SEC Proposed Amendment to Section 13D-G: Modernizing Beneficial Ownership Reporting – Strengthens Financial Transparency?
By Sushma Bafna, Supervisor, Assurance Services
The need for accurate and up-to-date information on beneficial ownership has become paramount in an era marked by complex corporate structures and increasing concerns over transparency. To address these challenges, the Securities and Exchange Commission (SEC) is proposing an amendment to Section 13D-G to modernize the rules governing beneficial ownership reporting. This article delves into the key elements of the proposed amendment and its potential impact on the reporting of beneficial ownership.
Related Securities Exchange Act Sections & Regulations
Section 13(d) requires any person or group of persons who beneficially own more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 (the “Act”) to file a Schedule 13D with the SEC within 10 days of the acquisition. A Schedule 13D must provide detailed information about the acquirer, including its identity, source of funds, plans for the company, and any agreements or understandings with other persons regarding the company.
Section 13(g) requires any person or group of persons who beneficially own more than 5% of a class of equity securities registered under the Act to file a Schedule 13G with the SEC within 45 days of the end of the calendar year for qualified institutional and exempt investors in which the ownership stake was acquired or within 10 days of acquiring the stake for passive investors. A Schedule 13G must provide less detailed information than a Schedule 13D, but it must still give the acquirer’s identity and the number of shares beneficially owned.
Regulation 13D-G provides rules for implementing the requirements of the Act Sections 13(d) and 13(g). For example, Regulation 13D-G defines terms used in the sections, such as “beneficial owner” and “control.”
Sections 13(d) and 13(g), along with Regulations 13D-G, provide investors with more information about significant ownership positions that could impact the market, influence investment decisions, monitor corporate governance practices, and prevent insider trading and market abuse.
The Proposed Amendment to the Regulation 13D-G
Accelerating the Filing Deadlines
Schedule 13D, the proposed amendments would reduce the deadline to file the Schedule from 10 days to 5 days of acquiring more than 5% of a Company’s equity securities.
Schedule 13G, firstly, the proposed amendments would reduce the deadline to file the Schedule from 45 days after the end of the calendar year to 5 days after the month of acquiring more than 5% of a Company’s equity securities. Secondly, the current rules require that an amendment be filed within 45 days after the year in which any change occurred. The proposed amendment reduced this deadline to five days after the month in which a material change occurred. Lastly, the current rules also require the amendment obligations for qualified or exempt investors and passive investors upon exceeding 10 percent beneficial ownership or a 5 percent increase or decrease in beneficial ownership of a Company’s equity securities to file an amendment within five days and one business day, respectively.
To ease filers’ administrative challenges resulting from these shortened deadlines, the proposed amendments would extend the filing “cut-off” times for these Schedules from 5:30 PM to 10:00 PM ET.
Reporting Derivative Securities
The current rules do not require investors to report their beneficial ownership of derivative securities. This can make tracking the true ownership of a company’s equity securities difficult. The proposed amendments would require holders of certain cash-settled derivative securities to be “deemed” beneficial owners of the reference equity securities. In addition, the proposed amendments would revise Item 6 of Schedule 13D to clarify that a person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security.
The proposal directs investors to report their beneficial ownership of derivative securities, which would provide the SEC with a more complete picture of a Company’s stock ownership.
Clarifying the Rules for Groups of Investors
The proposed amendments would clarify the circumstances under which two or more persons have formed a “group” under Regulation 13D-G and the Act. Those circumstances would include, among other things, “tipper-tippee” relationships in which a person shares non-public information about an upcoming Schedule 13D filing with another person who subsequently purchases the issuer’s securities based on that information.
In addition, the proposed amendments provide new exemptions allowing:
- investors to communicate with one another or the issuer without the purpose or effect of changing or influencing control of the issuer and
- investors and financial institutions enter into agreements governing the terms of derivative securities.
The proposal makes it easier for investors to comply with the rules. This would help to ensure that all investors are subject to the same disclosure requirements, regardless of how they hold their shares.
Structured Data Requirements for Schedules 13D and 13G
To make it easier for investors and markets to access, compile and analyze information disclosed on Schedules 13D and 13G, the proposed amendments would require that these filings use a structured, machine-readable data language. This requirement would apply to all information disclosed on Schedules 13D and 13G.
Benefits of Modernizing Beneficial Ownership Reporting
- Enhanced transparency: Modernized reporting requirements would make it easier for investors to track the ownership of a Company’s stock, which would help to improve market transparency and promote corporate accountability.
- Deterrence of market manipulation: Stricter reporting deadlines and expanded disclosure requirements would act as a deterrent against market manipulation and insider trading. The proposed amendment would create a more robust regulatory framework that discourages abusive practices and strengthens investor confidence in the fairness and integrity of financial markets.
- Increased Investor Protection: The timely reporting and enhanced disclosure requirements would empower investors to make well-informed decisions. They would have access to accurate and up-to-date information about significant ownership positions, enabling them to evaluate their investments’ potential risks and rewards.
Opposition to Modernization
Some investors have expressed opposition to the proposed amendments. These investors argue that the amendments would impose unnecessary administrative burdens, cause potential market disruptions, and the desired level of transparency would not be achieved. The SEC has responded to these concerns by stating that the proposed amendments are designed to be flexible, and the investors will be allowed to tailor the reporting obligations to their specific circumstances. The SEC has also stated that the proposed amendments will be subject to public comment before they are finalized.