Modernizing Shareholder Disclosure: SEC Adopts Amendments to Schedules 13D and 13G Filing Rules
The Securities and Exchange Commission (SEC) has ushered in significant amendments to beneficial-ownership disclosure rules, representing the first major overhaul in over 50 years. While these changes aim to offer more timely information to investors and maintain the momentum of activist campaigns, they have generated a mixed bag of reactions from market participants.
Swift Filing Requirements for Activist Investors
One of the most talked-about changes is the reduction in time for filing Schedule 13D, which is required for activist investors taking a 5% or more stake in a public company with intentions of influencing its management. The previous rule allowed 10 calendar days for the filing, but the revised rule compresses this timeframe to just five business days.
SEC Chair Gary Gensler supports the expedited deadline, arguing that it's more in line with the rapid pace of modern markets. He noted, "In an era of 24-hour media cycles and high-frequency trading, shortening this deadline brings Schedule 13D filings more into modern times."
However, the swiftness of the new timeline has been a point of contention. Industry groups like the Managed Funds Association expressed concerns that it tilts the balance of power towards corporations at the expense of activist investors. SEC Commissioner Hester Peirce, who cast the only opposing vote, went on record stating that the more aggressive timeline would burden activists with higher costs, potentially dampening their enthusiasm for launching bids to improve companies.
A More Lenient Approach Than Initially Suggested
The final rules revealed certain concessions from the SEC's original proposal, likely in response to market feedback. For example, the initial plan mandated 13D and certain 13G filers to disclose their positions within five calendar days, but this was relaxed to five business days in the final rules.
Moreover, the agency chose not to formalize new rules around certain contentious points. One of these was the definition of a "group" for the purpose of beneficial ownership. Instead of establishing new guidelines, the SEC opted to rely on existing regulations and provide market participants with interpretive guidance.
Grey Areas Remain in Rule Application
The revamped regulations, while clarifying many aspects, have left certain areas rather ambiguous. Legal experts point to the broad language used by the SEC in its guidance on what constitutes a "group," warning that this could give enforcement staff substantial discretion and potentially lead to unintended consequences.
Similarly, the SEC's decision to pull back from establishing distinct rules on cash-settled derivatives has stirred up questions about how beneficial ownership will be understood and enforced in those cases. Attorneys whom specialize in securities generally believe that the rule is not very black and white and potential issues might arise.
The Escalation of Compliance Costs
Another unavoidable implication of the new rules is the escalation in compliance costs. In its extensive 295-page rule document, the SEC acknowledged this but concluded that the added costs would not disrupt the market significantly. Critics have been less optimistic, particularly noting that smaller and less organized entities could be disproportionately impacted.
The SEC's newly amended beneficial-ownership disclosure rules stand to reshape the dynamics between corporations and activist investors significantly. Though some concessions have been made to soften the impact, the changes signify a decisive step in modernizing the way beneficial ownership is disclosed and regulated. These rules will become effective 90 days after being published in the Federal Register.