Monday, May 01, 2023

Comment period reopened for proposal to modernize beneficial ownership reporting

By Rodney F. Tonkovic, J.D.

The SEC has reopened the comment period for a proposal to modernize beneficial ownership reporting. The proposal was approved in February 2022, and the comment period ended on April 11, 2022. The comment period has been reopened in order for interested parties to comment on additional analysis contained in a staff memorandum by the Division of Economic and Risk Analysis. Comments will be due 30 days after publication in the Federal Register or on June 27, 2023, whichever is later (Reopening of Comment Period for Modernization of Beneficial Ownership Reporting, Release No. 33-11180, April 28, 2023).

Beneficial ownership reporting. On February 10, 2022, the SEC proposed amendments to modernize the rules governing beneficial ownership reporting. The proposed amendments to Regulation 13D-G would:
  • Accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports;
  • Expand the application of Regulation 13D-G to certain derivative securities;
  • Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; and
  • Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.
According to the Commission, the current deadlines for filing the initial Schedule 13D and Schedule 13G have not been updated since 1968 and 1977, respectively, and changes in the financial markets and technology warrant a reassessment of these filing deadlines and other aspects of the beneficial ownership rules.

DERA memo. The comment period for the proposal ended on April 11, 2022. Since that time, DERA reviewed the submitted comments plus additional data and existing research on beneficial ownership and prepared a memorandum to provide supplemental analysis related to the proposed rules' economic effects.

The memorandum first provides background and baseline data on Schedule 13D and 13G filings. In addition, the memo investigates potential effects on activism that may result from the proposed change to the initial Schedule 13D filing deadline. DERA notes that activist campaigns are associated with an economically significant increase in shareholder value around the filing or other announcement date, but that it is unable to predict how, if at all, a particular filer may change its behavior in response to a shortened filing deadline.

The memo also looks at the potential harms to selling shareholders under the current Schedule 13D filing deadline. Research shows, DERA says, that opportunistic traders may buy stock of the target issuer just prior to Schedule 13D filings. The harms to selling shareholders from trading opposite potentially informed, opportunistic traders may have broader implications for trust in markets and liquidity, DERA says, and lessening that informational advantage (that some may see as unfair) could enhance trust in the securities markets and promote capital formation. Again, DERA cautions that it cannot predict how activists are likely to respond to the proposed changes and thus to predict how likely it is for these harms to be avoided.

The release is No. 33-11180.