Securities and Exchange Commission (“SEC”) Chair Gary Gensler recently said, “In our fast-paced markets, it shouldn’t take ten days for the public to learn about an attempt to change or influence control of a public company.”
It came as little surprise then on October 10, 2023, when in a 4-1 vote, SEC commissioners adopted a rule to shorten the amount of time an investor has to disclose an ownership stake of more than five percent in a company from ten business days to five business days.
The SEC’s New Beneficial Ownership Rules
In the recent vote, the SEC adopted rule amendments governing beneficial ownership reporting requirements under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. Specifically, the amendments cut in half the time that activist investors and hedge funds will have to divulge large stakes in publicly traded companies. In addition, the new rules require market participants to provide more timely information on their positions, a move the SEC says will better meet the needs of investors in today’s financial markets.
In addition to shortening the deadline for initial Schedule 13D filings, the new rules clarify the meaning of “groups” subject to beneficial ownership reporting obligations, and perhaps most significantly, the rules clarify Schedule 13D disclosure requirements with respect to derivative securities to include the requirement that all interests in derivative securities must be fully disclosed. Finally, in a nod toward disclosure modernization, the new rules require that Schedule 13D and 13G filings be made using a structured, machine-readable data format.
Chair Gensler heralded the moves, saying in a statement, that the updated disclosure process was aimed at informing investors and the market more quickly in the wake of technological changes that have swept Wall Street in recent decades. “Frankly, these deadlines from half a century ago feel antiquated,” Gensler said. Indeed, the SEC’s reporting timelines for investors with and without the intent of influencing control of a business had not previously been amended since 1968 and 1977, respectively.
What the SEC’s New Rules Mean for Investors
While the rules certainly impact timelines for investors with “control intent,” the new rules have also shortened deadlines for investors with no “control intent,” such as qualified institutional investors. Institutional investors must now report significant stakes within forty-five days after the end of a calendar quarter rather than on a calendar year basis. Under the new requirements, passive investors, similarly, must make disclosures within five days, down from ten.
The rules also come as the SEC heightens scrutiny of the private funds industry, and analysts predict that the new rules will most heavily affect activist investors, since shorter deadlines could hamper such investors’ ability to build stakes above the five percent mark in secret and diminish the profits they gain once their positions become public. Since amendments to the disclosures will need to be filed within two business days, under the new rules, investors crossing the five percent threshold will now have to disclose all their interests in a company, including security-based swaps, which is how activist investors tend to build stakes secretly.
Hedge funds warned that the rule would make activist investing less attractive because other investors would jump in and drive up the price of companies while funds were building their positions. In addition, hedge funds have publicly criticized the rule, claiming that shortened deadlines will reduce market efficiency because investors will have less incentive to identify and fix mismanaged companies. But in its roll-out of the rules, the SEC stressed that efficiency and transparency are precisely the point of the new regulations.
The new reporting requirements are intended to alert the market about potential changes in corporate control and are intended to address information asymmetries in the market precisely to prevent investors from quietly building their positions without others knowing. Financial reform advocacy groups mostly welcomed these changes, lauding the new rules as a welcome step to increasing efficiency, transparency, and fairness for all market participants.
In all, the adoption of the new Schedule 13D and 13G rules reflects the culmination of a decades-long process of advocacy for the modernization of beneficial ownership reporting, and such action demonstrates the importance that the SEC will place on Section 13 beneficial ownership filing requirements going forward. All said, the new rules signal that this area of law will continue to be a singular focus for the agency for years to come.