a)(3), correct the filing date of a Schedule 13D or 13G
filing if it determines that such filing has not been processed by
EDGAR or was processed incorrectly by EDGAR.
---------------------------------------------------------------------------

Request for Comment
35. Should we amend Rule 13(a)(4) of Regulation S-T as proposed to
extend the ``cut-off'' times for Schedule 13D or 13G filings, including
any amendments thereto, to 10 p.m. eastern time?
36. If we amend Rule 13(a)(4) of Regulation S-T as proposed, should
we also extend EDGAR filer support hours beyond 6 p.m. eastern time?
37. Would the proposed amendment to Rule 13(a)(4) of Regulation S-T
be appropriate in light of the proposed accelerated filing deadlines
applicable to persons who are required to make Schedule 13D and 13G
filings, or do reasons exist to distinguish these filers from those who
file Section 16 reports or Schedule 14N?
38. Does the importance of the information required to be reported
within a Schedule 13D or 13G justify a continuation of the requirement
that these forms be filed by 5:30 p.m. on the due date, the same
deadline as almost all other Commission filings?
39. Should we amend Rule 201 of Regulation S-T as proposed?
40. Are there reasons to permit filers of Schedules 13D and 13G to
continue to petition the Commission for a temporary hardship exemption
under Rule 201 of Regulation S-T, especially if we were to adopt the
proposed amendment to Rule 13(a)(4) of Regulation S-T to extend the
``cut-off'' times for Schedules 13D and 13G?
41. If we do not adopt some or all of our proposed amendments to
the filing deadlines applicable to beneficial owners who make Schedule
13D and Schedule 13G filings, should we still adopt the proposed
amendments to Rules 13 and 201 of Regulation S-T?

B. Proposed Amendment to Rule 13d-3 To Regulate the Use of Cash-Settled
Derivative Securities

We are proposing to amend Rule 13d-3 to deem holders of certain
cash-settled derivative securities to be the beneficial owners of the
reference covered class. Specifically, we are proposing to add new
paragraph (e) to Rule 13d-3. As discussed in more detail below, in
addition to setting forth the circumstances under which a holder of a
cash-settled derivative security will be deemed the beneficial owner of
the reference equity securities, proposed Rule 13d-3(e) also includes
provisions describing how to calculate the number of reference equity
securities that a holder of a cash-settled derivative will be deemed to
beneficially own.
1. Background
Neither Section 3(a) nor Section 13(d) of the Exchange Act define
the term ``beneficial owner'' or ``beneficial ownership.'' Regulation
13D-G similarly does not expressly define those terms. To provide
clarity, the Commission adopted Rule 13d-3, which provides standards
for the purpose of determining whether a person is a beneficial owner
subject to Section 13(d).\85\ For example, Rule 13d-3(a) provides that
a person who directly or indirectly has or shares voting or investment
power is a beneficial owner. The Commission also recognized the
importance of accounting for contingent interests in equity securities
arising from investor use of derivatives, such as options, warrants or
rights. The Commission therefore chose to include holders of certain
derivatives as beneficial owners under Rule 13d-3: Those derivatives
that would be settled ``in-kind'' or otherwise convey a right to
acquire a covered class.\86\ Specifically, under Rule 13d-3(d)(1), a
person is ``deemed'' a beneficial owner of a covered class if that
person holds a right to acquire the covered class--for example, through
the exercise of an option or warrant or conversion of a security--that
is exercisable or convertible within 60 days. Similarly, under Rule
13d-3(d)(1), if a right has been acquired for the purpose or with the
effect of changing or influencing control of the issuer of securities,
that person is treated as a beneficial owner of the underlying class of
equity securities regardless of when that right may be exercisable,
exchangeable or convertible. At the same time, however, holding
derivatives that, by their terms, entitle the holder to nothing more
than economic exposure to a covered class historically has not been
considered sufficient to constitute beneficial ownership.\87\
---------------------------------------------------------------------------

\85\ Adoption of Beneficial Ownership Disclosure Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
The Commission emphasized that ``[a]n analysis of all relevant facts
and circumstances in a particular situation is essential in order to
identify each person possessing the requisite voting power or
investment power.'' Id. at 12344.
\86\ Acquisitions, Tender Offers, and Solicitations, Release No.
34-8392 (Aug. 30, 1968) [33 FR 14109 (Sept. 18, 1968)].
\87\ Commission Guidance on the Application of Certain
Provisions of the Securities Act of 1933, the Securities Exchange
Act of 1934, and Rules thereunder to Trading in Security Futures
Products, Release No. 34-46101 (June 21, 2002) [67 FR 43234 (June
27, 2002)] (stating the interpretive view that economic exposure
through cash-settled securities futures does not confer beneficial
ownership); Adoption of Beneficial Ownership Disclosure
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at
12348 (Mar. 3, 1977)] (indicating that amended Rule 13d-3 ``does not
expressly encompass those proposals relative to economic interests--
such as the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of securities'');
Filing and Disclosure Requirements Relating to Beneficial Ownership,
Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 18493 (Apr. 28,
1978)] (stating that ``traditional economic benefits--i.e., the
right to receive dividends or sale proceeds--are not included as
criteria for defining beneficial ownership'').
---------------------------------------------------------------------------

Over the years, commenters have raised concerns about the fact that
current Rule 13d-3 fails 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.\88\ An investor in a cash-settled derivative may be
positioned, by virtue of its commercial relationship with a
counterparty, to acquire any reference securities that the

[[Page 13861]]

counterparty may acquire to hedge the economic risk of that
transaction, including any obligations that may arise in connection
with settlement.\89\ Entry into the agreement governing the derivative
may, therefore, result in a rapid accumulation of a covered class by a
counterparty similar to the types of accumulations that prompted
Congress to enact Section 13(d). In addition, if institutional
counterparties hold sizable positions of reference securities with a
view toward future sales to holders of cash-settled derivative
securities, a regulatory concern arises under Rule 13d-3(b).\90\ For
example, if an arrangement or understanding exists outside of the terms
of a derivative instrument that enables an investor to acquire the
reference securities from a counterparty, the reference securities
could be viewed as having been impermissibly ``parked'' with the
counterparty on behalf of the derivative holder.\91\
---------------------------------------------------------------------------

\88\ See, e.g., Maria Lucia Passador, The Woeful Inadequacy of
Section 13(d): Time for a Paradigm Shift, 13 Va. L. & Bus. Rev.
279, 296-99 (2019) (``[I]n the recent past, cash-settled equity
derivatives--mainly call and security-based options--were frequently
used not only with a speculative and hedging purpose, but also with
the immediate, explicit, and specific aim of silently accumulating a
leading (or even control) position in public companies.''); Wachtell
Petition, supra note 17, at 8 (``Even in the absence of voting or
dispositive power, participants in large hedging transactions gain
influence in a number of ways. . . . [V]oting of the shares may be
subject to counterparty influence or control, either directly or
because the counterparty is motivated to vote the hedged shares in a
way that will please the investor and induce them to continue to
transact with such counterparty. . . . Even those derivatives that
are characterized as `cash-settled' may ultimately be settled in
kind, creating further market pressure as the participants need to
acquire shares for such settlement.'').
\89\ See infra Section III.C.2.a.
\90\ Rule 13d-3(b) deems persons to be the beneficial owners of
a covered class if they have used an arrangement that otherwise
prevented the vesting of beneficial ownership as part of a plan or
scheme to evade Section 13(d) or 13(g). 17 CFR 240.13d-3(b).
\91\ The Commission has pursued beneficial ownership reporting
violations at least twice based on the unreported ``parking'' of
equity securities with another party where such securities are
essentially held in reserve for the benefit of the party with the
intention to control or ultimately acquire them. See SEC v. First
City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). In that case,
the Commission charged First City Financial Corp. with using a
parking arrangement with Bear, Stearns Cos. to avoid filing a
Schedule 13D. After First City had acquired 4.9 percent of the stock
of Ashland Oil, Inc., Bear Stearns agreed to acquire stock on behalf
of First City and to sell the stock to First City once a sizable
position was obtained. The district court concluded that First City
deliberately attempted to circumvent the law. See SEC v. First City
Fin. Corp., 688 F. Supp. 705 (D.D.C. 1988); see also SEC v. Boyd L.
Jefferies, Lit. Rel. No. 11370 (Mar. 19, 1987).
---------------------------------------------------------------------------

The use of cash-settled derivative securities in the change of
control context also may serve as a catalyst for related acquisitions
of beneficial ownership by institutional counterparties that ultimately
could contribute to a shift in corporate control.\92\ The Commission
previously determined that the ``concentration of voting power in a
single block and its transferability are material information to the
market.'' \93\ Holders of cash-settled derivatives also may have
incentives to influence or control outcomes at the issuer of the
reference security just as they would if they directly owned the
reference security outright. Although holders of derivatives settled
exclusively in cash ordinarily would lack the express legal power under
the terms of such instruments to direct the voting or disposition of a
covered class, such holders may possess economic power that can be used
to produce desired outcomes through engagement with a counterparty or
the issuer of the reference security and potentially could impact the
stock price.\94\ An unwinding of agreements governing cash-settled
derivatives also could adversely impact the stock price of an issuer,
just as if the holder of the cash-settled derivative held the stock
directly, instead of the counterparty, and sold sizable blocks of such
shares. Consequently, counterparty dispositions of reference securities
at the conclusion of a cash-settled derivative agreement, should they
occur all together or involve high concentrations of beneficial
ownership, may impair the orderly operation and efficiency of our
capital markets. In the event of a default, these derivative positions
could not only adversely impact counterparties, but also issuers of
reference securities, the markets and other market participants. At a
minimum, greater transparency could influence counterparties' risk
management decisions. Proposed Rule 13d-3(e) is thus designed to make
information available about any large positions in cash-settled
derivative securities and, by implication, the related reference
securities. Under specified conditions, if holders of cash-settled
derivatives were deemed beneficial owners of the reference securities
in combination with the other amendments proposed in this release, the
resulting disclosures could alert issuers and the market to the
possibility of rapid accumulations of, and high concentrations in, a
covered class.\95\
---------------------------------------------------------------------------

\92\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at
18486 (Apr. 28, 1978)] (explaining that the need for disclosure had
been recently underscored by the pivotal role played by investment
managers holding large blocks of stock in surprise tender offers).
\93\ See Reporting of Beneficial Ownership in Publicly-Held
Companies, Release No. 34-26598 (Mar. 6, 1989) [54 FR 10552 (Mar. 6,
1989)].
\94\ See supra note 88; see also Theodore N. Mirvis et al.,
Beneficial Ownership of Equity Derivatives and Short Positions--A
Modest Proposal to Bring the 13D Reporting System into the 21st
Century, Wachtell, Lipton, Rosen & Katz (Mar. 3, 2008) at 2-3,
available at <a href="http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.15395.08.pdf">http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.15395.08.pdf</a> (noting that derivative securities ``often have
substantial effects on the securities and issuers involved'' and
that ``[t]he counterparties to these arrangements will often hedge
their positions by buying or selling the underlying securities,
which may have material effects in the trading of the relevant
security'').
\95\ Section 13(d) was intended to ``alert the market place to
every large, rapid aggregation or accumulation of securities,
regardless of technique employed, which might represent a potential
shift in corporate control.'' GAF Corp. v. Milstein, 453 F.2d 709,
717 (2d. Cir. 1971), cert denied, 406 U.S. 910 (1972).
---------------------------------------------------------------------------

By extending Rule 13d-3 to include certain persons who purchase
cash-settled equity-based derivatives, investors, issuers and other
market participants should have greater transparency regarding persons
with significant interests in an issuer's equity securities and
potential control intent. In particular, the proposed amendment to Rule
13d-3 could address concerns that financial product innovation has
outpaced the reach of a rule provision first adopted by the Commission
in 1968. Cash-settled derivatives imitate the economic performance of a
direct investment in an issuer's equity securities and, in turn, may
economically empower the holders of such derivatives to influence the
issuer or the price of its securities.\96\ Under current Rule 13d-3,
however, the holder of the cash-settled derivative generally is not
subject to beneficial ownership reporting obligations. Given such
person's potential to influence or change control of the issuer, we are
proposing an amendment that would, in specified circumstances, deem the
holder of a cash-settled derivative security to be the beneficial owner
of the reference security. For the reasons set forth above and as
explained more fully below, we believe such an amendment is necessary
for the protection of investors and appropriate in order to achieve the
purpose of Section 13(d). We also believe that requiring reporting
based wholly or partly upon the holding of such positions would be in
the public interest.
---------------------------------------------------------------------------

\96\ See supra note 88.
---------------------------------------------------------------------------

2. Proposed Amendment
As noted above, we are proposing to amend Rule 13d-3 to add new
paragraph (e). Like Rules 13d-3(b) and (d)(1), proposed Rule 13d-3(e)
would provide that holders of certain cash-settled derivative
securities will be ``deemed'' a beneficial owner of the reference
securities in a covered class.\97\

[[Page 13862]]

Specifically, proposed Rule 13d-3(e)(1) would provide that a holder of
a cash-settled derivative security \98\ shall be deemed the beneficial
owner of equity securities in the covered class referenced by the
derivative security if such person holds the derivative security with
the purpose or effect of changing or influencing the control of the
issuer of such class of equity securities, or in connection with or as
a participant in any transaction having such purpose or effect.\99\ As
discussed in more detail below, the concept ``purpose or effect of
changing or influencing the control of the issuer'' is a familiar one
under Regulation 13D-G,\100\ both in the context of determining whether
a person is a beneficial owner under Rule 13d-3 \101\ and for purposes
of determining whether a beneficial owner is eligible to report on
Schedule 13G in lieu of Schedule 13D under Rule 13d-1.\102\ As such, we
believe that use of this phrase in proposed Rule 13d-3(e) would ease
the administrative burdens associated with application of this proposed
provision.
---------------------------------------------------------------------------

\97\ It is possible under our current regulatory framework that
a holder of a cash-settled derivative security could be deemed the
beneficial owner of the reference securities under Rule 13d-3(b) by
virtue of their counterparty relationships if such relationships
constitute ``a plan or scheme to evade the reporting requirements of
section 13(d) or (g).'' 17 CFR 240.13d-3(b). Application of that
rule, however, would require an examination of the facts and
circumstances surrounding the relationship between the holder of a
cash-settled derivative security and its counterparty, the
intentions of the parties with respect to such relationship and the
effect of such relationship on the holder's beneficial ownership of
the reference securities. Id. By contrast, proposed Rule 13d-3(e)
would require a comparatively less extensive and more streamlined
inquiry in order for a holder of a cash-settled derivative security
to be deemed the beneficial owner of the reference securities,
focusing predominantly on whether the derivative security is held
with the purpose or effect of changing or influencing the control of
the issuer of the reference securities.
\98\ For purposes of proposed Rule 13d-3(e), the term
``derivative security'' would have the meaning set forth in 17 CFR
240.16a-1(c) (``Rule 16a-1(c)''). See Rule 16a-1(c) (defining
``derivative securities'' as including certain rights, such as
options, warrants, convertible securities, stock appreciation rights
or similar rights ``with an exercise or conversion privilege at a
price related to an equity security, or similar securities with a
value derived from the value of an equity security,'' excluding
certain enumerated rights, obligations, interests and options). As
discussed infra notes 110-114 and the accompanying text, however,
for purposes of proposed Rule 13d-3(e), the term ``derivative
security'' does not include security-based swaps, as defined in
Section 3(a)(68) of the Exchange Act and the rules and regulations
thereunder.
\99\ The provision at 17 CFR 240.12b-2 (``Rule 12b-2 of
Regulation 12B'') defines the term ``control'' to mean ``the
possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or
otherwise.'' The provision at 17 CFR 240.12b-1 sets forth the scope
of Regulation 12B, and provides that all rules contained in
Regulation 12B ``shall govern . . . all reports filed pursuant to
section[ ] 13.''
\100\ See, e.g., 17 CFR 240.13d-102. Under Item 10 of Schedule
13G, QIIs and Passive Investors must certify that the ``securities .
. . were not acquired and are not held for the purpose of or with
the effect of changing or influencing the control of the issuer.''
Id.
\101\ See 17 CFR 240.13d-3(d)(1)(i) (providing that ``any person
who acquires a security or power specified in paragraph[ ] (d)(1)(i)
. . . with the purpose or effect of changing or influencing the
control of the issuer, or in connection with or as a participant in
any transaction having such purpose or effect'' shall be deemed a
beneficial owner immediately upon such acquisition).
\102\ See 17 CFR 240.13d-1(b)(1)(i), (c)(1) and (e)(1)(i). In
addition to these provisions, Rules 13d-3(b) and 13d-5(b)(2)(ii)
also incorporate a ``purpose or effect'' standard.
---------------------------------------------------------------------------

Persons who acquire and hold cash-settled derivative securities
with the purpose or effect of changing or influencing control of the
issuer may seek to use their position to influence the voting,
acquisition or disposition of any shares the counterparty may have
acquired in a hedge, proprietary investment or otherwise. Moreover, the
economic realities of the counterparty relationship mean that, even
absent an express right to direct the voting, acquisition or
disposition of such shares, the holders of cash-settled derivative
securities could be well-positioned to pursue a change in control. The
derivative holder's counterparty may have a business relationship to
develop and protect, and thus may ultimately cast votes in accordance
with the preference of the derivative holder. Even if any counterparty
shares are not voted, the derivative holder's probability of success in
exerting influence or control over the issuer of the reference security
may increase given that any voting power the derivative holder held
would be magnified by minimizing the number of shares that potentially
could be voted against its plans or proposals. Similarly, while the
terms of the derivative instrument may only provide for settlement in
cash, these types of derivative holders could remain in a position to
acquire any reference securities that the counterparty may acquire to
hedge the economic risk of that transaction. In recognition that an
investment in a cash-settled derivative instrument could be converted
into direct holdings of the reference security via an amendment to the
instrument or otherwise, persons who use cash-settled derivatives also
may present these economic positions to an issuer or its shareholders
as a basis on which they should engage with them.\103\ These persons,
therefore, hold their cash-settled derivative securities in a manner
that implicates the policies underlying Section 13(d).\104\
---------------------------------------------------------------------------

\103\ See infra note 263 and accompanying text.
\104\ See Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 at 18484 (Apr. 28, 1978)] (noting that Section 13(d)'s
legislative history indicates that the purpose of that section is
``to provide information to the public and the affected issuer about
rapid accumulations of its equity securities'' by ``persons who
would then have the potential to change or influence control of the
issuer'').
---------------------------------------------------------------------------

Proposing that application of Rule 13d-3(e) be conditioned on a
person holding the derivative security with the purpose or effect of
changing or influencing the control of the issuer of such class of
equity securities, or in connection with or as a participant in any
transaction having such purpose or effect is consistent with other
provisions of our beneficial ownership rules. Rule 13d-3(d)(1) contains
this same condition. Specifically, Rule 13d-3(d)(1) provides that if a
right has been acquired for the purpose or with the effect of changing
or influencing control of the issuer of securities, the holder of that
right is immediately treated as a beneficial owner of the underlying
class of equity securities regardless of when that right may be
exercisable, exchangeable or convertible. In such instances, the holder
of such a right would not be entitled to voting or investment power
over the underlying security for a substantial period of time that may
extend far beyond 60 days. Nonetheless, the Commission believed it
appropriate to immediately deem these persons to be the beneficial
owners of such underlying securities because it recognized that such a
right, when acquired for the purpose or with the effect of changing or
influencing control, can be used to influence the control of the issuer
even before the right is exercisable.\105\ We recognize that cash-
settled derivative securities differ from the rights covered under Rule
13d-3(d)(1) in that they ordinarily do not entitle their holders to
acquire the reference securities. To the extent such derivative
security is held with the purpose or effect of changing or influencing
the control of the issuer, however, we believe that the potential for a
holder of a cash-settled derivative security to exert influence on a
counterparty that may directly hold the reference securities implicates
the same concerns that the Commission articulated in adopting Rule 13d-
3(d)(1). Thus, we believe that deeming such holders to be beneficial
owners of the reference securities would be consistent with the
Commission's longstanding view of the right to acquire beneficial
ownership as described in Rule 13d-3(d)(1).
---------------------------------------------------------------------------

\105\ Id. at 18490 (stating that ``the acquisition of [such a
right] offers a distinct possibility for actions which are for the
purpose or with the effect of changing or influencing control''
including, for example, ``obtaining an interest in a block of
securities large enough to influence control, or in coupling an
option with an agreement concerning the composition of the board of
directors'').
---------------------------------------------------------------------------

In addition, as with the treatment of in-kind-settled derivative
securities under Rule 13d-3(d)(1)(i), proposed paragraph (e)(1) also
would include a provision stating that any securities that are not
outstanding but are referenced by the relevant cash-settled derivative
security will be deemed to be

[[Page 13863]]

outstanding for the purpose of calculating the percentage of the
relevant covered class beneficially owned by the holder of the
derivative security. Those reference securities, however, will not be
deemed to be outstanding for the purpose of any other person's
calculation of the percentage of the covered class it beneficially
owns.
The disclosures that would be made in a Schedule 13D as a result of
treating holders of cash-settled derivative securities as beneficial
owners would provide needed transparency regarding the potential to
influence or control the issuer of the reference security. If cash-
settled derivative holders with an intent to influence or control the
issuer become Schedule 13D filers based on their economic exposure to
the reference security as a result of the proposed amendment to Rule
13d-3, then their plans or proposals would become publicly available.
At present, such intentions remain undisclosed unless the person is
determined to be a beneficial owner under Rule 13d-3 on other grounds.
Proposed paragraph (e)(2) of Rule 13d-3 would set forth the formula
for calculating the number of equity securities that a holder of a
cash-settled derivative will be deemed to beneficially own pursuant to
paragraph (e)(1). This provision is necessary because derivatives may
not always have a perfect ``one-to-one'' relationship to the reference
security. Instead, the value of the derivative security, although based
on the value of a reference security, may change at a multiple or
fraction to any change in value of the reference security, particularly
in the case of a security option. This difference in the amount by
which the value of a derivative security changes as compared to the
amount by which the value of the reference security changes is referred
to as the ``delta.'' For example, a $1 change in the value of the
reference security may result in a $2 change in the value of the
derivative security. In that case, the delta of the derivative security
would be equal to two. If the delta of a derivative security is equal
to one, then the value of the derivative security perfectly tracks the
changes in value of the reference security. Calculation of beneficial
ownership pursuant to a derivative security is easier in these
circumstances because of the perfect one-to-one relationship between
the derivative security and the reference security.
Proposed paragraph (e)(2) applies these concepts for purposes of
determining the number of securities that a holder of a cash-settled
derivative will be deemed to beneficially own pursuant to paragraph
(e)(1). Proposed paragraph (e)(2)(ii) of Rule 13d-3 defines ``delta''
to mean, with respect to a derivative security, the ratio that that is
obtained by comparing (x) the change in the value of the derivative
security to (y) the change in the value of the reference equity
security. Proposed paragraph (e)(2)(i) provides that the number of
securities that a holder of such derivative security will be deemed to
beneficially own pursuant to paragraph (e)(1) will be the larger of two
calculations, set forth in proposed paragraphs (e)(2)(i)(A) and (B), in
each case as applicable. If applicable, proposed paragraph (e)(2)(i)(A)
would calculate the number of securities as the product of (x) the
number of securities by reference to which the amount payable under the
derivative security is determined multiplied by (y) the delta of the
derivative security.\106\ Proposed paragraph (e)(2)(i)(B), if
applicable, would calculate the number of securities by (x) dividing
the notional amount of the derivative security by the most recent
closing market price of the reference equity security, and then (y)
multiplying such quotient by the delta of the derivative security.\107\
---------------------------------------------------------------------------

\106\ As an illustration of the application of this proposed
rule, a holder of a derivative security with a delta equal to one
that references 100 shares of a covered class of common stock would
be deemed to beneficially own 100 shares of such covered class. If,
however, that derivative security had a delta equal to two, then
such holder would be deemed to beneficially own 200 shares of such
covered class, calculated as (x) the 100 shares of common stock
referenced by the derivative security multiplied by (y) the
derivative security's delta of two.
\107\ As an illustration of the application of this proposed
rule, if a person holds a derivative security with a notional amount
of $100 and a delta equal to one that references a covered class of
common stock with a most recent closing market price of $10 per
share, then that person would be deemed to beneficially own 10
shares of such covered class. If, however, that same derivative
security had a delta equal to two, then such person would be deemed
to beneficially own 20 shares of such covered class, calculated as
(x) the quotient obtained by dividing the $100 notional amount of
the derivative security by the $10 per share most recent closing
market price, (y) multiplied by the derivative security's delta of
two.
---------------------------------------------------------------------------

Proposed paragraph (e)(2)(i)(A) would be applicable if the
agreement governing the terms of the derivative security provides a way
to calculate the number of reference securities on which the amount
payable pursuant to that security is based. Proposed paragraph
(e)(2)(i)(B) would be applicable if the agreement governing the terms
of the derivative security does not provide such a methodology for
determining the applicable number of reference securities. Thus, there
will be some derivative securities to which proposed paragraph
(e)(2)(i)(A) will be inapplicable (i.e., those derivative securities
for which the agreement does not provide a way to calculate the number
of reference securities on which the amount payable pursuant to that
security is based). On the other hand, proposed paragraph (e)(2)(i)(B)
will be applicable to all derivative securities (i.e., because the
calculation set forth in that paragraph can be performed regardless of
whether the agreement governing the terms of the derivative security
provides a methodology for determining the applicable number of
reference securities). As such, to address those scenarios in which
both paragraphs (e)(2)(i)(A) and (B) apply, paragraph (e)(2)(i)
provides that the number of securities that a holder of a derivative
security will be deemed to beneficially own pursuant to paragraph
(e)(1) will be the larger of the two amounts yielded by those
paragraphs.
The proposed amendment to Rule 13d-3 also includes three notes to
paragraph (e)(2). The first note provides that, for purposes of
determining the number of equity securities that a holder of a cash-
settled derivative security will be deemed to beneficially own, only
long positions in derivative securities should be counted. Short
positions, whether held directly against a covered class or
synthetically through a cash-settled derivative security, should not be
netted against long positions or otherwise taken into account.\108\ The
second note provides that, when calculating the number of securities
that a holder of such derivative security will be deemed to
beneficially own pursuant

[[Page 13864]]

to paragraph (e)(1), the calculation in paragraph (e)(2)(i)(B) should
be performed on a daily basis. Similarly, the third note provides that
if a derivative security does not have a fixed delta (i.e., if the
delta is variable and changes over the term of the derivative
security), then a person who holds such derivative security should
calculate the delta on a daily basis, for purposes of determining the
number of equity securities that such person will be deemed to
beneficially own, based on the closing market price of the reference
equity security on that day. Although we recognize that such daily
calculations may impose administrative burdens on holders of derivative
securities, this approach will help to ensure the accuracy of
beneficial ownership reporting and is consistent with the approach
taken by at least one foreign jurisdiction.\109\
---------------------------------------------------------------------------

\108\ ``Short positions,'' such as those within the meaning of
the term as defined in 17 CFR 240. 14e-4(a)(1)(ii) (``Rule 14e-
4(a)(1)(ii)''), are not treated as beneficial ownership under
current Rule 13d-3. In addition, Section 13(d)(1) applies to persons
who ``acquire'' beneficial ownership, and the aggregate amount of
beneficial ownership held, as determined under Rule 13d-3(c),
including certain contingent interests in a covered class, is
required to be reported. As such, a beneficial owner subject to
Section 13(d) or 13(g) reports its capacity to vote or dispose of a
covered class whether through power it directly or indirectly holds
or is deemed to hold under Rule 13d-3(d) by virtue of its contingent
interest. The regulatory framework, therefore, only applies to
persons who hold the equivalent of a ``long position'' within the
meaning of the term as defined in Rule 14e-4(a)(1)(i). Persons who
hold ``short positions'' have no such capacity to vote or dispose of
a covered class and thus are beyond the scope of Sections 13(d) and
13(g) and Regulation 13D-G with the exception that a beneficial
owner that otherwise must report on Schedule 13D may incur
disclosure obligations with respect to any short sale activity, such
as those arising under Item 6 of Schedule 13D. See 17 CFR 240.13d-
101 (requiring disclosure of ``any contracts . . . with respect to .
. . any securities of the issuer''). A beneficial owner is not
required to report its ``net long position'' within the meaning of
such term as defined in Rule 14e-4(a)(1), and we are not currently
proposing any changes in this regard.
\109\ See DTR 5.3.3C, Recital 7 (Jan. 1, 2021), available at
<a href="https://www.handbook.fca.org.uk/handbook/DTR/5/?view=chapter">https://www.handbook.fca.org.uk/handbook/DTR/5/?view=chapter</a> (``In
order to ensure that information about the total number of voting
rights accessible to the investor is as accurate as possible, delta
should be calculated daily taking into account the last closing
price of the underlying share.'').
---------------------------------------------------------------------------

Finally, proposed Rule 13d-3(e) would exclude from its purview
security-based swaps, as defined in Section 3(a)(68) of the Exchange
Act and the rules and regulations thereunder.\110\ In a separate
rulemaking, the Commission has proposed to require disclosure of
security-based swap positions.\111\ Specifically, proposed 17 CFR
240.10B-1 (``Rule 10B-1'') would require public reporting on Schedule
10B of, among other things: (1) Certain large positions in security-
based swaps; (2) positions in any security or loan underlying the
security-based swap position; and (3) any other instrument relating to
the underlying security or loan or group or index of securities or
loans.\112\ As described in more detail in the related proposing
release, proposed Rule 10B-1 would include specific quantitative
thresholds for when public reporting is required and include a schedule
of all of the information that must be reported.\113\ We believe that
the position disclosures with respect to cash-settled security-based
swaps required under our proposed Rule 10B-1, if adopted, would provide
sufficient information regarding holdings of security-based swaps such
that additional regulation under Regulation 13D-G at this time would be
unnecessarily duplicative.\114\ Further, to the extent that investors
seek to use cash-settled derivatives other than security-based swaps in
order to bypass the disclosures that Rule 10B-1 would require, Rule
13d-3(e), if adopted, would help prevent the exploitation of any
regulatory gap between Schedule 10B and Schedule 13D that might
otherwise exist.
---------------------------------------------------------------------------

\110\ Proposed Rule 13d-3(e) is not subject to Exchange Act
Section 13(o). Section 13(o) provides that a person shall be
``deemed'' a beneficial owner of an equity security based on the
purchase or sale of a security-based swap ``only to the extent that
the Commission determines after consultation with the prudential
regulators and the Secretary of the Treasury, that the purchase or
sale of the security-based swap, or class of security-based swap,
provides incidents of ownership comparable to direct ownership of
the equity security, and that it is necessary to achieve the
purposes of this section that the purchase or sale of the security-
based swaps, or class of security-based swap, be deemed the
acquisition of beneficial ownership of the equity security.''
Section 13(o) applies to security-based swaps and does not apply to
other types of derivative securities. Because proposed Rule 13d-3(e)
does not cover security-based swaps, Section 13(o) is inapplicable
to the proposed requirement.
\111\ Prohibition Against Fraud, Manipulation, or Deception in
Connection with Security-Based Swaps; Prohibition against Undue
Influence over Chief Compliance Officers; Position Reporting of
Large Security-Based Swap Positions, Release No. 34-93784 (Dec. 15,
2021) [87 FR 6652 (Feb. 4, 2022)].
\112\ Id. at 6657.
\113\ Id. For example, a person would be required to file a
Schedule 10B once the ``Security-Based Swap Equivalent Position''
(as described in the proposing release for Rule 10B-1 [87 FR 6652
(Feb. 4, 2022)]) represents more than 5% of a class of equity
securities. Id. at n.138 and accompanying text.
\114\ But see Beneficial Ownership Reporting Requirements and
Security-Based Swaps, Release No. 34-64628 (June 8, 2011) [76 FR
34579 (June 14, 2011)] (readopting without change the relevant
portions of Rules 13d-3 and 16a-1 to preserve the application of
those rules to persons who purchased or sold security-based swaps
after the effective date of Section 13(o) by making the
determinations required by Section 13(o) after consultation with
prudential regulators and the Secretary of the Treasury).
---------------------------------------------------------------------------

Request for Comment
42. Should we amend Rule 13d-3 as proposed to deem persons who
acquire or hold cash-settled derivative securities with the purpose or
effect of changing or influencing the control of the issuer, or in
connection with or as a participant in any transaction having such
purpose or effect, as beneficial owners? Would the proposed rule
sufficiently reduce the opportunities for persons to utilize cash-
settled derivative securities to evade reporting under Section 13(d)?
43. Would the circumstances in which a holder acquires or holds a
cash-settled derivative security with the purpose or effect of changing
or influencing the control of the issuer be reasonably determinable?
Should we provide further guidance on this point? Rather than amending
Rule 13d-3 to deem as beneficial owners persons who acquire or hold
cash-settled derivative securities with the purpose or effect of
changing or influencing the control of the issuer, should we
incorporate standards for establishing when a person becomes a
beneficial owner that are more objectively determinable? For example,
should we identify more specific indicia such as any of the plans
described in Item 4 of Schedule 13D?
44. Can a cash-settled derivative be used to influence or change
the control of an issuer? If so, please explain how the terms of the
derivative security or the derivative investor's relationship with a
counterparty can effectuate that influence or change in control. For
example, are cash-settled derivative contracts executed on a scale
large enough to impact the voting by counterparties and thus the
margins of victory on proposals put forth by the issuer of a covered
class for shareholder approval?
45. Instead of treating holders of cash-settled derivative
securities as beneficial owners, should we instead amend Schedule 13D
and Schedule 13G to expressly include more comprehensive line item
disclosure requirements concerning the use of cash-settled derivative
securities? For example, should Item 6 of Schedule 13D be further
revised to ask for a full description of any cash-settled derivative's
material terms, and Item 7 of Schedule 13D be revised to explicitly
require the filing of cash-settled derivative instruments as an
exhibit?
46. Regardless of whether proposed Rule 13d-3(e) is adopted, should
the Commission increase the 60-day time period specified in Rule 13d-
3(d)(1) so that persons who hold contingent interests in a covered
class will be deemed beneficial owners earlier? If so, would 90, 120,
180 or some greater number of days serve as the optimal date by which
to deem persons who hold such interests, such as derivative holders, as
beneficial owners?
47. For purposes of proposed Rule 13d-3(e), the term ``derivative
security'' would have the meaning set forth in Rule 16a-1(c), excluding
security-based swaps. Are there other types of derivatives (other than
security-based swaps) that should be included within the purview of
proposed Rule 13d-3(e) that are not included in the scope of the term
``derivative securities,'' as defined in Rule 16a-1(c)? For purposes of
Rule 13d-3(e), should rights with an exercise or conversion privilege
at a price that is not fixed, which Rule 16a-1(c)(6) excludes from the
term ``derivative securities'' in Rule 16a-1(c), be included?
48. Is our proposed inclusion of the concept of ``delta'' in Rule
13d-3(e) appropriate? If so, are the proposed

[[Page 13865]]

application and definition of ``delta'' in Rules 13d-3(e)(2)(i) and
(ii), respectively, appropriate for purposes of determining the number
of equity securities that a holder of a cash-settled derivative
security is deemed to beneficially own?
49. For securities where the ``delta,'' as we propose to define it,
is not equal to 1, is our proposed calculation of the number of
securities beneficially owned appropriate? Should the calculation be
performed in another way? For example, should the calculation be
limited to the number of reference securities contemplated by the
instrument?
50. Should we include the three proposed notes to Rule 13d-3(e)(2)?
Should only long positions in derivative securities be counted for
purposes of determining the number of equity securities that a holder
of a cash-settled derivative security will be deemed to beneficially
own, as proposed? As an alternative to proposed Note 1 to Rule 13d-
3(e)(2), should short positions in cash-settled derivative securities
be netted against long positions or otherwise taken into account for
purposes of determining the number of equity securities that a holder
of a cash-settled derivative security will be deemed to beneficially
own? If not, how should they be taken into account? For purposes of
Notes 2 and 3 to Rule 13d-3(e)(2), is ``daily,'' as proposed, the
appropriate frequency, or should those calculations be performed with a
different frequency (e.g., on a weekly or monthly basis)? Is the
proposed daily frequency of these calculations unduly burdensome on
holders of cash-settled derivative securities? Other than the frequency
with which the calculation must be performed, are there other
difficulties associated with these calculations that would also make
them burdensome?
51. For purposes of the calculations in Rule 13d-3(e)(2)(i)(B) and
Note 3 to Rule 13d-3(e)(2), is the closing market price of the
reference equity security, as proposed, the appropriate basis for those
calculations, or is there a different basis that is more appropriate
(e.g., the volume-weighted average trading price of the reference
equity security throughout a given day)?
52. Could the daily calculation requirements in proposed Notes 2
and 3 to Rule 13d-3(e)(2) result in situations in which a person's
beneficial ownership does not exceed 5% of a covered class at the time
that person acquires a derivative security, but then exceeds 5% at a
later time solely by virtue of the fact that the closing market price
of the reference equity security or the delta of the derivative
security, as applicable, has changed (i.e., not as a result of any
further acquisitions)? If so, would it be appropriate to subject that
person to the obligations of the beneficial ownership reporting regime
under such circumstances?
53. Would proposed Rule 10B-1 provide sufficient information
regarding holdings of cash-settled security-based swaps such that
beneficial ownership reporting of cash-settled security-based swaps
under Regulation 13D-G is unnecessary, or should beneficial ownership
derived from cash-settled security-based swaps be included under
Regulation 13D-G? If the information regarding holdings of cash-settled
security-based swaps that would be required pursuant to proposed Rule
10B-1 were not available, would there be a need for the beneficial
ownership derived from cash-settled security-based swaps to be included
under Regulation 13D-G?

C. Proposed Amendments to Rule 13d-5 to Affirm Its Application and
Operation

We are proposing a series of amendments to Rule 13d-5 to clarify
and affirm its application to two or more persons who ``act as'' a
group under Sections 13(d)(3) and (g)(3) of the Exchange Act.
Specifically, we are proposing to amend Rule 13d-5 to:
<bullet> Change the title of the rule from ``Acquisition of
securities'' to ``Acquisition of beneficial ownership'' to more
accurately reflect the purpose, application and operation of the rule
and ensure its consistency with Section 13(d)(1);
<bullet> Revise Rule 13d-5(a) to conform the text to the new title
and Section 13(d);
<bullet> Redesignate paragraph (b)(1) as paragraph (b)(1)(i) and
revise it to remove the potential implication that it sets forth the
exclusive legal standard for group formation under Section 13(d)(3) or
13(g)(3);
<bullet> Add new paragraph (b)(1)(ii) to specify that if a person,
in advance of filing a Schedule 13D, discloses to any other person that
such filing will be made and such other person acquires securities in
the covered class for which the Schedule 13D will be filed, those
persons shall be deemed to have formed a group within the meaning of
Section 13(d)(3);
<bullet> Add new paragraph (b)(1)(iii) to specify that a group
subject to reporting obligations under Section 13(d) shall be deemed to
acquire any additional equity securities acquired by a member of the
group after the date of the group's formation;
<bullet> Add new paragraph (b)(1)(iv) to carve out from paragraph
(b)(1)(iii) any intra-group transfers of equity securities;
<bullet> Add new paragraph (b)(2)(i) to specify that when two or
more persons ``act as'' a group under Section 13(g)(3) of the Act, the
group shall be deemed to have become the beneficial owner, for purposes
of Sections 13(g)(1) and (2) of the Act, of the beneficial ownership
held by its members;
<bullet> Add new paragraph (b)(2)(ii) to specify that a group
regulated under Section 13(g) shall be deemed to acquire any additional
equity securities acquired by a member of the group after the date of
the group's formation; and
<bullet> Add new paragraph (b)(2)(iii) to carve out from paragraph
(b)(2)(ii) any intra-group transfers of equity securities.
In addition, the proposed amendments would redesignate current Rule
13d-5(b)(2) as new Rule 13d-6(b). This change is discussed both in this
section and in Section II.D, which describes our proposed amendments to
Rule 13d-6.
1. Background
Sections 13(d)(3) and 13(g)(3) are identical, and each of these two
provisions provides that ``[w]hen two or more persons act as a . . .
group for the purpose of acquiring, holding, or disposing of securities
of an issuer, such syndicate or group shall be deemed a `person.' ''
Neither of these two provisions defines the term ``group.'' The
determination of whether coordinated efforts among two or more persons
constitutes a group subject to regulation as a single ``person'' under
these two statutory provisions is a question of fact. Congress enacted
these provisions based on two practical considerations. First, Sections
13(d)(1) and 13(g)(1), by their terms, apply to, and impose filing
obligations upon, a single ``person.'' Second, Congress recognized the
need to protect against the evasion of disclosure requirements by
persons who collectively sought to change or influence control of an
issuer yet who each acquired and held an amount of beneficial ownership
at or just below the reporting threshold.\115\
---------------------------------------------------------------------------

\115\ Section 13(d)(3) was enacted to prevent ``easy avoidance
of section 13(d)'s disclosure requirements by a group of investors
acting together in their acquisition or holding of securities.''
Senate Report No. 550, 90th Congress, 1st Session 8 (1967); House
Report No. 1711, 90th Congress, 2d Session 8-9 (1968); see also 113
Cong. Record Proceedings and Debates of the 90th Congress; Bill-S.
510 (Jan. 18, 1967) (noting that the specific provision applicable
to groups was added to ``close the loophole that now exists which
allows a syndicate, where no member owns more than 10 percent, to
escape the reporting requirements of the Securities Exchange Act'').

---------------------------------------------------------------------------

[[Page 13866]]

Congress sought to address this problem of coordinated
circumvention by ``deeming'' two or more persons to be one person for
purposes of Sections 13(d) and 13(g). Based on the statutory treatment
of two or more persons as if they were one person when they ``act as''
a group for at least one of the three purposes specified in the
statutory provisions (i.e., acquiring, holding or disposing of
securities of an issuer), the beneficial ownership collectively held by
the group members is imputed to the group. To the extent the aggregate
amount of beneficial ownership exceeds 5% of a covered class, the group
may be required to file a beneficial ownership report.
In these situations, a fundamental question arises as to whether
the group is subject to Section 13(d) or Section 13(g). The
determination of which statutory provision applies to a group depends
on whether a non-exempt acquisition of beneficial ownership has been
made that can be imputed to the group, and, when on its own or added to
any other beneficial ownership held by the group, results in beneficial
ownership exceeding 5% of the covered class. If such an acquisition
occurs, the group is subject to regulation under Section 13(d).\116\ To
the extent no such acquisition attributable to the group has occurred,
but the collective amount of beneficial ownership held by the group
members exceeds 5% of a covered class at the end of a calendar year,
the group is subject to Section 13(g).
---------------------------------------------------------------------------

\116\ The operative term ``after acquiring'' in Section 13(d)(1)
makes the application of Section 13(d) contingent upon the existence
of an acquisition. Determining that an acquisition has occurred is
thus necessary to establish the application of Section 13(d).
---------------------------------------------------------------------------

Congress did not define the term ``acquisition.'' When the
Commission proposed the predecessor to the current Rule 13d-5(a),\117\
it made clear that purchases would not be the exclusive means of making
an acquisition and deemed ``certain persons who become beneficial
owners of securities to have acquired such securities,'' even if such
person ``had not intended, and had taken no action, to become a
beneficial owner.'' \118\ The Commission also adopted Rule 13d-5(b) to
address situations in which the factual record does not establish the
existence of an acquisition attributable to a group. Following Rule
13d-5(b)'s adoption, an acquisition by a group could thus be ``deemed''
to occur even in the absence of an associated market-based purchase or
other transaction, as could be the case when a group is formed for the
exclusive purpose of voting.\119\ Given that the acquisition which
triggers the reporting obligation must be made by a single person,
acquisitions occurring before the date of group formation are not
considered ``acquisitions'' of beneficial ownership that could trigger
a filing obligation. The requisite acquisition needed to satisfy the
statutory element ``after acquiring,'' therefore, must occur
contemporaneously with, or subsequent to, group formation. Without
evidence that an acquisition attributable to the group has occurred,
the filing deadline for a Schedule 13D also cannot be established under
Section 13(d)(1) and corresponding Rule 13d-1(a). To address this
concern, the Commission proposed that an acquisition was ``deemed'' to
occur if two or more persons agreed to act together for purposes of
acquiring, holding or disposing of any securities of the issuer. In
adopting Rule 13d-5, the Commission explained it was ``defining
acquisition'' and that the new provision ``deems the formation of
certain groups of persons for the purpose of acquiring, holding or
disposing of securities to be an acquisition which may trigger the
reporting requirements of section 13(d), even though the group has not
made any purchase or other acquisition subsequent to its formation.''
\120\ The new rule therefore provided the Commission with a mechanism
by which it could attribute an acquisition to the group for purposes of
not only satisfying the ``after acquiring'' element of Section
13(d)(1), but also designating a date of ``acquisition'' needed to
commence the 10-day filing deadline for the initial Schedule 13D.\121\
---------------------------------------------------------------------------

\117\ The predecessor rule, Rule 13d-6, was redesignated Rule
13d-5 in 1978. Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 (Apr. 28, 1978)]. Unless otherwise noted, references to Rule
13d-5 in this section of the release also refer to the predecessor
Rule 13d-6.
\118\ Various Proposals Relating to Beneficial Owners and
Holders of Record of Voting Securities, Release No. 34-11616 (Aug.
25, 1975) [40 FR 42212 (Sept. 11, 1975)]; see also Adoption of
Beneficial Ownership Disclosure Requirements, Release No. 34-13291
(Feb. 24, 1977) [42 FR 12342 at 12345 (Mar. 3, 1977)] (explaining
that ``[d]onees, executors, trustees and legatees who become
beneficial owners will be `deemed' to have acquired such securities,
even though such persons had not so intended and had taken no action
to become beneficial owners'').
\119\ See Adoption of Beneficial Ownership Disclosure
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342
(Mar. 3, 1977)] (adopting Rule 13d-6(b), the predecessor to current
Rule 13d-5(b)); Filing and Disclosure Requirements Relating to
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR
18484 (Apr. 28, 1978)] (redesignating Rule 13d-6(b) as current Rule
13d-5(b)). In proposing Rule 13d-6(b), the Commission was acting
partly in response to an appellate court ruling issued in connection
with private litigation. The appellate court found that it was
unnecessary ``for a group to acquire additional securities if their
combined holdings, upon formation of the group, were more than five
percent of the class'' for purpose of Section 13(d). See GAF Corp.
v. Milstein, 453 F. 2d 709 (2d Cir. 1971), cert. denied 400 U.S. 910
(1972). The Milstein group was an informal arrangement in which the
individual members were not bound to vote their shares as would be
the case if participating in a stock pool. The alleged group also
never had an enforceable right to vote. GAF Corporation asserted
that certain acts should be considered evidence of a conspiracy, but
the evidence did not show any additional purchases. The Second
Circuit Court of Appeals held that formation of a group of
shareholders alone, where their aggregate holdings exceed 10% of a
particular class of securities, and where no further acquisitions
are intended by the membership of the group, still required
compliance with Section 13(d). In so holding, the Second Circuit
refused to follow the ruling in Bath Industries, Inc. v. Blot, 427
F.2d 97 (7th Cir. 1970) where the Seventh Circuit held that a group
owning in excess of 10% of a class of securities must file only when
further acquisitions were contemplated. Recognizing that informal
associations could be subjected to reporting obligations upon mere
formation, the Seventh Circuit adopted an ``additional purchase''
rule. Even identification of the precise date of the alleged group
formation as the Second Circuit instructed the district court to
find upon remand, however, would not then have determined whether an
acquisition occurred that subjected the group to regulation under
Section 13(d) or the latest date by which the Schedule 13D could
have been timely filed.
\120\ Adoption of Beneficial Ownership Reporting Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
\121\ While the adopting release for Rule 13d-6(b) acknowledges
the Commission was providing ``more objective standards'' to help
determine the reporting obligation of groups under Section 13(d), it
qualified such statement by indicating that the standards were being
provided only for ``certain purposes'' rather than in every
instance. Adoption of Beneficial Ownership Reporting Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at 12342 (Mar. 3,
1977)]. The Commission's regulatory objective should be read in the
context of the overall impetus for the initial 1975 rule proposal,
which did not propose to define the term ``group.'' The Commission
further explained at adoption of Rule 13d-6(b) in 1977 that it had
previously published, on August 25, 1975, its ``Proposals Relating
to Disclosure of Beneficial Owners and Holders of Record of Voting
Securities.'' As set forth therein, the Commission's 1975 ownership
proposals, if adopted, would have ``deemed certain persons,
including members of a group, who become beneficial owners of
securities through non-purchase transactions to have `acquired' such
securities.'' Id. at 12343.
---------------------------------------------------------------------------

Given that the term ``group'' is not defined under Sections
13(d)(3) and 13(g)(3), investors, issuers and courts historically have
considered the circumstances under which two or more persons must
operate in order to be found to have formed agroup.\122\

[[Page 13867]]

Notwithstanding that the regulatory framework does not require proof of
an agreement between two or more persons as a prerequisite to
establishing the existence of a group, some courts, in assessing group
formation, consider an agreement among group members to be a necessary
element.\123\
---------------------------------------------------------------------------

\122\ In Sections 13(d)(3) and 13(g)(3), Congress identified,
but did not define, four associations through which collective
action may be taken by two or more persons that potentially could
subject them to regulation under Sections 13(d) and 13(g) as a
single person. In specifying ``partnership, limited partnership,
syndicate,'' Congress expressly referenced three types of groupings
of persons that, like the term ``group,'' are similarly undefined.
To the extent two or more persons could not be found to have
``act[ed] as a partnership, limited partnership [or] syndicate,''
such persons still could be found under the statutes to be jointly
operating as any ``other group.'' The reference to ``group,''
therefore, is simply designed to serve as a general classification
inclusive of the three specific, named types of associations, and
when combined with the term ``other,'' renders the term ``other
group'' but one of four types of associations identified by Congress
which are susceptible to being regulated as a single person under
Section 13(d) or 13(g).
\123\ For example, in CSX Corporation v. Children's Inv. Fund
Mgmt. (UK) LLP, 562 F. Supp. 2d 511 (S.D.N.Y. 2008), the district
court referred to a ``requisite agreement'' when offering an
analytical framework to be applied in assessing whether or not a
group had been formed, and cited to Hallwood Realty Partners, L.P.
v. Gotham Partners, L.P., 95 F. Supp. 2d 169, 176 (S.D.N.Y 2000),
aff'd, 286 F.3d 613 in support of this proposition.
---------------------------------------------------------------------------

In rendering opinions regarding group formation, some courts have
suggested that a group can only be formed if an agreement exists among
its purported members.\124\ These cases appear to reflect such courts'
attempts to find a workable means of administering the Section 13(d)
regulatory framework and making related determinations about when a
group may be found to exist under the statute. In addition, some courts
have construed the language of Rule 13d-5(b)(1), which provides that a
group is formed if an agreement to act together has been reached for
one of four purposes, as governing group formation in every instance as
opposed to discrete instances.\125\ These decisions suggest that a
plaintiff must prove, and by extension, a court must affirm, the
presence of an agreement for purposes of satisfying the legal standards
in Rule 13d-5(b)(1).
---------------------------------------------------------------------------

\124\ One early court decision that predates the adoption of
Rule 13d-5(b) found that a group had been formed earlier than
reported and opined that ``absent an agreement between [the
defendants] a `group' would not exist.'' Corenco Corp. v. Schiavone
& Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973). Similarly, another
court decision cited the necessity of ``sift[ing] through the record
to determine whether there [was] sufficient direct or circumstantial
evidence to support the inference of a formal or informal
understanding.'' Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir.
1979), cert. denied sub. nom. Dickinson v. SEC, 460 U.S. 1069
(1983). The court ultimately determined that ``direct and
circumstantial evidence supports [its] finding of an agreement
between'' the alleged group members. Id. In another decision, the
court reasoned that it was ``not compelled to play ostrich in the
face of the strong circumstantial evidence demonstrating the
existence of an agreement among [the defendants] . . . . It would
require a degree of naivete unbecoming to this Court to believe that
the various activities of defendants were not the product of an
agreement among the group but, rather, were merely coincidences.''
Champion Parts Rebuilders, Inc. v. Cormier Corp., 661 F. Supp. 825,
850 (N.D.Ill. 1987) (citations omitted). The court based its factual
finding that an agreement existed on evidence indicating: (a) A
common plan and goal; (b) a pattern of parallel and continued
purchases over a relatively short and essentially concurrent time
period; (c) correlation of defendants' activities and
intercommunications, largely through their common agent; and (d)
claims of shareholder support at the meeting with the corporation.
Id.
\125\ For example, the Second Circuit, finding that the district
court in the above mentioned CSX Corporation matter did not make
sufficient findings to permit appellate review of a group violation
of Section 13(d), stated: ``on remand the District Court will have
to make findings as to whether the Defendants formed a group for the
purpose of `acquiring, holding, voting or disposing,' 17 CFR
240.13d-5(b)(1) of [an issuer's] shares owned outright.'' CSX Corp.
v. Children's Inv. Fund Mgmt., 2011 WL 2750913, at *4 (2d Cir. July
18, 2011). An earlier Second Circuit opinion stated, ``the key
inquiry in the present case is whether [the defendants] `agreed to
act together for the purpose of acquiring, holding, voting or
disposing of' [an issuer's] common stock. 17 CFR 240.13d-5(b)(1).''
Morales v. Quintel Ent., Inc., 249 F.3d I 15 (2d Cir. 2001). In a
ruling that co

[…truncated; see source link]

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on March 10, 2022.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.