SEC hopes to update rules for 13D disclosures

On June 23, 2021, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler announced that in order to promote market transparency, he has requested SEC staff to propose amendments to the 50-year-old Section 13 (d) beneficial ownership requirements. In particular, Chairman Gensler asked staff to consider expediting the deadline for investors to warn the market when they acquire beneficial ownership of more than 5% of a publicly traded company. Speaking to the annual London City Weeks International Financial Services Forum, Chairman Gensler expressed doubts as to whether the current rules make sense given the speed of current markets and technologies.

IN-DEPTH

The long-standing rules require investors to file a Schedule 13D within 10 days of acquiring an interest in excess of 5%, along with a statement of the purpose of the acquisition, such as to exert influence over the publicly traded company by taking directorships. seek or otherwise investigate any acquisition or restructuring of the public company. To speed up this timeline, activist investors should announce their stakes sooner, giving potential targets more time to prepare for a response.

The 10-day filing requirement is set forth in Section 13(d) of the Securities Exchange Act of 1934 (the Act), but the statute explicitly states that the SEC may shorten the time per line. Currently, rule 13d-1 (rule) reflects the 10-day requirement under the law, but the rule is subject to change by the SEC. It wouldn’t be surprising if staff are also considering changing existing rules to shorten the deadline for changes after an initial Schedule 13D is filed. Rule 13d-2(a) requires that a Schedule 13D be promptly amended in the event of a material change in disclosed information. However, fast is not defined in the rules and a rule change could codify (or shorten to one business day) the generally accepted deadline of two business days rather than allow a determination of facts and circumstances.

A proposed rule to shorten the 10-day disclosure period is likely to provoke a strong response from two competing forces: (1) activists who argue that a shorter period deprives them of time to build their interests without market forces affecting the stock price to finalize their investment and (2) state-owned companies claiming that the 10-day window is an archaic measure that unnecessarily deprives the market of material information and leaves them insufficient time to respond to potential attempts to influence the state-owned company.

Chairman Genslers’ strong interest in Section 13(d) also indicates that the SEC may want to take additional steps to enforce the disclosure obligations of Section 13(d). For example, the SEC may charge investors who violate Rule 13d-2(a) more aggressively by not immediately amending their Schedule 13Ds when there is a material change in investment intention or in circumstances where an investor increases beneficial ownership by 1% or lower or more. Our Corporate Advisory and White-Collar teams recommend that Schedule 13D filers review their compliance procedures to ensure they can effectively monitor changes in beneficial ownership or investment intentions to ensure their filings are made and updated in a timely manner.