Rule2023-22678
Modernization of Beneficial Ownership Reporting
Primary source
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Published
November 7, 2023
Effective
February 5, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to certain rules that govern beneficial ownership reporting. The amendments generally shorten the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G. The amendments also clarify the disclosure requirements of Schedule 13D with respect to derivative securities. We also are expanding the timeframe within a given business day by which Schedules 13D and 13G must be filed, and separately requiring that Schedule 13D and 13G filings be made using a structured, machine-readable data language. Further, we discuss how, under the current rules, an investor's use of a cash-settled derivative security may result in the person being treated as a beneficial owner of the class of the reference equity security. We also are providing guidance on the application of the current legal standard found in section 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934 to certain common types of shareholder engagement activities. Finally, we are making certain technical revisions.
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<title>Federal Register, Volume 88 Issue 214 (Tuesday, November 7, 2023)</title>
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[Federal Register Volume 88, Number 214 (Tuesday, November 7, 2023)]
[Rules and Regulations]
[Pages 76896-76984]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22678]
[[Page 76895]]
Vol. 88
Tuesday,
No. 214
November 7, 2023
Part II
Securities and Exchange Commission
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17 CFR Parts 232 and 240
Modernization of Beneficial Ownership Reporting; Final Rule
Federal Register / Vol. 88 , No. 214 / Tuesday, November 7, 2023 /
Rules and Regulations
[[Page 76896]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 232 and 240
[Release Nos. 33-11253; 34-98704; File No. S7-06-22]
RIN 3235-AM93
Modernization of Beneficial Ownership Reporting
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; guidance.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to certain rules that govern beneficial ownership
reporting. The amendments generally shorten the filing deadlines for
initial and amended beneficial ownership reports filed on Schedules 13D
and 13G. The amendments also clarify the disclosure requirements of
Schedule 13D with respect to derivative securities. We also are
expanding the timeframe within a given business day by which Schedules
13D and 13G must be filed, and separately requiring that Schedule 13D
and 13G filings be made using a structured, machine-readable data
language. Further, we discuss how, under the current rules, an
investor's use of a cash-settled derivative security may result in the
person being treated as a beneficial owner of the class of the
reference equity security. We also are providing guidance on the
application of the current legal standard found in section 13(d)(3) and
13(g)(3) of the Securities Exchange Act of 1934 to certain common types
of shareholder engagement activities. Finally, we are making certain
technical revisions.
DATES:
Effective dates: The amendments are effective on February 5, 2024.
Compliance dates: See section II.G.
FOR FURTHER INFORMATION CONTACT: Nicholas Panos, Senior Special
Counsel, and Valian Afshar, Senior Special Counsel, 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 adopting 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''), 17 CFR 240.13d-101 (``Rule 13d-101''), and
17 CFR 240.13d-102 (``Rule 13d-102'') under the Securities Exchange Act
of 1934 [15 U.S.C. 78a et seq.] (``Exchange Act'').\1\ We also are
adopting 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\ In addition, we are rescinding 17 CFR
240.13d-7 (``Rule 13d-7'').
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\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.
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Table of Contents
I. Introduction
II. Discussion of the Final Amendments
A. 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), (e), (f), and (g)
2. Rule 13d-1(b), (c), and (d)
3. Rule 13d-2(a) and (b)
4. Rule 13d-2(c) and (d)
5. Rules 13(a)(4) and 201(a) of Regulation S-T
B. Proposed Amendment to Rule 13D-3 Regarding the Use of Cash-
Settled Derivative Securities
1. Proposed Amendment
2. Comments Received
3. Commission Guidance
C. Proposed Amendments to Rule 13D-5
1. Proposed Rule 13d-5(b)(1)(i), (b)(2)(i), and (b)(1)(ii)
2. Proposed Rule 13d-5(b)(1)(iii) and (b)(2)(ii)
3. Proposed Rule 13d-5(b)(1)(iv) and (b)(2)(iii)
D. Proposed Amendments to Rule 13D-6 To Create Certain
Exemptions
1. Proposed Amendments
2. Comments Received
3. Final Amendments
E. Amendment to Schedule 13D To Clarify Disclosure Requirements
Regarding Derivative Securities
1. Proposed Amendment
2. Comments Received
3. Final Amendment
F. Structured Data Requirement for Schedules 13D and 13G
1. Proposed Amendment
2. Comments Received
3. Final Amendment
G. Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Overview
B. Baseline
1. Current Schedule 13D and 13G Filing Requirements
2. Market Trends
3. Affected Parties and Current Market Practices
C. Economic Effects of the Final Rules
1. Shortened Initial Schedule 13D Filing Deadline
2. Shortened Schedule 13G Filing Deadlines
3. Other Amendments
D. Reasonable Alternatives to the Final Rules
1. Alternative Filing Deadlines
2. Tiered Approaches
3. Modify Structured Data Requirement
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of Comment Letters on PRA Estimates
C. Burden and Cost Estimates for the Final Amendments
VI. Regulatory Flexibility Act Certification Statutory Authority
I. Introduction
We are amending certain rules within 17 CFR 240.13d-1 through
240.13f-1 (``Regulation 13D-G'') \3\ and Regulation S-T to modernize
the beneficial ownership reporting requirements and improve their
operation and efficacy. Some \4\ of these amendments are based on the
amendments that the Commission proposed in 2022 (``Proposed
Amendments'').\5\ Specifically, we are adopting revisions to the
deadlines for Schedule 13D and Schedule 13G filings. We also are
adopting certain related technical changes to Regulation S-T that the
Commission proposed in connection with these amendments. Further, we
are requiring that Schedule 13D and 13G filings be submitted using a
structured, machine-readable data language.
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\3\ Unless otherwise noted, when we refer to Regulation 13D-G,
we are referring to title 17, part 240 of the Code of Federal
Regulations [17 CFR part 240], in which 17 CFR 240.13d-1 through
240.13f-1 are published.
\4\ See infra note 22 for a discussion of certain technical
amendments we are adopting that the Commission did not previously
propose.
\5\ See Modernization of Beneficial Ownership Reporting, Release
Nos. 33-11030; 34-94211 (Feb. 10, 2022) [87 FR 13846 (Mar. 10,
2022)] (``Proposing Release''). On Apr. 28, 2023, the Commission
reopened the comment period for the Proposing Release in connection
with the addition to the comment file of a memorandum prepared by
staff of the Commission's Division of Economic and Risk Analysis.
See Reopening of Comment Period for Modernization of Beneficial
Ownership Reporting, Release Nos. 33-11180; 34-97405 (Apr. 28, 2023)
[88 FR 28440 (May 4, 2023)] (``Reopening Release''). That memorandum
provided supplemental data and analysis related to certain economic
effects of the Proposed Amendments. See Memorandum of the Staff of
the Division of Economic and Risk Analysis, Supplemental data and
analysis on certain economic effects of proposed amendments
regarding the reporting of beneficial ownership (Apr. 28, 2023),
available at <a href="https://www.sec.gov/comments/s7-06-22/s70622-20165251-334474.pdf">https://www.sec.gov/comments/s7-06-22/s70622-20165251-334474.pdf</a> (``DERA Memorandum'').
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In response to the comments we received on the Proposed
Amendments,\6\ however, we are making
[[Page 76897]]
certain adjustments from the proposal. For example, we are not adopting
proposed 17 CFR 240.13d-3(e) (``Rule 13d-3(e)'') to deem certain
holders of cash-settled derivative securities \7\ as beneficial owners
of the reference covered class.\8\ Instead, we discuss how, under
current Rule 13d-3, persons using these types of derivative securities
may already be subject to regulation as beneficial owners. We also are
not adopting many of the proposed amendments to Rules 13d-5 \9\ and
13d-6. Instead, we are issuing guidance on the application of the
current legal standard found in sections 13(d)(3) and 13(g)(3) to
certain common types of shareholder engagement activities.
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\6\ See generally letters submitted in connection with the
Proposed Amendments, available at <a href="https://www.sec.gov/comments/s7-06-22/s70622.htm">https://www.sec.gov/comments/s7-06-22/s70622.htm</a>. Unless otherwise specified, all references in this
release to comment letters are to comments submitted on the Proposed
Amendments. Further, on June 22, 2023, the Commission's Investor
Advisory Committee (``IAC'') adopted recommendations (``IAC
Recommendations'') with respect to the Proposed Amendments. See U.S.
Securities and Exchange Commission Investor Advisory Committee,
Recommendation of the Market Structure Subcommittee of the SEC
Investor Advisory Committee on SEC Proposed Amendments to Regulation
13D-G, Proposed Rule 10B-1, and Proposed Rule 9j-1 (June 22, 2023),
available at <a href="https://www.sec.gov/files/spotlight/iac/20230622-recommendation-regarding-sec-proposed-amendments-regulation-13d-g-proposed-rule-10b-1-and.pdf">https://www.sec.gov/files/spotlight/iac/20230622-recommendation-regarding-sec-proposed-amendments-regulation-13d-g-proposed-rule-10b-1-and.pdf</a>. The IAC was established in Apr. 2012
pursuant to section 911 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act [Pub. L. 111-203, sec. 911, 124 Stat. 1376,
1822 (2010)] (``Dodd-Frank Act'') to advise and make recommendations
to the Commission on regulatory priorities, the regulation of
securities products, trading strategies, fee structures, the
effectiveness of disclosure, and initiatives to protect investor
interests and to promote investor confidence and the integrity of
the securities marketplace. We discuss the IAC Recommendations in
connection with the comments received on the Proposed Amendments
below. See infra sections II.A.1.b, II.A.2.b, II.B.2, and II.C.1.b.
In addition, on Sept. 21, 2022, the IAC held a meeting that included
a panel discussion on the Proposed Amendments. See the agenda for
that meeting, including the panelists that discussed the Proposed
Amendments, at <a href="https://www.sec.gov/spotlight/investor-advisory-committee/iac092122-agenda.htm">https://www.sec.gov/spotlight/investor-advisory-committee/iac092122-agenda.htm</a>.
\7\ As used in this release (including for purposes of proposed
Rule 13d-3(e)), the term ``derivative security'' has 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). For purposes of proposed Rule 13d-3(e), the
term ``derivative security'' would not have included a security-
based swap, as defined in section 3(a)(68) of the Exchange Act and
the rules and regulations thereunder (``SBS''). As the context
requires, references to ``SBS'' in this release includes both the
singular (``security-based swap'') and plural (``security-based
swaps'') form. See Proposing Release at 13864 & nn.110-114.
\8\ 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.
\9\ See infra note 22 and sections II.C.2 and II.C.3 for a
discussion of the proposed amendments to Rule 13d-5 that we are
adopting.
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With respect to the Schedule 13D and Schedule 13G filing deadlines,
we are amending the following rules:
<bullet> 17 CFR 240.13d-1(a) (``Rule 13d-1(a)''): Shortening the
filing deadline for the initial Schedule 13D to within five business
days \10\ after the date on which a person acquires beneficial
ownership of more than five percent of a covered class; \11\
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\10\ The term ``business day'' currently is not defined in
section 13(d) or 13(g) or any rule of Regulation 13D-G. Accordingly,
we are amending 17 CFR 240.13d-1(i) (``Rule 13d-1(i)'') by adopting
a new paragraph (i)(2) that defines ``business day'' for purposes of
Regulation 13D-G to mean any day, other than Saturday, Sunday, or a
Federal holiday, from 12 a.m. to 11:59 p.m. Eastern Time. See infra
notes 14 and 134 for further discussion of our new definition of
``business day.''
\11\ Throughout this release, we refer to an initial Schedule
13D filing obligation as being incurred under Rule 13d-1(a) when a
person ``acquires beneficial ownership of more than 5% of a covered
class,'' among other similar formulations. These formulations refer
to the requirement in Rule 13d-1(a), which currently states that
``[a]ny person who, after acquiring directly or indirectly the
beneficial ownership of any equity security of a [covered class], is
directly or indirectly the beneficial owner of more than five
percent of the class shall, within 10 days after the acquisition,
file with the Commission, a . . . Schedule 13D.''
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<bullet> 17 CFR 240.13d-1(e), (f), and (g) (``Rule 13d-1(e), (f),
and (g)''): Shortening the filing deadline for the initial Schedule 13D
required to be filed by certain persons who become ineligible to report
on Schedule 13G in lieu of Schedule 13D to five business days after the
event that causes the ineligibility;
<bullet> 17 CFR 240.13d-1(b) and (d) (``Rule 13d-1(b) and (d)''):
Shortening the deadline for the initial Schedule 13G filing for
Qualified Institutional Investors (``QIIs'') \12\ and Exempt Investors
\13\ to within 45 days \14\ after the end of the calendar quarter in
which beneficial ownership first exceeds five percent of a covered
class; \15\
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\12\ 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 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, a person registered as an
investment adviser 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 Rule 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). In addition, under Rule 13d-
1(b), in order to qualify to report on Schedule 13G in lieu of
Schedule 13D, a QII must have acquired securities in the covered
class in the ordinary course of business and not with the purpose
nor with the effect of changing or influencing the control of the
issuer, nor in connection with or as a participant in any
transaction having such purpose or effect. 17 CFR 240.13d-
1(b)(1)(i).
\13\ The term ``Exempt Investor'' as used in this release refers
to persons holding beneficial ownership of more than 5% of a covered
class, but who have not made an acquisition of beneficial ownership
subject to section 13(d). For example, persons who acquire all of
their securities prior to the issuer registering the subject
securities under the Exchange Act are not subject to section 13(d).
In addition, persons who acquire no more than 2% of a covered class
within a 12-month period are exempted from section 13(d) by section
13(d)(6)(B). In both cases, however, those persons are subject to
section 13(g). Amendments to Beneficial Ownership Reporting
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854, n.8
(Jan. 16, 1998)]; see also Proposing Release at 13856, n.55.
\14\ Any reference to ``day'' in this release means ``calendar
day,'' and those terms may be used interchangeably. Any reference to
``business day'' means ``business day,'' as we are defining that
term. See supra note 10 and infra note 134 for discussions of our
new definition of ``business day.''
\15\ In addition, we are retaining the requirement in Rule 13d-
1(b)(2) that a QII file its initial Schedule 13G on a more expedited
basis if its beneficial ownership exceeds 10% of a covered class. 17
CFR 240.13d-1(b)(2). We are amending that rule, however, to require
that such an initial Schedule 13G be filed within five business days
after the end of the first month in which the QII's beneficial
ownership exceeds 10% of a covered class, computed as of the last
day of the month, rather than the current requirement of 10 calendar
days after month-end.
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<bullet> 17 CFR 240.13d-1(c) (``Rule 13d-1(c)''): Shortening the
deadline for Passive Investors \16\ to file an initial Schedule 13G in
lieu of Schedule 13D to within five business days after the date on
which they acquire beneficial ownership of more than five percent of a
covered class;
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\16\ 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 and are not 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. Amendments to Beneficial Ownership Reporting Requirements,
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854, n.9 (Jan. 16,
1998)]. These investors are ineligible to report beneficial
ownership pursuant to Rule 13d-1(b) or (d) but are eligible to
report beneficial ownership on Schedule 13G in reliance upon Rule
13d-1(c).
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<bullet> 17 CFR 240.13d-2(a) (``Rule 13d-2(a)''): Revising the
deadline for filing amendments to Schedule 13D to two business days
after the date on which a material change occurs;
[[Page 76898]]
<bullet> 17 CFR 240.13d-2(b) (``Rule 13d-2(b)''): Shortening the
deadline for Schedule 13G amendments filed pursuant to that provision
to 45 days after the end of the calendar quarter in which a reportable
change occurs;
<bullet> 17 CFR 240.13d-2(c) (``Rule 13d-2(c)''): Shortening the
filing deadline for Schedule 13G amendments filed pursuant to that
provision to five business days after the end of the month in which
beneficial ownership first exceeds 10 percent of a covered class, and
thereafter upon any deviation by more than five percent of the covered
class, with these requirements applying if the thresholds were crossed
at any time during a month; and
<bullet> 17 CFR 13d-2(d) (``Rule 13d-2(d)''): Revising the deadline
for Schedule 13G amendments filed pursuant to that provision to two
business days after the date on which beneficial ownership exceeds 10
percent of a covered class, and thereafter upon any deviation by more
than five percent of the covered class.
In addition, we are amending Rule 13d-2(b) to require that an
amendment to a Schedule 13G be filed only if a ``material change''
occurs (replacing the current rule text that requires an amendment upon
the occurrence of ``any change'' in the facts previously reported).
Further, we are amending 17 CFR 232.13(a) (``Rule 13(a) of Regulation
S-T'') to permit Schedules 13D and 13G, and any amendments thereto,
that are submitted by direct transmission commencing on or before 10
p.m. Eastern Time \17\ on a given business day to be deemed to have
been filed on the same business day.\18\ This amendment should provide
additional time for beneficial owners to prepare and submit their
Schedule 13D or 13G filings.\19\ The following table summarizes the
changes we are adopting with respect to Schedule 13D and 13G filings,
as described more fully in section II.A:
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\17\ When we refer to ``Eastern Time'' in this release, we mean
Eastern Standard Time or Eastern Daylight Saving Time, whichever is
currently in effect.
\18\ This rule applies to filing deadlines expressed both in
calendar days and in business days. For example, for filing
deadlines expressed in calendar days, if the deadline falls on a
Federal holiday, a Saturday, or a Sunday, then the filing may be
made on the next business day thereafter. See infra note 268.
\19\ See Rule 13(a)(2) of Regulation S-T. We also are amending
17 CFR 232.201(a) (``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.
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Current Schedule Current Schedule
Issue 13D New Schedule 13D 13G New Schedule 13G
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Initial Filing Deadline......... Within 10 days Within five QIIs & Exempt QIIs & Exempt
after acquiring business days Investors: 45 Investors: 45
beneficial after acquiring days after days after
ownership of more beneficial calendar year-end calendar quarter-
than 5% or losing ownership of more in which end in which
eligibility to than 5% or losing beneficial beneficial
file on Schedule eligibility to ownership exceeds ownership exceeds
13G. Rule 13d- file on Schedule 5%. Rule 13d-1(b) 5%. Rule 13d-1(b)
1(a), (e), (f), 13G. Rule 13d- and (d). and (d).
and (g). 1(a), (e), (f), QIIs: 10 days QIIs: Five
and (g). after month-end business days
in which after month-end
beneficial in which
ownership exceeds beneficial
10%. Rule 13d- ownership exceeds
1(b). 10%. Rule 13d-
1(b).
Passive Investors: Passive Investors:
Within 10 days Within five
after acquiring business days
beneficial after acquiring
ownership of more beneficial
than 5%. Rule 13d- ownership of more
1(c). than 5%. Rule 13d-
1(c).
Amendment Triggering Event...... Material change in Same as current All Schedule 13G All Schedule 13G
the facts set Schedule 13D: Filers: Any Filers: Material
forth in the Material change change in the change in the
previous Schedule in the facts set information information
13D. Rule 13d- forth in the previously previously
2(a). previous Schedule reported on reported on
13D. Rule 13d- Schedule 13G. Schedule 13G.
2(a). Rule 13d-2(b). Rule 13d-2(b).
QIIs & Passive QIIs & Passive
Investors: Upon Investors: Same
exceeding 10% as current
beneficial Schedule 13G:
ownership or a 5% Upon exceeding
increase or 10% beneficial
decrease in ownership or a 5%
beneficial increase or
ownership. Rule decrease in
13d-2(c) and (d). beneficial
ownership. Rule
13d-2(c) and (d).
Amendment Filing Deadline....... Promptly after the Within two All Schedule 13G All Schedule 13G
triggering event. business days Filers: 45 days Filers: 45 days
Rule 13d-2(a). after the after calendar after calendar
triggering event. year-end in which quarter-end in
Rule 13d-2(a). any change which a material
occurred. Rule change occurred.
13d-2(b). Rule 13d-2(b).
QIIs: 10 days QIIs: Five
after month-end business days
in which after month-end
beneficial in which
ownership beneficial
exceeded 10% or ownership exceeds
there was, as of 10% or a 5%
the month-end, a increase or
5% increase or decrease in
decrease in beneficial
beneficial ownership. Rule
ownership. Rule 13d-2(c).
13d-2(c).
Passive Investors: Passive Investors:
Promptly after Two business days
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.
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As noted above, we are not adopting proposed Rule 13d-3(e).
Instead, we discuss the circumstances in which a holder of a cash-
settled derivative security, excluding SBS, may be deemed the
beneficial owner of the reference covered class under Rule 13d-3. We
also are not adopting the proposed exemption in 17 CFR 240.13d-6(d)
[[Page 76899]]
(``Rule 13d-6(d)''), which the Commission proposed to enable certain
persons to transact in derivative securities in the ordinary course of
business without concern that they had formed a group under section
13(d)(3) or 13(g)(3), in part because we are not adopting proposed Rule
13d-3(e).
To further clarify the disclosure requirements with respect to
derivative securities, particularly cash-settled derivative securities,
held by a person required to report on Schedule 13D, the Commission is
adopting an amendment to Schedule 13D. Specifically, we are amending
Item 6 of 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 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 any derivative not
originating with, or offered or sold by, the issuer, such as a cash-
settled option or SBS.
As noted above, we are not adopting most of the proposed
substantive amendments to Rule 13d-5.\20\ We also are not adopting
proposed 17 CFR 240.13d-6(c) (``Rule 13d-6(c)''), which would have
specified certain circumstances under which two or more persons may
coordinate and consult with one another and engage with an issuer
without being subject to regulation as a group. Instead, we are issuing
guidance regarding the appropriate legal standard for determining
whether a group is formed. This guidance is intended to provide clarity
on the circumstances under which a person may be deemed to have formed
a group with another person or persons within the meaning of sections
13(d)(3) and 13(g)(3).
---------------------------------------------------------------------------
\20\ But see infra note 22 and sections II.C.2 and 3 for a
discussion of the proposed amendments to Rule 13d-5 that we are
adopting.
---------------------------------------------------------------------------
We are adopting the proposed requirement that Schedules 13D and 13G
be filed using a structured, machine-readable data language. We are,
therefore, now requiring that all disclosures, including quantitative
disclosures, textual narratives, and identification checkboxes, on
Schedules 13D and 13G be filed using an XML-based language.\21\ This
requirement is intended to make it easier for investors and other
market participants to access, compile, and analyze information that is
disclosed on Schedules 13D and 13G.
---------------------------------------------------------------------------
\21\ Under this structured data requirement, only the exhibits
to Schedules 13D and 13G will remain unstructured.
---------------------------------------------------------------------------
Finally, we also are adopting certain technical revisions, some of
which were not included among the Proposed Amendments.\22\
---------------------------------------------------------------------------
\22\ Specifically, as proposed, we are: (1) changing the title
of Rule 13d-5 from ``Acquisition of securities'' to ``Acquisition of
beneficial ownership''; (2) revising 17 CFR 240.13d-5(a) (``Rule
13d-5(a)'') to conform the text to the new title; (3) redesignating
current Rule 13d-6 as new 17 CFR 240.13d-6(a) (``Rule 13d-6(a)'');
and (4) redesignating current 17 CFR 240.13d-5(b)(2) (``Rule 13d-
5(b)(2)'') as new 17 CFR 240.13d-6(b) (``Rule 13d-6(b)''). The
Commission did not receive any substantive comments on these
amendments, so we are adopting them as proposed for the reasons set
forth in the Proposing Release. We also are making other technical
changes not included in the Proposing Release, namely: (1)
rescinding in its entirety Rule 13d-7 because Congress already
repealed the statutory requirements under sections 13(d)(1), (d)(2),
(g)(1), and (g)(2) for beneficial owners to deliver a copy of a
Schedule 13D or 13G, and any amendments thereto, to the issuer of
the covered class and any national securities exchanges where such
equity securities are listed, see Public Law 111-203, 124 Stat. 1900
929R(a)(1)(B) through (4)(B) (2010); (2) making conforming
amendments to Schedules 13D and 13G to remove the notes in those
Schedules that refer to Rule 13d-7 and its requirements; (3)
correcting incorrect cross references in Item 8 of Schedule 13G; and
(4) replacing the gender-based pronouns used in Rules 13d-1, 13d-3,
13d-6, 13d-101, and 13d-102 with gender-neutral phrases and making
additional conforming edits to the surrounding text as necessary.
Although the Commission did not propose these amendments, we find
good cause, in accordance with the Administrative Procedure Act
(``APA''), Public Law 79-404, 60 Stat. 237 (June 11, 1946), that, in
light of their technical nature, notice and public comment in
respect of these amendments is impracticable, unnecessary, or
contrary to the public interest. 5 U.S.C. 553(b)(3)(B).
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II. Discussion of the Final Amendments
A. 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 adopting a series of amendments to the deadlines for filing
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. These amendments are listed in section
I above and discussed in more detail below.
1. Rule 13d-1(a), (e), (f), and (g)
Section 13(d)(1) of the Exchange Act requires a disclosure
statement to be filed ``within ten days after [acquiring beneficial
ownership of more than five percent of a covered class] or within such
shorter time as the Commission may establish by rule.'' \23\ Consistent
with this provision, Rule 13d-1(a) sets forth the 10-day filing
deadline for the initial Schedule 13D.\24\ Although the Dodd-Frank Act
amended section 13(d)(1) to grant the Commission the authority to
shorten the deadline for filing the initial Schedule 13D, the 10-day
deadline has not been updated since it was enacted more than 50 years
ago.\25\
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\23\ 15 U.S.C. 78m(d)(1).
\24\ 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).
\25\ Section 13(d)(1) of the Exchange Act was enacted by the
Ninetieth Congress in 1968 through the approval of Senate Bill 510.
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Rule 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) \26\ or (c) \27\ (which permit investors to file the
more abbreviated Schedule 13G in lieu of the longer-form Schedule 13D).
Rule 13d-1(e), (f), and (g) ensure that initial Schedule 13D filings
uniformly are subject to a 10-day deadline, regardless of whether the
beneficial owners were previously eligible to file a Schedule 13G in
lieu of the Schedule 13D.
---------------------------------------------------------------------------
\26\ 17 CFR 240.13d-1(b).
\27\ 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). Rule 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.\28\ Institutional and non-institutional
beneficial owners who are unable to certify that they do not hold
beneficial ownership for the purpose of or with the effect of changing
or influencing the control of the issuer 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.'' \29\ Rule 13d-1(e)(1)
requires
[[Page 76900]]
such persons to 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.
---------------------------------------------------------------------------
\28\ 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.''
\29\ 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 expressed the view 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)].
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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 percent 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 percent 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.
Rule 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). Under Rule 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
Rule 13d-1(b) and (c).
a. Proposed Amendments
In the Proposing Release, the Commission proposed to amend Rule
13d-1(a) to require a Schedule 13D to be filed within five days after
the date on which a person acquires beneficial ownership of more than
five percent of a covered class. The Commission stated that the
deadline for filing an initial Schedule 13D should be revised in light
of advances in technology and developments in the financial markets and
noted that shortening that deadline would be consistent with previous
efforts to accelerate public disclosures of material information to the
market.\30\ The Commission also asserted that the proposed five-day
deadline would maintain an appropriate balance between the requirement
that material information be timely disseminated to investors and the
competing interest that undue burdens not be imposed in the change of
control context.\31\ In addition, the Commission stated that it was
mindful of the need to balance the market's demand for timely
information and the administrative burden placed upon a filer to
adequately and accurately prepare that information.\32\ Finally, the
Commission noted that the current 10-day filing deadline ``contributes
to information asymmetries that could harm investors'' and stated that
shortening that deadline could increase transparency and provide
assurance ``that transactions are not being made based on mispriced
securities caused by a prolonged lag in the dissemination of market-
moving information,'' thereby improving investor confidence, market
efficiency, and liquidity.\33\
---------------------------------------------------------------------------
\30\ Proposing Release at 13851.
\31\ Id.
\32\ Id. at 13852.
\33\ Proposing Release at 13850, 13852.
---------------------------------------------------------------------------
In the Proposing Release, the Commission also proposed to amend the
initial Schedule 13D filing deadline under Rule 13d-1(e)(1), (f)(1),
and (g) for largely the same reasons that it proposed to amend Rule
13d-1(a). Specifically, the Commission proposed to make conforming
revisions to Rule 13d-1(e), (f), and (g) so that persons who initially
elected to report beneficial ownership on Schedule 13G, in lieu of a
Schedule 13D, but subsequently lost their eligibility would be treated
no differently from persons who make a Schedule 13D their initial
filing.\34\ Accordingly, the Commission proposed to amend Rule 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.\35\
---------------------------------------------------------------------------
\34\ Id. at 13854.
\35\ Id.
---------------------------------------------------------------------------
b. Comments Received
Commenters \36\ expressed a range of views on the proposed
amendments to Rule 13d-1(a), (e), (f), and (g). A number of commenters
supported shortening the deadline for filing an initial Schedule 13D
from 10 days to five days.\37\ Several
[[Page 76901]]
commenters asserted that the proposed amendments would increase the
timeliness and quality of information for market participants.\38\ A
number of commenters asserted that the proposed amendments would
increase transparency and fairness in the financial markets.\39\
---------------------------------------------------------------------------
\36\ Throughout the release, in describing some of the comments
we received on the Proposed Amendments, we focus on those commenters
that responded to a specific request for comment or question raised
in the Proposing Release or Reopening Release, or that addressed a
specific Proposed Amendment. We note that several commenters
expressed general support or opposition for the Proposed Amendments
or raised concerns or made recommendations that are unrelated to or
beyond the scope of the Proposed Amendments; we do not, however,
summarize all of their comments in this release. For the sake of
brevity, we also do not cite letters that substantially duplicate
comments made in other letters that we cite in this release. For
example, in response to the Reopening Release, a number of
commenters submitted substantially identical letters generally
supporting some of the Proposed Amendments and expressing concerns
or making recommendations with respect to other parts of the
Proposed Amendments. See, e.g., Letter Type B, available at <a href="https://www.sec.gov/comments/s7-06-22/s70622-typeb.htm">https://www.sec.gov/comments/s7-06-22/s70622-typeb.htm</a>; Letter Type C,
available at <a href="https://www.sec.gov/comments/s7-06-22/s70622-typec.pdf">https://www.sec.gov/comments/s7-06-22/s70622-typec.pdf</a>.
We also note that several commenters submitted letters with
substantially similar views as those expressed in Letter Type B, but
with the letters worded sufficiently differently that they could not
be consolidated with Letter Type B. See, e.g., letter from Gerardo
Cruz (June 27, 2023). We note the same with respect to Letter Type
C. See, e.g., letters from Chad Thompson (June 29, 2023); Bert
Abanes (June 28, 2023). See infra note 37 for a discussion of Letter
Type A. See infra note 458 for a discussion of Letter Type D and
Letter Type E.
\37\ See, e.g., letters from Committee on Federal Regulation of
Securities of the Section of Business Law of the American Bar
Association (Apr. 28, 2022) (``ABA'') (expressly supporting only the
proposed amendment to Rule 13d-1(a), but noting that ``[t]he
Committee is not unanimous in this view'' and that ``[t]here is
support among some members of the Committee to further shorten the
initial filing deadline to one or two calendar days'' and that
``there are other members of the Committee that suggest a five
business day deadline is more appropriate''); Brandon Rees, Deputy
Director of Corporations and Capital Markets, AFL-CIO (Apr. 11,
2022) (``AFL-CIO'') (expressly supporting only the proposed
amendment to Rule 13d-1(a)); Americans for Financial Reform
Education Fund (Apr. 11, 2022) (``AFREF'') (same); Americans for
Financial Reform Education Fund, American Federation of Labor and
Congress of Industrial Organizations (AFL-CIO), Communications
Workers of America (CWA), Interfaith Center on Corporate
Responsibility (ICCR), Public Citizen (June 27, 2023) (``AFREF, et
al.'') (same); Anonymous (Feb. 19, 2022) (``Anonymous 1'');
Anonymous (Feb. 19, 2022) (``Anonymous 3''); Anonymous (Feb. 20,
2022) (``Anonymous 5''); Anonymous (Mar. 14, 2022) (``Anonymous
11''); Anonymous (Mar. 14, 2022) (``Anonymous 12''); Anthony R.,
Individual Investors (Feb. 18, 2022) (``Anthony R.''); Better
Markets (Apr. 11, 2022) (``Better Markets I'') (same); Better
Markets (June 27, 2023) (``Better Markets II'') (same); Maria
Ghazal, Senior Vice President and Counsel, Business Roundtable (Apr.
11, 2022) (``BRT'') (same); Curtis Robinson (Feb. 18, 2022) (``C.
Robinson''); Richard F. McMahon, Jr., Senior Vice President, Energy
Supply & Finance Edison Electric Institute (Mar. 22, 2022)
(``EEI''); An Investor, Engineer (Apr. 4, 2022) (``Engineer''); Mark
R. Allen, Executive Vice President, FedEx Corporation (Apr. 12,
2022) (``FedEx''); Freeport-McMoRan Inc./Douglas N. Currault II,
Senior Vice President and General Counsel (Apr. 11, 2022)
(``Freeport-McMoRan''); Tyler Gellasch, Executive Director, Healthy
Markets Association (Mar. 22, 2022) (``HMA I''); Healthy Markets
Association (Apr. 29, 2022) (``HMA II'') (same); Jack Pieper (Feb.
21, 2022) (``J. Pieper''); Joshua Soucie, Managing Director,
Singularity Acquisitions LLC (Feb. 21, 2022) (``J. Soucie''); Jonah
(Feb. 18, 2022) (``Jonah''); Juan, Relationship Banker II (Feb. 19,
2022) (``Juan''); Brandon Rees, Deputy Director of Corporations and
Capital Markets, AFL-CIO (June 6, 2022) (``Labor Unions'') (same);
Mark C. (Feb. 19, 2022) (``Mark C.''); Mike (Feb. 23, 2022)
(``Mike''); Jeffrey S. Davis, Senior Vice President and Senior
Deputy General Counsel, Nasdaq, Inc. (Apr. 12, 2022) (``Nasdaq'');
National Investor Relations Institute (Apr. 15, 2022) (``NIRI'')
(same); Phillip Worts (July 29, 2023) (``P. Worts''); Marc
Steinberg, Radford Chair in Law and Professor of Law, Southern
Methodist University (Feb. 22, 2022) (``Prof. Steinberg'') (same);
Society for Corporate Governance (Apr. 13, 2022) (``SCG'') (same);
Christina Maguire, President and Chief Executive Officer, Society
for Corporate Governance and Matthew D. Brusch, President and CEO,
National Investor Relations Institute (July 7, 2023) (``SCG &
NIRI'') (same); Tammy Baldwin, Sherrod Brown, Bernard Sanders,
Elizabeth Warren, Tammy Duckworth, and Jeffrey A. Merkley, United
States Senators (July 18, 2022) (``Sen. Baldwin, et al.'') (same);
SIFMA Asset Management Group, William Thurn, Managing Director,
SIFMA AMG (Apr. 11, 2022) (``SIFMA AMG'') (same); Theodore N.
Mirvis, Adam O. Emmerich, David A. Katz, Sabastian V. Niles, Jenna
E. Levine, and Carmen X. W. Lu (Feb. 10, 2022) (``T. Mirvis, et
al.''); Taj Reilly (Feb. 19, 2022) (``T. Reilly''); TIAA (Apr. 11,
2022) (``TIAA'') (same); Todd (Feb. 19, 2022) (``Todd''); Wachtell,
Lipton, Rosen & Katz (Apr. 11, 2022) (``WLRK I'') (same); Wachtell,
Lipton, Rosen & Katz (Oct. 4, 2022) (``WLRK II''); see also Letter
Type B; Letter Type C. We note that commenters submitted a
substantively identical version of the letter from Sen. Baldwin, et
al. an additional 16 times. See Letter Type A, available at <a href="https://www.sec.gov/comments/s7-32-10/s73210-typeb.pdf">https://www.sec.gov/comments/s7-32-10/s73210-typeb.pdf</a>. As such, every
citation to the letter from Sen. Baldwin, et al. in this release
should also be read as a citation to those additional 16 submissions
of the substantively identical letter.
\38\ See, e.g., letters from ABA; Anthony R.; FedEx; Freeport-
McMoRan; Jonah; P. Worts; T. Mirvis, et al.
\39\ See, e.g., letters from ABA; AFREF, et al.; Anonymous 5;
Anonymous 12; Better Markets I; FedEx; Freeport-McMoRan; Labor
Unions; Nasdaq; P. Worts; Sen. Baldwin, et al.
---------------------------------------------------------------------------
Several commenters identified potential specific benefits of the
proposed amendments. For example, some commenters asserted that the
proposed amendments would be particularly beneficial for retail
investors by providing them with additional information and
transparency.\40\ Another commenter stated that the proposed amendments
would enable investors and the market to ``better track when beneficial
owners take significant positions in covered securities for purposes of
controlling or exerting influence over issuers, resulting in more
informed decision-making by investors and more accurate valuation of
securities by the market.'' \41\
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\40\ See, e.g., letters from C. Robinson (``I welcome all rules
that require more disclosure and faster times to report[ ].''); J.
Soucie; P. Worts.
\41\ See letter from TIAA; see also letter from P. Worts.
---------------------------------------------------------------------------
Other commenters highlighted potential downsides of the current 10-
day deadline. For example, one commenter described the 10-day deadline
as costly to public companies and investors generally and based its
support for the proposed amendments ``on the fundamental concept that a
public company must have timely information about its owners in order
to engage with them effectively and respond promptly to their
concerns.'' \42\ Another commenter stated that ``[i]nvestors' and
market participants' abilities to prudently manage their positions and
exposures is materially undermined by the arbitrary, unnecessary,
discriminatory delay in reporting.'' \43\
---------------------------------------------------------------------------
\42\ See letter from SCG; see also letter from NIRI (stating
that the proposal ``would also ensure that public companies are not
ambushed and are better prepared to respond to an activist investor
who has accumulated a significant position over a relatively short
period of time'').
\43\ See letter from HMA I.
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Several commenters suggested that the proposed amendments would
reduce information asymmetry among market participants.\44\ Other
commenters raised similar information asymmetry-based concerns
regarding the 10-day filing deadline. For example, one commenter
expressed concern that under the current deadline, pension funds are
deprived of any short-term gains from hedge fund activism if they sell
shares during the 10-day delay in disclosure of a beneficial ownership
stake.\45\ Another commenter asserted that the current 10-day deadline
``disadvantages selling shareholders after the 5% threshold is reached
and permits activist investors to ambush public companies, often by
disclosing an ownership interest that far exceeds 5% of shares
outstanding.'' \46\ Further, one commenter suggested that the proposed
amendments could help address information asymmetries that facilitate
``stealth'' accumulations at artificially low market prices, which
purportedly transfer value from public investors to those activists
engaged in seeking ownership, control, or influence over the target
company.\47\
---------------------------------------------------------------------------
\44\ See, e.g., letters from ABA; AFREF; AFREF, et al.; Better
Markets II; Freeport-McMoRan; Nasdaq; NIRI; SCG; SCG & NIRI; see
also Letter Type C. One of these commenters stated that ``if the
filing window is shortened, institutional investors will be better
able to manage liquidity shocks in a way that serves their ultimate
beneficiaries, instead of costing them money by unknowingly selling
undervalued shares.'' See letter from AFREF, et al.
\45\ See letter from Labor Unions.
\46\ See letter from NIRI.
\47\ See letter from Better Markets I; see also letter from
Better Markets II.
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Other commenters supported the proposed amendments based on changes
in technology and developments in the financial markets.\48\ For
example, one commenter supported the proposal based on the ``increasing
effectiveness of activist campaigns and their decreased cost due to
advances in information technology and the rise of concentrated
economic ownership in the United States,'' citing ``cost-effective
activism'' due to both the fact that ``little more than 10 to 15
institutions are the target audience'' and ``the Commission's new
universal proxy rule.'' \49\ Similarly, other commenters described the
current Schedule 13D filing deadline as ``outdated.'' \50\ One
commenter agreed with the expressed concern in the Proposing Release
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.\51\ One
commenter cited an April 2020 survey it conducted of its members
(composed of corporate officers and investor relations consultants)
indicating that 82 percent supported modernization of the Schedule 13D
filing deadlines.\52\
---------------------------------------------------------------------------
\48\ See, e.g., letters from ABA; AFL-CIO; Better Markets I;
BRT; C. Robinson; FedEx; Freeport-McMoRan; HMA I; HMA II; NIRI; SCG;
Sen. Baldwin, et al.; T. Mirvis, et al.; T. Reilly; WLRK I; WLRK II;
see also Letter Type B.
\49\ See letter from WLRK II. The commenter also noted that
``successful activism campaigns have been run by stockholders with
relatively small stakes, often below or well below 5%.'' Id.
\50\ See, e.g., letters from Sen. Baldwin, et al.; T. Mirvis, et
al.
\51\ See letter from BRT.
\52\ See letter from NIRI.
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Several commenters noted that many foreign jurisdictions require
beneficial ownership reporting on a shorter deadline than currently
required under Regulation 13D-G.\53\ One commenter disagreed with the
notion expressed in the Proposing Release that the comparison of the
beneficial ownership reporting deadline in the United States to foreign
jurisdictions is imperfect because U.S. corporate law permits anti-
takeover provisions that are not present in those jurisdictions.\54\ To
the contrary, that commenter asserted that some of those foreign
jurisdictions are even less
[[Page 76902]]
``stockholder'' and ``activism'' friendly than the United States,
making corporate takeovers and activism more difficult, and described
the corporate laws and corporate governance practices of those foreign
jurisdictions as compared to the United States (focusing, in
particular, on Delaware corporate law).\55\ Other commenters noted that
the proposed amendments would be consistent with similar Commission
efforts to accelerate filing deadlines.\56\
---------------------------------------------------------------------------
\53\ See, e.g., letters from AFREF; Better Markets I; SCG; Sen.
Baldwin, et al.; WLRK II.
\54\ See letter from WLRK II.
\55\ See id. The commenter also presented statistics indicating
that, notwithstanding the stricter beneficial ownership reporting
obligations and purportedly increased inhibitions on shareholder
activism, those foreign jurisdictions have experienced increased
shareholder activism in recent years. Id. Some commenters, however,
disagreed with and questioned the utility of this analysis of
foreign jurisdictions. See letters from Jose Ceballos, Council for
Investor Rights and Corporate Accountability (Dec. 20, 2022)
(``CIRCA III''); Richard B. Zabel, General Counsel Chief Legal
Officer, Elliott Investment Management L.P. (Nov. 21, 2022) (``EIM
III''); see also letter from Richard B. Zabel, General Counsel Chief
Legal Officer, Elliott Investment Management L.P. (June 27, 2023)
(``EIM IV'') (reiterating the points made in the commenter's letter
dated Nov. 21, 2022). One of those commenters asserted that
``regulatory structures, as well as cultural norms . . . mean that
activism in non-U.S. markets is less prevalent than in the United
States'' which is ``to the detriment of investors in those non-U.S.
markets where, in many cases, there remains a lack of independent
voices in the market able to hold boards and management
accountable.'' See letter from EIM III. The commenter also stated
that, because activism is less prevalent in those foreign
jurisdictions than in the U.S., ``[s]ome level of increased activist
engagement in a handful of non-U.S. markets . . . does not mean that
the Commission should seek to emulate regulatory structures in those
other jurisdictions.'' Id. The other commenter noted that the
analysis ignores that some of the cited foreign jurisdictions offer
benefits to shareholders that the United States does not. See letter
from CIRCA III.
\56\ See, e.g., letters from SCG; WLRK I.
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A number of commenters asserted that the proposed amendments would
not impose significant costs or burdens on beneficial owners of more
than five percent of a covered class.\57\ For example, one of those
commenters stated that the compliance costs of the proposed amendments
``are unlikely to be unduly burdensome, in a manner that outweighs the
benefits'' of the proposal given the nature of investors that generally
file a Schedule 13D and the technology available to them.\58\ Another
commenter agreed that the proposed amendments would be consistent in
balancing investors' need for adequate disclosures with the burdens
placed on filers to accurately prepare required disclosures.\59\
---------------------------------------------------------------------------
\57\ See, e.g., letters from ABA; Anonymous 11; BRT; Freeport-
McMoRan; J. Soucie; WLRK I.
\58\ See letter from WLRK I.
\59\ See letter from FedEx.
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Several commenters stated that the proposed amendments would not
significantly reduce shareholder activism.\60\ For example, one
commenter asserted that the proposed five-day deadline would not
significantly impair the ability of activists to pursue their
agendas.\61\ Another commenter questioned whether there is an empirical
basis for asserting that the proposed amendments would prevent
shareholder activism and engagement.\62\ Some commenters asserted that
the proposed amendments would not interfere with shareholder activism
on environmental, social, or governance (``ESG'') issues because many
such activists are not Schedule 13D filers.\63\ One commenter was ``not
persuaded that a 10-day delay in beneficial ownership disclosure after
acquiring a 5 percent stake is needed to incentivize . . . [a] large
investor to be an activist investor.'' \64\ And, one commenter asserted
that the proposed amendments are ``more likely to adversely affect
short-term behaviors than long-term oriented activism.'' \65\
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\60\ See, e.g., letters from ABA; AFREF; Better Markets I;
Better Markets II; HMA II; Labor Unions; Sen. Baldwin, et al.; WLRK
I.
\61\ See letter from Better Markets I. The commenter stated that
that many Schedule 13D filers currently do not avail themselves of
the full 10-day filing period, many activists are effective in their
campaigns without reaching the 5% beneficial ownership reporting
threshold, and the proposed five-day deadline would give activists
enough time to accumulate profits before public disclosure of their
goals, enabling them to offset the costs of their activism. Id.; see
also letter from Better Markets II (reiterating the point made in
its first letter and citing the data and analysis in the DERA
Memorandum for support).
\62\ See letter from HMA II.
\63\ See letters from Labor Unions; Sen. Baldwin, et al. One of
those commenters noted that some of the most impactful ESG campaigns
to date have occurred in Australia, where the beneficial ownership
reporting deadline for a 5% stake is two business days, which
``provides further evidence that a 10 day window is not needed to
use shareholder activism to meaningfully change corporate
behavior.'' See letter from Sen. Baldwin, et al. The Commission is
not expressing any view as to whether the measures described by the
commenters referenced herein would constitute activities undertaken
for the purpose of changing or influencing control of an issuer.
Nothing stated in this release changes or supersedes the
Commission's prior guidance regarding whether certain soliciting
activity has a control purpose or effect. See supra note 29.
\64\ See letter from AFL-CIO.
\65\ See letter from WLRK I.
---------------------------------------------------------------------------
In addition, a number of commenters stated that shareholder
activism is not uniformly beneficial for issuers and their
shareholders.\66\ For example, one commenter asserted that hedge fund
activism could be contributing to an emphasis on short-term gains over
sustainable, long-term growth that benefits longer-term investors.\67\
One commenter noted that while a Schedule 13D filing by an activist may
often lead to an immediate bump in the issuer's stock price, there is
no compelling evidence that activist interventions deliver long-term
value to shareholders.\68\ One commenter asserted that the current 10-
day deadline may discourage companies from going public, inhibiting
capital formation, based on the threat of activism and ``the burden of
being subject to attacks by activist investors, a number of whom have
short-term agendas.'' \69\ One commenter stated that activist investors
often pressure companies and their management to agree to their short-
term demands that may or may not be in the long-term interests of
shareholders, employees, and other stakeholders.\70\ Further, one
commenter cited a study indicating that activist hedge fund campaigns
targeting public companies are associated with a reduction in jobs,
research and development spending, and capital expenditures, which
arguably harms employees.\71\
---------------------------------------------------------------------------
\66\ See, e.g., letters from AFREF; Better Markets I; HMA II;
Labor Unions; NIRI; SCG; Sen. Baldwin, et al.; WLRK I.
\67\ See letter from AFREF. The commenter also noted that while
hedge fund activism is associated with short-term increases in
shareholder value, the evidence is much more mixed on the question
of whether hedge fund activism results in long-term gains. Id.; see
also letter from Better Markets I (stating that the benefits of
shareholders seeking to acquire or influence corporate control and
policy are mixed because some act out of short-term profit motives,
not a desire to promote long-term value).
\68\ See letter from WLRK I.
\69\ See letter from SCG. The commenter also stated that
although activists would have less time to buy additional shares
after crossing 5% under the proposal, there is no shareholder
protection rationale that would justify forcing other investors to
subsidize activists' efforts to build larger positions in issuers.
Id.
\70\ See letter from NIRI.
\71\ See letter from Labor Unions. The commenter also asserted
that the proposed amendments would benefit pension funds based on a
study it cited that found that while company value tends to increase
in the first three years after being targeted by an activist hedge
fund, these gains tend to be reversed in the fourth and fifth years.
Id.; see also letter from Sen. Baldwin, et al. (citing the same
study for the proposition that ``research . . . shows the stock
price increase [associated with an activist's Schedule 13D filing]
is temporary and in fact the company is often in a weaker economic
position post-activist intervention''). But see letter from
International Institute of Law and Finance (Nov. 1, 2022) (``Profs.
Bishop and Partnoy II'') (critiquing the cited study, noting, among
other things, that ``a simple analysis of the data, not undertaken
in that study, shows that employment levels at firms targeted by
activists decrease substantially in the years prior to an activist
intervention, violating the parallel trends assumption that is
required to make any sort of causal inference from the empirical
design'').
---------------------------------------------------------------------------
Finally, commenters raised a variety of other points in support of
the proposed amendments. For example, one commenter stated that the
balance that Congress sought to strike in the Williams Act \72\ was
between activist investors seeking to change companies
[[Page 76903]]
and those companies' management--not between an activist investor and a
company's other investors.\73\ One commenter stated that the proposed
amendments could moderate the sudden, abrupt changes in corporate
governance that often occur in issuers targeted by activist
investors.\74\ And, one commenter noted that the proposed amendments
fall ``squarely'' within the Commission's legal authority under section
929R of the Dodd-Frank Act and align with the Williams Act's intent
because Congress chose a 10-day deadline to accommodate the practical
challenges associated with preparing and filing a Schedule 13D.\75\
---------------------------------------------------------------------------
\72\ Public Law 90-439, 82 Stat. 454 (July 29, 1968).
\73\ See letter from HMA II. The commenter also stated that
there is no evidence or legitimate policy rationale to support a
connection between the purported benefits of activist strategies
generally on the one hand, and the purported need to preserve the
ability of the small subset of investors engaged in them to be able
to trade while in possession of material, non-public information to
the detriment of other investors--for precisely 10 days. Id.
\74\ See letter from AFREF. The commenter stated that the
proposed amendments could decrease the likelihood of issuers that
are not targeted by activist investors taking preemptive steps
(e.g., overspending on short-term shareholder payouts and forgoing
investments necessary for long-term financial health and growth) to
avoid becoming targets of activism. Id. The commenter also asserted
that the proposed amendments would benefit shareholders and other
market participants by facilitating sound corporate governance. Id.
For example, the commenter stated that a shortened filing deadline
would help investors ensure their asset managers are fulfilling
their fiduciary duties and help inform the education and advocacy
efforts of those with a stake in proxy contests, shareholder
resolutions, and other important votes. Id.
\75\ See letter from Better Markets I.
---------------------------------------------------------------------------
A number of commenters opposed shortening the initial Schedule 13D
filing deadline to five days.\76\ Several commenters expressed concern
that the proposed amendments would disincentivize shareholder activism
by reducing the amount of time that such shareholders have to
accumulate positions in an issuer before filing a Schedule 13D, thereby
depriving issuers and their shareholders of the positive benefits of
such activism.\77\ For example, one commenter stated that ``if active
shareholders are unable to establish an economically efficient pre-
disclosure ownership stake, public company shareholders (and the
economy more broadly) will be less likely to benefit from the improved
stock price performance that often attends the monitoring and
engagement activities pursued by engaged shareholders, given that such
shareholders would have difficulty justifying certain engagements with
issuers.'' \78\ Similarly, another commenter asserted that the proposal
would ``mak[e] it more costly for blockholders to build a sufficient
position to effect change'' and ``reduce the profitability of, and
therefore the incentive to pursue, activist strategies,'' which would
``reduce management's accountability to shareholders and corporate
governance generally.'' \79\ And another commenter stated that
``although the SEC requires an activist buyer to disclose information
that the buyer has acquired, the SEC fails to ask whether the buyer
would acquire the information initially'' and suggested that, under the
proposed deadline, ``the buyer would often be unlikely to make the
original investment in information.'' \80\
---------------------------------------------------------------------------
\76\ See, e.g., letters from Adrian Day, RIA (Feb. 12, 2022)
(``A. Day''); Daniel Austin, Director, U.S. Policy and Regulation,
Alternative Investment Management Association (Apr. 11, 2022)
(``AIMA''); Ben Mason (June 26, 2023) (``B. Mason''); Bernard
Sharfman (Mar. 22, 2022) (``B. Sharfman'') (expressly opposing only
the proposed amendment to Rule 13d-1(a)); CIRCA (Apr. 11, 2022)
(``CIRCA I'') (same); CIRCA III (same); Milan Dalal, CIRCA (June 27,
2023) (``CIRCA IV'') (same); Charles F. Pohl, Chairman, Dodge & Cox
(Apr. 12, 2022) (``Dodge & Cox''); Edwin Fraser (Apr. 11, 2022)
(``E. Fraser'') (same); Susan Olson, General Counsel and Sarah
Bessin, Associate General Counsel, Investment Company Institute
(Apr. 7, 2022) (``ICI I''); Irenic Capital Management LP (Apr. 11,
2022) (``ICM'') (same); Marcus Frampton (Mar. 16, 2022) (``M.
Frampton'') (same); Managed Funds Association (Apr. 11, 2022)
(``MFA'') (same); National Venture Capital Association (Apr. 11,
2022) (``NVCA'') (same); Perkins Coie LLP (Apr. 12, 2022) (``Perkins
Coie''); Jeffrey N. Gordon, Professor of Law, Columbia Law School
(June 20, 2022) (``Prof. Gordon'') (same); Robert Eccles and
Shivaram Rajgopal (Mar. 31, 2022) (``Profs. Eccles and Rajgopal'')
(same); Alan Schwartz, Sterling Professor, Yale Law School and the
Yale School of Management and Steven Shavell, Samuel R. Rosenthal
Professor of Law and Economics, Harvard Law School Director, John M.
Olin Center for Law, Economics & Business, Harvard University (Apr.
12, 2022) (``Profs. Schwartz and Shavell I'') (same); Alan Schwartz,
Sterling Professor, Yale Law School and the Yale School of
Management and Steven Shavell, Samuel R. Rosenthal Professor of Law
and Economics, Harvard Law School Director, John M. Olin Center for
Law, Economics & Business, Harvard University (May 15, 2022)
(``Profs. Schwartz and Shavell II'') (same); Edward P. Swanson,
Texas A&M University, Glen M. Young, Texas State University, and
Christopher G. Yust, Texas A&M University (Feb. 19, 2022) (``Profs.
Swanson, Young, and Yust'') (same); Rolf Parta (Apr. 7, 2022) (``R.
Parta'') (same); Allison K. Thacker, President and Chief Investment
Officer, Rice Management Company, Treasurer, William Marsh Rice
University (Mar. 21, 2022) (``Rice Management'') (same); Jennifer
Nadborny, Simpson Thacher Bartlett LLP (Apr. 11, 2022) (``STB'')
(same); Donna Anderson, Marc Wyatt, and Bob Grohowski, T. Rowe Price
(Apr. 11, 2022) (``TRP'') (same).
\77\ See, e.g., letters from AIMA; CIRCA I; CIRCA III; CIRCA IV;
Dodge & Cox; ICM; MFA; Prof. Gordon; Profs. Eccles and Rajgopal;
Profs. Schwartz and Shavell I: Profs. Schwartz and Shavell II;
Profs. Swanson, Young, and Yust; Rice Management; TRP.
\78\ See letter from ICM.
\79\ See letter from AIMA.
\80\ See letter from Profs. Schwartz and Shavell II (emphasis in
original); see also letter from Profs. Schwartz and Shavell I.
---------------------------------------------------------------------------
In addition, one commenter expressed concern that the proposed
amendments would disproportionately disincentivize shareholder activism
that is targeted towards reforms other than a sale of the issuer.\81\
Another commenter asserted that the proposed amendments would inhibit
an activist investor's ability to make overtures to an issuer's
management prior to public disclosure and to consult with other
shareholders to ensure that shareholders' opinions and proposals are
considered when approaching management.\82\ And, one commenter stated
that the proposed amendments would particularly disincentivize activism
at medium- and small-cap companies because a larger economic position
is needed to offset the activists' costs.\83\
---------------------------------------------------------------------------
\81\ See letter from Profs. Swanson, Young, and Yust. The
comment letter also stated that if the proposed accelerated initial
Schedule 13D filing deadline reduces activists' ability to profit
from price discovery, the proposed amendments could reduce market
efficiency. Id.
\82\ See letter from CIRCA I. In a separate letter, this
commenter also disagreed with those supporting commenters that
expressed concern about the negative effects that activists may have
on targeted companies and cited data indicating that activist
interventions benefit all shareholders in both the short- and long-
term. See letter from CIRCA III.
\83\ See letter from Prof. Gordon; see also letter from ICM
(predicting a reduction in shareholder activism and related benefits
for other shareholders and stating that the predicted ``harms . . .
will be most pronounced at micro-, small-, and mid-capitalization
issuers . . . where the majority of active shareholder engagement
occurs'').
---------------------------------------------------------------------------
Several commenters took issue with the information asymmetry
concerns that the Commission expressed as a justification for the
proposed amendments.\84\ For example, one commenter cited data
indicating that shareholders who sell during the period after an
activist accumulates more than five percent beneficial ownership but
before the activist files its Schedule 13D
[[Page 76904]]
still generally benefit from that activist's accumulation because the
stock price generally increases prior to the Schedule 13D filing.\85\
Some commenters stated that the information asymmetry described in the
Proposing Release is no different from the general asymmetry that
exists in the market when any investor--activist or otherwise--
determines to invest the time and resources to develop and then
implement an investment thesis.\86\ Similarly, some commenters asserted
that information asymmetry is a quintessential element of the U.S.
capital markets where investors are, and should be, entitled to profit
from their analysis, hard work, and risk taking.\87\ Other commenters
stated that selling shareholders are not forced to sell their shares
and do so voluntarily, either seeking liquidity or because they have
doubts about the issuer's prospects, and noted that such shareholders
have the same access as the Schedule 13D filer to disclosures from both
the issuer and insiders.\88\ Some commenters asserted that the
Commission ignored the fact that although some investors may miss out
on selling at an appreciated price once the Schedule 13D is filed, a
larger number of investors generally will benefit from the efforts of
an activist.\89\ Finally, one commenter asserted that the Williams Act
was not intended to address information asymmetry-based concerns or the
interests of shareholders who elect to sell prior to the disclosure of
an initial Schedule 13D and cited to the legislative history and a U.S.
Supreme Court decision to support such assertion.\90\
---------------------------------------------------------------------------
\84\ See, e.g., letters from AIMA; CIRCA I; CIRCA III; CIRCA IV;
Dodge & Cox; ICM; Prof. Gordon; Profs. Swanson, Young, and Yust;
TRP. In addition, one commenter did not oppose the proposal but
expressed concern about the information asymmetry-based
justification. See letter from Elliott Investment Management L.P.
(Apr. 11, 2022) (``EIM I''). That commenter stated, among other
things, that ``the suggestion that an activist's awareness of her
confidential intention to build a position in a public company
should prohibit her from trading is both illogical and inconsistent
with established law'' and contrasted the proposal with the
``recently proposed short sale reporting rulemaking'' in which ``the
Commission . . . expressly provided an alternative that protects the
confidentiality of short sellers and their strategies, in
recognition that disclosure would vitiate the value of their
research.'' Id. (citing Short Position and Short Activity Reporting
by Institutional Investment Managers, Release No. 34-94313 (Feb. 25,
2022) [87 FR 14950 (Mar. 16, 2022)] (``Short Position Reporting
Proposal'')); see also letter from Richard B. Zabel, General Counsel
& Chief Legal Officer, Elliott Investment Management L.P. (Sept. 18,
2023).
\85\ See letter from Profs. Swanson, Young, and Yust.
\86\ See, e.g., letters from CIRCA I; ICM; Prof. Gordon. These
commenters also asserted that the Commission has long recognized the
legitimacy of this asymmetry, including by allowing confidential
treatment in Form 13F filings and in other contexts. Id.
\87\ See, e.g., letters from CIRCA I; ICM; Prof. Gordon.
\88\ See, e.g., letters from AIMA; ICM. Similarly, one commenter
noted the absence of data indicating that shareholders are harmed by
the timing of when they sell a security under the current Schedule
13D reporting regime and posited that shareholders selling during
the 10-day period are generally sophisticated, non-retail investors
seeking liquidity based on an investment strategy which is unrelated
(and indifferent) to disclosure indicating whether an activist has a
stake in the company. See letter from CIRCA III.
\89\ See letters from AIMA; TRP.
\90\ See letter from ICM (citing Rondeau v. Mosinee Paper Corp.,
422 U.S. 49 (1975)); see also letters from B. Sharfman (``[T]he U.S.
Supreme Court has repeatedly and unambiguously stated that the `sole
purpose' of the Williams Act was for the protection of investors who
are confronted with a cash tender offer.'' (citing Piper et al. v.
Chris-Craft Industries, Inc., 430 U.S. 1 (1977)); EIM IV (citing
Rondeau, 422 U.S. 49, for the same proposition, but not expressly
opposing the proposal).
---------------------------------------------------------------------------
A number of commenters also disagreed with the Commission's
technological advancement- and financial market development-based
justifications for the proposed acceleration of the beneficial
ownership reporting deadlines.\91\ For example, some commenters
asserted that neither Congress nor the Commission previously suggested
that technological ability to file is or should be the primary basis to
determine the appropriate filing deadlines for Schedules 13D and
13G.\92\ One commenter asserted that the Commission has not made
significant technological advances over the years to its own systems
that market participants rely on to prepare Schedules 13D and 13G,
making it challenging and costly for investors to gather the
information about beneficial ownership they need to file Schedules 13D
and 13G.\93\ One commenter asserted that technological advances do not
support shortening the filing deadline as proposed because despite
advances in technology, the filing process still has numerous
operational components that take time to complete.\94\ Another
commenter stated that recent trends indicate that activist investors
are having a moderate and declining impact in the United States and,
therefore, the Commission should ``encourage new forms of activism, not
suppress them.'' \95\
---------------------------------------------------------------------------
\91\ See, e.g., letters from AIMA; CIRCA IV; Dodge & Cox; ICI I;
ICM; Robert E. Bishop, Fellow, UC Berkeley School of Law Center for
Law and Business, Frank Partnoy, Adrian A. Kragen Professor of Law,
UC Berkeley School of Law (Apr. 11, 2022) (``Profs. Bishop and
Partnoy I''); STB; see also letter from Investment Adviser
Association (Apr. 11, 2022) (``IAA'') (neither clearly supporting
nor opposing the proposed amendments, but expressing certain
concerns and making certain recommendations regarding the proposed
amendments).
\92\ See, e.g., letters from AIMA; ICI I; ICM; STB.
\93\ See letter from ICI I.
\94\ See letter from IAA. The commenter cited legal developments
since 1968, including various anti-takeover mechanisms and the
adoption of section 13(f) and Form 13F, as well as certain
technological developments that provide public companies with the
benefit of nearly-contemporaneous insight into their shareholder
base and that have facilitated management entrenchment as offsetting
factors to any technological advancements during that time period
that would increase the ease of making a Schedule 13D filing. Id.
\95\ See letter from Profs. Bishop and Partnoy I. The commenter
further said that ``given the development of poison pills, public
company boards are no longer monitored by hostile takeovers, so
activism is the remaining recourse.'' Id.
---------------------------------------------------------------------------
Several commenters expressed concerns that the proposed amendments
do not align with the purpose or objectives of the Williams Act. For
example, one commenter asserted that the proposed amendments ``would
necessarily be considered to be beyond [the Commission's] statutory
authority and an `abuse of discretion,' if not `arbitrary and
capricious' under the APA'' because the proposed rule does not connect
the proposed reduction in filing time with what the commenter described
as the ``sole purpose'' of the Williams Act under Supreme Court
precedent, namely the protection of shareholders confronted with a cash
tender offer.\96\ Another commenter stated that not all of the
investors who file on Schedule 13D are activist investors engaging in
the types of activities the Williams Act seeks to regulate.\97\ Other
commenters expressed concern that the proposed amendments would disrupt
the balance that the Williams Act sought to strike.\98\
---------------------------------------------------------------------------
\96\ See letter from B. Sharfman.
\97\ See letter from STB. The commenter noted that many Schedule
13D filers are former Exempt Investors who became disqualified to
file on Schedule 13G because they acquired more than 2% beneficial
ownership in a 12-month period. Id. The commenter also noted that
many Schedule 13D filers are investors who seek a minority position
and potentially a board seat (given their desire to more actively
monitor their sizeable investment), but seek to work cooperatively
with the issuer, with the goal of building shareholder value for all
investors, and possess no intent to replace a majority of the board
of directors, launch a tender offer, or make an offer to take the
company private. Id.
\98\ See letters from CIRCA IV; ICM.
---------------------------------------------------------------------------
Some opposing commenters detailed the potential compliance burdens
that the proposed amendments could impose. For example, some commenters
expressed concern that the proposed five-day deadline would be unduly
burdensome for smaller and non-institutional beneficial owners.\99\
Other commenters asserted that the proposed amendments would present
compliance challenges \100\ and create significant reporting and
monitoring burdens.\101\ One commenter expressed concern that the
proposed amendments could negatively impact the ability of investors
and their advisors to draft meaningful disclosures and engage in
thoughtful analysis.\102\
---------------------------------------------------------------------------
\99\ See letters from A. Day; E. Fraser.
\100\ See letter from NVCA.
\101\ See letter from Perkins Coie; see also letter from
Jennifer W. Han, Executive Vice President, Chief Counsel & Head of
Global Regulatory Affairs, Managed Funds Association and National
Association of Private Fund Managers (July 24, 2023) (``MFA &
NAPFM'') (describing potential costs associated with the Proposed
Amendments, but not expressly opposing the Proposed Amendments).
\102\ See letter from STB. For example, the commenter suggested
that in order to avoid making a ``late'' filing with the Commission,
beneficial owners may shift to boilerplate disclosures in their
Schedule 13D filings, which can be prepared more quickly but are
less useful to investors and regulators. Id.
---------------------------------------------------------------------------
Other commenters raised various other concerns regarding the
proposed
[[Page 76905]]
amendments. For example, a number of commenters expressed concerns that
the proposed amendments would increase management entrenchment and
reduce shareholder engagement and corporate accountability.\103\ One
commenter stated that although ``some purchasers may file within fewer
than the required 10 days for Schedule 13D,'' that ``does not justify
accelerating the reporting timeline.'' \104\ One commenter also noted
that the proposed accelerated initial Schedule 13D filing deadline
could result in activist investors relying more heavily on derivatives,
such as total return swaps and call options.\105\ One commenter
asserted that the Commission has not provided a compelling
justification for the proposed amendments or provided evidence to
support its concerns regarding information asymmetries and reporting
gaps that would warrant the proposed acceleration of the beneficial
ownership reporting deadlines.\106\ One commenter expressed concern
that the proposed amendments would induce a front-running effect that
would distort market pricing and increase market volatility.\107\ Other
commenters asserted that investors already have access to all of the
volume and price data for publicly traded companies that they need to
take appropriate action and, therefore, do not need additional
information regarding holdings by significant beneficial owners.\108\
---------------------------------------------------------------------------
\103\ See, e.g., letters from AIMA; CIRCA I; CIRCA III; Dodge &
Cox; ICM; M. Frampton; MFA; Rice Management; TRP.
\104\ See letter from AIMA. According to the commenter, ``[m]ost
investors will have a total aggregate investment in mind,'' and
``[w]hen the investor reaches this level and exceeds the 5%
threshold, she files her Schedule 13D,'' but ``[t]his standard
market practice in no way suggests that all other holders who are
continuing to accumulate shares should be required to file
earlier.'' Id.
\105\ See letter from Profs. Swanson, Young, and Yust.
\106\ See letter from ICI I.
\107\ See letter from Rice Management.
\108\ See letters from ICM; R. Parta.
---------------------------------------------------------------------------
In addition, one commenter expressed concern that the Commission
has not cited a market event or failure related to the existing
beneficial ownership regime to support the proposed amendments.\109\
That commenter distinguished the proposed amendments from other
congressional efforts to accelerate public disclosures based on the
fact that the proposed amendments apply to unrelated, third-party
investors rather than issuers or insiders.\110\ Finally, one commenter
asserted that the proposed amendments conflict with contract law in the
United States, which generally refrains from imposing disclosure
obligations on buyers of property.\111\
---------------------------------------------------------------------------
\109\ See letter from AIMA.
\110\ Id. The commenter also stated that although some
beneficial owners file a Schedule 13D before the end of the 10-day
deadline, this does not support shortening the deadline because the
decision as to when to file is based on each investor's target
accumulation level. Id.
\111\ See letter from Profs. Schwartz and Shavell I.
---------------------------------------------------------------------------
Some of the commenters that generally supported the proposed
amendments also made various recommendations to the Commission. For
example, one commenter recommended that the Commission require that an
initial Schedule 13D be filed by the end of the day on which a person
acquires beneficial ownership of more than five percent of a covered
class.\112\ Another recommended that the Commission require that an
initial Schedule 13D be filed within one calendar day of a person
acquiring three percent, rather than more than five percent, of a
covered class and that a person be prohibited from acquiring more than
three percent until one business day after filing a Schedule 13D.\113\
Similarly, one commenter recommended that the Commission require that
an initial Schedule 13D be filed within one business day after crossing
the five percent threshold and institute a moratorium on the
acquisition of beneficial ownership of additional equity securities of
an issuer by any acquirer required to file a Schedule 13D that would be
in effect from the acquisition of a five percent beneficial ownership
stake until two business days after filing the Schedule 13D.\114\
---------------------------------------------------------------------------
\112\ See letter from Corey (Feb. 19, 2022) (``Corey'').
\113\ See letter from Prof. Steinberg.
\114\ See letter from WLRK I. The commenter asserted that the
proposed five-day deadline will still substantially fail to serve
the purpose of the Williams Act to require the timely release of
information to the investing public with respect to the accumulation
of substantial ownership of an issuer's voting securities. Id.
According to the comment, this will ``provide hedge funds and
activist shareholders ample time to accrue significant stakes in an
issuer and ``improperly exploit, and profit from, information
asymmetries at the expense of other public investors.'' Id. The
commenter also stated that the moratorium is necessary to address
information asymmetries and ensure the markets have time to assess
impact of Schedule 13D filing and likened it to the 10-business day
cooling off period applicable to Passive Investors switching from
Schedule 13G filers to Schedule 13D filers. Id.
---------------------------------------------------------------------------
Other supporting commenters recommended that the Commission require
that an initial Schedule 13D be filed within two business days,
consistent with the filing deadline for a Form 4.\115\ One supporting
commenter recommended that the Commission require that an initial
Schedule 13D be filed within three days rather than five days.\116\
Other supporting commenters recommended that the Commission consider
further shortening the beneficial ownership reporting deadlines without
specifying an alternative filing deadline.\117\
---------------------------------------------------------------------------
\115\ See, e.g., letters from NIRI; SCG; SCG & NIRI; see also
Letter Type C; letter from PL Salvati (Aug. 9, 2023) (``PL
Salvati'') (neither clearly supporting nor opposing the proposal,
but recommending a two-business day deadline).
\116\ See letter from T. Reilly.
\117\ See, e.g., letters from AFREF; Freeport-McMoRan; HMA I.
---------------------------------------------------------------------------
In addition, some of the commenters that generally opposed the
proposed amendments made various recommendations to the Commission. For
example, one recommended that rather than shortening the Schedule 13D
filing deadline, the Commission should impose a prohibition on tipping
by an activist as soon as it reaches the five percent threshold until
it files a Schedule 13D.\118\ Another recommended that the Commission
include an assets under management-based threshold for the proposed
accelerated Schedule 13D filing deadlines.\119\
---------------------------------------------------------------------------
\118\ See letter from Prof. Gordon.
\119\ See letter from A. Day.
---------------------------------------------------------------------------
Other opposing commenters recommended that the Commission consider
a ``tiered approach'' to Rule 13d-1(a).\120\ For example, one commenter
suggested a tiered approach designed to vary the reporting deadline for
an initial Schedule 13D based on the issuer's market capitalization
without any limitation on acquisitions during the period between the
time that the investor acquires more than five percent of a covered
class and the time that the initial Schedule 13D is filed.\121\ Another
opposing commenter recommended that the Commission require those who
cross certain thresholds (e.g., 10 percent) or accumulate certain
amounts after crossing five percent (e.g., an additional three percent)
to file on the more accelerated timeline, but allowing investors who
trigger Schedule 13D filings for more technical reasons and who are not
accumulating stock in connection with a potential activist engagement
(e.g., proxy contests or intended take-private activity) to continue
filing under the current regime.\122\
---------------------------------------------------------------------------
\120\ See letters from ICM; STB.
\121\ See letter from ICM.
\122\ See letter from STB.
---------------------------------------------------------------------------
Some opposing commenters recommended that if the Commission revises
the initial Schedule 13D filing deadline, it should adopt a different
deadline than proposed. For example, one commenter recommended that the
[[Page 76906]]
Commission consider extending the filing deadline (e.g., to 15 or 30
days) rather than accelerating it.\123\ One commenter recommended that
the Commission require an initial Schedule 13D be filed within eight
days rather than the proposed five days.\124\ Other commenters
recommended that the Commission require an initial Schedule 13D be
filed in five business days rather than five calendar days.\125\ Some
of those commenters suggested that a five-business day deadline would
be more appropriate in light of the steps required to prepare and file
an accurate Schedule 13D,\126\ and one commenter noted that most
analogous securities laws governing reporting of material changes
(e.g., Form 8-K and Exchange Act section 16 filings) require filings
within time periods designated in business days rather than calendar
days.\127\
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\123\ See letter from E. Fraser. The commenter also recommended
that the Commission consider a provision for when a shareholder's
position goes over the 5% threshold because of ordinary corporate
actions that result in the number of outstanding shares to drop such
that the shareholder unwittingly holds over the 5% of outstanding
shares and recommended that the Commission consider increasing the
threshold from greater than 5% beneficial ownership to 10%. Id.
\124\ See letter from MFA.
\125\ See, e.g., letters from Dodge & Cox; ICI I; SIFMA AMG;
STB; see also IAC Recommendations (recommending that the Commission
adopt a five-business day deadline, rather than a five-calendar day
deadline, for an initial Schedule 13D filing).
\126\ See letters from Dodge & Cox; ICI I.
\127\ See letter from STB; see also IAC Recommendations.
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Finally, some commenters that neither clearly supported nor opposed
the proposed amendments made recommendations to the Commission. Several
commenters recommended an alternative filing deadline than proposed,
with some suggesting that the Commission require an initial Schedule
13D be filed within one day,\128\ within two days,\129\ five business
days,\130\ or on the same day as the event triggering the filing
obligation.\131\ Some commenters expressed a general preference for a
deadline expressed in ``business days'' rather than ``calendar days.''
\132\ And, one commenter recommended that to the extent the Commission
is concerned about Schedule 13D filers acquiring additional shares
after crossing the five percent threshold without public disclosure, it
should prohibit trading after crossing the five percent threshold
rather than accelerating the filing deadlines.\133\
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\128\ See, e.g., letters from Jason Dunlop, Software Developer
for the FAA (Feb. 19, 2022) (``J. Dunlop''); John Kennedy, Tax
Paying American Citizen (Feb. 22, 2022) (``J. Kennedy''); Phillip,
Retail Investor (Feb. 19, 2022) (``Phillip''). These commenters
suggested that all beneficial ownership reports should be filed
within one day. See also letter from Juan B. (Aug. 14, 2023) (``Juan
B.'') (recommending that the initial Schedule 13D and 13G filing
deadlines under Rule 13d-1(a), (b), and (d) be shortened to one
day).
\129\ See letter from Charles Jacobs, USCG (Feb. 20, 2022) (``C.
Jacobs'').
\130\ See letters from IAA; Profs. Bishop and Partnoy II; Robert
Bishop, Associate Professor, Duke Law School, and Frank Partnoy,
Adrian A. Kragen Professor of Law, UC Berkeley School of Law,
Berkeley Haas (Affiliated Faculty) (June 27, 2023) (``Profs. Bishop
and Partnoy III''). One of these commenters asserted that five
calendar days would be extremely challenging for filers to obtain
and verify all the information needed to ensure the accuracy and
completeness of an initial Schedule 13D filing. See letter from IAA.
\131\ See, e.g., letters from Chris McEntee, Retail Investor
(Mar. 14, 2022) (``C. McEntee''); David Choate (Aug. 2, 2023) (``D.
Choate''). These commenters suggested that all beneficial ownership
reports should have a same-day filing deadline.
\132\ See, e.g., letters from IAA; Profs. Bishop and Partnoy
III. One of these commenters recommended that the Commission use
business days to give filers sufficient time to analyze and prepare
Schedules 13D and 13G and make it more likely that the Commission,
issuers, and the marketplace will receive beneficial ownership
information that is accurate and complete and asserted that the use
of business days instead of calendar days when establishing the
filing deadlines will not have a detrimental impact on the proposed
benefits of shorter deadlines. See letter from IAA. Another of these
commenters expressed the belief that ``there is now a broad
consensus that the final rule should be framed in terms of business
(or trading) days.'' See letter from Profs. Bishop and Partnoy III.
\133\ See letter from Committee on Securities Law of the
Business Law Section of the Maryland State Bar Association (Apr. 11,
2022) (``MSBA'').
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c. Final Amendments
We are amending Rule 13d-1(a), (e), (f), and (g) to shorten the
initial Schedule 13D filing deadline. We are adopting a five-business
day \134\ deadline, however, rather than the proposed five-calendar day
deadline based on the input we received from commenters.
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\134\ The term ``business day'' is not defined in section 13(d)
or 13(g) or any rule of Regulation 13D-G. Accordingly, in the
Proposing Release, the Commission proposed 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. Proposing Release at 13847, n.5. One commenter
addressed this proposal, expressing concern that the proposed
definition of ``business day'' could raise confusion as to on which
business day a material change occurred if the event took place
outside of the hours set forth in that definition (i.e., 6 a.m. to
10 p.m. Eastern Time). See letter from EIM I. Accordingly, the
commenter recommended that the ``business day'' definition comprise
the full 24-hour period of any given day based on the customary
definition of the term. Id. To avoid the concern expressed by this
commenter, we are adopting the commenter's recommendation. As such,
the term ``business day'' for purposes of Regulation 13D-G will be
defined to mean any day, other than Saturday, Sunday, or a Federal
holiday, from 12:00 a.m. to 11:59 p.m. Eastern Time. We believe this
will avoid any confusion as to the date on which a beneficial
ownership report is due if, for example, a person incurs a filing
obligation before 6 a.m. or after 10 p.m. on a day that is not a
Saturday, Sunday, or Federal holiday. It is important to note,
however, as stated at the outset of Regulation 13D-G, that
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.
Thus, even though the definition of ``business day'' encompasses an
entire day, a Schedule 13D or 13G must be submitted by direct
transmission to the Commission in accordance with the times set
forth in Rule 13(a) of Regulation S-T in order to be deemed to have
been filed on that day. See infra section II.A.5 for a more detailed
discussion of Rule 13(a) of Regulation S-T, including the amendments
we are adopting to extend the filing ``cut-off'' time for Schedules
13D and 13G.
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As noted above, Rule 13d-1(a) currently requires an initial
Schedule 13D to be filed within 10 days after the date on which a
person acquires beneficial ownership of more than five percent of a
covered class.\135\ We are amending Rule 13d-1(a) to require a Schedule
13D to be filed within five business days after the date \136\ of such
acquisition. Similarly, as discussed above, Rule 13d-1(e), (f), and (g)
currently require an initial Schedule 13D to be filed within 10 days
after the date on which a person loses its Schedule 13G eligibility. We
are
[[Page 76907]]
amending those rules to require such Schedule 13D to be filed within
five business days after such date.
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\135\ 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. 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); see also 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.''); 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.''). To the extent a
person willfully fails to comply with section 13(d), a beneficial
owner also has exposure to criminal liability under section 32(a) of
the Exchange Act.
\136\ We also are revising Rule 13d-1(a) to state that the
initial Schedule 13D must be filed within five business days ``after
the date of such acquisition'' rather than the current formulation
of ``after such acquisition.'' This modification, which the
Commission proposed, is intended to clarify that, for purposes of
determining the filing deadline, the first day in the five-business
day count towards reaching the deadline is the day after the date on
which beneficial ownership of more than 5% is acquired (rather than
the date of such acquisition). We also are adopting similar changes
to Rule 13d-1(c) and (f)(1), as those rules currently contain
language similar to the ``after such acquisition'' formulation
currently in Rule 13d-1(a). We do not believe that a similar change
is required for Rule 13d-1(e) and (g), as those rules use different
formulations. See 17 CFR 240.13d-1(e)(1) and (g) (currently
requiring an initial Schedule 13D be filed ``within 10 days'' of the
filing trigger date).
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For purposes of determining the filing deadline under these
amendments, the Commission must receive the filing by the fifth
business day after the date on which the initial Schedule 13D filing
obligation arises--i.e., the date on which a person acquires beneficial
ownership of more than five percent of a covered class under Rule 13d-
1(a) or the date on which a person loses eligibility to file on
Schedule 13G under Rule 13d-1(e), (f), and (g)--in order for the filing
to be considered timely. Pursuant to our amendment to Rule 13(a)(4) of
Regulation S-T, discussed in section II.A.5 below, the filing will have
to be submitted by direct transmission commencing on or before 10 p.m.
Eastern Time on the due date.\137\
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\137\ See infra section II.A.5 for a discussion of our amendment
to Rule 13(a)(4) of Regulation S-T, which extends the filing ``cut-
off'' time for Schedules 13D and 13G from 5:30 p.m. Eastern Time to
10 p.m. Eastern Time.
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We believe the current 10-day filing deadline for an initial
Schedule 13D filing should be revised to ensure investors receive
material information in a manner that is considered timely in light of
advancements in technology and developments in the financial markets
that have occurred since that deadline was enacted in 1968. Those
technological advancements include, for example, market professionals'
use of information technologies to compile the necessary data and
prepare a filing,\138\ as well as their ability to submit filings
electronically through the Commission's Electronic Data Gathering,
Analysis, and Retrieval (``EDGAR'') system.\139\ In addition, the use
of modern information technology and other developments in the
financial markets may facilitate an investor's accumulation of a large
equity stake more quickly than at the time Congress enacted the
Williams Act.\140\ Before 1993, ``the prevailing practice'' was to
``settl[e] securities transactions within five business days of trade
date.'' \141\ Since then, the Commission has shortened the settlement
cycle three times, most recently adopting rule amendments this year
that require settlement of most transactions in securities within one
business day after the trade date (with which compliance will be
required by May 28, 2024).\142\ Because a shortened settlement cycle
enables investors to access the proceeds of their transactions more
quickly, investors also may be able to acquire a significant equity
stake more quickly than when settling their transactions within five
business days of trade date.\143\ Congress, in the Dodd-Frank Act,
expressly empowered the Commission to shorten the deadline for filing
the initial Schedule 13D.\144\ Because of those advances in technology
and developments in the financial markets, we are now exercising that
authority to shorten the initial Schedule 13D filing deadline.
---------------------------------------------------------------------------
\138\ See, e.g., letters from Better Markets I (noting
``technological advancements over the last 54 years [that] have
reduced the need for a 10-day reporting period,'' including ``vastly
more efficient data compilation methods''); SCG (noting that
``[e]very fund manager with the resources to amass a 5% stake in a
company should have sufficient record-keeping technology to
determine'' the amount of their beneficial ownership in a rapid
manner); 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'').
\139\ 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'' and cited 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)]; see also 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="https://www.sec.gov/rules/petitions/2011/petn4-624.pdf">https://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 based, in part, on ``[c]hanges in
technology, acquisition mechanics and trading practices [that] have
given investors the ability to make these types of reports with very
little advance preparation time'' and the fact that ``the markets
rely on the expectation that material information wil1 be
disseminated promptly and widely, in no small part due to the impact
of the internet and online information exchange'').
\140\ See, e.g., letter from SCG. This commenter noted, for
example, that ``investment managers [in 1968] didn't have access to
email, instant messaging, fax machines, market data terminals,
computer-assisted trading technology, or alternative `dark pool'
trading venues that help facilitate the accumulation of significant
positions.'' Id. The commenter also noted that ``[d]aily trading
volumes on U.S. exchanges, which averaged 22 million shares in 1968,
have grown by more than 1,000 times.'' Id.
\141\ Shortening the Securities Transaction Settlement Cycle,
Release No. 34-96930 (Feb. 15, 2023) [88 FR 13872, 13873 (Mar. 6,
2023)].
\142\ Id. at 13873, 13916.
\143\ See letter from SCG (``Fifty-four years ago, there was no
standard period for settling securities trades; today the settlement
cycle is two business days and the Commission recently proposed
shortening that period further to `T+1' (one business day) by 2024
to reduce risks to investors.''). See also infra text accompanying
note 677 for further discussion of some ways in which investors may
be able to acquire a significant equity stake more quickly in
today's financial markets.
\144\ Public Law 111-203, 124 Stat. 1900 929R(a)(1)(A) (2010).
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We note that our shortening of 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.\145\ For example, in 2002, 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.'' \146\
[[Page 76908]]
Similarly, 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.'' \147\
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\145\ For example, the Sarbanes-Oxley Act of 2002 (``Sarbanes-
Oxley Act'') amended section 16(a) of the Exchange Act to require
that change of beneficial ownership reports under section 16(a) of
the 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 Aug. 27, 2002, the Commission
adopted amendments to implement the accelerated deadline for Form 4
filings, shortening the deadline from 10 days after the close of
each calendar month to two business days after a filing obligation
is triggered. 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 Mar. 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.
\146\ 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. See supra note 110 and accompanying text. We also
recognize that the acceleration of these deadlines was prompted, in
part, by section 409 of the Sarbanes-Oxley Act, 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 the deadline for section 16 filings
in the Sarbanes-Oxley Act. See supra note 145. As such, we believe
that these technological advances and market practices also support
accelerating the initial Schedule 13D filing deadline.
\147\ Acceleration of Periodic Report Filing Dates and
Disclosure Concerning Website Access to Reports, Release No. 34-
46464 (Sept. 5, 2002) [67 FR 58479, 58483 (Sept. 16, 2002)]; 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.'').
---------------------------------------------------------------------------
Despite those efforts to accelerate various other reporting
deadlines, the initial Schedule 13D filing deadline has remained
unchanged since its enactment in 1968. As a number of commenters
pointed out, there have been significant changes in technology and
developments in the financial markets in the intervening years that
have rendered the 10-day deadline ``outdated.'' \148\ Commenters also
highlighted some costs that the current 10-day deadline may be imposing
on market participants (i.e., by delaying the disclosure of potentially
material information) \149\ and identified some potential benefits of
shortening that deadline, including increased timeliness of information
and improved transparency and fairness in the financial markets.\150\
We agree with those commenters that shortening the initial Schedule 13D
filing deadline will increase the timeliness of the disclosure of
material information, thereby improving market transparency,
facilitating better-informed decision-making by investors, and
enhancing the efficiency of resource allocation (i.e., the direction of
capital and other resources to their most productive uses) across the
economy.\151\
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\148\ See supra notes 48-52 and accompanying text.
\149\ See supra notes 42-43 and accompanying text.
\150\ See supra notes 38-41 and accompanying text.
\151\ See infra section IV.C.1.a.ii.
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We recognize that several commenters opposed the proposed
amendments to Rule 13d-1(a), (e), (f), and (g). Some commenters
asserted that neither Congress nor the Commission previously suggested
that technological ability to file should be the primary basis to
determine the appropriate initial Schedule 13D filing deadline.\152\
There is some indication, however, that when enacting the 10-day
deadline, Congress considered the amount of time a beneficial owner
would need to prepare and submit a filing.\153\ As noted above, there
have been significant technological advancements since 1968 that have
made it easier to prepare and file a Schedule 13D more quickly.\154\
There also is some indication that Congress enacted section 13(d), in
part, to provide shareholders with material information regarding
potential changes in control in a timely manner to facilitate their
investment decisions.\155\ Because changes in technology and
developments in the financial markets since 1968 have facilitated
investors' abilities to rapidly accumulate beneficial ownership,\156\
we believe it is appropriate to shorten the initial Schedule 13D
deadline so that the rate at which shareholders become aware of such
accumulations keeps pace.\157\
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\152\ See supra note 92 and accompanying text.
\153\ 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. 136 (1967) (statement of Stanley Kaplan, Professor, University
of Chicago) (stating that ``[r]equiring the filing . . . within
seven days after acquisition of 10% of equity securities seems to
provide an unduly short time for preparation of a document of that
magnitude and significance'' and noting that ``[i]t will take longer
to prepare and check such a document properly'').
\154\ See supra notes 138-139 and accompanying text.
\155\ See 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. 25
(1967) (statement of Manuel F. Cohen, Chairman, Securities and
Exchange Commission) (``We think that this bill would improve our
ability to elicit . . . information [regarding changes of control] .
. . in a timely way, that is necessary for appropriate investor
information and judgment.''); see also id. at 70 (statement of
Donald J. Calvin, Vice President, New York Stock Exchange) (noting
that Senator Harrison A. Williams, Jr. stated that ``[t]he primary
objective of this bill . . . is to provide full and timely
disclosure to stockholders'' and stating that ``[d]isclosure to
stockholders of events which may affect investment decisions is and
has been for many years a primary object of exchange policy'' and
that ``[w]e consider timely disclosure . . . vital to the fair
operation of a securities market'').
\156\ See supra note 140 and accompanying text.
\157\ We recognize that several commenters disagreed that
technological advancements and other developments in the financial
markets justify shortening the initial Schedule 13D deadline as
proposed. See supra notes 91-95 and accompanying text. For example,
some commenters noted that despite advances in technology, the
filing process still has numerous operational components that take
time to complete. See letter from IAA; see also letter from STB
(stating that ``calculation of beneficial ownership remains an
extremely manual process, can involve significant judgment and
relies on third party information''). Others described some ways in
which it may be more difficult to accumulate a significant equity
stake in today's financial markets. See infra notes 678-679 and
accompanying text. As an initial matter, we expect that the change
from the proposed five-calendar day deadline to a five-business day
deadline should mitigate these concerns. See infra note 165 and
accompanying text. In addition, for the reasons discussed infra
notes 166-168 and accompanying text, we believe that our analyses of
the current timing of Schedule 13D filings and accumulations of
significant equity stakes demonstrate that Schedule 13D filers are
capable, utilizing modern technology and in light of the
characteristics of today's financial markets, of complying with the
amended five-business day deadline. This is especially so given the
sophistication and size of many Schedule 13D filers. See supra note
58 and accompanying text. Finally, some commenters expressed
concerns about filers' ability to meet the proposed deadline (as
well as the other Schedule 13D and 13G filing deadlines) given the
amount of time it may take to obtain EDGAR filer codes. See, e.g.,
letters from MSBA; STB. To ensure they obtain their EDGAR filer
codes in a timely manner, we generally expect filers to begin the
process of applying for their EDGAR filer codes before they have
incurred a filing obligation (e.g., as they begin to acquire shares
with a control intent but before crossing the 5% threshold). Filers
should note that the Commission's staff reviews all Form ID
applications, and filers should allow sufficient time for that
review. Further, the Commission's staff works diligently to process
Form IDs promptly upon receipt of an application.
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Many commenters also expressed concern that shortening the initial
Schedule 13D filing deadline could, among other things, disincentivize
shareholder activism by reducing the amount of time such shareholders
have to accumulate positions in an issuer's covered class before filing
a Schedule 13D.\158\ According to those commenters, this reduction of
time could deprive issuers and their shareholders of the positive
benefits of such activism, thereby increasing management entrenchment
and reducing shareholder engagement and corporate accountability.\159\
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\158\ See supra notes 77-83 and accompanying text.
\159\ See supra notes 77-83, 103 and accompanying text.
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Although we primarily are concerned with ensuring that investors
receive material information in a timely manner, we agree that we
should remain conscious of the competing interest that undue burdens
not be imposed on shareholders engaging in change of
[[Page 76909]]
control transactions.\160\ In the Proposing Release, the Commission
``recognize[d] the chilling effect that a shortening of the initial
Schedule 13D filing deadline could have on a shareholder's ability . .
. to effect changes at companies'' if the shortened deadline increases
the costs and reduces the incentives for shareholders attempting to
effect a change of control.\161\ Yet, the Commission further stated
that it did not believe ``that a shortening of the deadline would
unduly disrupt that balance,'' noting that ``many Schedule 13D filers
currently do not avail themselves of the full 10-day filing period.''
\162\ A number of commenters similarly asserted that the proposed five-
day deadline would not significantly impede shareholder activism or
impose significant costs or burdens on beneficial owners of more than
five percent of a covered class.\163\
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\160\ See 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.'');
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.).
\161\ Proposing Release at 13851. The Commission noted academic
research indicating that large blockholders may improve the share
price and the corporate governance of the companies in which they
invest and that all of a company's shareholders enjoy these
benefits. Proposing Release at 13851, n.30. The Commission further
recognized that shortening the initial Schedule 13D filing deadline
could reduce the profitability of such investments, making large
blockholders less inclined to make those investments or engage with
the companies in ways that produce such benefits. Id. This is
consistent with the concerns that many opposing commenters
expressed. See supra notes 77-83 and accompanying text; see also
infra section IV.C.1.b.i.
\162\ Id.
\163\ See supra notes 57-65 and accompanying text.
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Notwithstanding this support for the proposed five-calendar day
deadline, we have decided to instead adopt a five-business day
deadline. This change from the proposal comports with a recommendation
that a number of commenters, including several that opposed the
proposed amendments, made to the Commission.\164\ Further, this shift
to a ``business days''-based deadline also will help to address a
variety of concerns that commenters expressed about the burdens
associated with the proposed five-day deadline. Specifically, five
business days (as compared to five calendar days) gives beneficial
owners additional time to accumulate positions in an issuer before
filing a Schedule 13D and to prepare and file an accurate Schedule
13D.\165\ As with the proposed five-calendar day deadline, we also note
that many Schedule 13D filings currently are made within the amended
five-business day deadline.\166\ This demonstrates that at least some
Schedule 13D filers are likely to be unaffected by the shortened
deadline. And, many Schedule 13D filers are sophisticated, large
investors that have access to technology and resources that should
allow them to prepare and file a Schedule 13D within five business
days.\167\ As such, we do not anticipate a five-business day deadline
will be unduly disruptive for Schedule 13D filers.
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\164\ See supra notes 125, 130 and accompanying text.
\165\ The five-business day deadline, as compared to the
proposed five-calendar day deadline, generally will give beneficial
owners additional time before their Schedule 13D filing is due if
the filing period encompasses days that are not business days (i.e.,
Saturday, Sunday, or a Federal holiday). As an illustrative example,
if a person acquires beneficial ownership of more than 5% of a
covered class on a Wednesday, then under the five-business day
deadline, the initial Schedule 13D is not due until the following
Wednesday (assuming there are no Federal holidays during that
period), giving the filer a total of seven days to prepare and
submit the Schedule 13D. However, under the proposed five-day
deadline, if a person acquires beneficial ownership of more than 5%
of a covered class on a Wednesday, then the initial Schedule 13D
will be due on the following Monday (assuming that Monday is not a
Federal holiday), giving the filer a total of five days to prepare
and submit the Schedule 13D. For purposes of performing this
comparison of the five-business day deadline to the proposed five-
day deadline, it is important to keep in mind that if the last day
of a filing deadline expressed in ``days'' falls on a Saturday,
Sunday, or Federal holiday, 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.'').
\166\ See infra section IV.B.3.a.i (``Approximately 29 percent
of the initial Schedule 13D filings [in 2022], representing about 41
percent of all of the initial Schedule 13D filings that were filed
by the current filing deadline, were filed within the amended five-
business day deadline.'').
\167\ See supra note 58 and accompanying text.
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With respect to shareholder activism in particular, we note that
for the vast majority of campaigns, the shareholder currently
accumulates at least 90 percent of its equity stake, with many
accumulating 100 percent of their equity stake, within the amended
five-business day deadline.\168\ This demonstrates that most
shareholder activists may not be affected by the shortened deadline. In
addition, for those campaigns that would be affected by the amended
five-business day deadline, we expect the activists will adapt to the
shortened deadline and continue to pursue the campaigns.\169\ For
example, for those campaigns in which the shareholder has accumulated
less than 90 percent of its equity stake within the amended five-
business day deadline, we note that the unrealized gains attributable
to the shares accumulated after the amended deadline generally
represent a significantly smaller portion of the shareholder's total
unrealized gains (when compared to the shares accumulated prior to the
amended deadline).\170\
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\168\ See infra section IV.C.1.b.i, Table 6 (noting that for
approximately 208 of the 215 campaigns conducted annually, at least
90% of the equity stake is accumulated within the amended five-
business day deadline); see also letter from Better Markets II
(citing the same analysis conducted in the DERA Memorandum for the
proposed five-day deadline and stating that the analysis
``indicate[s] that shortening the deadline should not significantly
impede activist campaigns'').
\169\ See infra note 847 and accompanying text.
\170\ See infra section IV.C.1.b.i, Table 6 (noting that for the
7 campaigns conducted annually for which less than 90% of the total
equity stake was accumulated by the amended five-business day
deadline, and the 1 campaign conducted annually for which less than
75% of the total equity stake was accumulated by the amended five-
business day deadline, the average percentages of the filer's
unrealized gains on reported equity stake, as of the day after
filing date, attributable to shares accumulated after amended
deadline were 9.1% and 22.6%, respectively); see also letter from
Better Markets II (citing the same analysis conducted in the DERA
Memorandum for the proposed five-day deadline and stating that ``for
filers who acquired less than 100% of their reported stake by the
proposed deadline, only 6.8% of their unrealized gains on average
were attributable to shares accumulated after the proposed
deadline'').
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Finally, we note that profits from shareholder activism may not be
derived solely from the increase in share price associated with the
public disclosure of an activist's more than five percent beneficial
ownership stake. Specifically, shareholder activists may continue to
experience abnormal positive returns from activism even after filing
their initial Schedule 13D. Thus, to the extent a shareholder activist
seeks to profit from increases in share price after the public
disclosure of its more than five percent beneficial ownership stake, we
would not expect a reduction in the profits associated with such
disclosure to be determinative as to whether a shareholder engages in
an activist campaign.
The amended five-business day deadline reflects our attempt to
ensure
[[Page 76910]]
investors receive material information in a timely manner while, at the
same time, maintaining the appropriate balance between issuers of
securities and the shareholders who seek to exert influence or control
over issuers, especially when compared with the proposed five-calendar
day deadline, which many commenters supported,\171\ and the even
shorter deadlines many commenters recommended.\172\ We believe a five-
business day deadline is sufficiently prompt and represents a more
modern approach that reflects the technological advancements and other
developments in the financial markets in the more than 50 years since
the 10-day deadline was enacted. A five-business day deadline, as
compared to the current 10-day deadline, also would more closely align
the initial Schedule 13D filing deadline with the reporting deadline on
Form 8-K for issuers (generally, four business days) and Form 4 for
officers, directors, and beneficial owners of more than 10 percent of a
covered class (two business days), both in terms of the length of the
deadline and the use of ``business days,'' rather than ``days,'' to
express the deadline.\173\ This alignment should help to ensure that
investors consistently receive prompt disclosures of material
information, irrespective of the source. A five-business day deadline
for the initial Schedule 13D also is more consistent in both length and
form with the filing deadlines for similar beneficial ownership reports
in foreign jurisdictions.\174\
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\171\ See supra note 37 and accompanying text.
\172\ See, e.g., letters from C. McEntee (recommending a same-
day initial Schedule 13D filing deadline); D. Choate (same); Corey
(same); Prof. Steinberg (recommending, among other things, a one-day
initial Schedule 13D filing deadline); J. Dunlop (recommending a
one-day initial Schedule 13D filing deadline); J. Kennedy (same);
Juan B. (same); Phillip (same); WLRK I (recommending, among other
things, a one-business day initial Schedule 13D filing deadline); C.
Jacobs (recommending a two-day initial Schedule 13D filing
deadline); NIRI (recommending a two-business day initial Schedule
13D filing deadline); PL Salvati (same); SCG (same); SCG & NIRI
(same); T. Reilly (recommending a three-day initial Schedule 13D
filing deadline).
\173\ See supra note 150; see also letter from STB (noting that
most analogous securities laws governing reporting of material
changes (e.g., Form 8-K and section 16 filings) require filings
within time periods designated in business days rather than calendar
days). We further believe it is advisable to express all Schedule
13D filing deadlines (i.e., for both initial filings and amendments)
in ``business days.'' We expect that the consistent use of
``business days''--as opposed to using ``days'' or inconsistently
using both ``days'' and ``business days'' to express the filing
deadlines--will ease Schedule 13D filers' administrative burdens. We
also anticipate that this uniform approach across the filing
deadlines will make it easier for Schedule 13D filers to comply with
those deadlines. In addition, as amended, all of the Schedule 13G
deadlines that are less than 45 days also will be expressed in
``business days,'' consistent with one commenter's recommendation.
See letter from IAA (recommending that the Commission express
deadlines consistently in either calendar days or business days
across all of the Schedule 13D and 13G initial and amendment filing
deadlines, where the deadlines are less than 45 days to promote
compliance by making it simpler and less confusing to keep track of
the various deadlines).
\174\ 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.).
We note that commenters disagreed as to the utility of referencing
foreign jurisdictions' beneficial ownership reporting deadlines for
purposes of determining the appropriate initial Schedule 13D filing
deadline. See supra note 55 and accompanying text. Nonetheless, we
believe that this comparative analysis suggests that a shortened
deadline is workable based on the experiences of these foreign
jurisdictions.
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Overall, because we expect that the vast majority of activist
campaigns, and the value they create, will continue unabated under the
amended rules,\175\ we conclude that the significant benefits of the
amendments outlined here and below \176\ justify their costs.
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\175\ See infra section IV.C.1.b.
\176\ See infra section IV.C.a.
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Some commenters expressed other objections to the proposed
amendments. For example, several commenters disagreed with the
information asymmetry-based concerns in the Proposing Release as a
basis for the proposed amendments.\177\ We recognize that there are
information asymmetries involved in any market transaction and agree
that not all information asymmetries warrant a regulatory response. For
example, one commenter stated that the information asymmetries
described in the Proposing Release ``are simply the beneficial result
of research and initiative by investors and the sign of properly
functioning markets'' and expressed concern that ``[i]f activists have
no economic incentive to pursue activism, other shareholders will not
experience the increase in value that would have otherwise resulted
from the activist's conduct.'' \178\ We acknowledge that benefits may
stem from the information asymmetry between a Schedule 13D filer and
the market, and we recognize that the informational advantage of
Schedule 13D filers results, in general, from their own expenditures on
research and analysis or from their efforts and expenditures to pursue
changes at the issuers in which they accumulate these
shareholdings.\179\ As such, although the Proposing Release referred to
information asymmetries between Schedule 13D filers and selling
shareholders and expressed concern that those information asymmetries
``could harm investors,'' \180\ we do not focus on the reduction of
these asymmetries as a justification for shortening the initial
Schedule 13D deadline, as discussed in sections IV.C.1.a.iii and iv
below.
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\177\ See supra notes 84-90 and accompanying text.
\178\ See letter from EIM I. Further, that commenter contrasted
the proposal with the Short Position Reporting Proposal and stated
that ``[t]he Commission does not explain why the research and
analysis of a short seller is entitled to protection and does not
constitute material non-public information about the company it is
shorting, while the research and analysis of an activist is somehow
characterized differently.'' Id.; see also supra note 84. The
commenter's comparison of our shortening of the initial Schedule 13D
deadline to the Short Position Reporting Proposal is inapt. We are
shortening the Schedule 13D deadline in order to ensure that
investors receive material information regarding potential changes
in control in a timely manner to facilitate their investment
decisions. This is consistent with the purpose of section 13(d), and
necessarily requires public disclosure, including of the Schedule
13D filer's identity. See supra note 155 and accompanying text;
Exchange Act section 13(d)(1)(A) (requiring a Schedule 13D filer to
disclose, among other things, its ``background and identity''). The
Short Position Reporting Proposal addresses a different regulatory
scheme, and the reasons for those proposed amendments are discussed
in that release. See Short Position Reporting Proposal. In addition,
contrary to the commenter's suggestion that the Commission is
disregarding the value of an activist's research and analysis, the
amended five-business day deadline represents our attempt to
maintain an appropriate balance between the requirement that
material information be timely disseminated to investors and the
competing interest that undue burdens not be imposed in the change
of control context.
\179\ See infra sections IV.C.1.a.iii and iv.
\180\ See Proposing Release at 13850 & n.19, 13881 & n.214.
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Some other information asymmetries may, however, raise concerns
that warrant a regulatory response. Specifically, the research and
analysis prepared by the staff of the Division of Economic and Risk
Analysis indicate that shortening the initial Schedule 13D deadline to
five business days could meaningfully reduce information asymmetries
between ``informed bystanders'' \181\ and other, less-informed
investors who sell their shares during the period after which an
initial Schedule 13D filing obligation has been incurred but before the
filing is made.\182\ The informational advantage those
[[Page 76911]]
``informed bystanders'' have over the selling shareholders in these
transactions and the associated wealth transfers may be perceived by
some market participants to be unfair. Thus, to the extent that a
shortened initial Schedule 13D filing deadline would reduce these
wealth transfers, thereby addressing this perceived unfairness, this
change could enhance trust in the securities markets and promote
capital formation.\183\
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\181\ See infra note 753 and accompanying text for a discussion
of the term ``informed bystanders,'' as used in this release.
\182\ See infra section IV.C.1.a.iii.
\183\ See id.
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We also note that some commenters questioned the appropriateness
and legality of the proposed amendments in light of certain U.S.
Supreme Court cases that the commenters cited for the proposition that
the ``sole purpose'' of the Williams Act is to protect shareholders
confronted with a cash tender offer.\184\ In both cases, the Court made
the cited statements in the limited context of determining causes of
action or remedies that are available for purported violations of
certain provisions of the Williams Act. Neither decision suggests that
the provisions and protections of the Williams Act are available only
when a cash tender offer is involved; in fact, the Court in Rondeau v.
Mosinee Paper Corp. referred to the defendant-shareholder's belated
compliance with section 13(d), notwithstanding the absence of a pending
or threatened cash tender offer.\185\ We also note statements in the
legislative history indicating that Congress intended that the Williams
Act would apply to any ``acqui[sition] of a substantial block of equity
securities . . . by a cash tender offer . . . or through open market or
privately negotiated purchases.'' \186\ We do not believe, therefore,
that our shortening of the initial Schedule 13D deadline must be tied
to risks shareholders face in connection with cash tender offers.
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\184\ See supra notes 90, 96 and accompanying text (describing
comment letters citing Piper et al. v. Chris-Craft Industries, Inc.
430 U.S. 1 (1977) and Rondeau v. Mosinee Paper Corp., 422 U.S. 49
(1975)).
\185\ 442 U.S. at 59 (noting, in relevant part, that the
shareholder ``has now filed a proper Schedule 13D, and there has
been no suggestion that he will fail to comply with the Act's
requirement of reporting any material changes in the information
contained therein'' notwithstanding the fact that the shareholder
``has not attempted to obtain control of respondent, either by a
cash tender offer or any other device'').
\186\ S. Rep. No. 90-550 to Accompany S. 510, (Aug. 29, 1967);
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. 16
(1967) (statement of Manuel F. Cohen, Chairman, Securities and
Exchange Commission) (stating that ``[t]he bill before you deals
with stock acquisitions in three specific contexts'' including ``the
acquisition by means of a cash tender offer'' and ``other
acquisitions by any person or group'').
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Finally, some opposing commenters expressed other doubts regarding
the Commission's authority to shorten the initial Schedule 13D deadline
as proposed \187\ and asserted that the Commission did not identify a
market event or failure that would justify the proposed
amendments.\188\ As noted above, however, section 13(d)(1) of the
Exchange Act clearly grants the Commission authority to shorten the
initial Schedule 13D filing deadline.\189\ In addition, the Commission
has long recognized that acquisitions made after a person acquires
beneficial ownership of more than five percent of a covered class but
before the person files an initial Schedule 13D constitute 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.'' \190\ We believe
that the current length of that disclosure gap, together with the
information asymmetry \191\ that it may facilitate and the advancements
in technology and developments in the financial markets since Congress
enacted the Williams Act, provide grounds to shorten the initial
Schedule 13D filing deadline from 10 days to five business days.
---------------------------------------------------------------------------
\187\ See supra note 96 and accompanying text.
\188\ See supra notes 106, 109 and accompanying text.
\189\ 15 U.S.C. 78m(d)(1) (requiring a Schedule 13D to be filed
``within ten days . . . or within such shorter time as the
Commission may establish by rule'').
\190\ 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).
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
S. Comm. on Banking, Housing and Urban Affairs (Comm. Print 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.
\191\ See supra notes 181-183 and accompanying text.
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2. Rule 13d-1(b), (c), and (d)
Congress enacted section 13(g) in 1977 \192\ to address the absence
of beneficial ownership reporting by persons who had accumulated large
amounts of stock in a public issuer but were not required to file a
beneficial ownership report under section 13(d).\193\ 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.'' \194\
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 five percent of a covered class.
Section 13(g) was intended to close this gap.
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\192\ Domestic and Foreign Investment Improved Disclosure Act of
1977, Public Law 95-214, sec. 203, 91. Stat. 1494.
\193\ S. Rep. No. 114, at 13 (1977).
\194\ S. Rep. No. 95-114, at 13 (1977), as reprinted in 1977
U.S.C.C.A.N. 4098, 4111.
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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).\195\ 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 five percent of a covered class.\196\ Rule 13d-
1(b), (c), and (d) provide the filing deadlines for the initial
Schedule 13G. Which deadline a person is subject to for its initial
Schedule 13G filing depends on whether the person is a QII, Exempt
Investor, or Passive Investor.
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\195\ Filing and Disclosure Requirements Relating to Beneficial
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 (Apr.
28, 1978)] (``Filing and Disclosure Release'').
\196\ Id. at 18486; see also S. Rep. No. 114, at 14 (1977).
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A QII relying upon Rule 13d-1(b) currently is obligated under 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, but only if such QII beneficially owns more than
five percent of a covered class at the end of a calendar year.\197\ If
the QII
[[Page 76912]]
beneficially owns more than 10 percent 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 five
percent throughout the calendar year without incurring a filing
obligation unless the QII beneficially owns more than 10 percent of a
covered class at the end of any month during that year.
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\197\ 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 Schedule 13G had until 45 days after the end of the calendar year
to report beneficial ownership to the extent the percentage
beneficially owned exceeded 5% as of the end of the calendar year.
See Filing and Disclosure Release at 18486 (explaining that ``the
first proviso 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).
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Rule 13d-1(d),\198\ 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.\199\
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).\200\
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\198\ 17 CFR 240.13d-1(d).
\199\ 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 Release at 18502. 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.
\200\ Filing and Disclosure Release at 18486 (stating that ``the
enactment of section 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
section 13(d)(5) is within the primary purpose of section 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.
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Finally, a beneficial owner electing to report on Schedule 13G in
lieu of Schedule 13D in reliance on Rule 13d-1(c) as a Passive Investor
must file a Schedule 13G within 10 days after acquiring beneficial
ownership of more than five percent of a covered class. A person is
eligible to file as a Passive Investor only if such person is not
seeking to acquire or influence control of an issuer and beneficially
owns less than 20 percent 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.
a. Proposed Amendments
The Commission proposed to amend Rule 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 after the end of the month
in which beneficial ownership exceeds five percent of a covered class.
The Commission expected that the proposed acceleration of these
deadlines would result in more timely disclosures while minimizing any
potential additional burdens.\201\ The Commission also believed 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.\202\
---------------------------------------------------------------------------
\201\ Proposing Release at 13856.
\202\ Id.
---------------------------------------------------------------------------
Given the proposal to shorten the initial reporting deadline to
five business days after the end of the month, the Commission also
recognized that the current provision of Rule 13d-1(b)(2) that operates
to accelerate that initial filing deadline if beneficial ownership
exceeds 10 percent at the end of any month would be unnecessary in
light of Rule 13d-2(c)'s overlapping Schedule 13G amendment
requirement.\203\ Accordingly, the Commission proposed to further amend
Rule 13d-1(b)(2) to delete the language that imposes an initial
reporting obligation on QIIs after exceeding 10 percent of a covered
class.
---------------------------------------------------------------------------
\203\ Id.
---------------------------------------------------------------------------
The Commission also proposed 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. The Commission believed that it would be
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 consistency between
the deadlines in Rule 13d-1(c) and (a) and to facilitate the overall
goal of increasing transparency in beneficial ownership.\204\
---------------------------------------------------------------------------
\204\ Id.
---------------------------------------------------------------------------
In proposing these amendments, the Commission stated that 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 sections 13(d) and 13(g).\205\
For example, the Commission noted investors reporting pursuant to
current Rule 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 percent.\206\ The proposed amendments to the
filing deadlines for initial Schedule 13G filings by QIIs and Exempt
Investors, therefore, were intended to improve transparency and avoid
any gaps in reporting.\207\
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\205\ Id. at 13855.
\206\ Id.
\207\ Id. at 13855-56.
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In addition, the Commission noted that when Rule 13d-1(c) was
adopted in 1998, Passive Investors may not have had reasonable access
to advanced technologies to make more immediate filings possible.\208\
Consistent with its justification for proposing to shorten the initial
Schedule 13D filing deadline under Rule 13d-1(a), the Commission
asserted that Passive Investors today not only have gained valuable
experience complying with these reporting provisions, but also have
ready access to the necessary filing technology.\209\ As such, the
Commission proposed amending Rule 13d-1(c) in light of those
technological advancements and
[[Page 76913]]
its proposed amendment to the analogous filing deadline in Rule 13d-
1(a).
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\208\ Id. at 13856.
\209\ Id.
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b. Comments Received
Commenters submitted a variety of views on the proposed amendments
to Rule 13d-1(b), (c), and (d). Several commenters supported the
proposed amendments.\210\ Some of those commenters supported
accelerating the initial Schedule 13G filing deadlines for many of the
same reasons they supported accelerating the initial Schedule 13D
filing deadline.\211\ Another commenter asserted that the proposed
amendments would benefit shareholders and other market participants by
facilitating sound corporate governance.\212\
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\210\ See, e.g., letters from AFL-CIO (supporting only the
proposed amendment to Rule 13d-1(c)); AFREF (same); AFREF, et al.
(same); Anonymous 3; Anonymous 5; Anonymous 11; Anonymous 12;
Anthony R.; C. Robinson; John F. Phinney Jr, CEO & Founder,
Convergence Inc. (June 15, 2023) (``Convergence'') (supporting only
the proposed amendment to Rule 13d-1(b)); EEI; Engineer; FedEx;
Freeport-McMoRan; Andrew Patrick White, Founder CEO of FundApps
(Feb. 28, 2022) (``FundApps'') (same); HMA I; J. Pieper; J. Soucie;
Jonah; Juan; Mark C.; Mike; Nasdaq; P. Worts; T. Mirvis, et al.;
Todd.
\211\ See supra notes 38-40, 43-44 and accompanying text.
\212\ See letter from AFREF. For example, the commenter asserted
that a shortened filing deadline would help investors ensure their
asset managers are fulfilling their fiduciary duties and help inform
the education and advocacy efforts of those with a stake in proxy
contests, shareholder resolutions, and other important votes. Id.
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Several commenters supported the proposed amendments based on
changes in technology and developments in the financial markets.\213\ A
number of commenters noted that some foreign jurisdictions require
beneficial ownership reporting on a shorter deadline than currently
required under Regulation 13D-G.\214\ One commenter viewed the current
Schedule 13G filing deadlines as outdated.\215\ Other commenters
asserted that the proposed amendments would not impose significant
costs to beneficial owners of more than five percent of a covered
class.\216\ And, another commenter stated that the proposed amendments
would be consistent in balancing the need for adequate disclosures with
burdens placed on filers to accurately prepare required
disclosures.\217\
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\213\ See, e.g., letters from AFL-CIO; C. Robinson; FedEx;
Freeport-McMoRan; T. Mirvis, et al.
\214\ See, e.g., letters from AFREF; Convergence; FundApps.
\215\ See letter from T. Mirvis, et al.
\216\ See, e.g., letters from Anonymous 11; Freeport-McMoRan; J.
Soucie.
\217\ See letter from FedEx.
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Several commenters opposed the proposed amendments.\218\ Some of
those commenters disagreed with the Commission's technological
advancement-based justifications for the proposed acceleration of the
beneficial ownership reporting deadlines.\219\ For example, one
commenter asserted that the Commission has never suggested that
technological ability to file is or should be the primary basis to
determine the appropriate filing deadlines for Schedules 13D and
13G.\220\ Another commenter stated that electronic filing of a Schedule
13G can take longer than physical mailing because of the time and
effort required to obtain EDGAR filing codes as compared to simply
making an overnight mailing or hand delivery of a paper filing.\221\
Another commenter questioned why the existence of new filing
technologies justify subjecting QIIs to Schedule 13G filing
requirements so much shorter than the ones currently in place.\222\
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\218\ See, e.g., letters from A. Day; ABA; AIMA; B. Mason; Dodge
& Cox; E. Fraser (opposing only the proposed amendment to Rule 13d-
1(c)); IAA (opposing only the proposed amendments to Rule 13d-1(b)
and (d)); ICI I; MFA (same); MSBA (supporting only the proposed
amendments to Rule 13d-1(c) and (d)); Perkins Coie; Kenneth E.
Bentsen, Jr, CEO and President, Securities Industry and Financial
Markets Association (Apr. 11, 2022) (``SIFMA'') (opposing only the
proposed amendments to Rule 13d-1(b) and (c)); Kyle Brandon,
Managing Director, Head of Derivatives Policy, SIFMA (June 27, 2023)
(``SIFMA & SIFMA AMG'') (same); State Street Corporation (Apr. 11,
2022) (``SSC'') (opposing only the proposed amendment to Rule 13d-
1(b)); STB; TIAA (opposing only the proposed amendment to Rule 13d-
1(b)); TRP.
\219\ See, e.g., letters from ABA; Dodge & Cox; IAA; ICI I;
MSBA; STB; TIAA.
\220\ See letter from ICI I. The commenter also stated that the
Commission has not made significant technological advances over the
years to its own systems that market participants rely on to prepare
Schedules 13D and 13G, making it challenging and costly for
investors to gather the information about beneficial ownership they
need to file Schedules 13D and 13G. Id.
\221\ See letter from MSBA. The commenter also noted that
Passive and Exempt Investors generally do not have specialized
technology that would make it practical for them to file a Schedule
13G on the proposed accelerated bases.
\222\ See letter from TIAA. The commenter also asserted that the
Proposing Release did not provide data showing that QIIs have as a
standard matter adopted the type of technological improvements that
would make it easier for them to prepare these filings on such a
short timeline. Id.
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Some opposing commenters acknowledged the technological advances
identified in the Proposing Release but disagreed that they justify the
proposed amendments. For example, one commenter stated that
technological advances do not support significantly reducing filing
deadlines as proposed because, despite advances in technology, the
filing process still has numerous operational components that take time
to complete.\223\ Similarly, some commenters stated that
notwithstanding any technological advancements, a month-end-based
reporting deadline for Schedule 13G would be difficult to meet because
much of the process is still manual and cannot be done reliably via any
current technology, including exercising the judgment required to
determine whether a person is a beneficial owner under the various
provisions of Rule 13d-3.\224\ Another commenter stated that, despite
technological advancements, it is often difficult for QIIs to gather
aggregate information quickly, confirm such information for accuracy,
draft disclosure documents and receive approval for filing purposes,
especially given that QIIs often beneficially own positions in many
issuers and those positions change frequently.\225\
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\223\ See letter from IAA (noting that ``an investment advisory
firm's reporting process could involve receiving spreadsheets from
multiple affiliates, consolidating those spreadsheets into one
report, reviewing the consolidated report for errors and
discrepancies, following up to correct issues, calculating
beneficial ownership, preparing Schedule 13D or 13G'' and may also
require them to obtain ``review by outside counsel . . . [and]
signatures (including from group members if needed)'').
\224\ See letters from STB; TIAA. For example, one of these
commenters noted that notwithstanding any technological
advancements, a month-end-based reporting deadline for Schedule 13G
would be difficult to meet because analysis of Rule 13d-3 beneficial
ownership depends on the most recently published outstanding share
number from an issuer and, therefore, an investor cannot reliably
determine whether it is a 5% beneficial owner of any particular
stock as of a month-end reference date until the last day of such
month and there is no consistent monthly disclosure requirement for
an issuer's outstanding shares. See letter from STB.
\225\ See letter from ABA.
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Opposing commenters also criticized some of the Commission's other
justifications for, or the purported benefits of, the proposed
amendments. For example, some commenters stated that the Commission has
not provided evidence to support its concerns regarding reporting gaps
and information asymmetries that would warrant the proposed
acceleration of the reporting deadlines.\226\ Others asserted that the
Commission has not articulated how the proposed amendments will promote
transparency into matters of corporate control and questioned the
necessity of the proposed amendments in that respect.\227\ Some of
those
[[Page 76914]]
commenters expressed the view that the Commission's existing rules
provide sufficient transparency into matters of corporate control with
respect to QIIs and Passive Investors,\228\ as well as Exempt
Investors.\229\ In addition, one commenter asserted that the Commission
has not persuasively explained why it is appropriate to accelerate the
beneficial ownership reporting deadlines as proposed.\230\ Some
commenters stated that the information filed on Schedule 13G by Passive
and Exempt Investors is unlikely to be material information that is
market-moving.\231\ Other commenters asserted that the proposed
amendments would provide little benefit to the market given that
institutional investment managers' trading activity is already subject
to significant scrutiny by the Commission and the public through the
filing of Form 13F.\232\
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\226\ See, e.g., letters from ICI I; SIFMA; TIAA. Those
commenters also asserted that the Commission's unsubstantiated
concerns about QIIs selling down positions before the end of a
reporting period to avoid a Schedule 13G filing does not provide an
appropriate basis for the proposed amendment to Rule 13d-1(b). Id.
\227\ See letters from ABA; SIFMA; STB.
\228\ See letters from ABA; STB. For example, those commenters
noted that QIIs and Passive Investors already are obligated to amend
their Schedule 13G promptly upon crossing a 10% beneficial ownership
threshold and are obligated to file an initial Schedule 13D if their
control intent changes. Id.
\229\ See letters from SIFMA; STB. For example, those commenters
noted that Exempt Investors are largely investors who have held the
shares since prior to the issuer's IPO and, as such, their original
ownership is already materially disclosed in the IPO prospectus. Id.
In addition, those commenters noted that to the extent an Exempt
Investor's beneficial ownership either exceeds 10% or exceeds their
pre-IPO beneficial ownership level, it will be required to make
section 16 filings or make an initial Schedule 13D filing. Id.
\230\ See letter from ICI I.
\231\ See letters from ABA; MSBA. For example, those commenters
noted that a Schedule 13G filed by a Passive Investor does not
include information about potential changes in control and that
Passive Investors must certify that they do not have a control
intent. Id. Those commenters also noted that the proposed amendments
to Rule 13d-5 include a ``tipper-tippee'' provision with respect to
the filing of a Schedule 13D but not with respect to the filing of a
Schedule 13G, see letter from MSBA, and stated that accelerating the
filing deadline for Exempt Investors will provide no additional
information to the market given that the vast majority of Exempt
Investors become Exempt Investors following the effectiveness of a
registration statement which contains all of the information, if not
more, that would be included in a Schedule 13G. See letter from ABA.
\232\ See letters from ABA; MFA.
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Several commenters also expressed concern regarding administrative
burdens associated with the proposed amendments to Rule 13d-1(b) and
(d).\233\ Some commenters noted that beneficial owners often file a
Schedule 13G for multiple different issuers, which ``strains'' their
filing resources at the end of the reporting period.\234\ One commenter
stated that a month-end-based reporting deadline applicable would
burden the external resources (including outside counsel, filing
agents, and the EDGAR system) needed to prepare and make these filings
given that all QIIs and Exempt Investors would be performing the
Schedule 13G filing analysis during the same five-business day
period.\235\ One commenter expressed concern that the proposed
amendment to Rule 13d-1(b) could create practical difficulties for
QIIs, including insufficient time to validate the data to be included
in a consolidated filing for a large institutional investor with
multiple entities.\236\ And, one commenter expressed concern that
institutional investors and other unregistered entities may lack the
infrastructure and personnel to comply with the revised filing
deadlines and described year-round monitoring of beneficial ownership
reporting obligations and the filing deadlines that would be required
under the proposed amendments as burdensome.\237\
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\233\ See, e.g., letters from ABA; IAA; ICI I; Perkins Coie;
SSC; STB; see also letter from MFA & NAPFM.
\234\ See letters from IAA; ICI I.
\235\ See letter from STB. The commenter also asserted that the
proposed five-business day period after month-end is not enough time
for outside counsel to gather the requisite information from their
clients and prepare a Schedule 13G filing and expressed concern that
investors may not be able to obtain EDGAR filing codes in time to
meet the proposed deadlines, noting that the Commission recently has
been taking three to five business days (and even longer during busy
periods) to generally provide such codes. Id.
\236\ See letter from SSC; see also letter from IAA.
\237\ See letter from Perkins Coie.
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Other commenters expressed similar concerns that the proposed
amendment to Rule 13d-1(b) would increase QIIs' filing burdens
significantly, without material benefit to investors.\238\ Some of
those commenters disagreed with the Commission's statement that QIIs
already have systems in place to monitor their beneficial ownership
levels and asserted that the proposed amendment would require
significant changes to their operational systems and processes.\239\
One commenter disagreed with the Commission's statement that the
proposed amendments only would require QIIs to monitor the beneficial
ownership levels on a monthly basis, suggesting instead that the
proposed amendments would require daily monitoring.\240\ Another
commenter expressed concern that, as a practical matter, the proposed
five-day deadline under Rule 13d-1(c) would be impossible to comply
with in most cases.\241\ The same commenter also stated that Exempt
Investors that are not affiliated with the issuer are unlikely to
become aware of their potential beneficial ownership reporting
obligations in a timely manner and, therefore, may be unlikely to be
able to comply with the proposed deadline under Rule 13d-1(d) given the
practical challenges associated with making a Schedule 13G filing.\242\
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\238\ See, e.g., letters from ABA; ICI I; SIFMA.
\239\ See letters from ICI I; SIFMA.
\240\ See letter from SIFMA.
\241\ See letter from MSBA. For example, the commenter explained
that obtaining EDGAR filing codes by making a Form ID filing
requires the assistance of counsel and that such filing usually
takes 7 days to be processed by the Commission, by which time the
proposed deadline will have passed given that many Passive Investors
are unaware of their Schedule 13G filing obligations until after
they have crossed the 5% threshold. Id. The commenter also asserted
that even if a Passive Investor is aware of its Schedule 13G filing
obligation before it has crossed the 5% threshold, it is unlikely to
take steps to prepare for such obligation before actually crossing
the threshold. Id. In addition, the commenter noted that many
Schedule 13G filings have multiple filing persons, which requires
even more time in the preparation of the filing and the engagement
of counsel to help prepare the filing. Id.
\242\ Id.
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Some commenters expressed concern that the proposed deadlines would
be unduly burdensome for smaller and non-institutional beneficial
owners,\243\ with one commenter stating that by increasing overhead
costs and expanding an already complex regulatory regime, the
Commission's accelerated timeline will render it particularly difficult
for smaller managers, who cannot readily bear the costs and
administrative burden of monthly filings.\244\ Some commenters also
asserted that the proposed amendment to Rule 13d-1(b) raises
significant concerns regarding harm to investment advisers and funds
and would impose substantial unnecessary costs on their clients.\245\
Similarly, some commenters stated that the proposed amendment to Rule
13d-1(b) and (d) would create a significant risk of prematurely
disclosing sensitive portfolio holdings information to the market,
which may result in front-running, copycatting, and other abusive
trading practices that harm advisers and their clients, including funds
and their investors.\246\ And, more generally, one commenter expressed
concern that the proposed amendments would create significant reporting
and monitoring burdens for all Schedule 13G filers.\247\
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\243\ See, e.g., letters from A. Day; E. Fraser; MFA.
\244\ See letter from MFA.
\245\ See letters from ICI I; MFA.
\246\ See letters from IAA; ICI I.
\247\ See letter from Perkins Coie.
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Opposing commenters also highlighted some other potential risks
associated with the proposed deadlines. For example, one commenter
expressed concern that reporting within such a short time period under
the proposed
[[Page 76915]]
amendment to Rule 13d-1(b) would increase the risk reported information
would subsequently need to be revised through amendments to Schedule
13G, potentially confusing the market.\248\ One commenter asserted that
the proposed amendments would increase the number of unintentionally
inaccurate filings.\249\ One commenter expressed concern that the
proposed amendments could negatively impact the ability of investors
and their advisors to draft meaningful disclosures and engage in
thoughtful analysis.\250\ Another commenter stated that the proposed
amendments could be more broadly disruptive to trading.\251\
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\248\ See letter from ICI I.
\249\ See letter from ABA.
\250\ See letter from STB; see also supra note 102.
\251\ See letter from TRP. Specifically, the commenter posited
that there would be additional trading and volatility in certain
issuers just after the reporting deadline each month, as
institutional investors begin the process of accumulating or
reducing positions, followed by reduced liquidity leading up to the
reporting deadline, as they concluded that trading. Id.
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Finally, several opposing commenters expressed concern that the
proposed amendments do not reflect the differences between Schedule 13D
and 13G filers (particularly QIIs) based on the legislative and
administrative history of sections 13(d) and (g) of the Exchange
Act.\252\ And, other commenters expressed concern that the proposed
amendment to Rule 13d-1(b) would be unprecedented and inappropriate,
unnecessary to accomplish the Commission's regulatory objectives, and
inconsistent with the intent and administrative history of the rules
under sections 13(d) and 13(g).\253\
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\252\ See letters from ABA; ICI I.
\253\ See id.
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The opposing commenters also provided some recommendations
regarding the proposed amendments. A number of those commenters
suggested a quarter-end-based initial Schedule 13G filing deadline for
QIIs and Exempt Investors rather than a month-end-based deadline. For
example, some commenters recommended that QIIs be required to file
their initial Schedule 13G within 45 days after the end of a calendar
quarter as of which the QII beneficially owns more than five percent of
a covered class to align with the filing timeframe under section 13(f)
and better reflect the distinction the Commission has historically made
between QIIs and other institutional investors.\254\ Similarly, some
commenters recommended that the Commission require that both QIIs and
Exempt Investors file their initial Schedule 13G 45 days after the end
of a calendar quarter, consistent with the Form 13F \255\ filing
deadline.\256\ One commenter recommended that QIIs be required to file
their initial Schedule 13G within 15 business days after the end of a
calendar quarter as of which the QII beneficially owns more than five
percent of a covered class.\257\ Another commenter recommended that
QIIs be required to file their initial Schedule 13G on a quarterly
basis with at least a 30-day period before the filing deadline.\258\
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\254\ See letters from Dodge & Cox; ICI I; SIFMA.
\255\ See infra note 280 for a discussion of Form 13F and its
filing deadlines.
\256\ See letters from IAA; MFA; see also IAC Recommendations
(recommending that the Commission shorten the initial filing
deadlines for QIIs and Exempt Investors to 45 days after the end of
a calendar quarter). One of the commenters stated that a quarterly
deadline would increase transparency for market participants as
compared with the current annual deadline and noted that
institutional investment managers are already reviewing and
assessing their holdings on a quarterly basis in order to prepare
Form 13F filings and are more equipped to submit accurate Schedule
13G filings with the same frequency. See letter from IAA. The
commenter also asserted that aligning the deadlines for initial
Schedule 13G filings with Form 13F filings would strike the right
balance between the Commission's concerns about information
asymmetry in the marketplace, and advisers' concerns about
operational strains and competitive disadvantages that would come
with publicly exposing their positions more frequently. Id.
\257\ See letter from SSC.
\258\ See letter from TRP.
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Opposing commenters also made alternative suggestions regarding the
proposed amendments. For example, one commenter recommended that QIIs
and Exempt Investors be required to file their initial Schedule 13G
within 10 days after the end of the month in which its beneficial
ownership exceeds five percent as of month-end.\259\ Another commenter
recommended that to the extent the Commission is concerned about
Schedule 13G filers acquiring additional shares after crossing the five
percent threshold without public disclosure, it should prohibit trading
after crossing the five percent threshold rather than accelerating the
filing deadlines.\260\ One commenter suggested that if the Commission
seeks to apply the proposed amendments to a broad set of investors
whose activities are largely unrelated to matters of corporate control,
or where such matters may be implicated but are already subject to
disclosure requirements under the existing disclosure regime, it should
conduct further study and analysis to better understand what percentage
of such investors ever are implicated in actual change in control
scenarios--to determine the percentage of activist matters where
earlier and more frequent disclosure of such investors' holding would
have been materially beneficial to investors.\261\ Another commenter
recommended that rather than adopting the proposed amendments, the
Commission should add a column to Form 13F requiring filers to
explicitly note, for each listed class of securities, whether the filer
has acquired over five percent beneficial ownership during the
reporting period.\262\ And, one commenter recommended that the
Commission consider extending the filing deadline for Passive Investors
(e.g., to 15 or 30 days) rather than accelerating it.\263\
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\259\ See letter from ABA.
\260\ See letter from MSBA.
\261\ See letter from STB. The commenter also suggested that if
the Commission's goal is market transparency more generally, and not
a targeted concern related to matters of corporate control, the
Commission should consider whether more appropriate tools exist to
disclose 5% beneficial ownership or material changes to such
positions in a more concise and efficient manner, using Form 13F as
an example. Id.
\262\ See letter from MFA.
\263\ See letter from E. Fraser. The commenter also recommended
that the Commission consider a provision for when a shareholder's
position goes over the 5% threshold because of ordinary corporate
actions that result in the number of outstanding shares to drop such
that the shareholder unwittingly has a holding over the 5% of
outstanding shares and suggested recommended that the Commission
consider increase the threshold from greater than 5% beneficial
ownership to 10%. Id.
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In addition, some supporting commenters recommended that t
[…truncated; see source link]Indexed from Federal Register on November 7, 2023.
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.