Even though the Securities and Exchange Commission (SEC) on Oct. 10, 2023, finalized a modified version of a proposal that cuts the 10-day initial deadline for beneficial ownership reporting in response to market concerns about the original proposal, Commissioner Hester Peirce still voted against the final release.
“Although better than the proposed rule, the final beneficial ownership reporting rule continues to rest on flawed economics,” said Peirce, who was the lone dissenter. “Accordingly, I cannot support it.”
In particular, the SEC revised its rules under the Securities Exchange Act of 1934 to require an investor who acquires more than 5 percent of a company’s equity to report that ownership on a Schedule 13D within five business days. The proposal was five calendar days. The final rule also states that amendments must be filed within two business days. The proposal was within one business day.
An investor with intent to control files 13D while an investor without a control intent files Schedule 13G. Thus, qualified institutional investors (QIIs), exempt investors and passive investors, for example, file 13G, which have varying deadlines.
Peirce’s Dissent: Might Hurt Investors
Commissioner Peirce, in a statement, acknowledged that the original filing timelines are not ideal. Still, the adopting release lacks the necessary justification for changing the deadlines.
“According to the Commission, shortening the 13D window will mitigate information asymmetries between everyday investors, on the one hand, and 13D filers and ‘informed bystanders,’ on the other hand,” Peirce said. “By the Commission’s logic, narrowing the filing window should enable uninformed traders to share in profits created by the diligent efforts of more informed investors. But, absent a compelling reason, people who lawfully possess information should not have to hand that information over to their uninformed counterparties.”
She said she is particularly concerned that the revised rules would prevent someone who has worked hard to identify a mismanaged company and develop a strategy for improving it from getting adequate compensation.
“As one commenter explained, ‘permitting buyers to make a profit from their asymmetric information is often needed to induce them to invest effort to discover firms that are mismanaged,’” Peirce stated. “And if investors pare back their monitoring of companies, other investors and the broader economy could suffer.
Peirce champions the free enterprise economy.
“The Commission’s economic analysis takes great pains to show that the changes will not impair activist investors that much, but in the process demonstrates that the rule will have substantial effects on how these investors proceed,” she added. “The result could be fewer potentially corporate value-enhancing campaigns.”
Decades-Old Filing Deadlines No Longer Relevant Today
But the majority of the SEC, including Commissioner Mark Uyeda, support the change in part because the initial filing deadlines have not been updated since 1968 for 13D and 1977 for 13G.
“Frankly, these deadlines from half a century ago feel antiquated,” said SEC Chair Gary Gensler in a statement.
“In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company,” Gensler said. “I am pleased to support this adoption because it updates Schedules 13D and 13G reporting requirements for modern markets, ensures investors receive material information in a timely way, and reduces information asymmetries.”
Under the final rule for Schedule 13G, the regulator shortened the initial filing deadline from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5 percent of the covered class. This revised requirement is for QIIs and exempt investors.
For passive investors, the SEC shortened the initial filing deadline from 10 days to five business days.
Uyeda, in a statement, said that he supported the changes because the final amendments reflect consideration of the concerns raised in comment letters.
For example, the change from proposed five days to five business days is meaningful, said Uyeda, a conservative who normally sides with Peirce.
Before the changes were made, the timeframe was 10 calendar days, not 10 business days for Schedule 13D and certain Schedule 13G filings. And the change to business days is also consistent with the recommendation provided by its Investor Advisory Committee in June.
“Amending the 13D/G filing deadline to reference business days, rather than calendar days, will allow the SEC to modernize the markets and meet its other goals of reducing information asymmetry in the markets,” the advisory panel’s recommendation states.
Commissioner Uyeda also cited some other changes made in response to concerns, including provisions related to certain holders of cash-settled derivatives securities as beneficial owners. The SEC provides a framework to determine whether these securities are deemed to be beneficial owners.
“The guidance on beneficial ownership determination is consistent with the treatment of security-based swaps set forth in a prior Commission release,” he said.
Still Significant Changes
Despite the modifications made to the proposal issued in February 2022, Dave Brown, a partner with Alston & Bird LLP in Washington, said that the final release still represents a major overhaul of the beneficial ownership reporting rules.
“Consistent with past practice in other rulemakings, the SEC pushed the boundaries with its proposing release and then adopted somewhat less extreme positions,” Brown said.
In his view, market participants—both companies and investors—will be disappointed with the rule changes.
“Given the speed of markets, it made sense for the SEC to shorten the reporting window for activist investors and others that exceed 5 percent,” he said. “However, it certainly increased the burden on passive and institutional investors by accelerating the time period that amendments are required. Fortunately, the SEC did not codify some of its more extreme interpretations from the proposing release.”
Brown also pointed out that the SEC did not have a public vote, which was surprising to him because the commission made significant changes to the reporting rules. “These types of amendments certainly deserved a public hearing,” he said.
The final rules are in Release Nos. 33-11253; Modernization of Beneficial Ownership Reporting.
The release becomes effective 90 days after publication in the Federal Register. Compliance date is Sept. 30, 2024.
This article originally appeared in the October 12, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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