[Federal Register Volume 87, Number 47 (Thursday, March 10, 2022)]
[Proposed Rules]
[Pages 13846-13899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03222]



[[Page 13845]]

Vol. 87

Thursday,

No. 47

March 10, 2022

Part III





Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 232 and 240





Modernization of Beneficial Ownership Reporting; Proposed Rule

  Federal Register / Vol. 87 , No. 47 / Thursday, March 10, 2022 / 
Proposed Rules  

[[Page 13846]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232 and 240

[Release Nos. 33-11030; 34-94211; File No. S7-06-22]
RIN 3235-AM93


Modernization of Beneficial Ownership Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to amend certain rules that govern beneficial ownership 
reporting. The proposed amendments would modernize the filing deadlines 
for initial and amended beneficial ownership reports filed on Schedules 
13D and 13G. The proposed amendments also would deem holders of certain 
cash-settled derivative securities as beneficial owners of the 
reference equity securities and clarify the disclosure requirements of 
Schedule 13D with respect to derivative securities. In addition, the 
proposed amendments would clarify and affirm the operation of the 
regulation as applied to two or more persons that form a group under 
the Securities Exchange Act of 1934, and provide new exemptions to 
permit such persons to communicate and consult with each other, jointly 
engage issuers and execute certain transactions without being subject 
to regulation as a group. We also are proposing to amend provisions 
regarding the date on which Schedules 13D and 13G filings are deemed to 
have been made. Finally, we are proposing to require that Schedules 13D 
and 13G be filed using a structured, machine-readable data language.

DATES: Comments should be received on or before April 11, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-06-22. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
submitted comments on its website (https://www.sec.gov/rules/proposed.shtml). Typically, comments also are available for website 
viewing and printing in the Commission's public reference room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10 a.m. and 3 p.m. Operating conditions may limit access to 
the Commission's public reference room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information. You should 
submit only information that you wish to make publicly available.
    Studies, memoranda or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Nicholas Panos, Senior Special 
Counsel, and Valian Afshar, Special Counsel, in the Office of Mergers 
and Acquisitions, Division of Corporation Finance, at (202) 551-3440, 
U.S. Securities and Exchange Commission, 100 F Street NE, Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR 
240.13d-1 (``Rule 13d-1''), 17 CFR 240.13d-2 (``Rule 13d-2''), 17 CFR 
240.13d-3 (``Rule 13d-3''), 17 CFR 240.13d-5 (``Rule 13d-5''), 17 CFR 
240.13d-6 (``Rule 13d-6'') and 17 CFR 240.13d-101 (``Rule 13d-101''), 
under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] 
(``Exchange Act'').\1\ We also are proposing amendments to 17 CFR 
232.13 (``Rule 13 of Regulation S-T'') and 17 CFR 232.201 (``Rule 201 
of Regulation S-T'') under 17 CFR part 232 (``Regulation S-T'').\2\
---------------------------------------------------------------------------

    \1\ Unless otherwise noted, when we refer to the Exchange Act, 
or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 
78a of the United States Code, at which the Exchange Act is 
codified, and when we refer to rules under the Exchange Act, or any 
paragraph of these rules, we are referring to title 17, part 240 of 
the Code of Federal Regulations [17 CFR part 240], in which these 
rules are published.
    \2\ Unless otherwise noted, when we refer to Regulation S-T, or 
any paragraph of the rules thereunder, we are referring to title 17, 
part 232 of the Code of Federal Regulations [17 CFR part 232], in 
which these rules are published.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Discussion of the Proposed Amendments
    A. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and 
201 of Regulation S-T To Revise Filing Deadlines and Filing Date 
Assignment
    1. Rule 13d-1(a)
    2. Rules 13d-1(e), (f) and (g)
    3. Rules 13d-1(b), (c) and (d)
    4. Rules 13d-2(a) and (b)
    5. Rules 13d-2(c) and (d)
    6. Rules 13(a)(4) and 201(a) of Regulation S-T
    B. Proposed Amendment to Rule 13d-3 To Regulate the use of Cash-
Settled Derivative Securities
    1. Background
    2. Proposed Amendment
    C. Proposed Amendments to Rule 13d-5 To Affirm Its Application 
and Operation
    1. Background
    2. The Commission's View of Group Formation
    3. Proposed Amendments
    D. Proposed Amendments to Rule 13d-6 To Create Certain 
Exemptions
    1. Background
    2. Proposed Amendments
    E. Proposed Amendments to Schedule 13D To Clarify Disclosure 
Requirements Regarding Derivative Securities
    1. Background
    2. Proposed Amendments
    F. Proposed Structured Data Requirements for Schedules 13D and 
13G
    1. Background
    2. Proposed Amendments
    G. Implications of the Proposed Amendments on Section 16
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Current Regulatory Framework
    2. Affected Parties
    C. Potential Benefits and Costs of the Proposed Amendments
    1. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and 
201 of Regulation S-T
    2. Proposed Amendment to Rule 13d-3
    3. Proposed Amendments to Rules 13d-5 and 13d-6
    4. Proposed Amendments to Item 6 of Schedule 13D
    5. Proposed Structured Data Requirement for Schedules 13D and 
13G
    D. Anticipated Effects on Efficiency, Competition and Capital 
Formation
    E. Reasonable Alternatives
1. Alternative Filing Deadlines
    2. Tiered Approach and Purchasing Moratorium
    3. Consolidate Beneficial Ownership Reporting
    4. Section 16 Rule Amendment
    5. Modify Scope of Structured Data Requirement
    F. Request for Comment
IV. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Incremental and Aggregate Burden and Cost Estimates for the 
Proposed Amendments to Rules 13d-2, 13d-3, 13d-5 and 13d-101
V. Small Business Regulatory Enforcement Fairness Act
VI. Regulatory Flexibility Certification

[[Page 13847]]

VII. Statutory Authority

I. Introduction

    We are proposing comprehensive changes to 17 CFR 240.13d-1 through 
240.13d-102 (``Regulation 13D-G'') and Regulation S-T to modernize the 
beneficial ownership reporting requirements and improve their operation 
and efficacy. Specifically, we are proposing to: (1) Revise the current 
deadlines for Schedule 13D and Schedule 13G filings; (2) amend Rule 
13d-3 to deem holders of certain cash-settled derivative securities as 
beneficial owners of the reference covered class; (3) align the text of 
Rule 13d-5, as applicable to two or more persons who act as a group, 
with the statutory language in Sections 13(d)(3) and (g)(3) of the 
Exchange Act; and (4) set forth the circumstances under which two or 
more persons may communicate and consult with one another and engage 
with an issuer without concern that they will be subject to regulation 
as a group with respect to the issuer's equity securities. We also are 
proposing certain related technical changes to Regulation S-T in 
connection with these proposed amendments. Finally, we are proposing to 
require that Schedules 13D and 13G be filed using a structured, 
machine-readable data language.
    To address concerns that the current deadlines for Schedule 13D and 
Schedule 13G filings are creating information asymmetries in today's 
market, we are proposing to:
     Revise the Rule 13d-1(a) filing deadline for the initial 
Schedule 13D to five days \3\ after the date on which a person acquires 
more than 5% of a covered class of equity securities; \4\
---------------------------------------------------------------------------

    \3\ Consistent with the current ``10-day'' deadline in Rule 13d-
1(a), the proposed ``five-day'' deadline for filing the initial 
Schedule 13D would be measured in calendar days. If the last day of 
the initial Schedule 13D deadline falls on a Federal holiday, a 
Saturday or a Sunday, then such filing may be made on the next 
business day thereafter. 17 CFR 240.0-3 (``[I]f the last day on 
which [a filing] can be accepted as timely filed falls on a 
Saturday, Sunday or holiday, such [filing] may be [made] on the 
first business day following.''). Any reference to ``days'' in 
either this release or any of our proposed amendments means 
``calendar days,'' and any reference to ``business days'' means 
``business days,'' as we are proposing to define that term. See 
infra note 5 for a discussion of our proposed definition of 
``business days.''
    \4\ As used in this release, a ``covered class'' is a class of 
equity securities described in Section 13(d)(1) of the Exchange Act 
and Rule 13d-1(i) and generally means, with limited exception, a 
voting class of equity securities registered under Section 12 of the 
Exchange Act.
---------------------------------------------------------------------------

     Amend Rules 13d-1(e), (f) and (g) to shorten the filing 
deadline for the initial Schedule 13D required to be filed by certain 
persons who forfeit their eligibility to report on Schedule 13G in lieu 
of Schedule 13D to five days after the event that causes the 
ineligibility;
     Revise the filing deadline under Rule 13d-2(a) for 
amendments to Schedule 13D to one business day \5\ after the date on 
which a material change occurs;
---------------------------------------------------------------------------

    \5\ The term ``business day'' is not defined in Section 13(d) or 
13(g) or any rule of Regulation 13D-G. Accordingly, we are proposing 
to define ``business day'' for purposes of Regulation 13D-G to mean 
any day, other than Saturday, Sunday or a Federal holiday, from 6 
a.m. to 10 p.m. eastern time.
---------------------------------------------------------------------------

     Amend Rules 13d-1(b) and (d) to shorten the deadline for 
the initial Schedule 13G filing for Qualified Institutional Investors 
(``QIIs'') \6\ and Exempt Investors \7\ to within five business days 
after the last day of the month in which beneficial ownership first 
exceeds 5% of a covered class;
---------------------------------------------------------------------------

    \6\ The institutional investors qualified to report on Schedule 
13G, in lieu of Schedule 13D and in reliance upon Rule 13d-1(b), 
include a broker or dealer registered under Section 15(b) of the 
Exchange Act, a bank as defined in Section 3(a)(6) of the Exchange 
Act, an insurance company as defined in Section 3(a)(19) of the 
Exchange Act, an investment company registered under Section 8 of 
the Investment Company Act of 1940, an investment adviser registered 
under Section 203 of the Investment Advisers Act of 1940, a parent 
holding company or control person (if certain conditions are met), 
an employee benefit plan or pension fund that is subject to the 
provisions of the Employee Retirement Income Security Act of 1974, a 
savings association as defined in Section 3(b) of the Federal 
Deposit Insurance Act, a church plan that is excluded from the 
definition of an investment company under Section 3(c)(14) of the 
Investment Company Act of 1940, non-U.S. institutions that are the 
functional equivalent of any of the institutions listed in Rules 
13d-1(b)(1)(ii)(A) through (I), so long as the non-U.S. institution 
is subject to a regulatory scheme that is substantially comparable 
to the regulatory scheme applicable to the equivalent U.S. 
institution, and related holding companies and groups (collectively, 
``Qualified Institutional Investors'' or ``QIIs''). 17 CFR 240.13d-
1(b)(1)(ii).
    \7\ The term ``Exempt Investor'' as used in this release refers 
to persons holding beneficial ownership of more than 5% of a covered 
class at the end of the calendar year, but who have not made an 
acquisition of beneficial ownership subject to Section 13(d). For 
example, persons who acquire all their securities prior to the 
issuer registering the subject securities under the Exchange Act are 
not subject to Section 13(d) and persons who acquire not more than 
two percent of a covered class within a 12-month period are exempted 
from Section 13(d) by Section 13(d)(6)(B), but in both cases are 
subject to Section 13(g). Section 13(d)(6)(A) exempts acquisitions 
of subject securities acquired in a stock-for-stock exchange that is 
registered under the Securities Act of 1933.
---------------------------------------------------------------------------

     Amend the deadline in Rule 13d-1(c), which permits Passive 
Investors \8\ to file an initial Schedule 13G in lieu of Schedule 13D 
within 10 days after acquiring beneficial ownership of more than 5% of 
a covered class, to five days after the date of such an acquisition;
---------------------------------------------------------------------------

    \8\ The term ``Passive Investors'' as used in this release 
refers to beneficial owners of more than 5% but less than 20% of a 
covered class who can certify under Item 10 of Schedule 13G that the 
subject securities were not acquired or held for the purpose or 
effect of changing or influencing the control of the issuer of such 
securities and were not acquired in connection with or as a 
participant in any transaction having such purpose or effect. These 
investors are ineligible to report beneficial ownership pursuant to 
Rules 13d-1(b) or (d) but are eligible to report beneficial 
ownership on Schedule 13G in reliance upon Rule 13d-1(c).
---------------------------------------------------------------------------

     Revise the filing deadlines required for amendments to 
Schedule 13G in Rule 13d-2(b) to five business days after the end of 
the month in which a reportable change occurs;
     Amend Rule 13d-2(c) to shorten the filing deadline for 
Schedule 13G amendments filed pursuant to that provision to five days 
after the date on which beneficial ownership first exceeds 10% of a 
covered class, and thereafter upon any deviation by more than 5% of the 
covered class, with these requirements applying if the thresholds were 
crossed at any time during a month; and
     Amend Rule 13d-2(d) to revise the filing deadline for 
Schedule 13G amendments filed pursuant to that provision from a 
``promptly'' standard to one business day after the date on which 
beneficial ownership exceeds 10% of a covered class, and thereafter 
upon any deviation by more than 5% of the covered class.
    In addition, instead of an amendment obligation arising for 
Schedule 13G filers upon the occurrence of ``any change'' in the facts 
previously reported regardless of the materiality of such change, we 
are proposing to revise Rule 13d-2(b) to require that an amendment to a 
Schedule 13G be filed only if a ``material change'' occurs. Further, we 
are proposing to amend Rule 13(a) of Regulation S-T to permit Schedules 
13D and 13G, and any amendments thereto, that are submitted by direct 
transmission on or before 10 p.m. eastern time on a given business day 
to be deemed to have been filed on the same business day. This 
amendment would provide additional time for beneficial owners to 
prepare and submit their Schedule 13D or Schedule 13G filings.\9\
---------------------------------------------------------------------------

    \9\ See Rule 13(a)(2) of Regulation S-T. We also are proposing 
to amend Rule 201(a) of Regulation S-T to make the temporary 
hardship exemption set forth in that rule--which applies to 
unanticipated technical difficulties preventing the timely 
preparation and submission of an electronic filing--unavailable to 
Schedules 13D and 13G, including any amendments thereto.
---------------------------------------------------------------------------

    The following table summarizes the changes we are proposing, as 
described more fully in Section II.A:

[[Page 13848]]



----------------------------------------------------------------------------------------------------------------
                                   Current Schedule      Proposed New      Current Schedule      Proposed New
              Issue                       13D            Schedule 13D             13G            Schedule 13G
----------------------------------------------------------------------------------------------------------------
Initial Filing Deadline.........  Within 10 days      Within five days    QIIs & Exempt       QIIs & Exempt
                                   after acquiring     after acquiring     Investors: 45       Investors: Five
                                   beneficial          beneficial          days after          business days
                                   ownership of more   ownership of more   calendar year-end   after month-end
                                   than 5% or losing   than 5% or losing   in which            in which
                                   eligibility to      eligibility to      beneficial          beneficial
                                   file on Schedule    file on Schedule    ownership exceeds   ownership exceeds
                                   13G. Rules 13d-     13G. Rules 13d-     5%. Rules 13d-      5%. Rules 13d-
                                   1(a), (e), (f)      1(a), (e), (f)      1(b) and (d).       1(b) and (d).
                                   and (g).            and (g).
                                                                          Passive Investors:  Passive Investors:
                                                                           Within 10 days      Within five days
                                                                           after acquiring     after acquiring
                                                                           beneficial          beneficial
                                                                           ownership of more   ownership of more
                                                                           than 5%. Rule 13d-  than 5%. Rule 13d-
                                                                           1(c).               1(c).
Amendment Triggering Event......  Material change in  No amendment        All Schedule 13G    All Schedule 13G
                                   the facts set       proposed--materia   Filers: Any         Filers: Material
                                   forth in the        l change in the     change in the       change in the
                                   previous Schedule   facts set forth     information         information
                                   13D. Rule 13d-      in the previous     previously          previously
                                   2(a).               Schedule 13D).      reported on         reported on
                                                       Rule 13d-2(a).      Schedule 13G.       Schedule 13G.
                                                                           Rule 13d-2(b).      Rule 13d-2(b).
                                                                          QIIs & Passive      QIIs & Passive
                                                                           Investors: Upon     Investors: No
                                                                           exceeding 10%       amendment
                                                                           beneficial          proposed--upon
                                                                           ownership or a 5%   exceeding 10%
                                                                           increase or         beneficial
                                                                           decrease in         ownership or a 5%
                                                                           beneficial          increase or
                                                                           ownership. Rules    decrease in
                                                                           13d-2(c) and (d).   beneficial
                                                                                               ownership. Rules
                                                                                               13d-2(c) and (d).
Amendment Filing Deadline.......  Promptly after the  Within one          All Schedule 13G    All Schedule 13G
                                   triggering event.   business day        Filers: 45 days     Filers: Five
                                   Rule 13d-2(a).      after the           after calendar      business days
                                                       triggering event.   year-end in which   after month-end
                                                       Rule 13d-2(a).      any change          in which a
                                                                           occurred. Rule      material change
                                                                           13d-2(b).           occurred. Rule
                                                                                               13d-2(b).
                                                                          QIIs: 10 days       QIIs: Five days
                                                                           after month-end     after exceeding
                                                                           in which            10% beneficial
                                                                           beneficial          ownership or a 5%
                                                                           ownership           increase or
                                                                           exceeded 10% or     decrease in
                                                                           there was, as of    beneficial
                                                                           the month-end, a    ownership. Rule
                                                                           5% increase or      13d-2(c).
                                                                           decrease in
                                                                           beneficial
                                                                           ownership. Rule
                                                                           13d-2(c).
                                                                          Passive Investors:  Passive Investors:
                                                                           Promptly after      One business day
                                                                           exceeding 10%       after exceeding
                                                                           beneficial          10% beneficial
                                                                           ownership or a 5%   ownership or a 5%
                                                                           increase or         increase or
                                                                           decrease in         decrease in
                                                                           beneficial          beneficial
                                                                           ownership. Rule     ownership. Rule
                                                                           13d-2(d).           13d-2(d).
Filing ``Cut-Off'' Time.........  5:30 p.m. eastern   10 p.m. eastern     All Schedule 13G    All Schedule 13G
                                   time. Rule          time. Rule          Filers: 5:30 p.m.   Filers: 10 p.m.
                                   13(a)(2) of         13(a)(4) of         eastern time.       eastern time.
                                   Regulation S-T.     Regulation S-T.     Rule 13(a)(2) of    Rule 13(a)(4) of
                                                                           Regulation S-T.     Regulation S-T.
----------------------------------------------------------------------------------------------------------------

    We also are proposing to add new paragraph (e) to Rule 13d-3 to 
deem holders of certain cash-settled derivative securities as 
beneficial owners of the reference covered class. Holders of derivative 
securities settled exclusively in cash do not have enforceable rights 
or any other entitlements with respect to the reference security under 
the terms of the agreement governing the derivative. Under certain 
circumstances described more fully below, however, holders of such 
derivative securities may have both the incentive and ability to 
influence or control the issuer of the reference securities. 
Accordingly, the proposed amendment would ``deem'' holders of such 
derivative securities to beneficially own the reference securities just 
as if they held such securities directly.
    The new means of determining who is a beneficial owner proposed in 
Rule 13d-3(e) would be applied separately from, and in addition to, 
Rules 13d-3(a) and (b), which provisions may, depending upon the facts 
and circumstances, apply independently from proposed Rule 13d-3(e) to 
persons who purchase or sell cash-settled derivatives. The application 
of proposed Rule 13d-3(e) would be limited to those persons who hold 
cash-settled derivatives in the context of changing or influencing 
control of the issuer of the reference security. By contrast, security-
based swaps, as defined by Exchange Act Section 3(a)(68) and the rules 
and regulations thereunder, would not be included among the derivative 
securities covered by proposed Rule 13d-3(e).
    We are proposing amendments that would align the text of Rule 13d-
5, as applicable to two or more persons who act as a group, with the 
statutory language in Sections 13(d)(3) and (g)(3) of the Exchange 
Act.\10\ By conforming the rule text to Sections 13(d)(3) and 13(g)(3), 
the proposed amendments to Rule 13d-5 are intended to remove the 
potential implication that an express or implied agreement among group 
members is a necessary precondition to the formation of a group under 
those provisions of the Exchange Act and, by extension, Regulation 13D-
G.\11\ In connection with those proposed amendments, we also are 
proposing to add a new provision in Rule 13d-5 that would affirm that 
if a person, in advance of filing a Schedule 13D, discloses to any 
other person that such filing will be made and such other person 
acquires securities in the covered class for which the Schedule

[[Page 13849]]

13D will be filed, then those persons are deemed to have formed a group 
within the meaning of Section 13(d)(3).
---------------------------------------------------------------------------

    \10\ See 15 U.S.C. 78m(d)(3) and (g)(3) (``When two or more 
persons act as a . . . group for the purpose of acquiring, holding, 
or disposing of securities of an issuer, such . . . group shall be 
deemed a `person' for the purposes of this subsection.''). The 
determination of whether two or more persons act as a group under 
these statutory provisions depends upon the particular facts and 
circumstances and may vary on a case-by-case basis.
    \11\ Further, to reinforce that Rule 13d-5, which is currently 
titled ``Acquisition of securities,'' is intended to set forth the 
circumstances under which an acquisition is deemed to occur for 
purposes of Section 13(d)(1) and Rule 13d-1, we also propose to 
delete Rule 13d-5(b)(2)--which provides that, under certain 
conditions, a group shall not be deemed to have made an acquisition 
if persons take concerted action to make purchases in a covered 
class directly from an issuer--and to redesignate it as new Rule 
13d-6(b). Rule 13d-6, titled ``Exemption of certain acquisitions,'' 
exempts certain acquisitions from the scope of Section 13(d). 
Because Rule 13d-5(b)(2) operates as the equivalent of an exemption, 
moving Rule 13d-5(b)(2) to Rule 13d-6 would harmonize the subject 
matter of those rules.
---------------------------------------------------------------------------

    In addition, we are proposing amendments that would revise Rule 
13d-6 to set forth additional exemptions from Sections 13(d) and (g). 
Specifically, new Rule 13d-6(c) would set forth the circumstances under 
which two or more persons may communicate and consult with one another 
and engage with an issuer without concern that they will be subject to 
regulation as a group with respect to the issuer's equity securities. 
New Rule 13d-6(d) would set forth the circumstances under which two or 
more persons may enter into an agreement governing a derivative 
security in the ordinary course of business without concern that they 
will become subject to regulation as a group with respect to the 
derivative's reference equity securities. These two exemptions are 
designed to provide greater certainty regarding the application of 
Sections 13(d)(3) and (g)(3), while ensuring that the proposed 
amendments to Rules 13d-3 and 13d-5 will not have a chilling effect on 
shareholder communications or engagement or impair certain financial 
institutions' capacity to execute strictly commercial transactions in 
the ordinary course of their business.
    In addition, we are proposing amendments that would revise Schedule 
13D to clarify the disclosure requirements with respect to derivative 
securities held by a person reporting on that schedule. Specifically, 
we are proposing to amend Item 6 to Schedule 13D, codified at Rule 13d-
101, to remove any implication that a person is not required to 
disclose interests in all derivative securities that use a covered 
class as a reference security. This proposed amendment is intended to 
eliminate any ambiguity regarding the scope of the disclosure 
obligations of Item 6 of Schedule 13D as to derivative securities, 
including with respect to derivatives not originating with the issuer, 
such as cash-settled options not offered or sold by the issuer and 
security-based swaps.
    Finally, we are proposing to require that Schedules 13D and 13G be 
filed using a structured, machine-readable data language. Specifically, 
we are proposing to require that all disclosures, including 
quantitative disclosures, textual narratives, and identification 
checkboxes, on Schedules 13D and 13G to be filed using an XML-based 
language to make it easier for investors and markets to access, compile 
and analyze information that is disclosed on Schedules 13D and 13G. 
Only the exhibits to Schedules 13D and 13G would remain unstructured.
    We invite and encourage interested parties to submit comments on 
any aspect of the proposed rule amendments. When commenting, please 
include the reasoning in support of your position or recommendation and 
provide any supporting documentation or data.

II. Discussion of the Proposed Amendments

A. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and 201 of 
Regulation S-T To Revise Filing Deadlines and Filing Date Assignment

    We are proposing a series of amendments that would revise the 
deadlines for filing the initial and amended beneficial ownership 
reports on Schedules 13D and 13G and expanding the timeframe within a 
given business day in which such filings may be timely made. 
Specifically, we are proposing amendments to the following rules:
     Rule 13d-1(a) to shorten the filing deadline for the 
initial Schedule 13D;
     Rules 13d-1(e), (f), and (g) to shorten the filing 
deadlines for the initial Schedule 13D for certain persons who forfeit 
their eligibility to report on Schedule 13G in lieu of Schedule 13D;
     Rules 13d-1(b), (c), and (d) to shorten the filing 
deadlines for the initial Schedule 13G;
     Rules 13d-2(a) and (b) to revise the filing deadline for 
amendments to Schedule 13D and Schedule 13G, respectively, and to align 
the legal standard that dictates when amendments to Schedule 13G are 
required with the relevant statutory provision;
     Rules 13d-2(c) and (d) to revise the filing deadlines for 
certain other amendments to Schedule 13G; and
     Rules 13(a) and 201(a) of Regulation S-T to revise the 
time by which Schedule 13D and 13G filings, including amendments 
thereto, must be submitted on a given business day in order to be 
deemed to have been filed on the same business day and to make a 
temporary hardship exemption unavailable to those filings.
    These proposed amendments are discussed in more detail below.
1. Rule 13d-1(a)
a. Background
    Section 13(d)(1) of the Exchange Act requires a disclosure 
statement to be filed ``within ten days after [an] acquisition [of more 
than 5% of a covered class] or within such shorter time as the 
Commission may establish by rule.'' \12\ Consistent with this 
provision, Rule 13d-1(a) sets forth the 10-day filing deadline for the 
initial Schedule 13D.\13\ Although the Dodd-Frank Wall Street Reform 
and Consumer Protection Act of 2010 (``Dodd-Frank Act'') amended 
Section 13(d)(1) to grant the Commission the authority to shorten the 
deadline for filing the initial Schedule 13D,\14\ the 10-day deadline 
has not been updated since it was enacted more than 50 years ago.\15\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78m(d)(1).
    \13\ 17 CFR 240.13d-1(a) (requiring that a Schedule 13D be filed 
``within 10 days after the acquisition'' of beneficial ownership of 
more than 5% of a covered class).
    \14\ Public Law 111-203, 124 Stat. 1900 929R(a)(1)(A) (2010).
    \15\ Section 13(d)(1) of the Exchange Act was enacted by the 
Ninetieth Congress in 1968 through the approval of Senate Bill 510.
---------------------------------------------------------------------------

    Technological advances since 1968, such as the ability to submit 
filings electronically through the Commission's Electronic Data 
Gathering, Analysis and Retrieval (``EDGAR'') system and the use of 
modern information technology in today's financial markets, have led to 
calls for a reassessment of the 10-day initial filing deadline,\16\ 
while others disagree that such advances warrant any change to the 
deadline.\17\ For example,

[[Page 13850]]

the Commission currently requires all Schedule 13D filings to be 
submitted electronically through its EDGAR system.\18\ Mandated 
electronic submissions relieve filers of the need to arrange for 
delivery in-person or through the U.S. mails. Furthermore, given the 
advances in the information technologies used by market professionals 
today, less time is needed to compile the necessary data and prepare 
and transmit the Schedule 13D to the Commission than was required in 
1968.
---------------------------------------------------------------------------

    \16\ See, e.g., Leo E. Strine, Jr., Who Bleeds When the Wolves 
Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our 
Strange Corporate Governance System, 126 Yale L.J. 1870, 1895, 1960-
61 (2017) (describing the ``disclosure regime under Section 13 of 
the Securities Exchange Act'' as ``antiquated'' and stating that 
``[i]t seems entirely clear to me that the idea of Section 13 was 
that an investor should come public as soon as reasonably possible 
after hitting the 5% threshold and that the reporting deadline was 
due to what it took to type up, proof, and deliver to Washington the 
required filing in 1968, when word processors and electronic filing 
with a button push did not exist''); David Benoit, Congress Asked to 
Act on Activist Investor Disclosures, The Wall Street Journal (Apr. 
15, 2015), https://www.wsj.com/articles/congress-asked-to-act-on-activist-investor-disclosures-1429107089 (noting that Citizens for 
Responsibility and Ethics in Washington, the Government 
Accountability Project and New Rules for Global Finance sent a 
letter to members of Congress requesting that the Schedule 13D 
filing deadline be shortened from 10 days to one day); Adam O. 
Emmerich et al., Fair Markets and Fair Disclosure: Some Thoughts on 
the Law and Economics of Blockholder Disclosure, and the Use and 
Abuse of Shareholder Power, 3 Harv. Bus. L. Rev. 135, 143 (2013) 
(noting that the 10-day Schedule 13D filing deadline reflected 
``commercial and technological realities that existed in 1968, 
[which] would have included the time required to mail the Schedule 
13D to the SEC's office''); letter from Wachtell, Lipton, Rosen & 
Katz to Elizabeth M. Murphy, Sec'y, U.S. Sec. & Exch. Comm'n (Mar. 
7, 2011) (``Wachtell Petition'') at 1-7, available at http://www.sec.gov/rules/petitions/2011/petn4-624.pdf (petitioning the 
Commission to propose amendments to the beneficial ownership 
reporting rules to, among other things, shorten the Schedule 13D 
filing deadline from 10 days to one business day).
    \17\ See, e.g., Lucian A. Bebchuk et al., Pre-Disclosure 
Accumulations by Activist Investors: Evidence and Policy, 39 J. 
Corp. L. 1, 14-17 (2013) (noting that the authors ``are not familiar 
. . . with any research establishing [the] claim'' that 
technological developments and changes in the capital markets since 
1968 have rendered the 10-day Schedule 13D filing deadline 
obsolete); Ronald Gilson and Jeffery Gordon, The Agency Costs of 
Agency Capitalism: Activist Investors and the Revaluation of 
Governance Rights, 113 Colum. L. Rev. 863, 904 (2013) (explaining 
that shortening the deadline would ``reduce the economic stake that 
an activist shareholder can accumulate before mandatory disclosure 
of its holding drives up the price of the target company's stock'' 
which would cause the ``activist sector [to] shrink, fewer firms 
[to] be identified as targets for strategic initiatives, and the 
activists [to] reduce costly campaign efforts''); Lucian A. Bebchuk 
and Robert J. Jackson Jr., The Law and Economics of Blockholder 
Disclosure, 2 Harv. Bus. L. Rev. 39, 44-47 (2012) (noting that 
Schedule 13D's 10-day filing deadline ``reflects a careful balance 
that Congress struck, after extensive debate, between the need to 
provide information to investors and the importance of preserving 
the governance benefits associated with outside blockholders'').
    \18\ In mandating that all Schedules 13D and 13G be filed 
electronically, the Commission reasoned that such a transition was 
necessary to facilitate ``more rapid dissemination of, and easier 
access to, financial and other material information . . . than under 
our current paper filing system'' while also citing to ``increased 
efficiencies in the filing process, which will significantly reduce 
the filing time required under traditional methods of paper 
delivery.'' See Rulemaking for EDGAR System, Release No. 34-35113 
(Dec. 19, 1994) [59 FR 67752 (Dec. 30, 1994)]; Mandated EDGAR Filing 
for Foreign Issuers, Release No. 34-45922 (May 14, 2002) [67 FR 
36678 (May 24, 2002)].
---------------------------------------------------------------------------

    The 10-day filing deadline raises concerns that material 
information about potential change of control transactions is not being 
disseminated to the public in a manner that would be considered timely 
in today's financial markets. The delay in reporting this material 
information contributes to information asymmetries that could harm 
investors.\19\ In enacting Section 13(d), including its original 
mandate of a 10-day filing deadline in 1968, Congress considered the 
need to strike an appropriate balance between, on the one hand, 
providing adequate disclosures to investors and, on the other hand, not 
unduly burdening those engaging in change of control transactions.\20\ 
In 2010, Congress reassessed the 10-day deadline established in 1968 
and subsequently amended Section 13(d) to authorize the Commission to 
shorten the 10-day deadline.\21\ This grant of statutory authority by 
Congress to establish a shorter deadline clearly indicates that the 
current 10-day deadline is not immutable and that the Commission is 
empowered to shorten that deadline to address the needs of today's 
investors and other market participants, particularly in light of the 
technological advancements and other developments in the financial 
markets that have occurred since 1968.\22\ In reassessing whether or 
not the current 10-day deadline still serves the primary purposes of 
Section 13(d), which are to provide information to the public and the 
subject issuer about accumulations of a covered class by persons who 
had the potential to change or influence control of such issuer \23\ 
and to regulate rapid accumulations of beneficial ownership that 
occurred within a short period of time,\24\ we have determined that an 
amendment to Rule 13d-1(a) is needed to adequately support those 
regulatory objectives.
---------------------------------------------------------------------------

    \19\ See, e.g., John C. Coffee, Jr. and Darius Palia, The Wolf 
at the Door: The Impact of Hedge Fund Activism on Corporate 
Governance, 41 J. Corp. L. 545, 597 (2016) (``[T]he gains that 
activists make in trading on asymmetric information--before the 
Schedule 13D's filing--come at the expense of selling shareholders. 
. . . Disclosure that is delayed ten days enables activists to 
profit from trading on asymmetric information over that period . . . 
.''); Adam O. Emmerich et al., supra note 17, at 142-46 (``[N]othing 
in the words or legislative history of the Williams Act suggests 
that the ten-day disclosure window established in 1968 was designed 
to allow activists to accumulate large stakes at discounted prices, 
unbeknownst to and to the detriment of counterparties and the 
market. To the contrary, the purpose of the Williams Act was to 
promptly arm market participants with information concerning 
potential changes in corporate control in order to allow them to 
make more informed investment decisions. The stealth accumulations 
at below-market prices . . . transfer value from public investors to 
activists . . . .''); Wachtell Petition, supra note 17, at 3 
(``[T]he ten-day [Schedule 13D] reporting lag leaves a substantial 
gap after the reporting threshold has been crossed during which the 
market is deprived of material information and creates incentives 
for abusive tactics on the part of aggressive investor prior to 
making a filing.''). But see, e.g., Ronald J. Gilson and Jeffrey N. 
Gordon, The Agency Costs of Agency Capitalism: Activist Investors 
and the Revaluation of Governance Rights, 113 Colum. L. Rev. 863, 
907-09 (2013) (``A shareholder's decision to sell results either 
from liquidity needs or the shareholder's reservation price for the 
security in question. Any asymmetry of information involved in the 
transaction arises from the activist's private information about its 
own intentions, which may include a forecast as to the likely target 
firm response. Why does the selling shareholder have an entitlement 
to share in the value of information created by the analysis of 
other investors?''); Lucian A. Bebchuk et al., supra note 17, at 17-
19 (contending that shortening the Schedule 13D filing deadline 
``would carry significant costs for public-company shareholders'' 
because ``requiring activist investors to disclose their ownership 
in public companies more quickly will reduce these investors' 
returns--thereby reducing the incidence and magnitude of outside 
blockholdings in large public companies''); Lucian A. Bebchuk and 
Robert J. Jackson Jr., supra note 17, at 47-51 (describing the 
``substantial body of empirical evidence that is consistent with the 
view that outside blockholders improve corporate governance and 
benefit public investors'' and noting that shortening the Schedule 
13D filing deadline could ``reduce the returns to outside 
shareholders considering acquiring a block and, in turn, . . . 
result in a reduction in the incidence and size of outside 
blocks'').
    \20\ See, e.g., Full Disclosure of Corporate Equity Ownership 
and in Corporate Takeover Bids: Hearing on S. 510 Before the 
Subcomm. on Securities of the S. Comm. on Banking and Currency, 90th 
Cong. 1 (1967) (statement of Manuel F. Cohen, Chairman, Securities 
and Exchange Commission) (``It must be emphasized again that in 
establishing requirements which will make this important information 
available to stockholders, we must be careful not to tip the scales 
to favor either incumbent management or those who would seek to oust 
them. We believe that the provisions of the present bill . . . 
reflect an appropriate balance among competing interests which, at 
the same time, will fulfill the need of public stockholders to be 
fully informed about the control and potential control of the 
company in which they have invested.''); H.R. Rep. No. 1711, at 4 
(1968) (``The bill avoids tipping the balance of regulation either 
in favor of management or in favor of the person making the takeover 
bid. It is designed to require full and fair disclosure for the 
benefit of investors while at the same time providing the offeror 
and management equal opportunity to fairly present their case.''); 
S. Rep. No. 550, at 3 (1968) (same); see also infra note 35 and 
accompanying text.
    \21\ See supra note 14 and accompanying text.
    \22\ At the same time, however, we recognize significant state 
law changes have occurred since the enactment of the Williams Act 
that have resulted in legal impediments being imposed upon 
blockholders in the market for corporate control. See Lucian A. 
Bebchuk and Robert J. Jackson Jr. supra note 17, at n.54 and 
accompanying text. These state law impediments have decreased the 
incidence of hostile takeover bids and, as a result, ``active 
outside blockholders filing a Schedule 13D are commonly not expected 
to seek to acquire control, but rather to monitor and engage with 
management and fellow shareholders.'' Id. at 56.
    \23\ See Reporting of Beneficial Ownership in Publicly-Held 
Companies, Release No. 34-26598 (Mar. 14, 1989) [54 FR 10552 at text 
accompanying n.20 (Mar. 14, 1989)] (``Section 13(d) was intended to 
provide information to the public and the subject company about 
accumulations of its equity securities in the hands of persons who 
then would have the potential to change or influence control of the 
issuer.'') (citing S. Rep. No. 550, 90th Cong., 1st Sess. 7 (1967); 
H.R. Rep. No. 1711, 90th Cong., 2nd Sess. 8 (1968); Hearings on S. 
510 before the Subcomm. on Securities of the Senate Comm. on Banking 
and Currency, 90th Cong., 1st Sess. (1967)).
    \24\ H.R. Rep. No. 90-1711 (1968) (``The purpose of section 
13(d) is to require disclosure of information by persons who have 
acquired a substantial interest, or increased their interest in the 
equity securities of a company by a substantial amount, within a 
relatively short period of time.''); see also Filing and Disclosure 
Requirements Relating to Beneficial Ownership, Release No. 34-17353 
(Dec. 4, 1980) [45 FR 81556 at text accompanying n.5 (Dec. 11, 
1980)] (``The legislative history of [Section 13(d)] indicates that 
it was intended to provide information to the public and the 
affected issuer about rapid accumulations of its equity securities 
by persons who would then have the potential to change or influence 
control of the issuer.'') (citing S. Rep. No. 550, 90th Cong., 1st 
Sess. 7 (1967); Hearings on S.510 before the Subcomm. on Securities 
of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess. 
(1967)).

---------------------------------------------------------------------------

[[Page 13851]]

b. Proposed Amendments
    We believe the 10-day filing deadline for the initial Schedule 13D 
filing should be revised in light of advances in technology and 
developments in the financial markets. Our proposal to shorten the 
initial filing deadline for Schedule 13D is consistent with previous 
Congressional and Commission efforts to accelerate public disclosures 
of material information to the market.\25\ For example, when the 
Commission accelerated the deadlines for issuers to submit their 
periodic reports, it reasoned that ``[s]ignificant technological 
advances over the last three decades have both increased the market's 
demand for more timely corporate disclosure and the ability of 
companies to capture, process and disseminate this information.'' \26\
---------------------------------------------------------------------------

    \25\ For example, the Sarbanes-Oxley Act of 2002 amended Section 
16(a) to require that change of beneficial ownership reports under 
Section 16(a) of Exchange Act be filed by officers, directors and 
beneficial owners of more than 10% of a covered class ``before the 
end of the second business day following the day on which the 
subject transaction has been executed.'' On August 27, 2002, the 
Commission adopted amendments to implement the accelerated deadline 
for Form 4 filings. See Ownership Reports and Trading by Officers, 
Directors and Principal Security Holders, Release No. 34-46421 (Aug. 
27, 2002) [67 FR 56461 (Sept. 3, 2002)]. On March 16, 2004, the 
Commission amended Form 8-K to generally require that such filings 
be made within four business days of a triggering event. In adopting 
the accelerated timeline, the Commission explained the amended 
requirement ``should enhance investor confidence in the financial 
markets.'' Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date, Release No. 34-49424 (Mar. 16, 2004) 
[69 FR 15593 at 15611 (Mar. 25, 2004)]. The Commission further 
explained that ``[t]he requirement of enhanced, timely disclosure 
should raise investors' expectations regarding the amount and timing 
of information that reporting companies must make available to the 
public'' and that ``[c]onfidence in the expectation of such enhanced 
disclosure should provide more certainty to those investors that 
they are making investment decisions in a more transparent market, 
which should reduce market volatility as a result of uncertainty of 
the availability of accurate timely information about public 
companies.'' Id.
    \26\ Acceleration of Periodic Report Filing Dates and Disclosure 
Concerning website Access to Reports, Release No. 34-46464 (Sept. 5, 
2002) [67 FR 58479 (Sept. 16, 2002)]. We recognize that these 
accelerated deadlines applied to periodic filings made by issuers, 
whereas Sections 13(d) and (g) relate to filings made by investors. 
We also recognize that the acceleration of these deadlines was 
prompted, in part, by Section 409 of the Sarbanes-Oxley Act of 2002, 
which ``added Section 13(l) of the Exchange Act . . . [to] require[ 
] disclosure on a rapid and current basis of such additional 
information concerning material changes in the financial condition 
or operations of the issuer,'' id. at n.15 and accompanying text 
(emphasis added), whereas no such ``rapid and current'' language 
exists in Sections 13(d) and 13(g). Nonetheless, the technological 
advances that have increased both the market's demand for more 
timely disclosure and the ability of issuers to file more rapidly 
are equally applicable to the information disclosed on Schedule 13D 
and available to investors making Schedule 13D filings. For example, 
Congress recognized the market's demand for more timely disclosure 
of non-issuer filings by accelerating deadline for Section 16 
filings in the Sarbanes-Oxley Act. See supra note 25. As such, we 
believe that these technological advances also support accelerating 
the initial Schedule 13D filing deadline.
---------------------------------------------------------------------------

    The Commission has long recognized the benefits of more expedient 
reporting, stating, for example, that ``a lengthy delay before . . . 
information becomes available makes the information less valuable to 
investors.'' \27\ Nonetheless, the deadline for filing an initial 
Schedule 13D has remained unchanged for over 50 years.\28\ We continue 
to appreciate the need for a balance to be struck between the 
requirement that material information be timely disseminated and the 
competing interest that undue burdens not be imposed in the change of 
control context.\29\ We recognize the chilling effect that a shortening 
of the initial Schedule 13D filing deadline could have on a 
shareholder's ability and incentive to effect changes at companies that 
may benefit all shareholders, particularly where the shortened deadline 
may increase the costs and reduce the incentives for those shareholders 
attempting such change of control efforts.\30\ We do not believe, 
however, that a shortening of the deadline would unduly disrupt that 
balance, as many Schedule 13D filers currently do not avail themselves 
of the full 10-day filing period.\31\ In recognition of the need to 
strike the appropriate balance between these interests, however, we 
also solicit public comment on this point in Section III.F below.
---------------------------------------------------------------------------

    \27\ Id.; see also H.R. Rep. 90-550 (1967) (``The persons 
seeking control, however, have information about themselves and 
about their plans which, if known to investors, might substantially 
change the assumptions on which the market price is based. The bill 
is designed to make relevant facts known so that shareholders have a 
fair opportunity to make their decision.'').
    \28\ Although the initial Schedule 13D deadline has not been 
changed, the idea of shortening the deadline for beneficial 
ownership reports has been previously recommended. For example, 
then-Chairman David S. Ruder recommended to Congress that the filing 
deadline for an initial beneficial ownership report be reduced from 
ten days to five business days and that the filing person be 
prohibited from acquiring additional securities until the filing was 
made. See Statement of David S. Ruder, Chairman of the Securities 
and Exchange Commission, Before the House Subcommittee on 
Telecommunications and Finance, Sept. 17, 1987; Statement of Charles 
C. Cox, Acting Chairman of the Securities and Exchange Commission, 
Before the Senate Committee on Banking, Housing and Urban Affairs, 
June 23, 1987 (``[The] Commission could also support legislation to 
require that a Schedule 13D be filed within five business days of 
crossing the 5 percent threshold, and that a prohibition on further 
purchases be imposed until the filing requirement is satisfied.'').
    \29\ See supra note 20 and accompanying text; see also 113 Cong. 
Rec. 24,664 (1967) (noting that ``takeover bids should not be 
discouraged, since they often serve a useful purpose by providing a 
check on entrenched but inefficient management'') (statement of Sen. 
Harrison A. Williams, Jr.).
    \30\ Academic research indicates that large blockholders may 
improve the share price and the corporate governance of the 
companies in which they invest, and these benefits are enjoyed by 
all of the company's shareholders. See infra Section III.C.b.i. This 
research also suggests that if the initial Schedule 13D filing 
deadline is shortened, it could reduce the profitability of such 
investments to large blockholders, making them less inclined to make 
those investments or engage with the companies in ways that produce 
such share price and corporate governance benefits. Id.
    \31\ See infra notes 203-205 and accompanying text (noting that 
22.97% of the initial Schedule 13D filings in the data set were 
filed on the 10th day).
---------------------------------------------------------------------------

    As noted above, Rule 13d-1(a) currently requires the initial 
Schedule 13D to be filed within 10 days after the date on which a 
person acquires beneficial ownership of more than 5% of a covered 
class.\32\ We are proposing to amend Rule 13d-1(a) to require a 
Schedule 13D to be filed within five days after the date of such 
acquisition. For purposes of determining the filing deadline under this 
proposed amendment, the Commission must receive the filing on the fifth 
day after the date of the acquisition in order for the filing to be 
considered timely. Under the current rules, the Commission would have 
to receive that filing on or before 5:30 p.m. eastern time on the due 
date.\33\ As described in Section II.A.6

[[Page 13852]]

below, however, we also are proposing to extend that cut-off time to 10 
p.m. eastern time for Schedule 13D and 13G filings, including 
amendments thereto.\34\
---------------------------------------------------------------------------

    \32\ Failure to comply with this deadline, as well as other 
deadlines for beneficial ownership filings, could lead to 
significant penalties. Under Section 21 of the Exchange Act, the 
Commission has the authority to investigate and enforce violations 
of Section 13(d)(1) and Rule 13d-1(a), and may seek to impose 
various remedies for late filings, such as injunctive relief, cease-
and-desist orders or civil monetary penalties. The Commission also 
may assert and refer criminal violations for prosecutions under 
Section 32(a) of the Exchange Act. Importantly, no state of mind 
requirement exists for violations of Section 13(d)(1) and 
corresponding Rule 13d-1(a). See SEC v. Levy, 706 F. Supp. 61, 63-69 
(D.D.C. 1989) (holding a defendant liable notwithstanding the 
defendant's assertion that his attorney ``misinformed defendant 
about his obligation to disclose'' information on Schedule 13D 
because scienter is not an element of such violations). In addition, 
a Schedule 13D filing obligation is not dependent on the investor 
intending to gain control of the company, but instead is based on a 
numerical beneficial ownership threshold. See SEC v. Savoy Indus., 
Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978) (``Indeed, the plain 
language of section 13(d)(1) gives no hint that intentional conduct 
need be found, but rather, appears to place a simple and affirmative 
duty of reporting on certain persons. The legislative history 
confirms that Congress was concerned with providing disclosure to 
investors, and not merely with protecting them from fraudulent 
conduct.''); see also Oppenheimer & Co., Inc., 47 SEC 286, 1980 WL 
26901, at *1-2 (May 19, 1980) (``We have previously held that the 
failure to make a required report, even though inadvertent, 
constitutes a willful violation.'').
    \33\ See Rule 13 of Regulation S-T, titled ``Date of filing; 
adjustment of filing date.'' 17 CFR 232.13. Rule 13(a)(2) provides 
that ``all filings submitted by direct transmission commencing on or 
before 5:30 p.m. [eastern time] shall be deemed filed on the same 
business day, and all filings submitted by direct transmission 
commencing after 5:30 p.m. [eastern time] shall be deemed filed as 
of the next business day.'' Id.
    \34\ See infra Section II.A.6.
---------------------------------------------------------------------------

    In proposing to establish new timeframes for filing reports, we are 
mindful of the need to balance the market's demand for timely 
information against the administrative burden placed upon a filer to 
adequately and accurately prepare that information. We also recognize 
that when enacting Section 13(d)(1), Congress considered the interests 
of both issuers of securities and the large shareholders who sought to 
exert influence or control over issuers, and took an even-handed 
approach.\35\ The proposed five-day deadline reflects our attempt to 
maintain that balance and similarly undertake an even-handed approach, 
especially when compared with considerably shorter initial filing 
deadlines some parties have recommended.\36\ However, in light of the 
technological advances and the rapid pace with which trading activities 
and large accumulations of beneficial ownership can occur in the 
financial markets today as compared to when the deadline was enacted in 
1968, we are concerned that the current delay in reporting market-
moving information on Schedule 13D raises investor protection 
concerns.\37\ Under current Rule 13d-1(a), large shareholders may 
acquire more shares without contemporaneously disclosing their 
beneficial ownership during the 10-day period that follows the date 
that a Schedule 13D filing obligation arises. Although the 10-day 
period may facilitate opportunities for certain shareholders to acquire 
stakes large enough to incentivize them to engage in corporate activism 
that could benefit all shareholders,\38\ the informational imbalance 
between a buyer and seller during that period may result in 
transactions being consummated based on mispriced securities.\39\
---------------------------------------------------------------------------

    \35\ In discussing the Williams Act, one Senator stated that 
``the committee has carefully weighed both the advantages and 
disadvantages to the public of the cash tender offer. We have taken 
extreme care to avoid tipping the scales either in favor of 
management or in favor of the person making the takeover bids. S. 
510 is designed solely to require full and fair disclosure for the 
benefit of investors.'' 113 Cong. Rec. S12557 (daily ed. Aug. 30, 
1967) (statement of Sen. Harrison A. Williams, Jr.). The Senator 
further stated that ``[t]he bill will at the same time provide the 
offeror and management with equal opportunity to present their 
case.'' Id.; see also Full Disclosure of Corporate Equity Ownership 
and in Corporate Takeover Bids: Hearing on S. 510 Before the 
Subcomm. on Securities of the S. Comm. on Banking and Currency, 90th 
Cong. 1 (1967) (statement of Manuel F. Cohen, Chairman, Securities 
and Exchange Commission) (``But the principal point is that we are 
not concerned with assisting or hurting either side. We are 
concerned with the investor who today is just a pawn in a form of 
industrial warfare.'').
    \36\ See, e.g., supra note 17.
    \37\ The Commission has long recognized that additional 
purchases made after a filing obligation arises under Section 
13(d)(1) and corresponding Rule 13d-1(a) constitutes a ``disclosure 
gap [that] may deprive security holders of a fair opportunity to 
adjust their evaluation of the securities of a company with respect 
to [a] potential change in control . . . .'' Report of the 
Securities and Exchange Commission on Beneficial Ownership Reporting 
Requirements pursuant to Section 13(h) of the Securities Exchange 
Act of 1934 (June 27, 1980); see also supra note 17. Following a 
review of the effectiveness of Section 13(d) conducted more than 
four decades ago, the Commission evaluated the then ``increasingly 
prevalent practice of [large blockholders] acquiring additional 
securities of [a covered] class during the 10-day period after the 
acquisition which results in the beneficial ownership of more than 5 
percent and before the disclosure statement is required to be, and 
normally is, filed . . . .'' Securities and Exchange Commission 
Report on Tender Offer Laws, Printed for the use of the Committee on 
Banking, Housing and Urban Affairs--United States Senate (Mar. 
1980). The Commission provided multiple illustrative examples in 
which ``the existing notification system often does not provide 
shareholders with relevant information in a timely manner.'' Id.
    \38\ See supra notes 17 and 19.
    \39\ H.R. Rep. 90-1711 (1968) (``But where no information is 
available about persons seeking control, or their plans, the 
shareholder is forced to make a decision on the basis of a market 
price which reflects evaluation of the company based on the 
assumption that the present management and its policies will 
continue.'').
---------------------------------------------------------------------------

    Congress enacted Section 13(d) as a means of requiring timely 
disclosures needed for informed investment decisions that ultimately 
could contribute to the accurate valuation of securities.\40\ The 
proposed shortening of the initial Schedule 13D filing deadline is 
consistent with those legislative objectives while holding the 
potential to benefit investors and improve the efficiency of U.S. 
capital markets. Market-moving information, such as the accumulation of 
a significant equity stake,\41\ would be made available more quickly, 
improving opportunities for more efficient and more accurate price 
discovery.\42\ In addition to more closely aligning the initial 
Schedule 13D filing deadline with the reporting deadline on Form 8-K 
for issuers and Form 4 for officers, directors and beneficial owners of 
more than 10% of a covered class, a shorter filing deadline for the 
initial Schedule 13D also would be consistent with the filing deadlines 
for similar beneficial ownership reports in foreign jurisdictions.\43\ 
The increase in transparency and corresponding assurance given to 
investors that transactions are not being made based on mispriced 
securities caused by a prolonged lag in the dissemination of market-
moving information should increase investor confidence. By increasing 
the certainty offered to shareholders that their trades are not being 
made on the basis of incomplete or outdated information, the proposed 
amendment to Rule 13d-1(a) could in turn enhance market efficiency and 
liquidity.
---------------------------------------------------------------------------

    \40\ See GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d. Cir. 
1971), cert. denied, 406 U.S. 910 (1972) (noting that without prompt 
disclosure, ``investors cannot assess the potential for changes in 
corporate control and adequately evaluate the company's worth'').
    \41\ The materiality of such information is supported by 
academic literature indicating that economically significant price 
changes occur in response to news about changes in corporate 
control, including the filing of a Schedule 13D. See infra note 215 
and accompanying text.
    \42\ See Takeover Bids: Hearing on H.R. 14475 and S. 510 Before 
the H. Subcomm. on Commerce and Finance of the H. Comm. on 
Interstate and Foreign Commerce, 90th Cong. 10 (1968) (statement of 
Manuel F. Cohen, Chairman, Securities and Exchange Commission) 
(``Now it is argued by some that the basic factor which influences 
shareholders to accept a tender offer is the adequacy of the price. 
But, I might ask, how can an investor evaluate the adequacy of the 
price if he cannot assess the possible impact of a change in 
control? Certainly without such information he cannot judge its 
adequacy by the current or recent market price. That price 
presumably reflects the assumption that the company's present 
business, control and management will continue. If that assumption 
is changed, is it not likely that the market price might change?''). 
The potential gains in market efficiency and price discovery that 
could be achieved with a shorter initial reporting deadline, 
however, could be offset by the costs imposed upon shareholders who 
seek to influence or change management. See supra note 38 and 
accompanying text.
    \43\ For example, Australia requires disclosure of any position 
of 5% or more within two business days if any transaction affects or 
is likely to affect control or potential control of the issuer. See 
Corporations Act 2001 (Cth) sec. 671B (Austl.). The United Kingdom 
imposes a two-trading-day deadline for disclosure of acquisitions in 
excess of 3% of an issuer's securities. See Disclosure Rules and 
Transparency Rules, Ch. 5 (U.K.). Germany requires a report 
``immediately,'' but in no event later than four days after crossing 
the acquisition threshold. See Securities Trading Act, Sept. 9, 
1998, BGBL. I at 2708, as amended, pt. 5 (Ger.). Hong Kong 
securities laws require a report within three business days of the 
acquisition of a ``notifiable interest'' under the law. See Part XV 
of the Securities and Futures Ordinance (promulgated by the 
Securities and Futures Commission, effective Apr. 1, 2003) (H.K.). 
This comparative analysis suggests that a shortened deadline is 
workable based on the experience of these foreign jurisdictions. We 
note, however, that this comparative analysis may be imperfect given 
the relevant differences in the legal systems in the U.S. and these 
foreign jurisdictions, including anti-takeover devices that are 
legal under certain states' corporate laws (e.g., low-threshold 
poison pills that are permitted under Delaware law) that may not be 
legal in these foreign jurisdictions.

---------------------------------------------------------------------------

[[Page 13853]]

Request for Comment
    1. Should we amend Rule 13d-1(a) as proposed?
    2. How has the market for corporate control changed since the 
enactment of the Williams Act? To the extent those changes are 
significant, how should we consider them in our analysis of shortening 
the reporting window?
    3. Should we amend Rule 13d-1(a), but have the initial Schedule 13D 
due within a different number of days than proposed (e.g., five 
business days rather than five days) after the date of acquisition? 
Should we use business days instead of days for purposes of the Rule 
13d-1(a) deadline for the initial Schedule 13D filing?
    4. Rather than shorten the deadline under Rule 13d-1(a) in all 
instances, should we offer a tiered approach, such as maintaining the 
10-day deadline for acquisitions of greater than 5% but no more than 
10% while instituting a shorter deadline if beneficial ownership 
exceeds 10%? Should a person who ``stands still'' (i.e., chooses to 
make no further acquisitions of beneficial ownership) after crossing 
the 5% threshold be subject to a longer filing deadline than those 
persons who continue to make acquisitions after crossing the 5% 
threshold? If so, how much extra time to file should such person be 
given? In addition, if a tiered deadline is recommended, should any 
limit be placed upon the amount that can be acquired during the day on 
which the 5% threshold is crossed? If any acquisition limits should be 
imposed on the day the 5% threshold is crossed under a scenario where 
we move to adopt tiered deadlines, what should be the maximum amount 
that a person could acquire and still be eligible for an extended 
filing deadline?
    5. Should the deadline for the initial Schedule 13D filing vary 
based on a particular characteristic of the issuer (such as its market 
capitalization or trading volume)? If so, please explain the 
justification for why the deadline for reporting beneficial ownership 
in certain types of issuers should be either shorter or longer based on 
any such characteristic.
    6. Would the costs associated with preparing and filing an initial 
Schedule 13D within the proposed five-day deadline substantially differ 
from current costs of filing, and if so, why?
    7. Would the proposed amendments improve price discovery of a 
covered class, and, in turn, reinforce investors' confidence in the 
integrity of the capital markets?
    8. Are there costs other than routine filing and preparation costs 
that we should consider in setting the initial Schedule 13D filing 
deadline, and if so, what are those costs and can they be quantified? 
For example, would shortening the deadline necessarily limit the amount 
of a covered class that a beneficial owner could acquire before the 
initial Schedule 13D filing is due? If so, please identify such limit 
or limitations. To the extent that any limit or limitations exist on 
the amount of beneficial ownership in a covered class that can be 
acquired on the same day on which the 5% reporting threshold is 
crossed, how would any such limit or limitations impose actual or 
anticipated costs upon shareholders in the covered class, including 
those who would be acquiring reportable positions for the first time?
    9. Other than administrative burden or liquidity concerns, what 
other potential drawbacks should be considered in setting a new filing 
deadline? For example, would there be observable decreases in 
shareholder activism?
    10. As a means of offsetting any incremental cost increases 
associated with the proposed change, should we amend Schedule 13D, 
codified at Rule 13d-101, to include pre-populated disclosure fields 
under each line item disclosure requirement that reduce the amount of 
narrative that the filer would be required to prepare and review? For 
example, rather than requiring filers to describe any plans or 
proposals that would result in the issuer undertaking an extraordinary 
transaction (e.g., a sale or transfer of a material amount of assets of 
the issuer or any of its subsidiaries), such a transaction type would 
be listed along with a box that could be ``checked'' by the filer to 
indicate the existence of any plan or proposal for the issuer to engage 
in such a transaction.
    11. Have any change of control transactions followed large 
accumulations of beneficial ownership that occurred after the 5% 
threshold was crossed but before the initial Schedule 13D was filed, 
and if so, what were those transactions?
    12. Is there evidence of shareholder harm that occurred as a result 
of purchases made by a large shareholder after the 5% threshold was 
crossed but before the Schedule 13D was filed? If so, please describe 
the impact of such accumulations (including any quantifiable harms).
    13. Have any corporate actions been prevented from occurring, or 
been forced to occur, as a result of the current 10-day filing deadline 
for an initial Schedule 13D? If so, what were those instances and how 
did the delay in reporting interfere with or otherwise impact the 
normal operation of the corporation? For example, were any issuers 
coerced or pressured to execute a settlement agreement or undertake a 
buyback of their securities as a direct consequence of the initially 
undisclosed amount of a covered class acquired once the 5% threshold 
was crossed? Aside from transactions that occur based upon an imbalance 
of information, are there any other specific difficulties that arise 
from information asymmetries in the days leading up to a Schedule 13D 
filing?
    14. Shares purchased during the 10-day window in advance of a 
Schedule 13D filing are purchased from shareholders who already have 
made the decision to exit or reduce their investment. It is possible 
that some or all of those shareholders would have sold their shares 
regardless of whether a Schedule 13D had been filed earlier. Is there 
evidence that a Schedule 13D filing impacts the liquidity of an 
issuer's shares or otherwise indicates that a Schedule 13D filing 
impacts shareholders' decisions to sell their shares?
2. Rules 13d-1(e), (f), and (g)
a. Background
    Rules 13d-1(e), (f), and (g) were adopted in 1998.\44\ Those rules 
are designed to ensure that initial Schedule 13D filing obligations are 
identical, regardless of whether the beneficial owners were previously 
eligible to file a Schedule 13G in lieu of the Schedule 13D. 
Specifically, Rules 13d-1(e), (f), and (g) set forth the initial 
Schedule 13D filing obligations for investors who are no longer 
eligible to rely upon Rule 13d-1(b) \45\ or (c).\46\ Rules 13d-1(b) and 
(c) permit investors to file a comparatively abbreviated Schedule 13G 
in lieu of the longer-form Schedule 13D and to have more time to make 
amended filings.
---------------------------------------------------------------------------

    \44\ Amendments to Beneficial Ownership Reporting Requirements, 
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
    \45\ 17 CFR 240.13d-1(b).
    \46\ 17 CFR 240.13d-1(c).
---------------------------------------------------------------------------

    Rule 13d-1(e) applies to persons who have been filing a Schedule 
13G in lieu of Schedule 13D in reliance upon either Rule 13d-1(b) or 
(c). Rules 13d-1(b) and (c) both provide that a person may not rely on 
those provisions if he or she beneficially owns the relevant equity 
securities with the purpose or effect of changing or influencing the 
control of the issuer. Institutional and non-institutional beneficial 
owners who are unable to certify that they do not hold beneficial 
ownership with the intent to change or influence control of the issuer

[[Page 13854]]

or in connection with any transaction that would have such purpose or 
effect, as described more fully under Item 10 of Schedule 13G, or 
certain institutional investors that also acquire or hold beneficial 
ownership outside of the ordinary course of business are considered to 
have, for purposes of this release, a ``disqualifying purpose or 
effect.'' \47\ Rule 13d-1(e)(1) currently requires that such persons 
file their initial Schedule 13D within 10 days of losing their Schedule 
13G eligibility because they beneficially own a covered class with a 
disqualifying purpose or effect.
---------------------------------------------------------------------------

    \47\ Whether investors are engaged in activity with the purpose 
or effect of changing or influencing control of an issuer, and thus 
holding beneficial ownership with a disqualifying purpose or effect, 
ordinarily is a determination that would be based upon the specific 
facts and circumstances. For that reason, the Commission has not 
provided extensive guidance on this issue. The Commission has 
previously opined that most solicitations in support of a proposal 
specifically calling for a change of control of the company (e.g., a 
proposal to seek a buyer for the company or a contested election of 
directors or a sale of a significant amount of assets or a 
restructuring of a corporation) would clearly have that purpose and 
effect. For a more expansive discussion of the Commission's 
reasoning and factors to consider when making this determination, 
see Amendments to Beneficial Ownership Reporting Requirements, 
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
---------------------------------------------------------------------------

    Similarly, Rule 13d-1(f) applies to persons who have been filing a 
Schedule 13G in lieu of Schedule 13D in reliance on Rule 13d-1(c). Rule 
13d-1(c) provides that persons may not rely on that provision if they 
beneficially own 20% or more of a covered class. Rule 13d-1(f)(1) 
currently requires that such persons file their initial Schedule 13D 
within 10 days of losing their Schedule 13G eligibility because they 
beneficially own 20% or more of a covered class.
    Finally, Rule 13d-1(g) applies to persons who have been filing a 
Schedule 13G in lieu of Schedule 13D in reliance upon Rule 13d-1(b). 
Only QIIs may rely on Rule 13d-1(b). Further, in order to rely on Rule 
13d-1(b), a QII must beneficially own the relevant equity securities in 
the ordinary course of its business. Rule 13d-1(g) currently requires 
that such persons either file their initial Schedule 13D or amend their 
Schedule 13G to indicate that they are now relying on Rule 13d-1(c) 
(assuming they are eligible to rely on that rule) within 10 days of 
losing their Schedule 13G eligibility under Rule 13d-1(b) because they 
either no longer are a QII or no longer beneficially own the relevant 
equity securities in the ordinary course of their business.
    Rules 13d-1(e), (f), and (g) operate as regulatory safeguards that 
reestablish the application of Rule 13d-1(a) to beneficial owners who 
previously relied on Rule 13d-1(b) or (c) to indefinitely suspend 
application of Rule 13d-1(a) and its attendant 10-day initial Schedule 
13D filing deadline. Under Rules 13d-1(e), (f), and (g), beneficial 
owners ``shall immediately become subject to'' Rules 13d-1(a) and 13d-
2(a), which provisions are reinstated anew with respect to those 
persons the moment they become ineligible to rely upon Rules 13d-1(b) 
and (c). Due to the importance of Schedule 13D's disclosure 
requirements and the regulatory purposes served by the timely 
dissemination of that material information, we have preliminarily 
concluded that no compelling reason exists to treat persons who become 
ineligible to file on Schedule 13G differently from persons who 
initially have no option other than to file on Schedule 13D.
b. Proposed Amendments
    For largely the same reasons that we are proposing to amend Rule 
13d-1(a) to shorten the initial Schedule 13D filing deadline 
thereunder, we also are proposing to amend the initial Schedule 13D 
filing deadline under Rules 13d-1(e)(1), (f)(1), and (g). Specifically, 
we are proposing to make conforming revisions to Rules 13d-1(e), (f), 
and (g) so that the Schedule 13D required to be filed by persons who 
initially elected to report beneficial ownership on Schedule 13G but 
subsequently lost their eligibility are treated no differently from 
persons who make a Schedule 13D their initial filing. Accordingly, we 
propose to amend Rules 13d-1(e), (f), and (g) to make the required 
Schedule 13D--or, in the case of Rule 13d-1(g), the amendment to 
Schedule 13G indicating that the filer is now relying on Rule 13d-1(c), 
if applicable--due no later than five days after the date on which the 
person became ineligible to report on Schedule 13G.
Request for Comment
    15. Given the proposed amendment to Rule 13d-1(a), should we make 
conforming changes to Rules 13d-1(e), (f), and (g) as proposed?
    16. Should we amend Rules 13d-1(e), (f), and (g) but have the 
initial Schedule 13D due within a different number of days than 
proposed (e.g., five business days rather than five days)? Should we 
use business days instead of days for purposes of the deadlines in 
Rules 13d-1(e), (f), and (g)?
    17. Are there any reasons why Schedule 13G filers submitting an 
initial Schedule 13D pursuant to Rules 13d-1(e), (f), and (g) should be 
required to file on a different timetable from those investors who file 
an initial Schedule 13D pursuant to the deadline in the proposed 
amendment to Rule 13d-1(a)?
    18. Rather than make conforming changes to Rules 13d-1(e), (f), and 
(g), should the Commission rescind Schedule 13G and rely on Section 
13(g)(5) of the Exchange Act to consolidate beneficial ownership 
reporting on a single form, Schedule 13D, with different disclosure 
requirements applicable to beneficial owners who can certify that they 
did not acquire and do not hold the beneficial ownership with a 
disqualifying purpose or effect?
    19. With respect to the proposed amendment to Rule 13d-1(g), if a 
filer who is no longer eligible to rely on Rule 13d-1(b) may instead 
rely on Rule 13d-1(c), should the deadline for filing an amended 
Schedule 13G in this instance differ from the deadline for filing an 
initial Schedule 13D pursuant to Rule 13d-1(g) given that the filer 
would continue to be able to certify that it does not hold beneficial 
ownership with a disqualifying purpose or effect? Would five business 
days after the month-end in which such change occurred be appropriate 
and consistent with our proposed change to Rule 13d-2(b)?
3. Rules 13d-1(b), (c), and (d)
a. Background
    Section 13(g) was added to the Exchange Act in 1977.\48\ Congress 
enacted Section 13(g) to address the absence of beneficial ownership 
reporting by persons who had accumulated large amounts of stock in a 
public issuer but who were not required to file a beneficial ownership 
report under Section 13(d).\49\ Section 13(g) was intended to 
``supplement the current statutory scheme by providing legislative 
authority for certain additional disclosure requirements that in some 
cases could not be imposed administratively.'' \50\ Beneficial owners 
who currently report on Schedule 13G pursuant to Section 13(g) and 
corresponding Rule 13d-1(d) are not subject to Section 13(d) because 
they either made an exempt acquisition or an acquisition otherwise not 
covered by the statute. Section 13(d), in contrast to Section 13(g), 
applies only to beneficial owners who make non-exempt acquisitions of 
more than 5% of a

[[Page 13855]]

covered class. Section 13(g) was intended to close this gap.
---------------------------------------------------------------------------

    \48\ Domestic and Foreign Investment Improved Disclosure Act of 
1977, Public Law 95-214, sec. 203, 91. Stat. 1494.
    \49\ S. Rep. No. 114, 95th Cong. 1st Sess. 13 (1977).
    \50\ S. Rep. No. 95-114, at 13 (1977), reprinted in 1977 U.S. 
Code Cong. & Admin. News. 4098, 4111.
---------------------------------------------------------------------------

    In response to the enactment of Section 13(g), the Commission 
adopted Schedule 13G to serve two purposes: (1) Provide an optional 
short form disclosure statement for certain persons subject to Section 
13(d); and (2) provide a mandatory disclosure statement for persons 
subject to Section 13(g).\51\ Together with Section 13(d), Section 
13(g) was intended to provide a ``comprehensive disclosure system of 
corporate ownership'' applicable to all persons who are the beneficial 
owners of more than 5% of a covered class.\52\
---------------------------------------------------------------------------

    \51\ Filing and Disclosure Requirements Relating to Beneficial 
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 (Apr. 
28, 1978)].
    \52\ Id. at 18486; see also Senate Report No. 114, 95th Cong. 
lst Sess. 14 (1977).
---------------------------------------------------------------------------

    The deadline for the initial Schedule 13G filing depends on whether 
the person is a QII, Exempt Investor or Passive Investor. Rule 13d-1(b) 
currently provides that a QII must file an initial Schedule 13G only if 
such QII beneficially owns more than 5% of a covered class at the end 
of a calendar year.\53\ A person relying upon Rule 13d-1(b) is 
obligated under current Rule 13d-1(b)(2) to file a Schedule 13G 
``within 45 days after the end of the calendar year in which the person 
became obligated'' to report beneficial ownership. If the QII 
beneficially owns more than 10% of a covered class as of the last day 
of any month, then the initial Schedule 13G must be filed within 10 
days after the end of that month. A QII relying on Rule 13d-1(b), 
therefore, may have beneficial ownership in excess of 5% during the 
calendar year without incurring a filing obligation unless the QII 
beneficially owns more than 10% of a covered class at the end of any 
month during the calendar year.
---------------------------------------------------------------------------

    \53\ First adopted as Rule 13d-5 in 1977 and subsequently 
redesignated as Rule 13d-1(b)(1) in 1978, the predecessor to current 
Rule 13d-1(b)(2) established that an institution eligible to report 
on the newly adopted Schedule 13G had until 45 days after the end of 
the calendar year to report beneficial ownership to the extent the 
amount held exceeded 5% at the end of the last day of the calendar 
year. See Filing and Disclosure Requirements Relating to Beneficial 
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 
18486 (Apr. 28, 1978)] (explaining that ``the first provision in new 
Rule 13d-1(b) has been added to make clear that the obligation to 
file a Schedule 13G need be determined only on the last day of the 
calendar year'' and that ``filing [a] Schedule 13G to disclose a 
beneficial ownership interest of more than five but not more than 
ten percent will be required forty-five days after the end of the 
calendar year''); see also Adoption of Beneficial Ownership 
Disclosure Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 
12342 (Mar. 3, 1977)] (describing the Commission's adoption of new 
Rule 13d-5 and related new Form 13D-5, which permitted brokers, 
dealers, banks, investment companies, investment advisers, and 
employee benefit plans to utilize an abbreviated disclosure notice).
---------------------------------------------------------------------------

    Rule 13d-1(d),\54\ as with Rule 13d-1(b), imposes an initial 
Schedule 13G filing deadline of 45 days after the end of the calendar 
year, but only for investors who have become beneficial owners without 
having made an acquisition recognized under Section 13(d)(1). Given 
that these investors did not make the requisite acquisition that would 
have subjected them to Section 13(d), the Commission has previously 
referred to this type of beneficial owner as an ``Exempt Investor.'' 
Unlike the QIIs and Passive Investors--discussed below, in the context 
of Rule 13d-1(c)--who file a Schedule 13G in lieu of Schedule 13D and 
at all times remain subject to Section 13(d), Exempt Investors are 
subject to Section 13(g) at the time their initial filing obligation 
arises. Exempt Investors reporting pursuant to Rule 13d-1(d) today may 
include persons such as founders of companies and early investors in an 
issuer's class of equity securities who made their acquisition before 
the class was registered under Section 12 of the Exchange Act.\55\ 
These beneficial owners may continue to influence or control the 
issuer. Accordingly, the Commission has emphasized that the disclosures 
required under Section 13(g) are obtained in connection with the 
overall regulatory purposes served by Section 13(d).\56\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.13d-1(d).
    \55\ The Commission has explained that certain ``persons who are 
not required to file under Rule 13d-1(a) . . . would be required to 
file a Schedule 13G pursuant to the amendments herein proposed.'' 
Filing and Disclosure Requirements Relating to Beneficial Ownership, 
Release No. 34-14693 (Apr. 21, 1978) [43 FR 18501 at 18502 (Apr. 28, 
1978)]. Such persons may include ``persons who acquired not more 
than two percent of a class of securities within a twelve month 
period, who are exempt from Rule 13d-1(a) by Section 13(d)(6)(B).'' 
Id. The Commission also stated that ``Regulation 13D-G . . . would 
require any person `otherwise' not required to report pursuant to 
Section 13(d), but who is a beneficial owner of more than five 
percent of a specified class of equity securities to report on 
Schedule 13G.'' Id.
    \56\ Filing and Disclosure Requirements Relating to Beneficial 
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 
18486 (Apr. 28, 1978)] (stating that ``the enactment of [S]ection 
13(g) has rendered moot the issue of whether obtaining'' disclosure 
from institutional investors in the ordinary course of their 
business and without any control intent ``under [S]ection 13(d)(5) 
is within the primary purpose of [S]ection 13(d)''). The Commission 
also emphasized ``the importance of disclosing to the public the 
location of rapidly accumulated blocks of stock, even though they 
have been acquired not with the purpose or with the effect of 
changing or influencing control'' as a predicate for its position. 
Id.
---------------------------------------------------------------------------

    Finally, Rule 13d-1(c) was adopted by the Commission on January 12, 
1998.\57\ The rulemaking created a new class of investor, commonly 
referred to as ``Passive Investors,'' eligible to report on a Schedule 
13G in lieu of the Schedule 13D that is otherwise required to be filed 
given that the person has made an acquisition subject to Section 13(d). 
Passive Investors are required under current Rule 13d-1(c) to file a 
Schedule 13G within 10 days after acquiring beneficial ownership of 
more than 5% of a covered class. Passive Investors electing to report 
on Schedule 13G in lieu of Schedule 13D are required under current Rule 
13d-1(c) to file within 10 days after acquiring beneficial ownership of 
more than 5% of a covered class. A person is only eligible to file on 
Schedule 13G under Rule 13d-1(c) if such person is not seeking to 
acquire or influence control of an issuer and beneficially owns less 
than 20% of a covered class. Persons unable or unwilling to certify 
under Item 10 of Schedule 13G that they do not have a disqualifying 
purpose or effect because, for example, the possibility exists that 
they may seek to exercise or influence control, are ineligible to file 
a Schedule 13G and must instead file a Schedule 13D.
---------------------------------------------------------------------------

    \57\ Amendments to Beneficial Ownership Reporting Requirements, 
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)].
---------------------------------------------------------------------------

b. Proposed Amendments
    We believe that the current initial Schedule 13G filing deadlines 
for all three types of Schedule 13G filers warrant reassessment. The 
current initial Schedule 13G filing deadlines' length and manner of 
applicability to QIIs and Exempt Investors together could, in certain 
circumstances, frustrate the purposes of Section 13(d) and Section 
13(g). Investors reporting pursuant to current Rules 13d-1(b) and (d) 
may avoid beneficial ownership reporting by selling down their 
positions before the end of the calendar year, and, in the case of 
QIIs, selling down before the end of a month if ownership exceeds 10%. 
Amendments to the filing deadlines for initial Schedule 13G submissions 
required to be made by QIIs and Exempt Investors may therefore be 
needed to improve transparency consistent with the intent of Congress 
when enacting Section 13(d) and Section 13(g). The existing deadlines 
and manner of applicability not only could give rise to a gap in 
reporting for persons who possess the potential to change control of an 
issuer--or, in the case of Exempt Investors, may already control an 
issuer--but also risk devaluing the importance of the disclosures when

[[Page 13856]]

made, if made at all.\58\ The very gap in reporting that Congress 
sought to close by enacting Section 13(g) may now be effectively just 
as wide given that large, undisclosed accumulations could be occurring 
and may be reported considerably later than is useful to investors and 
the market, if reported at all.\59\
---------------------------------------------------------------------------

    \58\ See infra note 221 and accompanying text (noting the 
importance to the market of information regarding beneficial 
ownership, regardless whether it is disclosed on Schedule 13D or 
13G, based on evidence that the initial filing of Schedule 13G, like 
that of Schedule 13D, generates a positive stock price reaction, 
albeit smaller in magnitude).
    \59\ See, e.g., Kristin Giglia, A Little Letter, a Big 
Difference: An Empirical Inquiry into Possible Misuse of Schedule 
13G/13D Filings, 116 Colum. L. Rev. 105, 115-16 (2015) (explaining 
that the availability of Schedule 13G may allow investors to 
``intentionally structure their acquisition strategies to exploit 
the gaps created by the current reporting regime, to their own 
short-term benefit and to the overall detriment of market 
transparency and investor confidence'' (internal quotations 
omitted)); In the Matter of Perry Corp., Release No. 34-60351 (July 
21, 2009) (illustrating how an institutional investor improperly 
relied upon Rule 13d-1(b) to defer reporting its beneficial 
ownership of nearly 10% of a covered class). QIIs in particular may 
be able to amass sizeable amounts of beneficial ownership without 
reporting such positions. Rule 13d-1(b)(2) provides in relevant part 
that ``it shall not be necessary to file a Schedule 13G unless the 
percentage of [a covered class] beneficially owned as of the end of 
the calendar year is more than five percent.'' As such, a QII may 
beneficially own in excess of 5% of a covered class for the entire 
year, sell down its position to 5% or below on the last day of the 
calendar year and bypass having to report at all under the current 
regulatory framework assuming that its beneficial ownership 
continues to be held in the ordinary course of business, without a 
disqualifying purpose or effect, and does not exceed 10% of a 
covered class.
---------------------------------------------------------------------------

    In addition, at the time Rule 13d-1(c) was first adopted, Passive 
Investors may not have had reasonable access to advanced technologies 
to make more immediate filings possible. Consistent with our 
justification for proposing to shorten the initial Schedule 13D filing 
deadline under Rule 13d-1(a), we believe Passive Investors today not 
only have gained valuable experience complying with these reporting 
provisions, but also have ready access to the necessary filing 
technology. As such, while the 10-day filing deadline in Rule 13d-1(c) 
may have been appropriate in 1998, technological advancements in the 
intervening two decades, as well as our proposed amendment to the 
analogous filing deadline in Rule 13d-1(a), support a reconsideration 
and recalibration of that deadline.
    Accordingly, we propose to amend Rules 13d-1(b) and (d) to shorten 
the filing deadline for the initial Schedule 13G to be filed by QIIs 
and Exempt Investors to five business days \60\ after the end of the 
month in which beneficial ownership exceeds 5% of a covered class. The 
proposed acceleration of these deadlines is expected to result in more 
timely disclosures while minimizing any additional burdens. We believe 
that these investors should already have well-established compliance 
systems in place to monitor Schedule 13G ownership levels to determine 
whether filing obligations have been triggered. For example, compliance 
operations at QIIs currently need to monitor beneficial ownership 
levels at least on a monthly basis in case their holdings exceed more 
than 10% at the end of the month and trigger an initial Schedule 13G 
filing pursuant to Rule 13d-1(b)(2). Similarly, Exempt Investors 
already need to monitor the level of their beneficial ownership 
continuously or periodically to ensure that the amount of their 
beneficial ownership does not unintentionally exceed 2% in a 12-month 
period and trigger application of Section 13(d).\61\
---------------------------------------------------------------------------

    \60\ Our proposed definition of ``business day'' would be 
consistent with how that term is defined under other rule provisions 
adopted under the Exchange Act, such as 17 CFR 240.14d-1 (``Rule 
14d-1(g)(3)''), which defines the term ``business day'' to mean 
``any day, other than Saturday, Sunday or a Federal holiday, and 
shall consist of the time period from 12:01 a.m. through 12:00 
midnight Eastern time.'' Unlike Rule 14d-1(g), which defines the 
term for purposes of Regulations 14D and 14E, the proposed 
amendments to Rules 13d-1 and 13d-2 that use the term ``business 
day'' are indifferent as to whether or not the date of the event 
that triggers a Schedule 13D or Schedule 13G filing obligation falls 
on a Saturday, Sunday or Federal holiday versus a business day. For 
example, under the proposed amendments to Rules 13d-1(b) and (d), 
the initial Schedule 13G would be due the fifth business day after 
the last day of the month in which beneficial ownership exceeds 5% 
of a covered class. In addition, as stated at the outset of 
Regulation 13D-G, Regulation S-T governs the preparation and 
submissions of filings in electronic format and should be read in 
conjunction with the rules contained within Regulation 13D-G, 
including Rules 13d-1 and 13d-2.
    \61\ Exempt Investors can jeopardize their eligibility to report 
on Schedule 13G by voluntarily or involuntarily making an 
acquisition, or acquisitions, by purchase or otherwise as determined 
under Rule 13d-5(a), that exceed(s) 2% of a covered class in a 
consecutive 12-month period and thus render unavailable the Section 
13(d)(6)(B) exemption.
---------------------------------------------------------------------------

    Given the proposal to shorten the initial reporting deadline to 
five business days after the end of the month, the current provision of 
Rule 13d-1(b)(2) that operates to accelerate that initial filing 
deadline if beneficial ownership exceeds 10% at the end of any month 
would be unnecessary in light of Rule 13d-2(c)'s overlapping Schedule 
13G amendment requirement.\62\ Accordingly, we propose to further amend 
Rule 13d-1(b)(2) to delete the language that imposes an initial 
reporting obligation on QIIs after exceeding 10% of a covered class.
---------------------------------------------------------------------------

    \62\ Specifically, current Rule 13d-2(c) would still require 
QIIs to file an amendment to their Schedule 13G within 10 days after 
the end of the first month in which their beneficial ownership 
exceeds 10% of a covered class, calculated as of the last day of the 
month. If the proposed amendment to Rule 13d-2(c) is adopted, 
however, QIIs would be required to make such disclosure within five 
days after the date on which the person's direct or indirect 
beneficial ownership exceeds 10%.
---------------------------------------------------------------------------

    We also are proposing to amend the filing deadline in Rule 13d-1(c) 
to five days after the date the person becomes obligated to file an 
initial Schedule 13G and amendment thereto, respectively, under those 
two provisions. We believe it is appropriate to amend the initial 
Schedule 13G filing deadline in Rule 13d-1(c) to match the proposed 
initial Schedule 13D filing deadline in Rule 13d-1(a) in order to 
maintain the historical regulatory consistency between the deadlines in 
Rules 13d-1(c) and (a) and to facilitate the overall goal of increasing 
transparency in beneficial ownership.
Request for Comment
    20. Should we amend Rules 13d-1(b), (c), and (d) as proposed?
    21. Should we amend Rules 13d-1(b) and (d) but require a different 
deadline for an initial Schedule 13G filing than we proposed? For 
example, should we require a shorter or longer deadline than our 
proposed deadline of within five business days after the end of the 
month in which beneficial ownership exceeded 5% in a covered class? 
Alternatively, should the deadline be expressed in days rather than 
business days to conform to the proposed deadlines in Rules 13d-1(a), 
(e), (f), and (g)?
    22. Do costs other than routine filing and preparation costs exist 
that we should consider in setting the initial Schedule 13G filing 
deadlines? If any such costs exist, please identify and quantify to the 
extent practicable. For example, would shorter deadlines inhibit 
beneficial owners' opportunities to verify the number of outstanding 
securities of a covered class for purposes of determining whether their 
beneficial ownership exceeds 5%? Such verification could include any 
internal processes that a beneficial owner may have in place to 
independently corroborate the accuracy of the number of shares 
disclosed in an issuer's most recent annual, quarterly or current 
report notwithstanding the absence of such an affirmative obligation 
under Rule 13d-1(j).\63\
---------------------------------------------------------------------------

    \63\ Rule 13d-1(j) provides that a beneficial owner may rely 
upon information in an issuer's most recent periodic or current 
report unless the beneficial owner knows or has reason to believe 
that the information contained in the report is inaccurate. 17 CFR 
240.13d-1(j).

---------------------------------------------------------------------------

[[Page 13857]]

    23. Our proposed amendment to Rule 13d-1(b)(2) would only require 
QIIs to determine the amount of their beneficial ownership as of the 
last day of a month for purposes of their initial Schedule 13G filing 
obligation under that rule. Should QIIs be required to determine the 
amount of their beneficial ownership as of any day during a month 
rather than only as of the last day of a month, and if so, what 
practical challenges or other burdens are associated with monitoring 
the level of beneficial ownership on a daily basis?
    24. Should we treat the initial Schedule 13G reporting deadline 
applicable to QIIs differently from the deadline applicable to Exempt 
Investors, and if so, why? For example, would any ``front running'' 
concerns exist with the proposed amendments for reporting deadlines 
applicable to QIIs?
    25. Section 13(g)(5) requires the Commission to ``achieve 
centralized reporting of information regarding ownership'' and ``avoid 
unnecessarily duplicative reporting.'' As a means of pursuing these 
goals, should the Commission eliminate Schedule 13G and consolidate 
beneficial ownership reporting into one form, Schedule 13D? Under this 
alternative, beneficial owners that previously would have been eligible 
to report on Schedule 13G could, for example, be required to satisfy 
less burdensome disclosure requirements on a new, consolidated form.
    26. Although Passive Investors certify that they did not acquire 
and do not hold beneficial ownership with a disqualifying purpose or 
effect, they are currently required to file their initial Schedule 13G 
by the same deadline as Schedule 13D filers. If we adopt our proposed 
amendment to the initial Schedule 13D filing deadline under Rule 13d-
1(a), are there any reasons why we should not make a corresponding 
change to the initial Schedule 13G filing deadline under Rule 13d-1(c) 
given that the same technological advancements equally enable Passive 
Investors to make a Schedule 13G filing on an accelerated basis?
4. Rules 13d-2(a) and (b)
a. Background
    Section 13(d)(2) requires that an amendment must be filed to the 
statement required under Section 13(d)(1) if any material change occurs 
in the facts set forth in the statement filed, but does not identify a 
specific deadline by which such amendment must be filed. Instead, Rule 
13d-2(a) provides, as its predecessor Rule 13d-2 did when first adopted 
in 1968,\64\ that such amendment must be filed with the Commission 
``promptly.'' \65\ The initial adopting release did not provide an 
explanation as to why ``promptly,'' as opposed to a specified deadline, 
was chosen. As a factual matter, the ``promptly'' standard may, under 
certain conditions, allow for more time to report a complex disclosure 
issue or material development based on an involuntary change in 
circumstances that nevertheless triggers an amendment obligation. The 
obligation to file an amendment under current Rule 13d-2(a) is not 
limited to acquisitions. Instead, changes in the disclosure narrative 
that are material also have to be reported in an amendment, as do 
material changes in the level of beneficial ownership caused by an 
involuntary change in circumstances, such as a reduction in the amount 
of beneficial ownership caused solely by an increase in the number of 
shares outstanding.\66\
---------------------------------------------------------------------------

    \64\ Acquisitions, Tender Offers, and Solicitations, Release No. 
34-8370 (July 30, 1968) [33 FR 11015 (Aug. 2, 1968)].
    \65\ 17 CFR 240.13d-2(a).
    \66\ See id. (requiring an amendment ``[i]f any material change 
occurs in the facts set forth in the Schedule 13D'' including ``any 
material increase or decrease in the percentage of the class 
beneficially owned'').
---------------------------------------------------------------------------

    Section 13(g)(2) requires that an amendment be filed to the 
statement required under Section 13(g)(1) if any material change occurs 
in the facts set forth in the statement filed, but like Section 
13(d)(2), does not identify a deadline by which such amendment must be 
filed. Rule 13d-2(b), however, does specify a deadline and provides 
that for all persons who report beneficial ownership on Schedule 13G, 
an amendment shall be filed ``within forty-five days after the end of 
each calendar year if, as of the end of the calendar year, there are 
any changes in the information reported in the previous filing on that 
Schedule [13G].''
b. Proposed Amendments
    We propose to amend Rule 13d-2(a) to require that all amendments to 
Schedule 13D be filed within one business day after the material change 
that triggers the amendment obligation. This change from the current 
``promptly'' standard would establish a specified filing deadline, 
remove any uncertainty as to the date on which an amendment is due and 
help ensure that beneficial owners amend their filings in a more 
uniform and consistent manner. In light of the technological advances 
discussed in Section II.A.1 above, and for many of the same reasons we 
are proposing to shorten the initial Schedule 13D filing deadline, we 
do not believe that requiring Schedule 13D amendments to be filed 
within one business day after the date on which a material change 
occurs will place those filers at a disadvantage.\67\ Further, because 
an amendment to a Schedule 13D only requires that the material change 
be reported and not a complete set of new narrative responses to each 
of the disclosure form's individual line items,\68\ those amendments 
should present a lower administrative burden than the initial Schedule 
13D filing.
---------------------------------------------------------------------------

    \67\ Our proposed amendment also would be consistent with the 
Commission's existing view that, under the current ``promptly'' 
standard in Rule 13d-2(a), ``[a]ny delay beyond the date the filing 
reasonably can be filed may not be prompt'' and that an amendment to 
a Schedule 13D reasonably could be filed in as little as one day 
following the material change. In re Cooper Laboratories, Release 
No. 34-22171 (June 26, 1985).
    \68\ Under Rule 13d-2(a), the Schedule 13D filer only has an 
obligation to ``file or cause to be filed with the Commission an 
amendment disclosing that [material] change.'' See also 17 CFR 
240.12b-15, titled ``Amendments,'' which explains that 
``[a]mendments filed pursuant to this section must set forth the 
complete text of each item as amended.''
---------------------------------------------------------------------------

    We also are proposing to amend Rule 13d-2(b) to require a Schedule 
13G to be amended within five business days of the end of the month in 
which a material change occurs in the information previously reported. 
Accelerating the deadline for amendments from the current standard of 
45 days after the end of the calendar year would help ensure that the 
information reported is timely and useful. In addition, this proposed 
deadline would be consistent with the proposed five business day 
deadline from the end of the month applicable to QIIs' and Exempt 
Investors' initial Schedule 13G filing obligations arising under Rules 
13d-1(b) and (d). To partially mitigate the time pressures resulting 
from the reduction of the current 45-day deadline and the need to meet 
these new deadlines, if adopted, we have proposed a ``business day'' 
standard in specifying the date on which the Schedule 13G filing would 
be due after an event that triggers a reporting obligation.\69\
---------------------------------------------------------------------------

    \69\ For a discussion of our proposed definition of ``business 
day'' for purposes of Regulation 13D-G, see supra note 5.
---------------------------------------------------------------------------

    We further believe the text of Rule 13d-2(b) regarding the legal 
standard that triggers an amendment obligation should be conformed to 
the statutory language. Sections 13(d)(2) and 13(g)(2) require such an 
amendment if a ``material change'' occurs to the facts in the statement 
previously filed. Unlike Sections 13(d)(2) and 13(g)(2), Rule

[[Page 13858]]

13d-2(b) does not include an express materiality qualifier for Schedule 
13G amendments and simply requires an amendment for ``any change.'' At 
the time Rule 13d-2(b) was adopted, however, the Commission stated that 
there is a materiality standard inherent in the provisions governing 
Schedule 13G filings. This inherent materiality standard is based on 
the fact that any disclosure provided by a Schedule 13G filer, in light 
of the infrequency of the reports and comparatively minimal statements 
required to be made, is effectively material.\70\ Our proposed change 
would, therefore, merely codify this view in the text of Rule 13d-2(b). 
As such, we are proposing to amend Rule 13d-2(b) to substitute the term 
``material'' in place of the term ``any'' to serve as the standard for 
determining the type of change that will trigger an amendment 
obligation under Rule 13d-2(b).
---------------------------------------------------------------------------

    \70\ Filing and Disclosure Requirements Relating to Beneficial 
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 
18489 (Apr. 28, 1978)] (stating the Commission's belief that because 
``the information required by Schedule 13G has been reduced to the 
minimum necessary to satisfy the statutory purpose, . . . a 
materiality standard is inherent in those requirements'' and ``it is 
unnecessary to further minimize it by the insertion of an express 
materiality standard'').
---------------------------------------------------------------------------

Request for Comment
    27. Should we amend Rules 13d-2(a) and (b) as proposed?
    28. Should we amend the filing deadlines contained within Rules 
13d-2(a) and (b) but specify filing deadlines other than the ones which 
have been proposed? For example, should we specify a filing deadline of 
two or three business days from the date of a material change for 
Schedule 13D amendments and 10 or 15 business days from the end of the 
month in which a material change occurs for Schedule 13G amendments? 
Instead of using ``business day'' as the standard for calculating these 
filing deadlines, should we instead use a certain number of days as we 
have proposed for revisions to Rules 13d-1(a), (c), (e)(1), (f)(1), and 
(g) and 13d-2(c)? Should all reporting deadlines for Schedule 13D and 
Schedule 13G filings be uniformly expressed in days, the standard in 
use now, or should we express the filing deadlines uniformly in terms 
of business days?
    29. Will the costs associated with preparing and filing an amended 
Schedule 13D or Schedule 13G within the proposed deadlines 
substantially differ from those costs now, and if so, why?
    30. Should we amend the filing deadline in Rule 13d-2(b) as 
proposed but instead retain the rule text that requires a Schedule 13G 
amendment to be filed if ``any change'' exists in the information 
previously reported, rather than a ``material change,'' as proposed? 
Under this alternative, the changes reported would continue to be 
viewed as material disclosures given their inherent materiality as the 
Commission described in the release adopting Rule 13d-2(b).\71\
---------------------------------------------------------------------------

    \71\ See supra note 70 and accompanying text.
---------------------------------------------------------------------------

5. Rules 13d-2(c) and (d)
a. Background
    Rule 13d-2(c) governs the amendment obligation for QIIs whose 
beneficial ownership exceeds 10% of a covered class. Under Rule 13d-
2(c), QIIs are required to file an amendment to their Schedule 13G 
within 10 days after the end of the first month in which their 
beneficial ownership exceeds 10% of a covered class, calculated as of 
the last day of the month. Once across the 10% threshold, QIIs are 
further required under current Rule 13d-2(c) to file additional 
amendments 10 days after the first month in which they increase or 
decrease their beneficial ownership by more than 5% of the covered 
class, calculated as of the last day of the month.
    Rule 13d-2(d) governs the amendment obligation for Passive 
Investors whose beneficial ownership exceeds 10% of a covered class. 
Under current Rule 13d-2(d), Passive Investors are required to 
``promptly'' file an amendment to their Schedule 13G upon acquiring 
greater than 10% of a covered class. Once across the 10% threshold, 
Passive Investors are further required under current Rule 13d-2(d) to 
file additional amendments ``promptly'' if they increase or decrease 
their beneficial ownership by more than 5% of the covered class.
    The amendment obligations arising under Rules 13d-2(c) and (d) are 
in addition to the requirement in Rule 13d-2(b) that a Schedule 13G be 
amended within 45 days after each calendar year end if, as of the end 
of the calendar year, any changes occur to the information previously 
reported on the Schedule 13G. As such, Rules 13d-2(c) and (d) 
supplement the amendment obligation under Rule 13d-2(b), which only 
arises if the person's beneficial ownership exceeds 5% of a covered 
class at the end of a calendar year. To comply with Rules 13d-2(c) and 
(d), QIIs and Passive Investors, depending on their beneficial 
ownership levels, may have to amend their Schedule 13G filings more 
frequently and do so throughout the year.
b. Proposed Amendments
    In connection with our proposed amendment to Rule 13d-2(b), we are 
proposing to amend Rule 13d-2(c) to require that QIIs file an amendment 
to their Schedule 13G within five days after the date on which their 
beneficial ownership exceeds 10% of a covered class, rather than the 
current requirement of 10 days after the end of the month. Similarly, 
once across the 10% threshold, QIIs would be required to file 
additional amendments five days after the date on which they increase 
or decrease their beneficial ownership by more than 5% of the covered 
class, rather than the current requirement of 10 days after the end of 
the month. These amendments, when considered in the context of our 
proposed amendment to Rule 13d-2(b), preserve the utility of Rule 13d-
2(c) as a provision that provides the market with earlier notice of 
QIIs' beneficial ownership exceeding 10% of a covered class and, 
thereafter, upon their beneficial ownership of the covered class 
increasing or decreasing by more than 5%. We believe the imposition of 
such an accelerated deadline is appropriate in the context of our 
proposed amendment to Rule 13d-2(c) because the high thresholds in that 
rule--10% beneficial ownership of a covered class and any subsequent 5% 
increase or decrease in beneficial ownership--warrant that the 
amendment be rapidly disseminated to the market. Consistent with our 
rationale for proposing to shorten the other deadlines, we believe QIIs 
have access to the same technology as other Schedule 13D and 13G filers 
to satisfy this deadline, especially given the size and sophistication 
of the persons eligible to file as QIIs.
    We also are proposing to amend Rule 13d-2(d) to change the 
amendment filing deadline from the current ``promptly'' standard to one 
business day after the date on which an amendment obligation arises. We 
are proposing to amend the ``promptly'' standard used in Rule 13d-2(d) 
for substantially the same reasons we are proposing to shorten the 
filing deadline for the initial Schedule 13G \72\ and change the filing 
deadline for Schedule 13D amendments.\73\
---------------------------------------------------------------------------

    \72\ See supra Section II.A.3.
    \73\ See supra Section II.A.4.
---------------------------------------------------------------------------

Request for Comment
    31. Should we amend the filing deadlines in Rules 13d-2(c) and (d) 
as proposed?

[[Page 13859]]

    32. Should we amend the filing deadlines in Rules 13d-2(c) and (d) 
but specify filing deadlines other than those we have proposed? For 
example, should the deadline in Rule 13d-2(c) be expressed in business 
days rather than days (and vice versa for the deadline in Rule 13d-
2(d))?
    33. If we adopt our proposed amendment to Rule 13d-2(b), should we 
retain Rule 13d-2(c)'s amendment obligation for QIIs as proposed? Or 
does the proposed shortened filing deadline in Rule 13d-2(b) obviate 
the need for Rule 13d-2(c)'s additional amendment obligation, even with 
the proposed shorter filing deadline?
    34. Should the amendment filing deadline applicable to Passive 
Investors differ from the amendment filing deadline applicable to QIIs 
and Exempt Investors, as well as persons who must make their initial 
filing on Schedule 13D? If so, why?
6. Rules 13(a)(4) and 201(a) of Regulation S-T
a. Background
    Regulation 13D-G states that Schedules 13D and 13G should be 
prepared in accordance with Regulation S-T, which governs the 
preparation and submission of documents filed electronically on the 
Commission's EDGAR system. In accordance with 17 CFR 232.12, EDGAR 
accepts electronic submissions Monday through Friday, except Federal 
holidays, from 6 a.m. to 10 p.m. eastern time.\74\ Under Rule 13(a)(2) 
of Regulation S-T, however, most filings not accepted by 5:30 p.m. will 
not be credited with having been received by the Commission on that 
business day.\75\ Instead, filings accepted after 5:30 p.m. but on or 
before 10 p.m. will be reflected on EDGAR as having been received on 
the next business day.\76\ Rule 13(a)(4) of Regulation S-T, however, 
sets forth certain exceptions from that 5:30 p.m. ``cut-off'' time. 
Specifically, it provides that certain filings--namely, Forms 3, 4 and 
5 and Schedule 14N--``submitted by direct transmission on or before 10 
p.m. [eastern time] shall be deemed filed on the same business day.'' 
\77\ Rule 13(a)(4), therefore, effectively extends the ``cut-off'' time 
for these filings from 5:30 p.m. to 10 p.m.
---------------------------------------------------------------------------

    \74\ 17 CFR 232.12(a). When we refer to ``eastern time'' in this 
release, we mean eastern standard time or eastern daylight saving 
time, whichever is currently in effect.
    \75\ 17 CFR 232.13(a)(2).
    \76\ Id.
    \77\ 17 CFR 232.13(a)(4). Rule 13(a)(3) also provides the same 
accommodation for registration statements or any post-effective 
amendment thereto filed pursuant to Rule 462(b). See 17 CFR 
232.13(a)(3).
---------------------------------------------------------------------------

    In addition, Rule 201 of Regulation S-T and 17 CFR 232.202 (``Rule 
202 of Regulation S-T'') address hardship exemptions from EDGAR filing 
requirements, and Rule 13(b) of Regulation S-T addresses the related 
issue of filing date adjustments. A filer may obtain a temporary 
hardship exemption under Rule 201 of Regulation S-T if it experiences 
unanticipated technical difficulties that prevent the timely submission 
of an electronic filing by submitting a properly formatted paper copy 
of the filing under cover of Form TH.\78\ Alternatively, instead of 
pursuing a hardship exemption, a filer may request a filing date 
adjustment under Rule 13(b) of Regulation S-T. This rule addresses 
circumstances in which a filer attempts in good faith to file a 
document with the Commission in a timely manner, but the filing is 
delayed due to technical difficulties beyond the filer's control.\79\ 
In those instances, the filer may request a filing date adjustment.\80\ 
The staff may grant the request if it appears that the adjustment is 
appropriate and consistent with the public interest and the protection 
of investors.\81\
---------------------------------------------------------------------------

    \78\ 17 CFR 232.201(a).
    \79\ 17 CFR 232.13(b).
    \80\ Id.
    \81\ Id.
---------------------------------------------------------------------------

b. Proposed Amendments
    We recognize the administrative challenges that could arise if we 
accelerate the Schedules 13D and 13G filing deadlines. Specifically, 
Schedule 13D and 13G filers would be required to prepare their filings 
in a more compressed timeframe while maintaining the accuracy and 
completeness of the information set forth in those filings. These 
challenges would be more acute for filers located in different time 
zones whose business hours do not overlap with the Commission's. In 
addition, institutional filers with more complex business 
organizations, including those with sub-advisory relationships common 
in the investment management industry, may have difficulty assembling 
all of the required data within the timeframe that will be necessary in 
order to comply with the proposed filing deadlines. We also recognize 
that if the proposed changes to those reporting deadlines are 
implemented, under the current rules, a Schedule 13D or 13G must be 
filed on and accepted by EDGAR by no later than 5:30 p.m. on a business 
day on which such a report would be due in order to have the submission 
be considered timely. We propose, therefore, to amend Rule 13(a)(4) of 
Regulation S-T to provide that any Schedule 13D or Schedule 13G, 
including any amendments thereto, submitted by direct transmission on 
or before 10 p.m. eastern time on a given business day will be deemed 
filed on the same business day.\82\ Conversely, any Schedule 13D or 13G 
submission not accepted by 10 p.m. on its due date will be assigned a 
filing date of the next business day, and for purposes of compliance 
with the applicable reporting requirements, would be considered 
late.\83\ Given the accelerated filing deadlines we propose for 
Schedule 13D and 13G filings, we anticipate the proposed extension in 
the ``cut-off'' time would ease filers' administrative burdens, 
including those located in different time zones, by giving them an 
additional four and a half hours during which they could timely file 
their Schedules 13D and 13G.
---------------------------------------------------------------------------

    \82\ Notwithstanding the proposed extension of the time period 
in which accepted Schedule 13D and 13G filings may be made and still 
be considered timely, filer support hours would not be extended. 
Filer support would continue to remain available only until 6 p.m. 
eastern time as is currently the case notwithstanding EDGAR's 
availability for the submission of Section 16 filings through 10 
p.m.
    \83\ Once transmitted, a Schedule 13D or 13G submission will be 
automatically processed by EDGAR and, if accepted by EDGAR, 
immediately disseminated to the public. While filings will receive 
an accession number upon transmission, the accession number only 
confirms receipt of the submission, not that it was actually 
accepted by EDGAR. Transmission without acceptance does not 
constitute an official filing. Under 17 CFR 232.11, an ``official 
filing'' means any filing that is received and accepted by the 
Commission. At present, a transmission that has commenced on a given 
business day will only receive that business day's filing date if 
``accepted'' at or before 5:30 p.m., meaning that it has 
successfully passed an acceptance review. An official filing has not 
been made unless and until the filer receives an acceptance message 
that includes a filing date. Accordingly, the filer is responsible 
for ensuring a transmission commences early enough in the business 
day to correct any errors in the transmittal process so that time-
sensitive filings can be accepted by the applicable deadline.
---------------------------------------------------------------------------

    We also propose to amend Rule 201(a) of Regulation S-T to remove 
the opportunity for a Schedule 13D or 13G filer to pursue a temporary 
hardship exemption under that rule. This proposed treatment is 
consistent with our treatment of Forms 3, 4, and 5, each of which has a 
10 p.m. ``cut-off'' time under Rule 13(a)(4) of Regulation S-T and is 
ineligible for a temporary hardship exemption under Rule 201(a) of 
Regulation S-T. We are proposing to amend Rule 201(a) of Regulation S-T 
to make temporary hardship exemptions unavailable to filers of 
Schedules 13D and 13G because of: The relative ease of using the EDGAR 
on-line filing system; the proposed extended 10 p.m. eastern

[[Page 13860]]

time filing deadline; the limited value to the public of paper filings; 
and the availability of a filing date adjustment under the same 
circumstances as a temporary hardship exemption would have been 
available but for the proposed amendment.\84\
---------------------------------------------------------------------------

    \84\ Filing date adjustments, as would have been true of 
temporary hardship exemptions, should be few in number given the 
relative ease with which filings are now made through EDGAR and the 
strong public interest in timely and readily available disclosures 
provided by Schedules 13D and 13G. As is also the case with other 
forms required to be filed on EDGAR, our filing desk would not 
accept in paper format any Schedule 13D or 13G filings except in the 
highly unlikely event that the filing satisfies the requirements for 
a continuing hardship exemption under Rule 202 of Regulation S-T. 
Filing date adjustments may, however, be made if a filer is unable 
to submit its Schedule 13D or 13G as a result of an EDGAR outage. In 
such circumstances, if a filer attempts in good faith to file its 
Schedule 13D or 13G in a timely manner but is delayed because of an 
EDGAR outage, that filer may request a filing date adjustment under 
Rule 13(b) of Regulation S-T on the grounds that such outage 
constitutes technical difficulties beyond the filer's control. 17 
CFR 232.13(b). Alternatively, the Commission may, under 17 CFR 
232.15(a)(3), correct the filing date of a Schedule 13D or 13G 
filing if it determines that such filing has not been processed by 
EDGAR or was processed incorrectly by EDGAR.
---------------------------------------------------------------------------

Request for Comment
    35. Should we amend Rule 13(a)(4) of Regulation S-T as proposed to 
extend the ``cut-off'' times for Schedule 13D or 13G filings, including 
any amendments thereto, to 10 p.m. eastern time?
    36. If we amend Rule 13(a)(4) of Regulation S-T as proposed, should 
we also extend EDGAR filer support hours beyond 6 p.m. eastern time?
    37. Would the proposed amendment to Rule 13(a)(4) of Regulation S-T 
be appropriate in light of the proposed accelerated filing deadlines 
applicable to persons who are required to make Schedule 13D and 13G 
filings, or do reasons exist to distinguish these filers from those who 
file Section 16 reports or Schedule 14N?
    38. Does the importance of the information required to be reported 
within a Schedule 13D or 13G justify a continuation of the requirement 
that these forms be filed by 5:30 p.m. on the due date, the same 
deadline as almost all other Commission filings?
    39. Should we amend Rule 201 of Regulation S-T as proposed?
    40. Are there reasons to permit filers of Schedules 13D and 13G to 
continue to petition the Commission for a temporary hardship exemption 
under Rule 201 of Regulation S-T, especially if we were to adopt the 
proposed amendment to Rule 13(a)(4) of Regulation S-T to extend the 
``cut-off'' times for Schedules 13D and 13G?
    41. If we do not adopt some or all of our proposed amendments to 
the filing deadlines applicable to beneficial owners who make Schedule 
13D and Schedule 13G filings, should we still adopt the proposed 
amendments to Rules 13 and 201 of Regulation S-T?

B. Proposed Amendment to Rule 13d-3 To Regulate the Use of Cash-Settled 
Derivative Securities

    We are proposing to amend Rule 13d-3 to deem holders of certain 
cash-settled derivative securities to be the beneficial owners of the 
reference covered class. Specifically, we are proposing to add new 
paragraph (e) to Rule 13d-3. As discussed in more detail below, in 
addition to setting forth the circumstances under which a holder of a 
cash-settled derivative security will be deemed the beneficial owner of 
the reference equity securities, proposed Rule 13d-3(e) also includes 
provisions describing how to calculate the number of reference equity 
securities that a holder of a cash-settled derivative will be deemed to 
beneficially own.
1. Background
    Neither Section 3(a) nor Section 13(d) of the Exchange Act define 
the term ``beneficial owner'' or ``beneficial ownership.'' Regulation 
13D-G similarly does not expressly define those terms. To provide 
clarity, the Commission adopted Rule 13d-3, which provides standards 
for the purpose of determining whether a person is a beneficial owner 
subject to Section 13(d).\85\ For example, Rule 13d-3(a) provides that 
a person who directly or indirectly has or shares voting or investment 
power is a beneficial owner. The Commission also recognized the 
importance of accounting for contingent interests in equity securities 
arising from investor use of derivatives, such as options, warrants or 
rights. The Commission therefore chose to include holders of certain 
derivatives as beneficial owners under Rule 13d-3: Those derivatives 
that would be settled ``in-kind'' or otherwise convey a right to 
acquire a covered class.\86\ Specifically, under Rule 13d-3(d)(1), a 
person is ``deemed'' a beneficial owner of a covered class if that 
person holds a right to acquire the covered class--for example, through 
the exercise of an option or warrant or conversion of a security--that 
is exercisable or convertible within 60 days. Similarly, under Rule 
13d-3(d)(1), if a right has been acquired for the purpose or with the 
effect of changing or influencing control of the issuer of securities, 
that person is treated as a beneficial owner of the underlying class of 
equity securities regardless of when that right may be exercisable, 
exchangeable or convertible. At the same time, however, holding 
derivatives that, by their terms, entitle the holder to nothing more 
than economic exposure to a covered class historically has not been 
considered sufficient to constitute beneficial ownership.\87\
---------------------------------------------------------------------------

    \85\ Adoption of Beneficial Ownership Disclosure Requirements, 
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)]. 
The Commission emphasized that ``[a]n analysis of all relevant facts 
and circumstances in a particular situation is essential in order to 
identify each person possessing the requisite voting power or 
investment power.'' Id. at 12344.
    \86\ Acquisitions, Tender Offers, and Solicitations, Release No. 
34-8392 (Aug. 30, 1968) [33 FR 14109 (Sept. 18, 1968)].
    \87\ Commission Guidance on the Application of Certain 
Provisions of the Securities Act of 1933, the Securities Exchange 
Act of 1934, and Rules thereunder to Trading in Security Futures 
Products, Release No. 34-46101 (June 21, 2002) [67 FR 43234 (June 
27, 2002)] (stating the interpretive view that economic exposure 
through cash-settled securities futures does not confer beneficial 
ownership); Adoption of Beneficial Ownership Disclosure 
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at 
12348 (Mar. 3, 1977)] (indicating that amended Rule 13d-3 ``does not 
expressly encompass those proposals relative to economic interests--
such as the right to receive or the power to direct the receipt of 
dividends from, or the proceeds from the sale of securities''); 
Filing and Disclosure Requirements Relating to Beneficial Ownership, 
Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 18493 (Apr. 28, 
1978)] (stating that ``traditional economic benefits--i.e., the 
right to receive dividends or sale proceeds--are not included as 
criteria for defining beneficial ownership'').
---------------------------------------------------------------------------

    Over the years, commenters have raised concerns about the fact that 
current Rule 13d-3 fails to explicitly address the circumstances in 
which an investor in a cash-settled derivative may influence or control 
an issuer by pressuring a counterparty to make certain decisions 
regarding the voting and disposition of substantial blocks of 
securities.\88\ An investor in a cash-settled derivative may be 
positioned, by virtue of its commercial relationship with a 
counterparty, to acquire any reference securities that the

[[Page 13861]]

counterparty may acquire to hedge the economic risk of that 
transaction, including any obligations that may arise in connection 
with settlement.\89\ Entry into the agreement governing the derivative 
may, therefore, result in a rapid accumulation of a covered class by a 
counterparty similar to the types of accumulations that prompted 
Congress to enact Section 13(d). In addition, if institutional 
counterparties hold sizable positions of reference securities with a 
view toward future sales to holders of cash-settled derivative 
securities, a regulatory concern arises under Rule 13d-3(b).\90\ For 
example, if an arrangement or understanding exists outside of the terms 
of a derivative instrument that enables an investor to acquire the 
reference securities from a counterparty, the reference securities 
could be viewed as having been impermissibly ``parked'' with the 
counterparty on behalf of the derivative holder.\91\
---------------------------------------------------------------------------

    \88\ See, e.g., Maria Lucia Passador, The Woeful Inadequacy of 
Section 13(d): Time for a Paradigm Shift,  13 Va. L. & Bus. Rev. 
279, 296-99 (2019) (``[I]n the recent past, cash-settled equity 
derivatives--mainly call and security-based options--were frequently 
used not only with a speculative and hedging purpose, but also with 
the immediate, explicit, and specific aim of silently accumulating a 
leading (or even control) position in public companies.''); Wachtell 
Petition, supra note 17, at 8 (``Even in the absence of voting or 
dispositive power, participants in large hedging transactions gain 
influence in a number of ways. . . . [V]oting of the shares may be 
subject to counterparty influence or control, either directly or 
because the counterparty is motivated to vote the hedged shares in a 
way that will please the investor and induce them to continue to 
transact with such counterparty. . . . Even those derivatives that 
are characterized as `cash-settled' may ultimately be settled in 
kind, creating further market pressure as the participants need to 
acquire shares for such settlement.'').
    \89\ See infra Section III.C.2.a.
    \90\ Rule 13d-3(b) deems persons to be the beneficial owners of 
a covered class if they have used an arrangement that otherwise 
prevented the vesting of beneficial ownership as part of a plan or 
scheme to evade Section 13(d) or 13(g). 17 CFR 240.13d-3(b).
    \91\ The Commission has pursued beneficial ownership reporting 
violations at least twice based on the unreported ``parking'' of 
equity securities with another party where such securities are 
essentially held in reserve for the benefit of the party with the 
intention to control or ultimately acquire them. See SEC v. First 
City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). In that case, 
the Commission charged First City Financial Corp. with using a 
parking arrangement with Bear, Stearns Cos. to avoid filing a 
Schedule 13D. After First City had acquired 4.9 percent of the stock 
of Ashland Oil, Inc., Bear Stearns agreed to acquire stock on behalf 
of First City and to sell the stock to First City once a sizable 
position was obtained. The district court concluded that First City 
deliberately attempted to circumvent the law. See SEC v. First City 
Fin. Corp., 688 F. Supp. 705 (D.D.C. 1988); see also SEC v. Boyd L. 
Jefferies, Lit. Rel. No. 11370 (Mar. 19, 1987).
---------------------------------------------------------------------------

    The use of cash-settled derivative securities in the change of 
control context also may serve as a catalyst for related acquisitions 
of beneficial ownership by institutional counterparties that ultimately 
could contribute to a shift in corporate control.\92\ The Commission 
previously determined that the ``concentration of voting power in a 
single block and its transferability are material information to the 
market.'' \93\ Holders of cash-settled derivatives also may have 
incentives to influence or control outcomes at the issuer of the 
reference security just as they would if they directly owned the 
reference security outright. Although holders of derivatives settled 
exclusively in cash ordinarily would lack the express legal power under 
the terms of such instruments to direct the voting or disposition of a 
covered class, such holders may possess economic power that can be used 
to produce desired outcomes through engagement with a counterparty or 
the issuer of the reference security and potentially could impact the 
stock price.\94\ An unwinding of agreements governing cash-settled 
derivatives also could adversely impact the stock price of an issuer, 
just as if the holder of the cash-settled derivative held the stock 
directly, instead of the counterparty, and sold sizable blocks of such 
shares. Consequently, counterparty dispositions of reference securities 
at the conclusion of a cash-settled derivative agreement, should they 
occur all together or involve high concentrations of beneficial 
ownership, may impair the orderly operation and efficiency of our 
capital markets. In the event of a default, these derivative positions 
could not only adversely impact counterparties, but also issuers of 
reference securities, the markets and other market participants. At a 
minimum, greater transparency could influence counterparties' risk 
management decisions. Proposed Rule 13d-3(e) is thus designed to make 
information available about any large positions in cash-settled 
derivative securities and, by implication, the related reference 
securities. Under specified conditions, if holders of cash-settled 
derivatives were deemed beneficial owners of the reference securities 
in combination with the other amendments proposed in this release, the 
resulting disclosures could alert issuers and the market to the 
possibility of rapid accumulations of, and high concentrations in, a 
covered class.\95\
---------------------------------------------------------------------------

    \92\ Filing and Disclosure Requirements Relating to Beneficial 
Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 18484 at 
18486 (Apr. 28, 1978)] (explaining that the need for disclosure had 
been recently underscored by the pivotal role played by investment 
managers holding large blocks of stock in surprise tender offers).
    \93\ See Reporting of Beneficial Ownership in Publicly-Held 
Companies, Release No. 34-26598 (Mar. 6, 1989) [54 FR 10552 (Mar. 6, 
1989)].
    \94\ See supra note 88; see also Theodore N. Mirvis et al., 
Beneficial Ownership of Equity Derivatives and Short Positions--A 
Modest Proposal to Bring the 13D Reporting System into the 21st 
Century, Wachtell, Lipton, Rosen & Katz (Mar. 3, 2008) at 2-3, 
available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.15395.08.pdf (noting that derivative securities ``often have 
substantial effects on the securities and issuers involved'' and 
that ``[t]he counterparties to these arrangements will often hedge 
their positions by buying or selling the underlying securities, 
which may have material effects in the trading of the relevant 
security'').
    \95\ Section 13(d) was intended to ``alert the market place to 
every large, rapid aggregation or accumulation of securities, 
regardless of technique employed, which might represent a potential 
shift in corporate control.'' GAF Corp. v. Milstein, 453 F.2d 709, 
717 (2d. Cir. 1971), cert denied, 406 U.S. 910 (1972).
---------------------------------------------------------------------------

    By extending Rule 13d-3 to include certain persons who purchase 
cash-settled equity-based derivatives, investors, issuers and other 
market participants should have greater transparency regarding persons 
with significant interests in an issuer's equity securities and 
potential control intent. In particular, the proposed amendment to Rule 
13d-3 could address concerns that financial product innovation has 
outpaced the reach of a rule provision first adopted by the Commission 
in 1968. Cash-settled derivatives imitate the economic performance of a 
direct investment in an issuer's equity securities and, in turn, may 
economically empower the holders of such derivatives to influence the 
issuer or the price of its securities.\96\ Under current Rule 13d-3, 
however, the holder of the cash-settled derivative generally is not 
subject to beneficial ownership reporting obligations. Given such 
person's potential to influence or change control of the issuer, we are 
proposing an amendment that would, in specified circumstances, deem the 
holder of a cash-settled derivative security to be the beneficial owner 
of the reference security. For the reasons set forth above and as 
explained more fully below, we believe such an amendment is necessary 
for the protection of investors and appropriate in order to achieve the 
purpose of Section 13(d). We also believe that requiring reporting 
based wholly or partly upon the holding of such positions would be in 
the public interest.
---------------------------------------------------------------------------

    \96\ See supra note 88.
---------------------------------------------------------------------------

2. Proposed Amendment
    As noted above, we are proposing to amend Rule 13d-3 to add new 
paragraph (e). Like Rules 13d-3(b) and (d)(1), proposed Rule 13d-3(e) 
would provide that holders of certain cash-settled derivative 
securities will be ``deemed'' a beneficial owner of the reference 
securities in a covered class.\97\

[[Page 13862]]

Specifically, proposed Rule 13d-3(e)(1) would provide that a holder of 
a cash-settled derivative security \98\ shall be deemed the beneficial 
owner of equity securities in the covered class referenced by the 
derivative security if such person holds the derivative security with 
the purpose or effect of changing or influencing the control of the 
issuer of such class of equity securities, or in connection with or as 
a participant in any transaction having such purpose or effect.\99\ As 
discussed in more detail below, the concept ``purpose or effect of 
changing or influencing the control of the issuer'' is a familiar one 
under Regulation 13D-G,\100\ both in the context of determining whether 
a person is a beneficial owner under Rule 13d-3 \101\ and for purposes 
of determining whether a beneficial owner is eligible to report on 
Schedule 13G in lieu of Schedule 13D under Rule 13d-1.\102\ As such, we 
believe that use of this phrase in proposed Rule 13d-3(e) would ease 
the administrative burdens associated with application of this proposed 
provision.
---------------------------------------------------------------------------

    \97\ It is possible under our current regulatory framework that 
a holder of a cash-settled derivative security could be deemed the 
beneficial owner of the reference securities under Rule 13d-3(b) by 
virtue of their counterparty relationships if such relationships 
constitute ``a plan or scheme to evade the reporting requirements of 
section 13(d) or (g).'' 17 CFR 240.13d-3(b). Application of that 
rule, however, would require an examination of the facts and 
circumstances surrounding the relationship between the holder of a 
cash-settled derivative security and its counterparty, the 
intentions of the parties with respect to such relationship and the 
effect of such relationship on the holder's beneficial ownership of 
the reference securities. Id. By contrast, proposed Rule 13d-3(e) 
would require a comparatively less extensive and more streamlined 
inquiry in order for a holder of a cash-settled derivative security 
to be deemed the beneficial owner of the reference securities, 
focusing predominantly on whether the derivative security is held 
with the purpose or effect of changing or influencing the control of 
the issuer of the reference securities.
    \98\ For purposes of proposed Rule 13d-3(e), the term 
``derivative security'' would have the meaning set forth in 17 CFR 
240.16a-1(c) (``Rule 16a-1(c)''). See Rule 16a-1(c) (defining 
``derivative securities'' as including certain rights, such as 
options, warrants, convertible securities, stock appreciation rights 
or similar rights ``with an exercise or conversion privilege at a 
price related to an equity security, or similar securities with a 
value derived from the value of an equity security,'' excluding 
certain enumerated rights, obligations, interests and options). As 
discussed infra notes 110-114 and the accompanying text, however, 
for purposes of proposed Rule 13d-3(e), the term ``derivative 
security'' does not include security-based swaps, as defined in 
Section 3(a)(68) of the Exchange Act and the rules and regulations 
thereunder.
    \99\ The provision at 17 CFR 240.12b-2 (``Rule 12b-2 of 
Regulation 12B'') defines the term ``control'' to mean ``the 
possession, direct or indirect, of the power to direct or cause the 
direction of the management and policies of a person, whether 
through the ownership of voting securities, by contract, or 
otherwise.'' The provision at 17 CFR 240.12b-1 sets forth the scope 
of Regulation 12B, and provides that all rules contained in 
Regulation 12B ``shall govern . . . all reports filed pursuant to 
section[ ] 13.''
    \100\ See, e.g., 17 CFR 240.13d-102. Under Item 10 of Schedule 
13G, QIIs and Passive Investors must certify that the ``securities . 
. . were not acquired and are not held for the purpose of or with 
the effect of changing or influencing the control of the issuer.'' 
Id.
    \101\ See 17 CFR 240.13d-3(d)(1)(i) (providing that ``any person 
who acquires a security or power specified in paragraph[ ] (d)(1)(i) 
. . . with the purpose or effect of changing or influencing the 
control of the issuer, or in connection with or as a participant in 
any transaction having such purpose or effect'' shall be deemed a 
beneficial owner immediately upon such acquisition).
    \102\ See 17 CFR 240.13d-1(b)(1)(i), (c)(1) and (e)(1)(i). In 
addition to these provisions, Rules 13d-3(b) and 13d-5(b)(2)(ii) 
also incorporate a ``purpose or effect'' standard.
---------------------------------------------------------------------------

    Persons who acquire and hold cash-settled derivative securities 
with the purpose or effect of changing or influencing control of the 
issuer may seek to use their position to influence the voting, 
acquisition or disposition of any shares the counterparty may have 
acquired in a hedge, proprietary investment or otherwise. Moreover, the 
economic realities of the counterparty relationship mean that, even 
absent an express right to direct the voting, acquisition or 
disposition of such shares, the holders of cash-settled derivative 
securities could be well-positioned to pursue a change in control. The 
derivative holder's counterparty may have a business relationship to 
develop and protect, and thus may ultimately cast votes in accordance 
with the preference of the derivative holder. Even if any counterparty 
shares are not voted, the derivative holder's probability of success in 
exerting influence or control over the issuer of the reference security 
may increase given that any voting power the derivative holder held 
would be magnified by minimizing the number of shares that potentially 
could be voted against its plans or proposals. Similarly, while the 
terms of the derivative instrument may only provide for settlement in 
cash, these types of derivative holders could remain in a position to 
acquire any reference securities that the counterparty may acquire to 
hedge the economic risk of that transaction. In recognition that an 
investment in a cash-settled derivative instrument could be converted 
into direct holdings of the reference security via an amendment to the 
instrument or otherwise, persons who use cash-settled derivatives also 
may present these economic positions to an issuer or its shareholders 
as a basis on which they should engage with them.\103\ These persons, 
therefore, hold their cash-settled derivative securities in a manner 
that implicates the policies underlying Section 13(d).\104\
---------------------------------------------------------------------------

    \103\ See infra note 263 and accompanying text.
    \104\ See Filing and Disclosure Requirements Relating to 
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 
18484 at 18484 (Apr. 28, 1978)] (noting that Section 13(d)'s 
legislative history indicates that the purpose of that section is 
``to provide information to the public and the affected issuer about 
rapid accumulations of its equity securities'' by ``persons who 
would then have the potential to change or influence control of the 
issuer'').
---------------------------------------------------------------------------

    Proposing that application of Rule 13d-3(e) be conditioned on a 
person holding the derivative security with the purpose or effect of 
changing or influencing the control of the issuer of such class of 
equity securities, or in connection with or as a participant in any 
transaction having such purpose or effect is consistent with other 
provisions of our beneficial ownership rules. Rule 13d-3(d)(1) contains 
this same condition. Specifically, Rule 13d-3(d)(1) provides that if a 
right has been acquired for the purpose or with the effect of changing 
or influencing control of the issuer of securities, the holder of that 
right is immediately treated as a beneficial owner of the underlying 
class of equity securities regardless of when that right may be 
exercisable, exchangeable or convertible. In such instances, the holder 
of such a right would not be entitled to voting or investment power 
over the underlying security for a substantial period of time that may 
extend far beyond 60 days. Nonetheless, the Commission believed it 
appropriate to immediately deem these persons to be the beneficial 
owners of such underlying securities because it recognized that such a 
right, when acquired for the purpose or with the effect of changing or 
influencing control, can be used to influence the control of the issuer 
even before the right is exercisable.\105\ We recognize that cash-
settled derivative securities differ from the rights covered under Rule 
13d-3(d)(1) in that they ordinarily do not entitle their holders to 
acquire the reference securities. To the extent such derivative 
security is held with the purpose or effect of changing or influencing 
the control of the issuer, however, we believe that the potential for a 
holder of a cash-settled derivative security to exert influence on a 
counterparty that may directly hold the reference securities implicates 
the same concerns that the Commission articulated in adopting Rule 13d-
3(d)(1). Thus, we believe that deeming such holders to be beneficial 
owners of the reference securities would be consistent with the 
Commission's longstanding view of the right to acquire beneficial 
ownership as described in Rule 13d-3(d)(1).
---------------------------------------------------------------------------

    \105\ Id. at 18490 (stating that ``the acquisition of [such a 
right] offers a distinct possibility for actions which are for the 
purpose or with the effect of changing or influencing control'' 
including, for example, ``obtaining an interest in a block of 
securities large enough to influence control, or in coupling an 
option with an agreement concerning the composition of the board of 
directors'').
---------------------------------------------------------------------------

    In addition, as with the treatment of in-kind-settled derivative 
securities under Rule 13d-3(d)(1)(i), proposed paragraph (e)(1) also 
would include a provision stating that any securities that are not 
outstanding but are referenced by the relevant cash-settled derivative 
security will be deemed to be

[[Page 13863]]

outstanding for the purpose of calculating the percentage of the 
relevant covered class beneficially owned by the holder of the 
derivative security. Those reference securities, however, will not be 
deemed to be outstanding for the purpose of any other person's 
calculation of the percentage of the covered class it beneficially 
owns.
    The disclosures that would be made in a Schedule 13D as a result of 
treating holders of cash-settled derivative securities as beneficial 
owners would provide needed transparency regarding the potential to 
influence or control the issuer of the reference security. If cash-
settled derivative holders with an intent to influence or control the 
issuer become Schedule 13D filers based on their economic exposure to 
the reference security as a result of the proposed amendment to Rule 
13d-3, then their plans or proposals would become publicly available. 
At present, such intentions remain undisclosed unless the person is 
determined to be a beneficial owner under Rule 13d-3 on other grounds.
    Proposed paragraph (e)(2) of Rule 13d-3 would set forth the formula 
for calculating the number of equity securities that a holder of a 
cash-settled derivative will be deemed to beneficially own pursuant to 
paragraph (e)(1). This provision is necessary because derivatives may 
not always have a perfect ``one-to-one'' relationship to the reference 
security. Instead, the value of the derivative security, although based 
on the value of a reference security, may change at a multiple or 
fraction to any change in value of the reference security, particularly 
in the case of a security option. This difference in the amount by 
which the value of a derivative security changes as compared to the 
amount by which the value of the reference security changes is referred 
to as the ``delta.'' For example, a $1 change in the value of the 
reference security may result in a $2 change in the value of the 
derivative security. In that case, the delta of the derivative security 
would be equal to two. If the delta of a derivative security is equal 
to one, then the value of the derivative security perfectly tracks the 
changes in value of the reference security. Calculation of beneficial 
ownership pursuant to a derivative security is easier in these 
circumstances because of the perfect one-to-one relationship between 
the derivative security and the reference security.
    Proposed paragraph (e)(2) applies these concepts for purposes of 
determining the number of securities that a holder of a cash-settled 
derivative will be deemed to beneficially own pursuant to paragraph 
(e)(1). Proposed paragraph (e)(2)(ii) of Rule 13d-3 defines ``delta'' 
to mean, with respect to a derivative security, the ratio that that is 
obtained by comparing (x) the change in the value of the derivative 
security to (y) the change in the value of the reference equity 
security. Proposed paragraph (e)(2)(i) provides that the number of 
securities that a holder of such derivative security will be deemed to 
beneficially own pursuant to paragraph (e)(1) will be the larger of two 
calculations, set forth in proposed paragraphs (e)(2)(i)(A) and (B), in 
each case as applicable. If applicable, proposed paragraph (e)(2)(i)(A) 
would calculate the number of securities as the product of (x) the 
number of securities by reference to which the amount payable under the 
derivative security is determined multiplied by (y) the delta of the 
derivative security.\106\ Proposed paragraph (e)(2)(i)(B), if 
applicable, would calculate the number of securities by (x) dividing 
the notional amount of the derivative security by the most recent 
closing market price of the reference equity security, and then (y) 
multiplying such quotient by the delta of the derivative security.\107\
---------------------------------------------------------------------------

    \106\ As an illustration of the application of this proposed 
rule, a holder of a derivative security with a delta equal to one 
that references 100 shares of a covered class of common stock would 
be deemed to beneficially own 100 shares of such covered class. If, 
however, that derivative security had a delta equal to two, then 
such holder would be deemed to beneficially own 200 shares of such 
covered class, calculated as (x) the 100 shares of common stock 
referenced by the derivative security multiplied by (y) the 
derivative security's delta of two.
    \107\ As an illustration of the application of this proposed 
rule, if a person holds a derivative security with a notional amount 
of $100 and a delta equal to one that references a covered class of 
common stock with a most recent closing market price of $10 per 
share, then that person would be deemed to beneficially own 10 
shares of such covered class. If, however, that same derivative 
security had a delta equal to two, then such person would be deemed 
to beneficially own 20 shares of such covered class, calculated as 
(x) the quotient obtained by dividing the $100 notional amount of 
the derivative security by the $10 per share most recent closing 
market price, (y) multiplied by the derivative security's delta of 
two.
---------------------------------------------------------------------------

    Proposed paragraph (e)(2)(i)(A) would be applicable if the 
agreement governing the terms of the derivative security provides a way 
to calculate the number of reference securities on which the amount 
payable pursuant to that security is based. Proposed paragraph 
(e)(2)(i)(B) would be applicable if the agreement governing the terms 
of the derivative security does not provide such a methodology for 
determining the applicable number of reference securities. Thus, there 
will be some derivative securities to which proposed paragraph 
(e)(2)(i)(A) will be inapplicable (i.e., those derivative securities 
for which the agreement does not provide a way to calculate the number 
of reference securities on which the amount payable pursuant to that 
security is based). On the other hand, proposed paragraph (e)(2)(i)(B) 
will be applicable to all derivative securities (i.e., because the 
calculation set forth in that paragraph can be performed regardless of 
whether the agreement governing the terms of the derivative security 
provides a methodology for determining the applicable number of 
reference securities). As such, to address those scenarios in which 
both paragraphs (e)(2)(i)(A) and (B) apply, paragraph (e)(2)(i) 
provides that the number of securities that a holder of a derivative 
security will be deemed to beneficially own pursuant to paragraph 
(e)(1) will be the larger of the two amounts yielded by those 
paragraphs.
    The proposed amendment to Rule 13d-3 also includes three notes to 
paragraph (e)(2). The first note provides that, for purposes of 
determining the number of equity securities that a holder of a cash-
settled derivative security will be deemed to beneficially own, only 
long positions in derivative securities should be counted. Short 
positions, whether held directly against a covered class or 
synthetically through a cash-settled derivative security, should not be 
netted against long positions or otherwise taken into account.\108\ The 
second note provides that, when calculating the number of securities 
that a holder of such derivative security will be deemed to 
beneficially own pursuant

[[Page 13864]]

to paragraph (e)(1), the calculation in paragraph (e)(2)(i)(B) should 
be performed on a daily basis. Similarly, the third note provides that 
if a derivative security does not have a fixed delta (i.e., if the 
delta is variable and changes over the term of the derivative 
security), then a person who holds such derivative security should 
calculate the delta on a daily basis, for purposes of determining the 
number of equity securities that such person will be deemed to 
beneficially own, based on the closing market price of the reference 
equity security on that day. Although we recognize that such daily 
calculations may impose administrative burdens on holders of derivative 
securities, this approach will help to ensure the accuracy of 
beneficial ownership reporting and is consistent with the approach 
taken by at least one foreign jurisdiction.\109\
---------------------------------------------------------------------------

    \108\ ``Short positions,'' such as those within the meaning of 
the term as defined in 17 CFR 240. 14e-4(a)(1)(ii) (``Rule 14e-
4(a)(1)(ii)''), are not treated as beneficial ownership under 
current Rule 13d-3. In addition, Section 13(d)(1) applies to persons 
who ``acquire'' beneficial ownership, and the aggregate amount of 
beneficial ownership held, as determined under Rule 13d-3(c), 
including certain contingent interests in a covered class, is 
required to be reported. As such, a beneficial owner subject to 
Section 13(d) or 13(g) reports its capacity to vote or dispose of a 
covered class whether through power it directly or indirectly holds 
or is deemed to hold under Rule 13d-3(d) by virtue of its contingent 
interest. The regulatory framework, therefore, only applies to 
persons who hold the equivalent of a ``long position'' within the 
meaning of the term as defined in Rule 14e-4(a)(1)(i). Persons who 
hold ``short positions'' have no such capacity to vote or dispose of 
a covered class and thus are beyond the scope of Sections 13(d) and 
13(g) and Regulation 13D-G with the exception that a beneficial 
owner that otherwise must report on Schedule 13D may incur 
disclosure obligations with respect to any short sale activity, such 
as those arising under Item 6 of Schedule 13D. See 17 CFR 240.13d-
101 (requiring disclosure of ``any contracts . . . with respect to . 
. . any securities of the issuer''). A beneficial owner is not 
required to report its ``net long position'' within the meaning of 
such term as defined in Rule 14e-4(a)(1), and we are not currently 
proposing any changes in this regard.
    \109\ See DTR 5.3.3C, Recital 7 (Jan. 1, 2021), available at 
https://www.handbook.fca.org.uk/handbook/DTR/5/?view=chapter (``In 
order to ensure that information about the total number of voting 
rights accessible to the investor is as accurate as possible, delta 
should be calculated daily taking into account the last closing 
price of the underlying share.'').
---------------------------------------------------------------------------

    Finally, proposed Rule 13d-3(e) would exclude from its purview 
security-based swaps, as defined in Section 3(a)(68) of the Exchange 
Act and the rules and regulations thereunder.\110\ In a separate 
rulemaking, the Commission has proposed to require disclosure of 
security-based swap positions.\111\ Specifically, proposed 17 CFR 
240.10B-1 (``Rule 10B-1'') would require public reporting on Schedule 
10B of, among other things: (1) Certain large positions in security-
based swaps; (2) positions in any security or loan underlying the 
security-based swap position; and (3) any other instrument relating to 
the underlying security or loan or group or index of securities or 
loans.\112\ As described in more detail in the related proposing 
release, proposed Rule 10B-1 would include specific quantitative 
thresholds for when public reporting is required and include a schedule 
of all of the information that must be reported.\113\ We believe that 
the position disclosures with respect to cash-settled security-based 
swaps required under our proposed Rule 10B-1, if adopted, would provide 
sufficient information regarding holdings of security-based swaps such 
that additional regulation under Regulation 13D-G at this time would be 
unnecessarily duplicative.\114\ Further, to the extent that investors 
seek to use cash-settled derivatives other than security-based swaps in 
order to bypass the disclosures that Rule 10B-1 would require, Rule 
13d-3(e), if adopted, would help prevent the exploitation of any 
regulatory gap between Schedule 10B and Schedule 13D that might 
otherwise exist.
---------------------------------------------------------------------------

    \110\ Proposed Rule 13d-3(e) is not subject to Exchange Act 
Section 13(o). Section 13(o) provides that a person shall be 
``deemed'' a beneficial owner of an equity security based on the 
purchase or sale of a security-based swap ``only to the extent that 
the Commission determines after consultation with the prudential 
regulators and the Secretary of the Treasury, that the purchase or 
sale of the security-based swap, or class of security-based swap, 
provides incidents of ownership comparable to direct ownership of 
the equity security, and that it is necessary to achieve the 
purposes of this section that the purchase or sale of the security-
based swaps, or class of security-based swap, be deemed the 
acquisition of beneficial ownership of the equity security.'' 
Section 13(o) applies to security-based swaps and does not apply to 
other types of derivative securities. Because proposed Rule 13d-3(e) 
does not cover security-based swaps, Section 13(o) is inapplicable 
to the proposed requirement.
    \111\ Prohibition Against Fraud, Manipulation, or Deception in 
Connection with Security-Based Swaps; Prohibition against Undue 
Influence over Chief Compliance Officers; Position Reporting of 
Large Security-Based Swap Positions, Release No. 34-93784 (Dec. 15, 
2021) [87 FR 6652 (Feb. 4, 2022)].
    \112\ Id. at 6657.
    \113\ Id. For example, a person would be required to file a 
Schedule 10B once the ``Security-Based Swap Equivalent Position'' 
(as described in the proposing release for Rule 10B-1 [87 FR 6652 
(Feb. 4, 2022)]) represents more than 5% of a class of equity 
securities. Id. at n.138 and accompanying text.
    \114\ But see Beneficial Ownership Reporting Requirements and 
Security-Based Swaps, Release No. 34-64628 (June 8, 2011) [76 FR 
34579 (June 14, 2011)] (readopting without change the relevant 
portions of Rules 13d-3 and 16a-1 to preserve the application of 
those rules to persons who purchased or sold security-based swaps 
after the effective date of Section 13(o) by making the 
determinations required by Section 13(o) after consultation with 
prudential regulators and the Secretary of the Treasury).
---------------------------------------------------------------------------

Request for Comment
    42. Should we amend Rule 13d-3 as proposed to deem persons who 
acquire or hold cash-settled derivative securities with the purpose or 
effect of changing or influencing the control of the issuer, or in 
connection with or as a participant in any transaction having such 
purpose or effect, as beneficial owners? Would the proposed rule 
sufficiently reduce the opportunities for persons to utilize cash-
settled derivative securities to evade reporting under Section 13(d)?
    43. Would the circumstances in which a holder acquires or holds a 
cash-settled derivative security with the purpose or effect of changing 
or influencing the control of the issuer be reasonably determinable? 
Should we provide further guidance on this point? Rather than amending 
Rule 13d-3 to deem as beneficial owners persons who acquire or hold 
cash-settled derivative securities with the purpose or effect of 
changing or influencing the control of the issuer, should we 
incorporate standards for establishing when a person becomes a 
beneficial owner that are more objectively determinable? For example, 
should we identify more specific indicia such as any of the plans 
described in Item 4 of Schedule 13D?
    44. Can a cash-settled derivative be used to influence or change 
the control of an issuer? If so, please explain how the terms of the 
derivative security or the derivative investor's relationship with a 
counterparty can effectuate that influence or change in control. For 
example, are cash-settled derivative contracts executed on a scale 
large enough to impact the voting by counterparties and thus the 
margins of victory on proposals put forth by the issuer of a covered 
class for shareholder approval?
    45. Instead of treating holders of cash-settled derivative 
securities as beneficial owners, should we instead amend Schedule 13D 
and Schedule 13G to expressly include more comprehensive line item 
disclosure requirements concerning the use of cash-settled derivative 
securities? For example, should Item 6 of Schedule 13D be further 
revised to ask for a full description of any cash-settled derivative's 
material terms, and Item 7 of Schedule 13D be revised to explicitly 
require the filing of cash-settled derivative instruments as an 
exhibit?
    46. Regardless of whether proposed Rule 13d-3(e) is adopted, should 
the Commission increase the 60-day time period specified in Rule 13d-
3(d)(1) so that persons who hold contingent interests in a covered 
class will be deemed beneficial owners earlier? If so, would 90, 120, 
180 or some greater number of days serve as the optimal date by which 
to deem persons who hold such interests, such as derivative holders, as 
beneficial owners?
    47. For purposes of proposed Rule 13d-3(e), the term ``derivative 
security'' would have the meaning set forth in Rule 16a-1(c), excluding 
security-based swaps. Are there other types of derivatives (other than 
security-based swaps) that should be included within the purview of 
proposed Rule 13d-3(e) that are not included in the scope of the term 
``derivative securities,'' as defined in Rule 16a-1(c)? For purposes of 
Rule 13d-3(e), should rights with an exercise or conversion privilege 
at a price that is not fixed, which Rule 16a-1(c)(6) excludes from the 
term ``derivative securities'' in Rule 16a-1(c), be included?
    48. Is our proposed inclusion of the concept of ``delta'' in Rule 
13d-3(e) appropriate? If so, are the proposed

[[Page 13865]]

application and definition of ``delta'' in Rules 13d-3(e)(2)(i) and 
(ii), respectively, appropriate for purposes of determining the number 
of equity securities that a holder of a cash-settled derivative 
security is deemed to beneficially own?
    49. For securities where the ``delta,'' as we propose to define it, 
is not equal to 1, is our proposed calculation of the number of 
securities beneficially owned appropriate? Should the calculation be 
performed in another way? For example, should the calculation be 
limited to the number of reference securities contemplated by the 
instrument?
    50. Should we include the three proposed notes to Rule 13d-3(e)(2)? 
Should only long positions in derivative securities be counted for 
purposes of determining the number of equity securities that a holder 
of a cash-settled derivative security will be deemed to beneficially 
own, as proposed? As an alternative to proposed Note 1 to Rule 13d-
3(e)(2), should short positions in cash-settled derivative securities 
be netted against long positions or otherwise taken into account for 
purposes of determining the number of equity securities that a holder 
of a cash-settled derivative security will be deemed to beneficially 
own? If not, how should they be taken into account? For purposes of 
Notes 2 and 3 to Rule 13d-3(e)(2), is ``daily,'' as proposed, the 
appropriate frequency, or should those calculations be performed with a 
different frequency (e.g., on a weekly or monthly basis)? Is the 
proposed daily frequency of these calculations unduly burdensome on 
holders of cash-settled derivative securities? Other than the frequency 
with which the calculation must be performed, are there other 
difficulties associated with these calculations that would also make 
them burdensome?
    51. For purposes of the calculations in Rule 13d-3(e)(2)(i)(B) and 
Note 3 to Rule 13d-3(e)(2), is the closing market price of the 
reference equity security, as proposed, the appropriate basis for those 
calculations, or is there a different basis that is more appropriate 
(e.g., the volume-weighted average trading price of the reference 
equity security throughout a given day)?
    52. Could the daily calculation requirements in proposed Notes 2 
and 3 to Rule 13d-3(e)(2) result in situations in which a person's 
beneficial ownership does not exceed 5% of a covered class at the time 
that person acquires a derivative security, but then exceeds 5% at a 
later time solely by virtue of the fact that the closing market price 
of the reference equity security or the delta of the derivative 
security, as applicable, has changed (i.e., not as a result of any 
further acquisitions)? If so, would it be appropriate to subject that 
person to the obligations of the beneficial ownership reporting regime 
under such circumstances?
    53. Would proposed Rule 10B-1 provide sufficient information 
regarding holdings of cash-settled security-based swaps such that 
beneficial ownership reporting of cash-settled security-based swaps 
under Regulation 13D-G is unnecessary, or should beneficial ownership 
derived from cash-settled security-based swaps be included under 
Regulation 13D-G? If the information regarding holdings of cash-settled 
security-based swaps that would be required pursuant to proposed Rule 
10B-1 were not available, would there be a need for the beneficial 
ownership derived from cash-settled security-based swaps to be included 
under Regulation 13D-G?

C. Proposed Amendments to Rule 13d-5 to Affirm Its Application and 
Operation

    We are proposing a series of amendments to Rule 13d-5 to clarify 
and affirm its application to two or more persons who ``act as'' a 
group under Sections 13(d)(3) and (g)(3) of the Exchange Act. 
Specifically, we are proposing to amend Rule 13d-5 to:
     Change the title of the rule from ``Acquisition of 
securities'' to ``Acquisition of beneficial ownership'' to more 
accurately reflect the purpose, application and operation of the rule 
and ensure its consistency with Section 13(d)(1);
     Revise Rule 13d-5(a) to conform the text to the new title 
and Section 13(d);
     Redesignate paragraph (b)(1) as paragraph (b)(1)(i) and 
revise it to remove the potential implication that it sets forth the 
exclusive legal standard for group formation under Section 13(d)(3) or 
13(g)(3);
     Add new paragraph (b)(1)(ii) to specify that if a person, 
in advance of filing a Schedule 13D, discloses to any other person that 
such filing will be made and such other person acquires securities in 
the covered class for which the Schedule 13D will be filed, those 
persons shall be deemed to have formed a group within the meaning of 
Section 13(d)(3);
     Add new paragraph (b)(1)(iii) to specify that a group 
subject to reporting obligations under Section 13(d) shall be deemed to 
acquire any additional equity securities acquired by a member of the 
group after the date of the group's formation;
     Add new paragraph (b)(1)(iv) to carve out from paragraph 
(b)(1)(iii) any intra-group transfers of equity securities;
     Add new paragraph (b)(2)(i) to specify that when two or 
more persons ``act as'' a group under Section 13(g)(3) of the Act, the 
group shall be deemed to have become the beneficial owner, for purposes 
of Sections 13(g)(1) and (2) of the Act, of the beneficial ownership 
held by its members;
     Add new paragraph (b)(2)(ii) to specify that a group 
regulated under Section 13(g) shall be deemed to acquire any additional 
equity securities acquired by a member of the group after the date of 
the group's formation; and
     Add new paragraph (b)(2)(iii) to carve out from paragraph 
(b)(2)(ii) any intra-group transfers of equity securities.
    In addition, the proposed amendments would redesignate current Rule 
13d-5(b)(2) as new Rule 13d-6(b). This change is discussed both in this 
section and in Section II.D, which describes our proposed amendments to 
Rule 13d-6.
1. Background
    Sections 13(d)(3) and 13(g)(3) are identical, and each of these two 
provisions provides that ``[w]hen two or more persons act as a . . . 
group for the purpose of acquiring, holding, or disposing of securities 
of an issuer, such syndicate or group shall be deemed a `person.' '' 
Neither of these two provisions defines the term ``group.'' The 
determination of whether coordinated efforts among two or more persons 
constitutes a group subject to regulation as a single ``person'' under 
these two statutory provisions is a question of fact. Congress enacted 
these provisions based on two practical considerations. First, Sections 
13(d)(1) and 13(g)(1), by their terms, apply to, and impose filing 
obligations upon, a single ``person.'' Second, Congress recognized the 
need to protect against the evasion of disclosure requirements by 
persons who collectively sought to change or influence control of an 
issuer yet who each acquired and held an amount of beneficial ownership 
at or just below the reporting threshold.\115\
---------------------------------------------------------------------------

    \115\ Section 13(d)(3) was enacted to prevent ``easy avoidance 
of section 13(d)'s disclosure requirements by a group of investors 
acting together in their acquisition or holding of securities.'' 
Senate Report No. 550, 90th Congress, 1st Session 8 (1967); House 
Report No. 1711, 90th Congress, 2d Session 8-9 (1968); see also 113 
Cong. Record Proceedings and Debates of the 90th Congress; Bill-S. 
510 (Jan. 18, 1967) (noting that the specific provision applicable 
to groups was added to ``close the loophole that now exists which 
allows a syndicate, where no member owns more than 10 percent, to 
escape the reporting requirements of the Securities Exchange Act'').

---------------------------------------------------------------------------

[[Page 13866]]

    Congress sought to address this problem of coordinated 
circumvention by ``deeming'' two or more persons to be one person for 
purposes of Sections 13(d) and 13(g). Based on the statutory treatment 
of two or more persons as if they were one person when they ``act as'' 
a group for at least one of the three purposes specified in the 
statutory provisions (i.e., acquiring, holding or disposing of 
securities of an issuer), the beneficial ownership collectively held by 
the group members is imputed to the group. To the extent the aggregate 
amount of beneficial ownership exceeds 5% of a covered class, the group 
may be required to file a beneficial ownership report.
    In these situations, a fundamental question arises as to whether 
the group is subject to Section 13(d) or Section 13(g). The 
determination of which statutory provision applies to a group depends 
on whether a non-exempt acquisition of beneficial ownership has been 
made that can be imputed to the group, and, when on its own or added to 
any other beneficial ownership held by the group, results in beneficial 
ownership exceeding 5% of the covered class. If such an acquisition 
occurs, the group is subject to regulation under Section 13(d).\116\ To 
the extent no such acquisition attributable to the group has occurred, 
but the collective amount of beneficial ownership held by the group 
members exceeds 5% of a covered class at the end of a calendar year, 
the group is subject to Section 13(g).
---------------------------------------------------------------------------

    \116\ The operative term ``after acquiring'' in Section 13(d)(1) 
makes the application of Section 13(d) contingent upon the existence 
of an acquisition. Determining that an acquisition has occurred is 
thus necessary to establish the application of Section 13(d).
---------------------------------------------------------------------------

    Congress did not define the term ``acquisition.'' When the 
Commission proposed the predecessor to the current Rule 13d-5(a),\117\ 
it made clear that purchases would not be the exclusive means of making 
an acquisition and deemed ``certain persons who become beneficial 
owners of securities to have acquired such securities,'' even if such 
person ``had not intended, and had taken no action, to become a 
beneficial owner.'' \118\ The Commission also adopted Rule 13d-5(b) to 
address situations in which the factual record does not establish the 
existence of an acquisition attributable to a group. Following Rule 
13d-5(b)'s adoption, an acquisition by a group could thus be ``deemed'' 
to occur even in the absence of an associated market-based purchase or 
other transaction, as could be the case when a group is formed for the 
exclusive purpose of voting.\119\ Given that the acquisition which 
triggers the reporting obligation must be made by a single person, 
acquisitions occurring before the date of group formation are not 
considered ``acquisitions'' of beneficial ownership that could trigger 
a filing obligation. The requisite acquisition needed to satisfy the 
statutory element ``after acquiring,'' therefore, must occur 
contemporaneously with, or subsequent to, group formation. Without 
evidence that an acquisition attributable to the group has occurred, 
the filing deadline for a Schedule 13D also cannot be established under 
Section 13(d)(1) and corresponding Rule 13d-1(a). To address this 
concern, the Commission proposed that an acquisition was ``deemed'' to 
occur if two or more persons agreed to act together for purposes of 
acquiring, holding or disposing of any securities of the issuer. In 
adopting Rule 13d-5, the Commission explained it was ``defining 
acquisition'' and that the new provision ``deems the formation of 
certain groups of persons for the purpose of acquiring, holding or 
disposing of securities to be an acquisition which may trigger the 
reporting requirements of section 13(d), even though the group has not 
made any purchase or other acquisition subsequent to its formation.'' 
\120\ The new rule therefore provided the Commission with a mechanism 
by which it could attribute an acquisition to the group for purposes of 
not only satisfying the ``after acquiring'' element of Section 
13(d)(1), but also designating a date of ``acquisition'' needed to 
commence the 10-day filing deadline for the initial Schedule 13D.\121\
---------------------------------------------------------------------------

    \117\ The predecessor rule, Rule 13d-6, was redesignated Rule 
13d-5 in 1978. Filing and Disclosure Requirements Relating to 
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 
18484 (Apr. 28, 1978)]. Unless otherwise noted, references to Rule 
13d-5 in this section of the release also refer to the predecessor 
Rule 13d-6.
    \118\ Various Proposals Relating to Beneficial Owners and 
Holders of Record of Voting Securities, Release No. 34-11616 (Aug. 
25, 1975) [40 FR 42212 (Sept. 11, 1975)]; see also Adoption of 
Beneficial Ownership Disclosure Requirements, Release No. 34-13291 
(Feb. 24, 1977) [42 FR 12342 at 12345 (Mar. 3, 1977)] (explaining 
that ``[d]onees, executors, trustees and legatees who become 
beneficial owners will be `deemed' to have acquired such securities, 
even though such persons had not so intended and had taken no action 
to become beneficial owners'').
    \119\ See Adoption of Beneficial Ownership Disclosure 
Requirements, Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 
(Mar. 3, 1977)] (adopting Rule 13d-6(b), the predecessor to current 
Rule 13d-5(b)); Filing and Disclosure Requirements Relating to 
Beneficial Ownership, Release No. 34-14692 (Apr. 21, 1978) [43 FR 
18484 (Apr. 28, 1978)] (redesignating Rule 13d-6(b) as current Rule 
13d-5(b)). In proposing Rule 13d-6(b), the Commission was acting 
partly in response to an appellate court ruling issued in connection 
with private litigation. The appellate court found that it was 
unnecessary ``for a group to acquire additional securities if their 
combined holdings, upon formation of the group, were more than five 
percent of the class'' for purpose of Section 13(d). See GAF Corp. 
v. Milstein, 453 F. 2d 709 (2d Cir. 1971), cert. denied 400 U.S. 910 
(1972). The Milstein group was an informal arrangement in which the 
individual members were not bound to vote their shares as would be 
the case if participating in a stock pool. The alleged group also 
never had an enforceable right to vote. GAF Corporation asserted 
that certain acts should be considered evidence of a conspiracy, but 
the evidence did not show any additional purchases. The Second 
Circuit Court of Appeals held that formation of a group of 
shareholders alone, where their aggregate holdings exceed 10% of a 
particular class of securities, and where no further acquisitions 
are intended by the membership of the group, still required 
compliance with Section 13(d). In so holding, the Second Circuit 
refused to follow the ruling in Bath Industries, Inc. v. Blot, 427 
F.2d 97 (7th Cir. 1970) where the Seventh Circuit held that a group 
owning in excess of 10% of a class of securities must file only when 
further acquisitions were contemplated. Recognizing that informal 
associations could be subjected to reporting obligations upon mere 
formation, the Seventh Circuit adopted an ``additional purchase'' 
rule. Even identification of the precise date of the alleged group 
formation as the Second Circuit instructed the district court to 
find upon remand, however, would not then have determined whether an 
acquisition occurred that subjected the group to regulation under 
Section 13(d) or the latest date by which the Schedule 13D could 
have been timely filed.
    \120\ Adoption of Beneficial Ownership Reporting Requirements, 
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
    \121\ While the adopting release for Rule 13d-6(b) acknowledges 
the Commission was providing ``more objective standards'' to help 
determine the reporting obligation of groups under Section 13(d), it 
qualified such statement by indicating that the standards were being 
provided only for ``certain purposes'' rather than in every 
instance. Adoption of Beneficial Ownership Reporting Requirements, 
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 at 12342 (Mar. 3, 
1977)]. The Commission's regulatory objective should be read in the 
context of the overall impetus for the initial 1975 rule proposal, 
which did not propose to define the term ``group.'' The Commission 
further explained at adoption of Rule 13d-6(b) in 1977 that it had 
previously published, on August 25, 1975, its ``Proposals Relating 
to Disclosure of Beneficial Owners and Holders of Record of Voting 
Securities.'' As set forth therein, the Commission's 1975 ownership 
proposals, if adopted, would have ``deemed certain persons, 
including members of a group, who become beneficial owners of 
securities through non-purchase transactions to have `acquired' such 
securities.'' Id. at 12343.
---------------------------------------------------------------------------

    Given that the term ``group'' is not defined under Sections 
13(d)(3) and 13(g)(3), investors, issuers and courts historically have 
considered the circumstances under which two or more persons must 
operate in order to be found to have formed agroup.\122\

[[Page 13867]]

Notwithstanding that the regulatory framework does not require proof of 
an agreement between two or more persons as a prerequisite to 
establishing the existence of a group, some courts, in assessing group 
formation, consider an agreement among group members to be a necessary 
element.\123\
---------------------------------------------------------------------------

    \122\ In Sections 13(d)(3) and 13(g)(3), Congress identified, 
but did not define, four associations through which collective 
action may be taken by two or more persons that potentially could 
subject them to regulation under Sections 13(d) and 13(g) as a 
single person. In specifying ``partnership, limited partnership, 
syndicate,'' Congress expressly referenced three types of groupings 
of persons that, like the term ``group,'' are similarly undefined. 
To the extent two or more persons could not be found to have 
``act[ed] as a partnership, limited partnership [or] syndicate,'' 
such persons still could be found under the statutes to be jointly 
operating as any ``other group.'' The reference to ``group,'' 
therefore, is simply designed to serve as a general classification 
inclusive of the three specific, named types of associations, and 
when combined with the term ``other,'' renders the term ``other 
group'' but one of four types of associations identified by Congress 
which are susceptible to being regulated as a single person under 
Section 13(d) or 13(g).
    \123\ For example, in CSX Corporation v. Children's Inv. Fund 
Mgmt. (UK) LLP, 562 F. Supp. 2d 511 (S.D.N.Y. 2008), the district 
court referred to a ``requisite agreement'' when offering an 
analytical framework to be applied in assessing whether or not a 
group had been formed, and cited to Hallwood Realty Partners, L.P. 
v. Gotham Partners, L.P., 95 F. Supp. 2d 169, 176 (S.D.N.Y 2000), 
aff'd, 286 F.3d 613 in support of this proposition.
---------------------------------------------------------------------------

    In rendering opinions regarding group formation, some courts have 
suggested that a group can only be formed if an agreement exists among 
its purported members.\124\ These cases appear to reflect such courts' 
attempts to find a workable means of administering the Section 13(d) 
regulatory framework and making related determinations about when a 
group may be found to exist under the statute. In addition, some courts 
have construed the language of Rule 13d-5(b)(1), which provides that a 
group is formed if an agreement to act together has been reached for 
one of four purposes, as governing group formation in every instance as 
opposed to discrete instances.\125\ These decisions suggest that a 
plaintiff must prove, and by extension, a court must affirm, the 
presence of an agreement for purposes of satisfying the legal standards 
in Rule 13d-5(b)(1).
---------------------------------------------------------------------------

    \124\ One early court decision that predates the adoption of 
Rule 13d-5(b) found that a group had been formed earlier than 
reported and opined that ``absent an agreement between [the 
defendants] a `group' would not exist.'' Corenco Corp. v. Schiavone 
& Sons, Inc., 488 F.2d 207, 217 (2d Cir. 1973). Similarly, another 
court decision cited the necessity of ``sift[ing] through the record 
to determine whether there [was] sufficient direct or circumstantial 
evidence to support the inference of a formal or informal 
understanding.'' Wellman v. Dickinson, 682 F.2d 355, 363 (2d Cir. 
1979), cert. denied sub. nom. Dickinson v. SEC, 460 U.S. 1069 
(1983). The court ultimately determined that ``direct and 
circumstantial evidence supports [its] finding of an agreement 
between'' the alleged group members. Id. In another decision, the 
court reasoned that it was ``not compelled to play ostrich in the 
face of the strong circumstantial evidence demonstrating the 
existence of an agreement among [the defendants] . . . . It would 
require a degree of naivete unbecoming to this Court to believe that 
the various activities of defendants were not the product of an 
agreement among the group but, rather, were merely coincidences.'' 
Champion Parts Rebuilders, Inc. v. Cormier Corp., 661 F. Supp. 825, 
850 (N.D.Ill. 1987) (citations omitted). The court based its factual 
finding that an agreement existed on evidence indicating: (a) A 
common plan and goal; (b) a pattern of parallel and continued 
purchases over a relatively short and essentially concurrent time 
period; (c) correlation of defendants' activities and 
intercommunications, largely through their common agent; and (d) 
claims of shareholder support at the meeting with the corporation. 
Id.
    \125\ For example, the Second Circuit, finding that the district 
court in the above mentioned CSX Corporation matter did not make 
sufficient findings to permit appellate review of a group violation 
of Section 13(d), stated: ``on remand the District Court will have 
to make findings as to whether the Defendants formed a group for the 
purpose of `acquiring, holding, voting or disposing,' 17 CFR 
240.13d-5(b)(1) of [an issuer's] shares owned outright.'' CSX Corp. 
v. Children's Inv. Fund Mgmt., 2011 WL 2750913, at *4 (2d Cir. July 
18, 2011). An earlier Second Circuit opinion stated, ``the key 
inquiry in the present case is whether [the defendants] `agreed to 
act together for the purpose of acquiring, holding, voting or 
disposing of' [an issuer's] common stock. 17 CFR 240.13d-5(b)(1).'' 
Morales v. Quintel Ent., Inc., 249 F.3d I 15 (2d Cir. 2001). In a 
ruling that concluded the evidence did not establish the existence 
of a group, a district court, which acknowledged Rule 13d-5(b) when 
outlining the applicable regulatory framework, found that the 
plaintiff's complaint ``d[id] not sufficiently allege an agreed-upon 
common purpose.'' Roth v. Jennings, 2006 U.S. Dist. LEXIS 4266, 2006 
WL 278135 at *5 (S.D.N.Y. Feb. 2, 2006). On appeal, however, the 
Second Circuit criticized the district court for ascribing undue 
weight to the defendants' use of a disclaimer in public filings that 
they were not a group and found that the district court consequently 
``gave no recognition to the terms of Sec.  13(d)(3) and Rule 13d-
5(b)(1).'' Roth v. Jennings, 489 F.3d 499, 512 (2d Cir. 2007).
---------------------------------------------------------------------------

2. The Commission's View of Group Formation
    Under a plain reading of Sections 13(d)(3) and 13(g)(3), an 
agreement is not a necessary element of group formation. The text of 
Rule 13d-5(b), along with the title of Rule 13d-5, also does not 
indicate that Rule 13d-5(b) was intended to serve as the exclusive 
definition of the term ``group.'' Rule 13d-5(b) provides a standard 
applicable only for purposes of deeming an acquisition to have occurred 
where none otherwise exists. Therefore, the Commission is not required 
to invoke Rule 13d-5, and by extension, first establish that group 
members have an agreement to act together as a precondition to 
asserting that a group exists. Accordingly, the Commission is not 
precluded from imputing acquisitions to the group through other means, 
such as physical evidence or reliance upon Rule 13d-5(a), which 
provides that a person (including a group) is deemed to have acquired 
beneficial ownership when it becomes a beneficial owner by purchase or 
otherwise. The existence of an agreement between two or more persons to 
act together for at least one of the four purposes specified in the 
rule text is thus a sufficient, but not a necessary, condition for 
group formation.
    Interpreting Rule 13d-5(b) as the exclusive definition of a group 
also would run counter to the purpose and otherwise impede application 
of Sections 13(d) and 13(g).\126\ Rule 13d-5(b) applies only when the 
aggregate amount of beneficial ownership held by group members exceeds 
5% of a covered class on the date on which the group members enter into 
an agreement. If the beneficial ownership is 5% or less of a covered 
class on that date, or the ownership held is not in a covered class 
because Section 12 registration is not yet effective or otherwise, no 
statutory coverage exists and Regulation 13D-G does not apply. 
Consequently, if Rule 13d-5(b) were administered as the exclusive 
definition of group, there would be no requirement for such groups to 
report their holdings after their beneficial ownership exceeded 5% of a 
covered class, even if such groups were to make considerable post-
formation acquisitions and ultimately take control of an issuer. Such a 
reading of Rule 13d-5(b) would produce the equivalent of an exemption 
from Section 13(d) for a person (i.e., the group) that otherwise may 
make future non-exempt acquisitions that would result in the beneficial 
ownership attributable to the group exceeding 5% of a covered class. 
There is no indication that this was the Commission's intention when it 
adopted Rule 13d-5(b).\127\
---------------------------------------------------------------------------

    \126\ For example, if the Commission were to construe Rule 13d-
5(b)(1) as the exclusive definition of the term ``group,'' and thus 
make an ``agreement'' a necessary element, that would directly 
conflict with the statutory language and narrow the circumstances in 
which Sections 13(d) and 13(g) could apply.
    \127\ When proposing Rule 13d-5(b), the Commission neither 
framed the rule as a proposed definition of ``group'' nor solicited 
comment on the sufficiency or any limitations of any such 
definition. Moreover, the proposed rule text was devoid of any 
reference to the term ``group.'' See Disclosure of Corporate 
Ownership, Release No. 34-11616 (Aug. 25, 1975) [40 FR 42212 (Sept. 
11, 1975)].
---------------------------------------------------------------------------

    Furthermore, there is no indication that Congress intended for the 
analysis of whether or not a group had formed to be dependent upon the 
existence of an express or implied agreement among two or more 
persons.\128\ Sections

[[Page 13868]]

13(d)(3) and 13(g)(3) are devoid of any reference to the term ``agree'' 
or ``agreement.'' The use of ``any,'' ``understanding,'' 
``relationship'' and ``arrangement'' in the associated regulatory text 
of Rule 13d-3(a) also points to a recognition that concerted action 
need not be formalized in an agreement or otherwise expressed.\129\ 
Section 13(d)(3), given the operative ``act as'' standard, encompasses 
not only agreements in the classic contractual ``offer'' and 
``acceptance'' sense of the term \130\ but also pooling arrangements, 
whether formal or informal, written or unwritten.\131\ Congress neither 
added a state of mind element into Sections 13(d)(3) and 13(g)(3) nor 
specified that two or more persons must ``act as'' a group pursuant to 
an agreement. If the term ``agreement'' were read into Sections 
13(d)(3) and 13(g)(3) as if it were an unintentionally omitted term, 
application of Section 13(d) or 13(g) also would be limited to only a 
subset of persons who otherwise ``act as a group'' within the meaning 
of Sections 13(d)(3) and 13(g)(3) instead of all persons who act as a 
group as expressly mandated.
---------------------------------------------------------------------------

    \128\ According to the legislative history, members of Congress 
contemplated that the beneficial ownership reporting threshold--
which was first enacted as more than 10% of a covered class, but 
currently is 5% of a covered class--could be bypassed by two or more 
persons acting in concert in furtherance of a common purpose or goal 
with each person individually holding an unreportable level of 
beneficial ownership. Both the House and Senate Reports accompanying 
the bill reflect an effort to prevent circumvention of the reporting 
threshold in this situation with the inclusion of the provision that 
became Section 13(d)(3). Those reports stated that Section 13(d)(3) 
``would prevent a group of persons [w]ho seek to pool their voting 
or other interests in the securities of an issuer from evading the 
provisions of the statute because no one individual owns more than 
10 percent of the securities.'' S. Rep. No. 550, 90th Cong., 1st 
Sess. 8 (1967); H.R. Rep. No. 1711, 90th Cong. 2d Sess. 8-9 (1968), 
Reprinted in (1968) U.S. Code Cong. & Admin. News. 2811, 2818. The 
reports further stated that ``[t]he group would be deemed to have 
become the beneficial owner, directly or indirectly, of more than 10 
percent of a class of securities at the time [t]hey agreed to act in 
concert.'' Id. As such, the reports noted that Section 13(d)(3) ``is 
designed to obtain full disclosure of the identity of any person or 
group obtaining the benefits of ownership [b]y reason of any 
contract, understanding, relationship, agreement or other 
arrangement.'' Id.
    \129\ Congress sought to make visible surreptitious purchases 
executed by persons or entities that were not only not incorporated, 
but also operating without a formal alliance. The legislation was 
thus drafted to capture ``informal associations'' that otherwise 
were not subject to having their joint activities disclosed. See 
Full Disclosure of Corporate Equity Ownership and in Corporate 
Takeover Bids: Hearing on S. 510 Before the Subcomm. on Securities 
of the S. Comm. on Banking and Currency, 90th Cong. 1 (1967). 
Because a group is deemed a single ``person'' once the standards of 
Section 13(d)(3) or 13(g)(3) have been met, that ``person'' may be 
considered a beneficial owner under Rule 13d-3(a) regardless of the 
absence of any contract or agreement.
    \130\ Section 13(d)(3) was ``designed to obtain full disclosure 
of the identity of any . . . group obtaining the benefits of 
ownership of securities by reason of any contract, understanding, 
relationship, agreement or other arrangement.'' S. Rep. No. 550, 
90th Cong., 1st Sess. 8 (1967); H.R. Rep. No. 1711, 90th Cong. 2d 
Sess. 8-9 (1968), Reprinted in (1968) U.S. Code Cong. & Admin. News. 
2811, 2818. During a hearing, an individual testifying before the 
Senate (who was a member of a corporation's management) observed 
that in the then-unregulated market of takeovers for corporate 
control, ``it [was] possible . . . for a group of people who [were] 
informally associated to each acquire less than 10 percent of the 
stock without having to report their acquisitions even though they 
have more than 10 percent as a group.'' Full Disclosure of Corporate 
Equity Ownership and in Corporate Takeover Bids: Hearing on S. 510 
Before the Subcomm. on Securities of the S. Comm. on Banking and 
Currency, 90th Cong. 1 (1967) (statement of Herbert F. Kahler, 
Secretary and General Counsel, International Silver Co.).
    \131\ Some courts and the Commission have not superimposed the 
term ``agreement'' into the legal standards governing the reporting 
of beneficial ownership by groups. See SEC v. Levy, 706 F. Supp. 61 
(D.D.C. 1989) (``In order to find that a `group' exists under 
Section 13(d)(3), a court must find that two or more people have 
formed a combination in support of a common objective.''); see also 
In the Matter of John A. Carley, Release No. 34-50695 (Nov. 18, 
2004) (``A group need not be formally organized, nor memorialize its 
intentions in writing. . . . All that is required is that its 
members combine in furtherance of a common objective.'').
---------------------------------------------------------------------------

    Whether or not a group exists is dependent upon the facts and 
circumstances.\132\ Recognizing that two or more persons may take 
concerted action informally and without memorializing their intentions 
in writing, the Commission has relied upon circumstantial evidence 
instead of an agreement to establish that two or more persons combined 
in furtherance of a common objective.\133\ A contrary approach or 
interpretation would elevate form over substance and make the 
regulation of groups in the beneficial ownership context wholly 
dependent upon evidence proving the existence of an agreement. The 
purpose of the statute would be frustrated, and a burden not intended 
by Congress would be placed upon any party alleging the existence of a 
group, including the Commission.\134\
---------------------------------------------------------------------------

    \132\ Group activity may be demonstrated by circumstantial 
evidence, SEC v. Savoy, 587 F.2d 1149 at 1162, such as: (1) The 
presence of a common plan or goal, Fin. Gen. Bankshares, Inc. v. 
Lance, 1978 WL 1082, at *9 (D.D.C. 1978); (2) ``considerable 
dissatisfaction'' with certain officers and a ``desire to reduce'' 
those officers' role in company management, Id. at *10; (3) strategy 
meetings with, among others, attorneys, Levy, 706 F. Supp. at 70; 
(4) a pattern of coordinated stock purchases, Hallwood Realty 
Partners, LP v. Gotham Partners, LP, 286 F.3d 613, 618 (2d Cir. 
2002); (5) the solicitation of others to join the group, Wellman, 
682 F.2d at 363-364; and (6) the existence of communications between 
and among group members. Gen. Aircraft Corp. v. Lampert, 556 F.2d 
90, 95 (1st Cir. 1977).
    \133\ SEC v. Levy, 706 F. Supp. 61, 69 (D.D.C. 1989); see also 
In the Matter of John Joslyn, Joseph Marsh, P. David Lucas, Steven 
Sybesma, Stanley Thomas and Jon Thompson, Release No. 34-50588 (Oct. 
26, 2004).
    \134\ See Bath Industries, Inc. v. Blot, 427 F.2d 97, 110 (7th 
Cir. 1970).
---------------------------------------------------------------------------

    The absence of a need to prove that a group made an acquisition for 
purposes of reporting under Section 13(g), in itself, supports our view 
that the existence of a group is not dependent upon application of Rule 
13d-5(b), and by extension, whether such persons had an agreement. The 
absence of the ``after acquiring'' element in Section 13(g)(1) supports 
the view that groups may be subject to reporting obligations under 
Section 13(d), just as they are under Section 13(g), without reference 
to Rule 13d-5(b). No regulatory purpose would be served by concluding 
that an agreement among members is a prerequisite to the imposition of 
a reporting obligation under Section 13(d)(1) but not Section 13(g)(1). 
Under the current regulatory framework, if an agreement does not exist 
or cannot be proven, and no acquisitions can otherwise be imputed to 
the group, Section 13(g) will still apply to require reporting by the 
group if the collective amount of beneficial ownership held by the 
group members exceeds 5% at the end of the calendar year.
3. Proposed Amendments
a. Proposed Rules 13d-5(b)(1)(i) and (b)(2)(i)
    Our proposal would amend Rule 13d-5 to track the statutory text of 
Sections 13(d)(3) and (g)(3) and specify that two or more persons who 
``act as'' a group for purposes of acquiring, holding or disposing 
securities are treated as a group. Specifically, Rule 13d-5(b)(1) would 
be redesignated as Rule 13d-5(b)(1)(i) and would be revised to, among 
other things, remove the reference to an agreement between two or more 
persons and instead indicate that when two or more persons act as a 
group under Section 13(d)(3), the group will be deemed to have acquired 
beneficial ownership of all of the equity securities of a covered class 
beneficially owned by each of the group's members as of the date on 
which the group is formed. In addition, proposed new Rule 13d-
5(b)(2)(i) would contain nearly identical language, with conforming 
changes to address circumstances in which two or more persons act as a 
group under Section 13(g)(3) and the group is deemed to become the 
beneficial owner of all of the equity securities of a covered class 
beneficially owned by each of the group's members as of the date on 
which the group is formed.
    These amendments would make clear that the determination as to 
whether two or more persons are acting as a group does not depend 
solely on the presence of an express agreement and that, depending on 
the particular facts and circumstances, concerted actions by two or 
more persons for the purpose of acquiring, holding or disposing of 
securities of an issuer are sufficient to

[[Page 13869]]

constitute the formation of a group.\135\ By revising Rule 13d-5(b) as 
we propose, we intend to eliminate any potential for the rule to be 
misconstrued and consequently used as a basis to narrow the application 
of Sections 13(d)(3) and 13(g)(3) to: (1) Two or more persons who first 
``agree'' to act as a group, instead of two or more persons who ``act 
as'' a group as expressly codified in these statutory provisions; and 
then (2) only an additional subset of those such groups whose 
beneficial ownership exceeds 5% on the date of an agreement.
---------------------------------------------------------------------------

    \135\ The Commission, in adopting Rule 13d-5(b)(1), indicated 
that it viewed the term ``holding'' as subsuming the term 
``voting,'' but nevertheless expressly referenced the term 
``voting'' for the avoidance of doubt. See Filing and Disclosure 
Requirements Relating to Beneficial Ownership, Release No. 34-14692 
(Apr. 21, 1978) [43 FR 18484 at 18492 (Apr. 28, 1978)].
---------------------------------------------------------------------------

b. Proposed Rule 13d-5(b)(1)(ii)
    In addition, given that a Schedule 13D filing may affect the market 
for an issuer's securities, information that a person will make a 
Schedule 13D filing in the near future can be material.\136\ Under 
certain circumstances, the person that incurs or will incur such a 
filing obligation may be incentivized to share that information with 
other investors. For example, a large blockholder may be planning to 
commence a future campaign to challenge or unseat directors serving on 
the board of the issuer of the covered class and seek support of its 
still undisclosed plan.\137\ By privately sharing this material 
information (i.e., the fact that the blockholder is or will be required 
to make a Schedule 13D filing) in advance of the public filing deadline 
with a goal of inducing a change in the voting electorate or 
strengthening a relationship, the blockholder may engender support of, 
and improve the likelihood of success regarding, any future changes 
proposed to the issuer. Similarly, by sharing such material information 
with other investors positioned to act on the information, the 
blockholder may incentivize those investors to acquire shares in the 
covered class before such filing is made.\138\ Such incentive would be 
based on the other investors' expectation of an increase in the price 
of the covered class once the market reacts to the Schedule 13D filing.
---------------------------------------------------------------------------

    \136\ See Alon Brav, Wei Jiang, Frank Partnoy and Randall S. 
Thomas, Hedge Fund Activism, Corporate Governance and Firm 
Performance, 61 J. Fin. 1729 (2008) (finding on average an abnormal 
short-term return of 7% over the window surrounding a Schedule 13D 
filing); Marco Brecht, Julian Franks, Jeremy Grant and Hammes F. 
Wagner, The Returns to Hedge Fund Activism: An International Study, 
Center for Economic Policy Research Discussion Paper No. 10507 (Mar. 
15, 2015).
    \137\ See, e.g., Susan Pulliam, Juliet Chung, David Benoit and 
Rob Barry, Activist Investors Often Leak Their Plans to a Favored 
Few, The Wall Street Journal (Mar. 26, 2014), https://www.wsj.com/articles/SB10001424052702304888404579381250791474792 (``Activists, 
who push for broad changes at companies or try to move prices with 
their arguments, sometimes provide word of their campaigns to a 
favored few fellow investors days or weeks before they announce a 
big trade, which typically jolts the stock higher or lower.'').
    \138\ The Commission expresses no opinion as to whether or not 
such a blockholder owes a fiduciary duty to other shareholders in 
the covered class.
---------------------------------------------------------------------------

    These activities raise a question as to whether those investors 
``act as'' a ``group for the purpose of acquiring'' the covered class 
within the meaning of Section 13(d)(3).\139\ They also raise investor 
protection concerns. For example, any near-term gains made by these 
other investors attributable to this asymmetric information may come at 
the expense of uninformed shareholders who sell at prices reflective of 
the status quo.\140\ Even though the demand to acquire shares in the 
covered class may increase as a direct result of the blockholder's 
communications, and in turn increase the prices at which such selling 
shareholders exit, such prices may be discounted in comparison to the 
price selling shareholders would have achieved had the information 
about the impending Schedule 13D filing been public. Consequently, this 
informational imbalance may result in opportunistic purchases 
benefitting a favored few.\141\
---------------------------------------------------------------------------

    \139\ This question arises regardless of whether such other 
investors would be independently subject to, and thus incur a stand-
alone reporting obligation under, Section 13(d)(1). Under Section 
13(d)(3), however, two or more persons may be treated as a single 
person only if the beneficial ownership collectively held exceeds 5% 
of the covered class.
    \140\ See infra Sections III.A and III.C.3.
    \141\ See Lucian Bebchuk, Alon Brav, and Wei Jiang, The Long-
Term Effects of Hedge Fund Activism, 115 Colum. L. Rev. 1085 (2015). 
The authors find an approximately 6% average abnormal return during 
the 20-day window before and after a Schedule 13D filing.
---------------------------------------------------------------------------

    To provide clarity on this issue, enhance investor confidence and 
promote accurate price discovery in the capital markets, we are 
proposing to amend Rule 13d-5 to include a provision, which would be 
codified in paragraph (b)(1)(ii), that states that a person who shares 
information about an upcoming Schedule 13D filing that such person will 
be required to make, to the extent this information is not yet public 
and communicated with the purpose of causing others to make purchases, 
and a person who subsequently purchases the issuer's securities based 
on this information will be deemed to have a formed a group within the 
meaning of Section 13(d)(3). Proposed Rule 13d-5(b)(1)(ii) further 
provides that the group formed on the basis of such concerted action 
will be deemed to acquire beneficial ownership in the covered class. 
This acquisition by the group, which occurs by operation of Rule 13d-
5(b)(1)(ii), would trigger application of Section 13(d)(1), and in 
turn, establish the filing deadline for the group's disclosure 
statement on Schedule 13D. The proposed amendment would thus help 
ensure that appropriate disclosures under Section 13(d) are made in 
these and similar circumstances.\142\
---------------------------------------------------------------------------

    \142\ Proposed Rule 13d-5(b)(1)(ii), if adopted, would provide 
that the conduct specified in the rule is sufficient to find that a 
group had been formed under Section 13(d)(3) and, at the same time, 
deem that group to have made the acquisition necessary to trigger 
application of Section 13(d)(1). The proposed rule would serve as an 
additional, not exclusive, means of establishing that the tipper and 
tippee formed a group that made an acquisition subject to Section 
13(d). The proposed rule would not supersede or replace the existing 
regulatory provisions under which the tipper-tippee could become 
subject to Section 13(d). Thus, the Commission would not need to 
invoke Rule 13d-5(b)(1)(ii) when seeking to enforce violations in 
the context of every tipper-tippee relationship, but instead could 
assert other bases for finding that two or more such persons acted 
as a group for the purpose of acquiring a covered class.
---------------------------------------------------------------------------

    We believe this proposed rule change is consistent with the purpose 
of Section 13(d). Section 13(d)(3) was designed to prevent 
circumvention of Section 13(d). As noted above, under Section 13(d)(3), 
a group may become subject to regulation even in the absence of any 
express or implied agreement to act together for the purpose of 
acquiring a covered class. For example, if a large blockholder shares 
non-public information about its anticipated obligation to file a 
Schedule 13D, as would be the case if a tipper were to share its 
intention to accumulate a stake that would trigger such a filing 
obligation, and the person who receives such information subsequently 
makes a purchase based on that information, such information-sharing 
and purchasing activity is sufficient to satisfy the statutory 
standards within Section 13(d)(3) to the extent the information was 
shared with the purpose of causing such additional purchases to be 
made. While the final determination as to whether two or more persons 
``act as'' a group for this purpose ultimately will depend upon the 
specific facts and circumstances, the advantages inherent to this 
mutually beneficial relationship between the tipper and the tippee are 
self-evident. The large blockholder would have shared non-public, 
potentially market-moving information concerning an impending Schedule 
13D filing

[[Page 13870]]

obligation. The blockholder benefits by virtue of the subsequent 
acquisition of shares by the other investors, which may support or 
contribute to an increase in the value of the blockholder's investment 
in the covered class. In addition, the blockholder meaningfully 
contributes to a relationship, and creates the potential for reciprocal 
behavior. Such reciprocity could, in turn, prompt additional concerted 
action that will further implicate the statute.\143\ Those investors, 
acting on the information shared by the blockholder, also benefit by 
capitalizing on an opportunity to acquire the covered class at a 
comparative ``discount'' relative to the price they presumably would 
have paid had more timely public disclosure of the sensitive 
information in their possession been made. Consequently, in our view, 
the tipping arrangement described above falls within the scope of 
activity Congress sought to regulate when it enacted Section 13(d)(3).
---------------------------------------------------------------------------

    \143\ See John C. Coffee, Jr. and Darius Palia, supra note 19, 
at 596 and n.173 (explaining that ``norms of reciprocity 
characterize many areas of commercial life'' and ``[f]or prudential 
reasons, hedge funds may prefer to share the gains among themselves 
by using an organizational structure that unites a number of funds 
into a loosely knit organization (i.e., the `wolf pack') that may 
acquire 25% or more of the target'' and noting that ``[a]lthough the 
lead hedge fund does not fully capture all the gains obtainable in 
the transaction it leads, it reduces its risk and may receive 
reciprocal treatment from other hedge funds that later invite it to 
join it to their `wolf packs' '').
---------------------------------------------------------------------------

    Under proposed Rule 13d-5(b)(1)(ii), the group will be deemed to 
have acquired beneficial ownership of the securities of any market 
participant with whom the large blockholder has communicated material 
information regarding its impending filing obligation on the earliest 
date on which the acquisition by the recipient (or recipients, as the 
case may be) of the material information occurs.\144\ The existence of 
this acquisition will not alter the blockholder's initial filing 
obligation in respect of its acquisition of beneficial ownership in 
excess of 5% of the covered class. Rather, that person will now be 
obligated to acknowledge the existence of the group under Item 2 of the 
cover page of Schedule 13D, and provide any other required disclosures 
as a group member. If other group members make purchases later than the 
first date on which the blockholder is deemed to have formed a group 
with another person, proposed Rule 13d-5(b)(1)(iii), discussed below, 
would operate to deem the group to have acquired any additional shares 
acquired by any such persons who are considered group members after the 
date of group formation. Under Rule 13d-1(k), group members have the 
option of jointly filing a single Schedule 13D or, alternatively, 
independently filing a Schedule 13D that identifies all members of the 
group.
---------------------------------------------------------------------------

    \144\ The term ``market participant'' is used in this release to 
refer to any investor in or trader of a covered class, as determined 
in this release. The term has been used in order to account for the 
foreseeable possibility that a large blockholder may need to consult 
with persons who are not investors or traders, such as outside 
counsel, broker dealers, filing agents and others in connection with 
having to make its initial Schedule 13D filing.
---------------------------------------------------------------------------

    No term within proposed Rule 13d-5(b)(1)(ii) prohibits the 
blockholder from making additional purchases in the covered class or 
communicating the existence of the filing obligation to other 
shareholders. As such, the large blockholder and the other investors 
are free to acquire a larger position in the covered class during the 
period that remains before the required beneficial ownership report 
discloses the existence of the group. While the impact of the proposed 
rule may reduce the number of members within, and beneficial ownership 
initially held by, a group formed under the described tipping 
arrangement, or eliminate the practice altogether, we believe the 
proposed rule is appropriate in light of the possibility for 
coordinated acquisitions without compliance with Section 13(d). We 
believe that adding a provision directly addressing the tipping 
arrangement described above would advance the policy purposes of 
Section 13(d).
c. Proposed Rules 13d-5(b)(1)(iii) and (b)(2)(ii)
    Groups may form at a time when a class of equity securities is not 
yet registered under Section 12 or the aggregate beneficial ownership 
held by the membership in the group on the date of its formation is 5% 
or below of a covered class. Expressly capturing post-formation 
acquisitions of beneficial ownership by group members therefore can 
become important for purposes of: Assessing whether a group 
intentionally tried to evade the reporting process; determining whether 
an amendment was due for a pre-existing Schedule 13D filing; and 
evaluating the availability of the Section 13(d)(6)(B) exemption. For 
example, imputing post-formation acquisitions to a group by rule would 
make clear that acquisitions by group members that collectively exceed 
the 2% exemptive threshold over a 12-month period are attributable to 
the group, thereby resulting in the group becoming ineligible to report 
pursuant to Section 13(g) and triggering a filing obligation under 
Section 13(d).\145\ The 12-month measurement period therefore extends 
into the time period where a beneficial owner, including a group, held 
an amount of beneficial ownership below the statutory threshold or 
where the group formed on a date when the class of equity was not 
registered under Section 12.\146\
---------------------------------------------------------------------------

    \145\ Section 13(d)(6)(B) takes into account all acquisitions 
that occurred during the preceding twelve months.
    \146\ The Commission has indicated that the 2% exemption 
operates on ``a rolling twelve-month basis.'' Filing and Disclosure 
Requirements Relating to Beneficial Ownership, Release No. 34-17353 
(Dec. 4, 1980) [45 FR 81556 at 81557 (Dec. 11, 1980)]. In other 
words, for an acquisition to be exempt under Section 13(d)(6)(B), 
``it must, when taken together with all other acquisitions of 
beneficial ownership by the same person of securities of the same 
class during the preceding twelve months, not exceed two percent of 
the class.'' Id.
---------------------------------------------------------------------------

    Absent an express provision that would treat post-formation 
acquisitions of beneficial ownership by group members as acquisitions 
by the group, the Commission or other affected parties must prove the 
acquisition is attributable to the group. For example, if the 
Commission invoked Rule 13d-5(a), it would have to establish that the 
group ``became'' a beneficial owner of more shares and thus made an 
acquisition within the meaning of that rule. To help ensure that 
acquisitions made by a group member after the date of group formation 
are attributed to the group once the collective beneficial ownership 
among group members exceeds 5% of a covered class, and reduce the 
Commission's evidentiary burden, we propose to amend Rule 13d-5 to 
expressly impute such acquisitions to the group. Proposed new Rule 13d-
5(b)(1)(iii) would provide that a group under Section 13(d)(3) will be 
deemed to have acquired beneficial ownership of equity securities of a 
covered class if any member of the group becomes the beneficial owner 
of additional equity securities of such covered class after the date of 
the group's formation. Proposed new Rule 13d-5(b)(2)(ii) would contain 
nearly identical language, with conforming changes to address 
circumstances in which a member of a group under Section 13(g)(3) 
becomes the beneficial owner of additional equity securities of a 
covered class after the date of the group's formation.
d. Proposed Rules 13d-5(b)(1)(iv) and (b)(2)(iii)
    We also are proposing amendments to Rule 13d-5 to carve out from 
the purview of proposed Rules 13d-5(b)(1)(iii) and (b)(2)(ii) intra-
group transfers of equity securities of a covered class. Specifically, 
proposed

[[Page 13871]]

Rule 13d-5(b)(1)(iv) would provide that a group under Section 13(d)(3) 
will not be deemed to have acquired beneficial ownership in a covered 
class if a member of the group becomes the beneficial owner of 
additional equity securities in such covered class through a sale by, 
or transfer from, another member of the group. Proposed new Rule 13d-
5(b)(2)(iii) would contain nearly identical language, with conforming 
changes to address circumstances in which a member of a group under 
Section 13(g)(3) becomes the beneficial owner of additional equity 
securities in a covered class through a sale by, or transfer from, 
another member of the group.
e. Proposed Amendment to the Title of Rule 13d-5
    To further align Rule 13d-5 with Section 13(d)(1), we also propose 
to amend the title of the rule to ``Acquisitions of beneficial 
ownership'' to remove the potential implication that Section 13(d) and 
Rule 13d-1(a) could only apply if a person made an actual acquisition 
of securities. Under Section 13(d)(1), a person becomes subject to a 
reporting obligation ``after acquiring'' beneficial ownership, which 
determination may or may not include an actual acquisition of 
securities based on whether a person is a beneficial owner under Rule 
13d-3. We also are proposing conforming amendments to Rule 13d-5(a) to 
replace the references to an ``acqui[sition] of securities'' with 
references to an ``acqui[sition] of beneficial ownership.''
f. Proposed Redesignation of Current Rule 13d-5(b)(2)
    Finally, for the avoidance of doubt or confusion as to the 
regulatory purpose Rule 13d-5 is intended to serve, and to reinforce 
its operation as a provision that governs acquisitions of beneficial 
ownership, we propose to relocate Rule 13d-5(b)(2) to neighboring Rule 
13d-6, titled ``Exemption of certain acquisitions,'' and redesignate it 
as new Rule 13d-6(b). No substantive changes would be made to the text 
of the rule. That amendment is discussed in more detail in Section II.D 
below.
Request for Comment
    54. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(i) and 
(b)(2)(i), as proposed? Rather than amending the rule as proposed to 
affirm that an express or implied agreement is not needed to subject a 
group to reporting under Section 13(d) or 13(g), should we instead 
issue a Commission interpretation that reiterates this point?
    55. Should we amend Rule 13d-5 to add new Rule 13d-5(b)(1)(ii), as 
proposed? Does the current regulatory framework sufficiently address 
such activity? Would the possible imposition of a Schedule 13D filing 
obligation adequately remediate the behavior we are seeking to address? 
Are there any changes to proposed Rule 13d-5(b)(1)(ii) that we should 
consider, such as further clarification to address situations where the 
non-public information about the Schedule 13D filing is shared by an 
employee who is not authorized to do so?
    56. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(iii) 
and (b)(2)(ii), as proposed? Alternatively, should additional 
acquisitions made by group members after the date of group formation 
under Section 13(d) be exempted, or should additional persons under 
Section 13(g) be exempted from regulation as a group, and if so, what 
would be the grounds upon which such exemptions could be granted?
    57. Should we amend Rule 13d-5 to add new Rules 13d-5(b)(1)(iv) and 
(b)(2)(iii), as proposed?
    58. Instead of amending Rule 13d-5 as proposed, should we propose a 
definition of the term ``group'' and, if so, how should the term be 
defined?
    59. Should we propose a rule or amendments to existing rules that 
would require groups to report exclusively on Schedule 13D, and if so, 
why should groups not be able to avail themselves of reporting on 
Schedule 13G in lieu of Schedule 13D as they do today? For example, 
Rule 13d-1(b)(1)(ii)(K) identifies a group as being among the qualified 
institutions eligible to report on Schedule 13G in lieu of Schedule 13D 
provided that every member of the group is a qualified institution. 
Should this provision be rescinded and other revisions be made to 
ensure that groups would be ineligible to qualify as QIIs or Passive 
Investors that report beneficial ownership on Schedule 13G?
    60. Have shareholders suffered quantifiable harm as a result of any 
weakness in the current regulatory framework as applied to groups, and 
if so, would new rules or amendments beyond what we have already 
proposed prevent such harm caused by undisclosed group activity from 
recurring?
    61. Is certain group activity going unreported under the current 
regulatory framework because it does not involve acquiring, holding or 
disposing of a covered class, and if so, what additional rule proposals 
or modifications could be made to address such activity?
    62. Do instances exist in which shareholders in a covered class 
were harmed as a result of the tipping arrangements described above, 
and if so, could such harm be quantified? To the extent any such 
shareholder harm has occurred, please explain how such harm occurred.
    63. Would Rule 13d-5(b)(1)(ii) unduly chill communications between 
shareholders and market participants, such as investment advisers? If 
so, what modifications to the proposed rule should we consider? For 
example, should application of the rule be conditioned on the recipient 
of the tip intending to coordinate with the tipper or making its 
purchases in reliance on the non-public information that the tipper 
provided so as to avoid a scenario in which such recipient is 
unwittingly deemed a member of a group simply by virtue of the tipper's 
independent communications or actions?
    64. Given that Rule 13d-5(b)(1)(ii) would operate and apply in 
addition to, and not to the exclusion of, Section 13(d)(3),\147\ should 
the Commission issue guidance about the facts and circumstances under 
which it would find that two or more persons ``act as a group'' under 
Section 13(d)(3) in the context of a tipper-tippee relationship or 
otherwise?
---------------------------------------------------------------------------

    \147\ See supra note 142.
---------------------------------------------------------------------------

    65. Should the scope of proposed Rule 13d-5(b)(1)(ii) be expanded 
to include the group formation standards under Section 13(g)(3) as 
well, and if so, why? Would other investors be incentivized to take a 
position in a covered class upon learning that a Schedule 13G filing 
was expected to be made by an Exempt Investor? For example, have any 
individual investors or groups filed a Schedule 13G as an Exempt 
Investor while also advocating for change without disclosure given the 
absence of an analogue to Item 4 of Schedule 13D or requirement under 
Item 10 of Schedule 13G for an Exempt Investor to certify as to its 
passivity? Similarly, should the scope of proposed Rule 13d-5(b)(1)(ii) 
be expanded to cover Schedule 13G filings made by a group of QIIs or 
Passive Investors given that such groups--like Schedule 13D filers--
still will have made an acquisition subject to Section 13(d)?
    66. For purposes of this release, ``market participant'' means any 
investor in or trader of a covered class.\148\ Should any modifications 
be made to our interpretation of the term ``market participant''? 
Alternatively, should we adopt a definition of the term ``market 
participant'' in Regulation

[[Page 13872]]

13D-G? If so, should Regulation 13D-G be amended to include a provision 
dedicated to providing defined terms used throughout the regulation?
---------------------------------------------------------------------------

    \148\ See supra note 144.
---------------------------------------------------------------------------

D. Proposed Amendments to Rule 13d-6 To Create Certain Exemptions

    We are proposing a series of amendments to Rule 13d-6 to reorganize 
the rule and exempt certain circumstances from resulting in a person 
being deemed to have acquired beneficial ownership of, or otherwise to 
beneficially own, equity securities of a covered class for purposes of 
Sections 13(d) and 13(g). Specifically, we are proposing to amend Rule 
13d-6 to:
     Redesignate the current text of Rule 13d-6 as Rule 13d-
6(a);
     Redesignate the current text of Rule 13d-5(b)(2) as Rule 
13d-6(b);
     Add new paragraph (c) to create an exemption from Sections 
13(d)(3) and 13(g)(3) for certain circumstances in which two or more 
persons take concerted actions with respect to an issuer or a covered 
class; and
     Add new paragraph (d) to create an exemption from Sections 
13(d)(3) and 13(g)(3) for certain circumstances in which two or more 
persons enter into an agreement setting forth the terms of a derivative 
security.
    These proposed amendments are discussed in further detail below.
1. Background
    Congress granted the Commission the authority to issue exemptions 
from the application of Sections 13(d) and 13(g). The Commission can, 
under Section 13(d)(6)(D), exempt, by rule, acquisitions ``as not 
entered into for the purpose of, and not having the effect of, changing 
or influencing the control of the issuer or otherwise as not 
comprehended within the purposes of [Section 13(d)].'' Congress 
similarly granted the Commission authority under Section 13(g)(6) to 
exempt any person or class of persons from Section 13(g) ``as it deems 
necessary or appropriate in the public interest or for the protection 
of investors.'' The Commission exercised this authority when it adopted 
Rule 13d-6, which exempts certain acquisitions. Currently, it sets 
forth one exemption from Section 13(d) for the acquisition of 
securities of an issuer by a person who, prior to such acquisition, was 
a beneficial owner of more than 5% of the outstanding securities of the 
same class as those acquired, provided that certain conditions are met.
    We recognize that our proposal to amend Rule 13d-5, as discussed 
above, may raise concerns among investors as to whether their 
communications and other activities with other investors would 
constitute the formation of a group. We also recognize the possibility 
that additional exemptions may be warranted to address situations in 
which beneficial ownership reporting under Section 13(d) or 13(g) by a 
group would be unnecessary from an investor protection standpoint or 
even contrary to the public interest. Specifically, we are aware that 
activity exists among shareholders, investors, holders of derivatives 
and other market participants that may, absent an exemption, implicate 
Sections 13(d)(3) and 13(g)(3). For example, institutional investors or 
shareholder proponents may wish to communicate and consult with one 
another regarding an issuer's performance or certain corporate policy 
matters involving one or more issuers. Subsequently, those investors 
and proponents may take similar action with respect to the issuer or 
its securities, such as engaging directly with the issuer's management 
or coordinating their voting of shares at the issuer's annual meeting 
with respect to one or more company or shareholder proposals.
    The beneficial ownership reporting system is not intended to impede 
communications among shareholders or between proponents and issuers 
that are not undertaken with the purpose or effect of changing or 
influencing control of an issuer. Accordingly, the regulatory purposes 
of Sections 13(d) and 13(g) would not be served by treating investors 
and proponents under those circumstances as a single person that 
``act[s] as'' a group by virtue of its ``holding'' of a covered class 
within the meaning of Sections 13(d)(3) and 13(g)(3).
    Similarly, investors in an equity-based derivative security may 
need to, in order to acquire the derivative security, enter into an 
agreement governing the terms of such instrument with a financial 
institution that, in the ordinary course of its business, acts as a 
counterparty to such investors. To offset any risk exposure to that 
derivative security, including any obligations that may arise at 
settlement, the financial institution may accumulate the reference 
equity security in a covered class and hold such reference security for 
the duration of the agreement. But for the joint actions of the parties 
in entering into the agreement, that specific acquisition of beneficial 
ownership in the covered class by the financial institution would not 
have occurred. As such, entry into such an agreement may implicate 
Sections 13(d)(3) and (g)(3) because two persons may be viewed as 
``act[ing] as'' a group given the financial institution's foreseeable 
acquisition of a covered class. Assuming that the investor and the 
financial institution did not enter into the agreement with the purpose 
or effect of changing or influencing control of the issuer, the 
regulatory purposes of Sections 13(d) and 13(g) would not be furthered 
by treating the investor and the financial institution as members of a 
group under Sections 13(d)(3) and 13(g)(3) solely by virtue of their 
entrance--for strictly commercial purposes and not for purposes of 
acquiring, holding or disposing of a covered class--into that 
agreement.
2. Proposed Amendments
    We are proposing amendments to Rule 13d-6 to exempt certain actions 
taken by two or more persons from the scope of Sections 13(d)(3) and 
13(g)(3) if those actions do not have the purpose or effect of changing 
or influencing the control of an issuer and thus are not within the 
purpose of Section 13(d).
    As an initial matter, we are proposing to redesignate current Rule 
13d-6 as Rule 13d-6(a) to allow for new exemptions to be added as 
subsequent paragraphs of Rule 13d-6. The text of current Rule 13d-6 
would not be changed in any way.
    In light of our proposed amendments to Rule 13d-5, we also are 
proposing to add new paragraph (c) to Rule 13d-6 to avoid chilling 
communications among shareholders or impeding shareholders' engagement 
with issuers where those activities are undertaken without the purpose 
or effect of changing or influencing control of the issuer (and are not 
made in connection with or as a participant in any transaction having 
such purpose or effect).\149\ Proposed

[[Page 13873]]

Rule 13d-6(c) would provide that two or more persons will not be deemed 
to have acquired beneficial ownership of, or otherwise beneficially 
own, an issuer's equity securities as a group solely because of their 
concerted actions related to an issuer or its equity securities, 
including engagement with one another or the issuer, provided they meet 
certain conditions. Such interactions, depending upon the level of 
coordination and degree to which the persons advocate in furtherance of 
a common purpose or goal, could be found to satisfy the ``act as'' a 
group standard under Section 13(d)(3) or 13(g)(3) for the purpose of 
``holding'' a covered class. To help ensure that the exemption is 
available only where such persons independently determine to take 
concerted actions, the proposed exemption would be available only if 
such persons are not directly or indirectly obligated to take such 
actions (e.g., pursuant to the terms of a cooperation agreement or 
joint voting agreement).
---------------------------------------------------------------------------

    \149\ The Commission has previously articulated policy concerns 
similar to those that underlie this proposed exemption. For example, 
in a rulemaking effort in the late 1990s, the Commission took steps 
to ensure that ``the Section 13(d) reporting obligations [do not] 
restrict a shareholder's ability to engage in proxy related 
activities,'' including their ``ability to use the proxy rule 
exemptions that were adopted in 1992 to facilitate communications 
among shareholders.'' Amendments to Beneficial Ownership Reporting 
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 at 
2858 (Jan. 16, 1998)]. In adopting those proxy rule exemptions, the 
Commission noted that ``[t]he purposes of the proxy rules themselves 
are better served by promoting free discussion, debate and learning 
among shareholders and interested persons.'' Regulation of 
Communications Among Shareholders, Release No. 34-31326 (Oct. 16, 
1992) [57 FR 48276 at 48279 (Oct. 22, 1992)]. Finally, as discussed 
supra note 47, our proposal, if adopted, would not change the 
existing standards for determining whether a person is engaging in 
an activity that would have the purpose or effect of changing or 
influencing the control of the issuer. For example, our proposal 
would not change the Commission's existing view that most proxy 
solicitations in support of a proposal specifically calling for a 
change of control of an issuer (e.g., a contested election of 
directors, a sale of the issuer or the restructuring of the issuer) 
would clearly have the purpose and effect of changing or influencing 
control. See Amendments to Beneficial Ownership Reporting 
Requirements, Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 at 
2859 (Jan. 16, 1998)]. See also supra note 99 for the definition of 
``control'' under Rule 12b-2 of Regulation 12B.
---------------------------------------------------------------------------

    In addition, we are proposing to add new paragraph (d) to Rule 13d-
6, in light of proposed new Rule 13d-3(e), to avoid impediments to 
certain financial institutions' ability to conduct their business in 
the ordinary course. Proposed Rule 13d-6(d) would provide that two or 
more persons will not be deemed to have formed a group under Section 
13(d)(3) or 13(g)(3) solely by virtue of their entrance into an 
agreement governing the terms of a derivative security. This exemption 
would only be available if the agreement is a bona fide purchase and 
sale agreement entered into in the ordinary course of business. 
Further, the exemption would only be available if such persons do not 
enter into the agreement with the purpose or effect of changing or 
influencing control of the issuer, or in connection with or as a 
participant in any transaction having such purpose or effect.
    Finally, as noted above, we are proposing to redesignate current 
Rule 13d-5(b)(2) as new Rule 13d-6(b). Current Rule 13d-5(b)(2) was 
first adopted in 1978 as a means to effectively exempt acquisitions 
from being attributed to a group within the meaning of Section 13(d)(3) 
solely by virtue of concerted actions by QIIs relating to the purchase 
of equity securities in a private offering.\150\ As such, our proposed 
placement of this provision, which operates to exempt an actual 
purchase transaction by a group from otherwise being treated as an 
acquisition under Rule 13d-5(b)(1), into Rule 13d-6, should add to 
administrative convenience as the provision would appear alongside 
another acquisition transaction already so exempted.
---------------------------------------------------------------------------

    \150\ Current Rule 13d-5(b), by its terms, acknowledges that the 
joint, concerted action by institutional investors specified in Rule 
13d-1(b) to purchase an issuer's equity securities pursuant to an 
agreement among QIIs would constitute an acquisition by a group 
subject to Section 13(d) absent a regulatory accommodation. The 
Commission therefore adopted the equivalent of an exemption by 
codifying its view within Rule 13d-5(b)(2) that the ``group shall be 
deemed not to have acquired any equity securities beneficially owned 
by the other members of the group.''
---------------------------------------------------------------------------

Request for Comment
    67. Should we amend Rule 13d-6 as proposed?
    68. Should we add new Rule 13d-6(c), as proposed, to exempt certain 
concerted actions by two or more persons from serving as the basis for 
group formation? Are the proposed conditions for reliance on this 
exemption appropriate? For example, is there another way that we can 
ensure that persons seeking to rely upon the exemption would 
independently reach decisions that result in concerted action being 
taken other than by requiring that such persons not be directly or 
indirectly obligated to take concerted actions, as proposed in Rule 
13d-6(c)(2)? Alternatively, if we adopt proposed Rule 13d-6(c), should 
we omit proposed paragraph (c)(2) and, therefore, only condition 
availability of the exemption on the requirement set forth in proposed 
paragraph (c)(1)?
    69. Is the proposed Rule 13d-6(c) exemption broad enough to exempt 
activity by shareholders who coordinate to make non-binding proposals 
under 17 CFR 240.14a-8 or otherwise, or is an express exemption needed 
for shareholders who act together in introducing such proposals?
    70. Should we add new Rule 13d-6(d), as proposed, to exempt the 
entrance by two or more persons into an agreement governing the terms 
of a derivative security from serving as the basis for group formation? 
Are the proposed conditions for reliance on this exemption appropriate? 
For example, does the condition that the agreement must be a bona fide 
purchase and sale agreement entered into in the ordinary course of 
business mitigate the concerns underlying Sections 13(d)(3) and 
13(g)(3)?
    71. Will the proposed new exemptions in Rule 13d-6 facilitate any 
actions that would be contrary to the intent of Sections 13(d) and 
13(g)?
    72. Congress broadly determined that when two or more persons ``act 
as'' a group for the purpose of acquiring, holding or disposing of a 
covered class, the persons would be treated as a single person for 
purposes of reporting beneficial ownership. Are there actions taken 
among shareholders other than the ones that we have proposed to exempt 
that the Commission should consider exempting?
    73. To the extent that a group would qualify to report on Schedule 
13G pursuant to Rule 13d-1(b), (c), or (d), do the costs of such a 
group complying with the beneficial ownership reporting requirements 
outweigh the benefits? For example, how would a Schedule 13G filed by a 
group contribute to price discovery? Should the Commission wholly 
exempt any group that qualifies to file a Schedule 13G from having to 
report at all, and if so, under what other conditions, if any, should 
such an exemption be available?
    74. Should we redesignate current Rule 13d-5(b)(2) as new Rule 13d-
6(b), as proposed? Would the relocation of that exemption, without 
altering the substance of that exemption, alter its availability or use 
or have any other collateral effects?

E. Proposed Amendments to Schedule 13D To Clarify Disclosure 
Requirements Regarding Derivative Securities

    We are proposing to amend Schedule 13D, codified at Rule 13d-101, 
to clarify the disclosure requirements with respect to derivative 
securities held by a person reporting on that schedule. Specifically, 
we are proposing to amend Item 6 to Schedule 13D to remove any 
implication that a person is not required to disclose interests in all 
derivative securities that use a covered class as a reference security.
1. Background
    In enacting Sections 13(d)(1)(A) through (E),\151\ Congress 
specified certain information that beneficial owners must report once 
they incur a filing obligation. Under Section 13(d)(1)(E), Congress 
provided that a beneficial owner must report ``information as to any 
contracts, arrangements, or understandings with any person with respect 
to any securities of the issuer, including [the] transfer of any of the 
securities, joint ventures, loan or option arrangements, puts or calls, 
guaranties of loans,

[[Page 13874]]

guaranties against loss or guaranties of profits, division of losses or 
profits, or the giving or with holding of proxies . . . .'' Consistent 
with the mandate of Section 13(d)(1)(E), this baseline disclosure 
requirement has existed within Schedule 13D since 1968.
---------------------------------------------------------------------------

    \151\ 15 U.S.C. 78m(d)(1).
---------------------------------------------------------------------------

    Schedule 13D sets forth the information that beneficial owners 
reporting pursuant to Rule 13d-1(a) or 13d-2(a) must disclose. In 
addition to the information specified by Sections 13(d)(1)(A) through 
(E), Congress also authorized the Commission to require disclosure of 
``such additional information'' it prescribes as ``necessary or 
appropriate in the public interest or for the protection of 
investors.''
    Item 6 of Schedule 13D requires beneficial owners to ``[d]escribe 
any contracts, arrangements, understandings or relationships (legal or 
otherwise) among the persons named in Item 2 [of Schedule 13D] and 
between such persons and any person with respect to any securities of 
the issuer'' and sets forth a non-exclusive list of examples of such 
contracts, arrangements, understandings or relationships.\152\ Because 
cash-settled derivative securities were not expressly included among 
these examples, questions may arise as to whether beneficial owners 
should report contracts, arrangements, understandings or relationships 
``with respect to'' an issuer's securities given that (1) only a purely 
economic, but no legal, interest is held through such derivatives in 
any class of an issuer's securities and (2) the issuer's securities are 
only used as a reference security.\153\ Further, the current 
requirement could be interpreted as excluding the use of cash-settled 
options not offered or sold by the issuer, or other derivatives not 
originating with the issuer, including other cash-settled derivatives 
such as security-based swaps.
---------------------------------------------------------------------------

    \152\ 17 CFR 240.13d-101. This rule codifies Schedule 13D, and 
Instruction A thereto provides, in relevant part, that a filer must 
``[a]nswer every item. If an item is inapplicable or the answer is 
in the negative, so state.'' Id. To the extent the initial 
disclosure provided indicates that the item was inapplicable or that 
there were no contracts, arrangements, understandings or 
relationships to report, the filer remains obligated under Section 
13(d)(2) and corresponding Rule 13d-2(a) to report material changes 
to such a response.
    \153\ As used in this release and the proposed revision to Item 
6 of Schedule 13D, the term ``reference security'' means the class 
of securities into which a derivative security is convertible, 
exchangeable or exercisable for, or, alternatively, if not 
convertible into or exchangeable or exercisable for, the class of 
securities from which the derivative security has economic exposure 
and has its value determined according to the terms of the 
derivative's governing instrument.
---------------------------------------------------------------------------

2. Proposed Amendments
    We are proposing to amend to Item 6 of Schedule 13D to clarify that 
a person is required to disclose interests in all derivative securities 
that use the issuer's equity security as a reference security. The 
proposed amendment would expressly state that such derivative 
contracts, arrangements, understandings and relationships with respect 
to an issuer's securities, including cash-settled security-based swaps 
and other derivatives which are settled exclusively in cash, would need 
to be disclosed under Item 6 of Schedule 13D in order to comply with 
Rules 13d-1(a) and 13d-101.
    The proposed amendment also would clarify that the derivative 
security need not have originated with the issuer or otherwise be part 
of its capital structure in order for a disclosure obligation to arise. 
At present, the formulation ``with respect to securities of the 
issuer'' in Item 6 might be read to suggest that contracts, 
arrangements, understandings or relationships that only create economic 
exposure to the issuer's equity securities or are otherwise considered 
synthetic could be excluded. Accordingly, to remove any ambiguity as to 
the scope of the required disclosures, we propose to revise Item 6 to 
expressly state that the use of derivative instruments, including cash-
settled security-based swaps and other derivatives settled exclusively 
in cash, which use the issuer's securities as a reference security are 
included among the types of contracts, arrangements, understandings and 
relationships which must be disclosed. To further minimize any 
potential ambiguity regarding what interests need to be disclosed, we 
also propose to eliminate the ``including but not limited to'' 
regulatory text that precedes the itemization of the instruments or 
arrangements covered.
Request for Comment
    75. Should we amend Item 6 of Schedule 13D as proposed?
    76. Are there any reasons not to expressly require disclosure of 
contracts, arrangements, understandings or relationships involving 
cash-settled derivative securities, including security-based swaps, 
under Item 6? To the extent that any such derivative instruments should 
not be subject to disclosure, why would excluding such instruments be 
appropriate given the statutory mandate in Section 13(d)(1)(E)?
    77. Do any other modifications need to be made to Item 6 in order 
to clarify the types of instruments or arrangements that are required 
to be disclosed, and, if so, what clarifications should we make and 
why? For example, should we include a general ``catch-all'' provision 
that requires disclosure of any contracts, arrangements, understandings 
or relationships substantially similar to the ones listed?
    78. Should the ``including but not limited to language'' under Item 
6 be eliminated, as proposed? Would this serve to remove ambiguity 
about what is required by the Item? Should the language be retained, 
and if so, why? Do any interests in a class of an issuer's securities 
exist that derive from sources not considered to be contracts, 
arrangements, understandings or relationships that should be subject to 
disclosure under Item 6, and if so, what are those sources? Conversely, 
are there reasons to exclude any particular instrument or class of 
instrument from Item 6 of Schedule 13D?

F. Proposed Structured Data Requirement for Schedules 13D and 13G

    We are proposing to require that beneficial ownership reports on 
Schedules 13D and 13G be filed using a structured, machine-readable 
data language. In particular, we are proposing to require that 
Schedules 13D and 13G be filed in part using an XML-based language 
specific to Schedules 13D and 13G (``13D/G-specific XML'').\154\ For 
both Schedules, all disclosures, including quantitative disclosures, 
textual narratives, and identification checkboxes, would be structured 
in 13D/G-specific XML under the proposal, with the exception of the 
exhibits to the Schedules, which would remain unstructured.
---------------------------------------------------------------------------

    \154\ This would be consistent with the approach used for other 
XML-based structured data languages created by the Commission for 
certain EDGAR Forms, including the data languages used for reports 
on each of Form 13F, Form D and the Section 16 beneficial ownership 
reports (Forms 3, 4 and 5).
---------------------------------------------------------------------------

1. Background
    Currently, the EDGAR Filer Manual requires Schedules 13D and 13G to 
be filed electronically on the Commission's EDGAR system in HTML or 
ASCII.\155\ HTML and ASCII are both unstructured data languages; thus, 
the disclosures reported on Schedules 13D and 13G are

[[Page 13875]]

not currently machine-readable.\156\ As a result, information disclosed 
on Schedules 13D and 13G is more difficult for investors and markets to 
access, compile and analyze as compared to information that is 
submitted in a machine-readable data language.
---------------------------------------------------------------------------

    \155\ See supra Section II.A.6.a; EDGAR Filer Manual (Volume II) 
version 59 (Sept. 2021) (``EDGAR Filer Manual''), at 5-1 (requiring 
EDGAR filers generally to use ASCII or HTML for their document 
submissions, subject to certain exceptions). Schedule 13D and 13G 
filers are required, by rule, to comply with the requirements of the 
EDGAR Filer Manual. See 17 CFR 232.301 (``Filers must prepare 
electronic filings in the manner prescribed by the EDGAR Filer 
Manual, promulgated by the Commission, which sets forth the 
technical formatting requirements for electronic submissions.'').
    \156\ The term ``machine-readable'' is defined in 44 U.S.C. 3502 
as ``data in a format that can be easily processed by a computer 
without human intervention while ensuring no semantic meaning is 
lost.''
---------------------------------------------------------------------------

    While the majority of EDGAR filings are submitted in HTML or ASCII, 
certain EDGAR filings are submitted using machine-readable, XML-based 
languages that are each specific to the particular EDGAR document type 
being submitted.\157\ This includes filings that, like Schedules 13D 
and 13G, are submitted by individuals and entities other than the 
registrant.\158\ For these EDGAR XML filings, filers are typically 
provided the option to either submit the filing directly to EDGAR in 
XML, or manually input their disclosures in an online web application 
and/or web form developed by the Commission that converts the completed 
form into an EDGAR-specific XML document.
---------------------------------------------------------------------------

    \157\ See Current and Draft Technical Specifications, available 
at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
    \158\ Examples include the Section 16 beneficial ownership 
reports (Form 3, 4 and 5) and Form 13F. See id.
---------------------------------------------------------------------------

2. Proposed Amendments
    We are proposing to replace the current HTML or ASCII requirement 
for Schedules 13D and 13G in the EDGAR Filer Manual with a structured 
data language requirement--specifically, with a requirement to use 
Schedule 13D/G-specific XML--for the disclosures reported on those 
Schedules. As is the case with other EDGAR Form-specific XML filings, 
reporting persons would be able to, at their option, submit filings 
directly to EDGAR in Schedule 13D/G-specific XML or use a web-based 
reporting application developed by the Commission that would generate 
the Schedule in 13D/G-specific XML.\159\ We believe that a structured 
data requirement for the disclosures reported on Schedules 13D and 13G 
would greatly improve the accessibility and usability of the 
disclosures, allowing investors to access, aggregate and analyze the 
reported information in a much more timely and efficient manner.\160\
---------------------------------------------------------------------------

    \159\ In addition, the Commission would develop electronic 
``style sheets'' that, when applied to the reported XML data, would 
represent that data in human-readable form on EDGAR.
    \160\ Section 13(g)(5) of the Exchange Act provides, in part, 
that ``the Commission shall take such steps as it deems necessary or 
appropriate in the public interest or for the protection of 
investors . . . to tabulate and promptly make available the 
information contained in any report filed pursuant to this 
subsection in a manner which will, in the view of the Commission, 
maximize the usefulness of the information to . . . the public.'' 15 
U.S.C. 78m(g)(5). The requirements proposed in this section would be 
consistent with this mandate. Although this statutory language 
applies only to beneficial ownership reports filed pursuant to 
Section 13(g)--i.e., a Schedule 13G filed by an Exempt Investor--we 
believe these public benefits would be furthered by applying the 
requirements proposed in this section to all Schedule 13D and 13G 
filers.
---------------------------------------------------------------------------

Request for Comment
    79. Should we replace the current HTML or ASCII requirement for 
Schedules 13D and 13G with a structured data requirement for the 
disclosures reported on those Schedules, as proposed?
    80. Rather than adding a structured data requirement for all 
disclosures (other than exhibits) reported on Schedules 13D and 13G, 
should we narrow the requirement to cover only a subset of the 
disclosures, such as the quantitative disclosures?
    81. Should we require the disclosures on Schedules 13D and 13G to 
be submitted using a different structured data language than 13D/G-
specific XML? Why or why not? If another structured data language would 
be more appropriate, please identify which one, and explain why.
    82. Would this proposed requirement yield reported data that is 
more useful to investors, compared with maintaining the current HTML or 
ASCII requirement for Schedules 13D and 13G, or requiring Schedules 13D 
and 13G to be filed in a structured data language other than a 13D/G-
specific XML?

G. Implications of the Proposed Amendments on Section 16

    Section 16 of the Exchange Act was designed both to provide the 
public with information about securities transactions and holdings of 
every person who is the beneficial owner of more than 10% of a class of 
equity security registered under Exchange Act Section 12 \161\ (``10% 
holder''), and each officer and director (collectively, ``insiders'') 
of the issuer of such a security, and to deter such insiders from 
profiting from short-term trading in issuer securities while in 
possession of material, non-public information. Upon becoming an 
insider, or upon Section 12 registration of the class of equity 
security, Section 16(a) \162\ requires an insider to file an initial 
report with the Commission disclosing his or her beneficial ownership 
of all equity securities of the issuer.\163\ Section 16(a) also 
requires insiders to report subsequent changes in such ownership.\164\ 
To prevent misuse of inside information by insiders, Section 16(b) 
\165\ provides the issuer (or shareholders suing on the issuer's 
behalf) a private right of action to recover any profit realized by an 
insider from any purchase and sale (or sale and purchase) of any equity 
security of the issuer within a period of less than six months.\166\
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78l.
    \162\ 15 U.S.C. 78p(a).
    \163\ Insiders file these reports on Form 3. 17 CFR 249.103.
    \164\ Insiders file transaction reports on Forms 4 and 5. 17 CFR 
249.104 and 249.105.
    \165\ 15 U.S.C. 78p(b).
    \166\ In addition, insiders are subject to the short sale 
prohibitions of Section 16(c).
---------------------------------------------------------------------------

    As applied to 10% holders, Congress intended Section 16 to reach 
persons presumed to have access to information because they can 
influence or control the issuer as a result of their equity 
ownership.\167\ Because Section 13(d) addresses these types of 
relationships, the Commission adopted Rule 16a-1(a)(1) to define 10% 
holders under Section 16 as persons deemed 10% beneficial owners under 
Section 13(d) and the rules thereunder.\168\ The Section 13(d) 
analysis, such as counting beneficial ownership of the equity 
securities underlying derivative securities exercisable or convertible 
within 60 days,\169\ is therefore imported into the 10% holder 
determination for Section 16 purposes. The application of Rule 16a-
1(a)(1) is straightforward; if a person is a 10% beneficial owner as 
determined pursuant to Section 13(d) and the rules thereunder, the 
person is deemed a 10% holder under Section 16.\170\
---------------------------------------------------------------------------

    \167\ See S. Rep. No. 1455, at 55, 68 (1934); see also S. Rep. 
No. 792, at 20-1 (1934); S. Rep. No. 379, at 21-2 (1963).
    \168\ Ownership Reports and Trading By Officers, Directors and 
Principal Security Holders, Release No. 34-28869 (Feb. 21, 1991) [56 
FR 7242 (Feb. 21, 1991)] (stating that as applied to 10% holders, 
Section 16 ``is intended to reach those persons who can be presumed 
to have access to inside information because they can influence or 
control the issuer as a result of their equity ownership'' and 
noting that Section 13(d) of the Exchange Act ``specifically 
addresses such relationships'').
    \169\ 17 CFR 240.13d-3(d).
    \170\ For example, the Commission applied an analysis derived 
from Rule 13d-3(d)(1) in publishing its views regarding when equity 
securities underlying a security future that requires physical 
settlement should be counted for purposes of determining whether the 
purchaser of the security future is subject to Section 16 as a 10% 
holder by operation of Rule 16a-1(a)(1). Commission Guidance on the 
Application of Certain Provisions of the Securities Act of 1933, the 
Securities Exchange Act of 1934, and Rules thereunder to Trading in 
Security Futures Products, Release No. 34-46101 (June 21, 2002) [67 
FR 43234 at Q 7 (June 27, 2002)].

---------------------------------------------------------------------------

[[Page 13876]]

    Thus, the proposed amendments to Rules 13d-3, 13d-5 and 13d-6 would 
directly impact the analysis under Rule 16a-1(a)(1) as to whether a 
person is a 10% holder. For example, because proposed Rule 13d-3(e) 
would provide that holders of cash-settled derivative securities in 
specified circumstances will be ``deemed'' beneficial owners of the 
reference securities in a covered class for purposes of Sections 13(d) 
and (g), those holders also would be deemed beneficial owners of such 
reference securities for purposes of determining whether that person is 
a 10% holder under Section 16. By expanding the meaning of ``beneficial 
owner'' under Rule 16a-1(a)(1) to include persons who hold cash-settled 
derivatives in specified circumstances, proposed Rule 13d-3(e) could 
increase the number of 10% holders and, in turn, the number of persons 
subject to Section 16(a)'s disclosure obligations,\171\ Section 16(b)'s 
short-swing profit liability \172\ and Section 16(c)'s short sale 
prohibitions.\173\ Similarly, two or more persons may be deemed to have 
formed a group that beneficially owns more than 10% of a covered class 
as a result of the application of our proposed amendments to Rule 13d-
5, particularly with respect to the tipper-tippee relationships that 
are the subject of proposed Rule 13d-5(b)(1)(ii). Under this 
circumstance, each group member would be considered a 10% holder 
subject to Sections 16(a), (b), and (c).\174\ By contrast, the proposed 
amendments to Rule 13d-6 would create new exemptions under which two or 
more persons will not be deemed to have acquired beneficial ownership 
of an issuer's equity securities as a group. To the extent beneficial 
owners qualify for and rely on the proposed exemptions in Rule 13d-6, 
those exemptions may offset any potential increase in the number of 
persons who become 10% holders as a result of our proposed amendments 
to Rule 13d-5.
---------------------------------------------------------------------------

    \171\ See supra notes 163-164 and accompanying text.
    \172\ See supra note 165 and accompanying text.
    \173\ See supra note 166.
    \174\ Ownership Reports and Trading By Officers, Directors and 
Principal Security Holders, Release No. 34-28869 (Feb. 21, 1991) [56 
FR 7242 at n.54 (Feb. 21, 1991)] (noting that ``[i]n contrast to 
Section 13(d), which requires a group filing, the group itself would 
not be a separate person for Section 16 purposes'' and that, 
instead, ``for purposes of determining status as a ten percent 
holder under Section 16, the securities beneficially owned by the 
group must be included in the calculation by each individual member 
of the group'').
---------------------------------------------------------------------------

    Given that Rule 16a-1(a)(1) has the same purpose as Regulation 13D-
G--i.e., to identify persons who can influence or control the issuer as 
the result of equity ownership--it appears appropriate to continue to 
apply the standards of Regulation 13D-G, as proposed to be amended, to 
identify 10% holders subject to Section 16. Accordingly, we believe it 
is not necessary to propose any amendments to Rule 16a-1(a)(1) in this 
release, but solicit public comment on the Section 16 implications 
resulting from our proposed amendments to Rules 13d-3, 13d-5, and 13d-
6.
Request for Comment
    83. Should Rule 16a-1(a)(1) import the beneficial ownership 
determinations of proposed Rule 13d-3(e) to determine who is a 10% 
holder for purposes of Section 16?
    84. Conversely, should we exclude holdings of cash-settled 
derivative securities with the purpose or effect of changing or 
influencing control of the issuer that would be included for the 
purposes of proposed Rule 13d-3(e) from 10% holder identification for 
purposes of Section 16? If so, should all types of such derivative 
holdings be excluded or only certain types of instruments? For example, 
under proposed Rule 13d-3(e), only long positions in such securities 
would be counted, and short positions would not be netted against long 
positions or otherwise taken into account. Similarly, as proposed, if a 
derivative security does not have a fixed delta (i.e., if the delta is 
variable and changes over the term of the derivative security), then a 
person who holds such derivative security would calculate the delta on 
a daily basis based on the closing market price of the reference equity 
security on that day for purposes of determining whether such person is 
a 10% holder. Are these criteria appropriate to apply to 10% holder 
determinations under Section 16?
    85. Would including ownership of cash-settled derivative securities 
held with the purpose or effect of changing or influencing the control 
of the issuer for purposes of 10% holder determinations be consistent 
with the purposes of Section 16? Should inclusion of these securities 
result in persons becoming 10% holders subject to Section 16(b)'s 
short-swing profit liability and Section 16(c)'s short sale 
prohibitions, as well as Section 16(a)'s disclosure obligations? If 
not, please explain why.
    86. Would the inclusion of such securities for purposes of Section 
16 10% holder determinations cause practical issues for any type of 
business? For example, would this potentially impair the capability of 
financial institutions to execute transactions using derivative 
securities, including as counterparties to clients, in the ordinary 
course of their business? If so, please explain why.
    87. Are there reasons why a holder of the cash-settled derivative 
securities covered by proposed Rule 13d-3(e) should be deemed the 
beneficial owner of the reference securities in a covered class for 
purposes of Sections 13(d) and (g) but not the beneficial owner of 
those reference securities for purposes of determining whether that 
person is a 10% holder under Section 16? If so, should we amend Rule 
16a-1(a)(1) to avoid the application of proposed Rule 13d-3(e) to the 
determination as to whether a person is a 10% holder under Section 16? 
For example, should we amend Rule 16a-1(a)(1) such that it defines 10% 
holders under Section 16 as persons deemed 10% beneficial owners under 
Section 13(d) and the rules thereunder other than Rule 13d-3(e)?
    88. Could the requirement in proposed Note 2 to Rule 13d-3(e)(2) 
(i.e., that the holder of a derivative security without a fixed delta 
calculate the delta on a daily basis) result in situations in which a 
person's beneficial ownership does not exceed 10% of a covered class at 
the time that person acquires a derivative security, but then exceeds 
10% at a later time solely by virtue of the fact that the delta of the 
derivative security changed (i.e., not as a result of any further 
acquisitions)? If so, would it be appropriate to subject that person to 
the requirements of Section 16 under such circumstances?
    89. Should Rule 16a-1(a)(1) import the group formation and 
beneficial ownership acquisition standards of Rule 13d-5, as altered by 
our proposed amendments, for purposes of determining who is a 10% 
holder for purposes of Section 16?
    90. Should Rule 16a-1(a)(1) import the acquisition exemptions set 
forth in Rule 13d-6, as altered by our proposed amendments, for 
purposes of determining who is a 10% holder for purposes of Section 16?
    91. Would importing the proposed amendments to Rules 13d-5 and 13d-
6, as would be the case under Rule 16a-1(a)(1), be inconsistent with 
the purposes of Section 16? If so, please explain.

III. Economic Analysis

A. Introduction

    Section 13(d) was enacted in 1968 with the intent to alert the 
marketplace to rapid accumulations of equity securities which might 
represent a shift

[[Page 13877]]

in corporate control.\175\ Together with Regulation 13D-G,\176\ these 
regulatory provisions have existed for more than 50 years. As discussed 
above, technological advances since 1968, such as the ability to submit 
filings electronically through the Commission's EDGAR system and the 
use of modern information technology in today's financial markets, have 
reduced the time needed to prepare and file Schedules 13D and 13G.\177\ 
Financial product innovation over the past half-century, such as the 
use of cash-settled derivative securities and the advent of electronic 
trading, have outpaced the reach of the regulation when first 
adopted.\178\ These developments can provide large investors with 
opportunities to acquire substantial stakes in companies that exceed 
the Section 13(d) and (g) reporting threshold that may not have existed 
previously.\179\ In addition, the legal landscape has evolved since the 
passage of the Williams Act. Hostile tender offers, once a prominent 
hallmark of the takeover wave in the 1980s, have become comparatively 
rare since the development and widespread adoption of the ``poison 
pill'' shareholder rights plan in the 1980s as an anti-takeover 
device.\180\ Today's market for corporate control features activist 
investors, particularly activist hedge funds, who seek to influence 
governance through accumulation of strict minority equity stakes 
instead of full control.\181\ As a result, less share accumulation is 
needed for large investors to exert influence. To modernize the 
beneficial ownership reporting requirements and improve their operation 
and efficacy, and to provide investors and market participants with 
more timely disclosure of information related to corporate control, we 
are proposing amendments to Regulation 13D-G and related technical 
changes to Regulation S-T. Specifically, we are proposing to (1) revise 
the current deadlines for Schedule 13D and Schedule 13G filings; (2) 
amend Rule 13d-3 to deem holders of certain cash-settled derivative 
securities as beneficial owners of the reference covered class; (3) 
align the text of Rule 13d-5, as applicable to two or more persons who 
act as a group, with the statutory language in Sections 13(d)(3) and 
(g)(3) of the Exchange Act; and (4) set forth the circumstances under 
which two or more persons may communicate and consult with one another 
and engage with an issuer without concern that they will be subject to 
regulation as a group with respect to the issuer's equity securities. 
We also are proposing certain related technical changes to Regulation 
S-T in connection with these proposed amendments and requirements that 
Schedules 13D and 13G be filed using a structured, machine-readable 
data language.
---------------------------------------------------------------------------

    \175\ See H.R. Rep. No. 90-1711 (1968), supra note 24; see also 
supra note 95.
    \176\ The Commission adopted Regulation 13D, the predecessor to 
Regulation 13D-G, in 1968. See 33 FR 11015 (Aug. 2, 1968), supra 
note 64.
    \177\ See supra Section II.A.1.
    \178\ See supra Section II.B.
    \179\ We note that while the reporting obligations under 
Exchange Act Section 16 and the Hart-Scott-Rodino Antitrust 
Improvements Act of 1976 could reduce incentives for large 
shareholders to accumulate substantial stakes that exceed the 
Section 13(d) and (g) reporting threshold, they do not eliminate 
those incentives or the need for more timely beneficial ownership 
reporting, as proposed. See infra Section III.B.1.
    \180\ See Kahan and Rock (2019), infra note 260 at 922-23 (``In 
effect, the poison pill moved the decision on the success of a 
hostile bid from shareholders voting with their feet (by tendering 
their shares in a tender offer) to shareholders voting by ballot (by 
replacing a majority of the board). . . . To get a rough sense of 
the current prevalence of toeholds, we collected data from Thompson 
Reuters on proposed takeovers that were classified as hostile. There 
were twenty-four such proposals between 2010 and 2015.''); see also 
supra note 22.
    \181\ See Brav, Jiang and Li (2021), infra note 215 (noting that 
``[a]ctivist hedge funds also differ from corporate raiders that 
operated in the 1980s, as they tend to accumulate strict minority 
equity stakes and do not seek direct control,'' and ``[a]ctivists 
are both outsiders and insiders, in that they do not seek full 
control but operate by influencing control''). We also note that 
today's market for corporate control has seen an increasing use of 
low-threshold poison pills (threshold of 10%-15%) along with 
evolving governance practice. Legal scholars have warned that too 
restrictive pills could negatively affect activist investors' 
profits and incentives and thereby activism. See Kahan and Rock 
(2019), infra note 260 (recommending that ``[w]hether pills with a 
threshold of 10% or 15% (low-threshold pills) should be permitted 
against activists [should] depend[ ] on the context,'' and ``pills 
with a threshold of less than 10% and pills with a `wolf-pack' 
trigger [should be regarded as] presumptively invalid'' because 
``[s]uch pills are not a reasonable response to any cognizable 
threat and impose excessive restrictions on the ability of an 
activist to conduct a credible contest and communicate with other 
shareholders''); see also infra Section III.C.1.b.i.
---------------------------------------------------------------------------

    Overall, we believe the proposed amendments would benefit investors 
and market participants by providing more timely information relating 
to significant stockholders as well as potential changes in corporate 
control, facilitating investor decision-making and reducing information 
asymmetry in the market. We also recognize that these amendments could 
increase costs for investors and issuers. For example, the amendments 
could increase costs for blockholders seeking to influence or control 
an issuer, and therefore potentially inhibit shareholder activism and 
the improvement of corporate efficiency.
    We are mindful of the costs and benefits of the proposed 
amendments. The discussion below discusses in detail the potential 
economic effects of the proposed amendments, including the likely 
benefits and costs, as well as the likely effects on efficiency, 
competition and capital formation.\182\ At the outset, we note that, 
where possible, we have attempted to quantify the benefits, costs and 
effects on efficiency, competition and capital formation expected to 
result from the proposed amendments. However, we are unable to quantify 
all potential economic effects because we lack information necessary to 
provide reasonable estimates for those effects. For example, the 
Commission is unable to reasonably quantify the potential harm to 
investors as a result of mispricing under the current rules, or the 
reduction in trading costs due to improvements to liquidity or capital 
formation that may arise from more efficient pricing under the proposed 
amendments. We also are unable to quantify, with precision, the 
increased costs for blockholders to initiate corporate change as a 
result of the shortened Schedule 13D filing deadlines and, therefore, 
the reduction of the costs and benefits the presence of such 
blockholders bring. To estimate such costs, we would need to know, for 
example, how many potential blockholders would reduce their share 
accumulation prior to disclosure after the proposed rule change, and 
the amount of any such reduction. The ability for blockholders to 
achieve their target accumulation level prior to disclosure depends on 
such target level, the liquidity of the targeted covered class, their 
acquisition plans and their ability to adapt the plans. Because we do 
not have all the inputs for these variables, we cannot provide a 
reasonable estimate of the effects of the proposed amendments. Where we 
are unable to quantify the economic effects of the proposed amendments, 
we provide a qualitative assessment of the potential effects and 
encourage commenters to provide data and information that would help 
quantify

[[Page 13878]]

the benefits, costs and potential impacts of the proposed amendments on 
efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \182\ Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] 
requires the Commission, when engaging in rulemaking where it is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation. Further, Section 23(a)(2) of the 
Exchange Act [15 U.S.C. 78w(a)(2)] requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------

B. Economic Baseline

1. Current Regulatory Framework
    To understand the effects of the proposed amendments, we first 
compare them to the current regulatory framework.
a. Filing Deadlines
    Section 13(d)(1) and Rule 13d-1(a) together require a person who 
directly or indirectly acquires ``beneficial ownership'' of more than 
5% of a covered class to file a Schedule 13D within 10 days of the 
acquisition that exceeds 5%.\183\ For investors who are eligible to 
file a Schedule 13G, the filing deadlines for the initial Schedule 13G 
are 45 days after the end of calendar year for QIIs and Exempt 
Investors if they beneficially own more than 5% of a covered class as 
of the last day of the calendar year, and within 10 days of acquiring 
beneficial ownership of more than 5% of a covered class for Passive 
Investors, under Rules 13d-1(b), (d), and (c), respectively.\184\ Rules 
13d-1(e), (f), and (g) set forth the initial Schedule 13D filing 
obligations for investors who are no longer eligible to file Schedule 
13G.\185\
---------------------------------------------------------------------------

    \183\ See supra Section II.A.1.
    \184\ See supra Section II.A.3.
    \185\ See supra Section II.A.2.
---------------------------------------------------------------------------

    Sections 13(d)(2) and 13(g)(2), together with Rules 13d-2(a), (b), 
(c), and (d), set forth amendment obligations related to original 
filings. Rule 13d-2(a) provides that if any material change occurs to 
the facts reported in the initial Schedule 13D filing, an amendment 
disclosing that change shall be filed with the Commission ``promptly.'' 
\186\ Rule 13d-2(b) requires that for all persons who report beneficial 
ownership on Schedule 13G, an amendment shall be filed ``within forty-
five days after the end of each calendar year if, as of the end of the 
calendar year, there are any changes in the information reported in the 
previous filing on that Schedule [13G].'' \187\ In addition, Rule 13d-
2(c) requires QIIs to file an amendment to their Schedule 13G within 10 
days after the end of the first month in which their beneficial 
ownership exceeds 10% of a covered class, or increases or decreases by 
more than 5% of the covered class, once across the 10% threshold.\188\ 
For Passive Investors, current Rule 13d-2(d) requires that they 
``promptly'' file an amendment to their Schedule 13G upon acquiring 
greater than 10% of a covered class, or if, once across the 10% 
threshold, they increase or decrease their beneficial ownership by more 
than 5% of the covered class.\189\
---------------------------------------------------------------------------

    \186\ See supra Section II.A.4.a and note 65.
    \187\ See supra Section II.A.4.a.
    \188\ See supra Section II.A.5.a.
    \189\ Id.
---------------------------------------------------------------------------

    In addition to Sections 13(d) and (g), Exchange Act Section 16 
provides the public with information about the securities transactions 
and holdings of an insider of an issuer, including 10% holders.\190\ 
Rule 16a-1(a)(1) defines 10% holders under Section 16 as persons deemed 
10% beneficial owners under Section 13(d) and the rules 
thereunder.\191\ Within 10 days of becoming an insider (including 
within 10 days of becoming a 10% holder), or upon registration of the 
class of equity security under Section 12, Section 16(a) requires an 
insider to file an initial report (Form 3) with the Commission 
disclosing his or her beneficial ownership of all equity securities of 
the issuer.\192\ Section 16(a) also requires insiders (including 10% 
holders) to report subsequent changes in such ownership by the end of 
the second business day following the day the transaction was executed 
(Form 4).\193\ These filing requirements are not necessarily 
duplicative with the Schedule 13D and 13G filing requirements given 
that, among other things, they only begin to apply to certain 
beneficial owners once the 10% threshold has been crossed and may 
require materially different disclosures, such as those relating to 
pecuniary interests. The reporting obligation under Section 16 could 
reduce incentives for large shareholders to accumulate stakes exceeding 
10%; however, it should not eliminate such incentives, the extent of 
which would depend on the objectives of the blockholders.
---------------------------------------------------------------------------

    \190\ See supra Section II.G.
    \191\ See supra note 168 and accompanying text.
    \192\ See 15 U.S.C. 78p(a)(2)(B); see also supra notes 162-163 
and accompanying text.
    \193\ See 15 U.S.C. 78p(a)(2)(C); see also supra note 164 and 
accompanying text.
---------------------------------------------------------------------------

    Lastly, certain acquisitions of ownership stakes are reportable 
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 
(``HSR'') \194\ via the Notification and Report Form.\195\ Instead of 
requiring public disclosure after acquiring beneficial ownership of a 
certain percentage of the covered class, HSR requires notification to 
the Federal Trade Commission and the Department of Justice prior to 
acquisition of any voting securities or assets if the acquisition will 
cause value of the acquirer's holdings to exceed certain dollar 
thresholds (i.e., if the value of equity or assets to be acquired 
exceeds $368 million, or if it is between $92 million and $368 million 
and meets some additional criteria).\196\ Because the dollar thresholds 
are not tied to the size of the target company, the category of persons 
required to report under Sections 13(d) and (g) would not necessarily 
be identical to those required to give prior notice under HSR. Also, 
unlike Section 13(d) and (g) reporting, the filing of the Notification 
and Report Form and the information in it are not publicly disclosed, 
except in some special circumstances.\197\ Similar to Section 16 
reporting obligations, reporting obligations under HSR could also 
reduce incentives for blockholders to accumulate ownership. However, 
this effect should be relatively smaller than those under Section 16, 
because the filings under HSR are not publicly disclosed.
---------------------------------------------------------------------------

    \194\ Public Law 94-435, 90 Stat 1383 (1976).
    \195\ 16 CFR part 803, appendix A.
    \196\ See 15 U.S.C. 18a(a), (b)(1)(A); 16 CFR 803.1; Revised 
Jurisdictional Thresholds for Section 7A of the Clayton Act, 86 FR 
7870 (Feb. 2, 2021). Specifically, notification is required either 
by planned acquisition of in excess of $200 million in voting 
securities or assets as adjusted annually or in excess of $50 
million as adjusted annually combined with certain additional 
factors. Adjusted thresholds are published for each fiscal year to 
reflect the percentage change in the gross national product for that 
year compared to the gross national product for the year ending 
September 30, 2003.
    \197\ See 15 U.S.C. 18a(h).
---------------------------------------------------------------------------

b. Beneficial Ownership
    Neither Section 3(a) nor Section 13(d) of the Exchange Act defines 
the term ``beneficial owner'' or ``beneficial ownership.'' Regulation 
13D-G similarly does not expressly define those terms. Rule 13d-3(a) 
provides that a person is a beneficial owner of a security if that 
person, directly or indirectly, has or shares voting power and/or 
investment power. In addition, Rule 13d-3 deems certain persons to be 
beneficial owners even if they lack voting power and investment power. 
Rule 13d-3(b) deems a person who uses any contract, arrangement or 
device to divest or prevent the vesting of beneficial ownership of the 
security as part of a plan or scheme to evade reporting under Section 
13(d) to be a beneficial owner. Rule 13d-3(d) deems a person to be a 
beneficial owner of an equity security if that person holds a right to 
acquire the security that is exercisable within 60 days or who acquires 
a right to acquire the security for the purpose or with the effect of 
changing or influencing control of the issuer of securities regardless 
of when that right is exercisable. Under the current rule, the scope of 
beneficial

[[Page 13879]]

ownership ordinarily does not include holders of cash-settled 
derivative securities because those instruments generally do not convey 
voting or investment power over any equity securities in the reference 
covered class.\198\ As noted above, if a person is deemed a beneficial 
owner for the purposes of Section 13(d) and the rules thereunder, then 
he or she also is deemed a beneficial owner for the purposes of 
Exchange Act Section 16 to the extent the beneficial ownership held 
exceeds 10% of a covered class.\199\
---------------------------------------------------------------------------

    \198\ See supra Section II.B.1. Under certain circumstances, 
investors in security-based swaps may be beneficial owners, as 
determined under Rule 13d-3, of a covered class. To the extent that 
a holder of a security-based swap owns that security not exclusively 
settled in cash, the person could be viewed as a beneficial owner 
under Rule 13d-3(d)(1). In addition, if a security-based swap is 
used as part of plan or scheme to evade beneficial ownership 
reporting, the person could be deemed a beneficial owner as 
described in Rule 13d-3(b). Finally, if the holder of a security-
based swap directly or indirectly holds the power to direct a 
counterparty how to vote or dispose of shares in a covered class 
used as a reference security, that person can be a beneficial owner 
as provided in Rule 13d-3(a). See Beneficial Ownership Reporting 
Requirements and Security-Based Swaps (Confirmation), Release No. 
34-64628 (June 8, 2011) [76 FR 34579 (June 14, 2011)].
    \199\ See supra note 168 and accompanying text; see also supra 
Section II.G.
---------------------------------------------------------------------------

c. Group Formation
    Under Sections 13(d)(3) and (g)(3), two or more persons 
``act[ing]'' as a ``group for the purpose of acquiring, holding, or 
disposing of [equity] securities'' constitute a single person for 
purposes of those statutory provisions.\200\ Rule 13d-5(b) states that 
when two or more persons ``agree to act together'' for the purpose of 
acquiring, holding, voting or disposing equity securities, the group 
formed thereby shall be deemed to have acquired beneficial ownership, 
for purposes of Sections 13(d) and (g), of all equity securities of the 
issuer beneficially owned by such persons.
---------------------------------------------------------------------------

    \200\ See supra Section II.C.1.
---------------------------------------------------------------------------

d. Item 6 of Schedule 13D
    As discussed in Section II.E.1., Congress set forth a statutory 
requirement under Section 13(d)(1)(E) that a person disclose 
``information as to any contracts, arrangements, or understandings with 
any person with respect to any securities of the issuer, including 
[the] transfer of any of the securities, joint ventures, loan or option 
arrangements, puts or calls, guaranties of loans, guaranties against 
loss or guaranties of profits, division of losses or profits, or the 
giving or with holding of proxies . . . .'' This obligation is codified 
at Rule 13d-101 and reflected in Item 6 of Schedule 13D. Item 6 
provides only an illustrative subset of the types of contracts, 
arrangements, understandings or relationships that must be disclosed, 
and cash-settled derivative securities have not been expressly 
identified in the list of examples, which could create an impression 
that a person is not required to disclose interests in all derivative 
securities that use the issuer's equity security as a reference 
security.
2. Affected Parties
    The relevant market participants for purposes of establishing the 
economic baseline for the proposed rules include: All investors that 
are required or potentially required to report their beneficial 
ownership on Schedules 13D and 13G; the issuers of the equity 
securities beneficially owned; investors that rely on beneficial 
ownership reports in connection with their investment decisions as to 
issuers' securities; shareholders of the issuer, particularly the long-
term shareholders of the issuer, who might be more affected by 
shareholder activism; market professionals, such as analysts that 
valuate securities; the financial institutions that serve as 
counterparties to cash-settled derivatives; and the management of the 
issuer. Section 16 filers also are relevant market participants because 
Section 13(d) and the rules thereunder are used to determine whether a 
person's beneficial ownership exceeds 10% and must be reported on Forms 
3, 4 and 5.
    During the calendar year 2020, the Commission received a total of 
10,542 Schedule 13D filings \201\ and 44,059 Schedule 13G filings,\202\ 
involving 3,940 unique Schedule 13D filers and 8,789 unique Schedule 
13G filers, respectively. To understand the extent to which the 
proposed amendments could affect holders with reporting obligations, we 
examine their current filing practice. Our preliminary analysis of the 
2020 filings \203\ shows that Schedule 13D filers reported a median 
accumulation of 8.4% of shares in their initial Schedule 13D filings. 
Approximately 20.7% of the initial Schedule 13D filings were filed 
within the first five days after the acquisition that crossed the 5% 
threshold. The median number of days between the acquisition that 
crossed the 5% threshold and the initial Schedule 13D filing was 10 
days \204\ with 22.9% of the initial Schedule 13D filings being made on 
the 10th day. A detailed day-by-day breakdown of the percentage of the 
filings made each day after crossing the 5% threshold is provided in 
Figure 1 and Table 1 below. For Schedule 13G filers, the median number 
of days between the date on which the 5% threshold was crossed and the 
initial filing was 21, and the median reported accumulation was 
6.3%.\205\
---------------------------------------------------------------------------

    \201\ Out of all the Schedule 13D filings, there were a total of 
2,288 initial filings and 8,254 amendments.
    \202\ Out of all the Schedule 13G filings, there were a total of 
12,838 initial filings and 31,221 amendments.
    \203\ We were able to collect data for our analysis from 2,236 
initial Schedule 13D filings and 12,759 initial Schedule 13G 
filings. Out of the 2,236 initial Schedule 13D filings, there are 
994 unique filings with sufficient data for our subsequent analysis.
    \204\ We note that approximately 32.9% of the Schedule 13D 
filings were made after 10 days. However, not all of these filings 
are considered late by the Commission. By rule, the Commission 
accepts as timely any filing that, if the calendar due date falls on 
a weekend or holiday, is received by the next business day. See 
supra note 3. Therefore, after we take into account weekends and 
holidays, we preliminarily estimate that about 20.1% of the filings 
are deemed late.
    \205\ We note that Schedule 13G filers include QIIs, Exempt 
Investors and Passive Investors. Under the current rules, Passive 
Investors must file their initial Schedule 13G within 10 days of 
acquiring more than 5% beneficial ownership, and Exempt Investors 
and QIIs must file within 45 days of the calendar year end in which 
their beneficial ownership exceeds 5%. Accordingly, the median 
filing time for all Schedule 13G filers presented here could be 
skewed for different types of filers. More specifically, the median 
of 21 days might be shorter than the actual median for QIIs and 
Exempt Investors, and longer than the actual median for Passive 
Investors. It is impracticable to produce statistics for different 
types of filers at this point because underlying data are not 
structured into an analyzable format.

---------------------------------------------------------------------------

[[Page 13880]]

[GRAPHIC] [TIFF OMITTED] TP10MR22.000


                        Table 1--Distribution of the Number of Days Between Crossing 5% and the Filing of an Initial Schedule 13D
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Distribution of Number of Days Between Crossing 5% Threshold and Filing of Schedule 13D
--------------------------------------------------------------------------------------------------------------------------------------------------------
Day Bin.................................         0               1               2               3               4               5               6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Events........................              45              45              38              33              19              26              38
Percent of Sample.......................            4.5%            4.5%            3.8%            3.3%            1.9%            2.6%            3.8%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Day Bin.................................         7               8               9              10             11-14            15+            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Events........................              57              62              76             228             180             147             994
Percent of Sample.......................            5.7%            6.2%            7.6%           22.9%           18.1%           14.8%          100.0%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The graph and table are based on staff analysis of 2020 EDGAR initial Schedule 13D filings. Filers are currently required to file within 10 days
  of the acquisition that exceeds 5% of a covered class.

C. Potential Benefits and Costs of the Proposed Amendments

    We have considered the potential costs and benefits associated with 
the proposed amendments. Overall, we believe the proposed amendments to 
Regulation 13D-G would benefit investors and market participants by 
providing more timely information relating to significant stockholders 
as well as potential changes in corporate control, facilitating 
investor decision-making, reducing information asymmetry and improving 
price discovery in the market. We also recognize that the proposed 
amendments could impose costs on the affected parties. For instance, 
the proposed amendments could increase the costs for blockholders to 
influence or control an issuer and potentially inhibit shareholder 
activism and its goal of improving corporate efficiency. A discussion 
of the anticipated economic costs and benefits of the proposed 
amendments is set forth in more detail below. We also expect the 
proposed amendments to affect compliance burdens. The quantitative 
estimates of changes in those burdens for purposes of the Paperwork 
Reduction Act of 1995 (``PRA'') are further discussed in Section IV 
below. For purposes of the PRA, we estimate that the proposed 
amendments would result in an increase of 140,799 burden hours from the 
increase in the number Schedule 13D filings and 13G filings.\206\ In 
addition, the estimated increase in the paperwork burden as a result of 
the proposed amendments for Forms 3, 4, and 5 will be 1,099 hours, 
16,911 hours and 594 hours, respectively.\207\
---------------------------------------------------------------------------

    \206\ See infra Section IV.B.
    \207\ See infra Section IV.B.
---------------------------------------------------------------------------

1. Proposed Amendments to Rules 13d-1 and 13d-2 and Rules 13 and 201 of 
Regulation S-T
a. Benefits
i. Schedule 13D Filing Deadlines
    We are proposing to amend Rule 13d-1(a) to shorten the initial 
Schedule 13D reporting deadline from 10 days to five days after the 
date of the acquisition that exceeds 5% of a covered class. We believe 
the proposed change would benefit investors, issuers and other market 
participants by providing them more timely disclosure on material 
information related to potential changes of corporate control. More 
timely disclosure of such market-moving information could improve 
transparency, reduce information asymmetry and mispricing in the 
market, and allow investors to make more informed investment decisions.
    As discussed above, significant stock ownership contains market-
moving information related to potential changes

[[Page 13881]]

of corporate control which could influence investors' decision making, 
and therefore Section 13(d) was enacted with the intention to ``alert 
the market place to every large, rapid aggregation or accumulation of 
securities, regardless of technique employed, which might represent a 
potential shift in corporate control.'' \208\ Following technological 
advances and financial product innovation in the years since Section 
13(d)'s enactment,\209\ the current 10-day filing deadline under 
Section 13(d)(1) and Rule 13d-1(a) could be used by shareholders to 
acquire more--sometimes far more--than 5% of a covered class during the 
10-day window before any disclosure, a concern raised by some 
observers.\210\ For example, Barry, Brav and Jiang (2020) has 
documented that, while blockholders disclosed a median ownership of 
6.5% in their Schedule 13D filings, filers in the top 5th percentile of 
reported ownership disclosed an accumulation of 22.5% of the shares 
when initial Schedule 13D filings are made,\211\ far exceeding the 5% 
threshold. These statistics suggest that while the reporting 
obligations under Section 16 and HSR may reduce the incentives for 
shareholders to accumulate ownership far above the statutory threshold, 
they do not eliminate such accumulations. However, such practice is 
also not as pervasive as some have claimed.\212\ Nevertheless, the 
ability or practice for shareholders to accumulate a level of 
beneficial ownership far exceeding the statutory threshold without 
timely disclosure could undermine the benefits of beneficial ownership 
reporting, increasing information asymmetry and mispricing in the 
market. Thus, by shortening the deadline for initial Schedule 13D 
filings, the proposed amendment could improve the timeliness of 
beneficial ownership reporting, benefiting investors and other market 
participants through improved transparency and reduced information 
asymmetry in the market.
---------------------------------------------------------------------------

    \208\ See supra note 95.
    \209\ See supra Section II.A.1 and Section II.B.1.
    \210\ See Wachtell Petition, supra note 16; see also Guhan 
Subramanian, Corporate Governance 2.0, Harv. Bus. Rev. (Mar. 2015) 
(using the example of activist shareholders' acquisition of a large 
stake in J.C. Penney to illustrate that some shareholders are 
``disorderly'' and a takeover by such parties could be 
``disastrous'' for the company), available at https://hbr.org/2015/03/corporate-governance-2-0; Williams Cos. Stockholder Litig., No. 
2020-0707, 2021 WL 754593, at *33-34 (Del. Ch. Feb. 26, 2021), 
aff'd., No. 139, 2021, 2021 WL 5112495 (Del. Nov. 3, 2021).
    \211\ See infra note 217 (findings are based on based on hedge 
fund activism events over the period 1994-2016); see also Lucian A. 
Bebchuk, Robert J. Jackson Jr, Alon Brav and Wei Jiang, Pre-
disclosure accumulations by activist investors: Evidence and policy, 
39.1 J. Corp. L. 1-34 (2013) (reporting that filers in top 5th 
percentile disclosed 21.2% of ownership based on a sample of data 
includes a total number of 2,040 Schedule 13D filings made by 
activist hedge funds from 1994 to 2007).
    \212\ See supra note 211.
---------------------------------------------------------------------------

    Schedule 13D contains information related to significant 
stockholders and potential changes of corporate control. Such 
information is important to investors' decision making, because the 
change in control over the issuer of the relevant covered class could 
directly affect the change in management, its key operational 
decisions, strategy and financial results, and thereby its 
valuation.\213\ The current 10-day filing deadline leads to a delay of 
such market moving information being incorporated by the market, 
leading to less efficient pricing and information asymmetries that 
would harm investors.\214\ It is well documented in the academic 
literature that economically significant price changes occur in 
response to news about changes in corporate control, such as the 
initial filing of a Schedule 13D.\215\ For example, Brav et al. (2008) 
find that the filing of a Schedule 13D is associated with large 
positive average abnormal returns, in the range of 7% to 8%, during the 
[-20, +20] announcement window, and about 2% during the filing day and 
the following day.\216\ Similar to Brav et al. (2008), Klein and Zur 
(2009) document that issuers targeted by hedge funds earn a mean 
market-adjusted abnormal return of 5.5% over the [-30, +5] window 
around the initial Schedule 13D filing date and 7.2% for the [-30, +30] 
period around the filing. Extending the analysis by Brav et al. (2008) 
to more recent years, Barry, Brav and Jiang (2020) report an average 
abnormal return about 4.5% over the [-20, 20] window.\217\ Therefore, 
during any delay between a market-moving event and the Schedule 13D 
filing, securities are likely to be mispriced relative to a full-
information benchmark, and information asymmetry between Schedule 13D 
filers and those with whom they share the information, and the rest of 
the market, is greater than otherwise. The prolonged delay could, 
therefore, harm the investors who happen to sell their shares during 
the 10-day window. As discussed in Section III.A, we are not able to 
quantify the potential harm to investors due to data limitations. If an 
initial Schedule 13D were required to be filed more promptly, those 
investors might be able to sell their shares at a higher price, or they 
may re-evaluate their investment decisions. Timelier reporting would 
also allow other market participants, such as analysts and investment 
advisers, to better value the securities and make better 
recommendations. We recognize that the benefit of more timely reporting 
to investors and other market participants could be offset by the costs 
to blockholders and other investors as a result of the proposed 
amendment's effect on shareholder activism. We discuss these offsetting 
costs in more detail below in Section III.C.b.i.
---------------------------------------------------------------------------

    \213\ See, e.g., Brav et al. (2008), infra note 215 (finding an 
increase in issuer's payout, operating performance and CEO turnover 
after 13D filings).
    \214\ See, e.g., Wachtell Petition, supra note 16 (``[T]he ten-
day [Schedule 13D] reporting lag leaves a substantial gap after the 
reporting threshold has been crossed during which the market is 
deprived of material information and creates incentives for abusive 
tactics on the part of aggressive investor prior to making a 
filing.''); see also, Coffee and Palia (2016), supra note 19 
(``[T]he gains that activists make in trading on asymmetric 
information--before the Schedule 13D's filing--come at the expense 
of selling shareholders. . . . Disclosure that is delayed ten days 
enables activists to profit from trading on asymmetric information 
over that period . . . .'').
    \215\ See, e.g., Alon Brav, Wei Jiang, Frank Partnoy, and 
Randall Thomas, Hedge Fund Activism, Corporate Governance, and Firm 
Performance, 63.4 The Journal of Finance 1729-1775 (2008) (finding 
``The abnormal return around the announcement of activism is 
approximately 7%, with no reversal during the subsequent year.''); 
see also April Klein and Emanuel Zur, Entrepreneurial Shareholder 
Activism: Hedge Funds and Other Private Investors, 64.1 The Journal 
of Finance 187-229 (2009) (finding ``a significantly positive market 
reaction for the target firm around the initial Schedule 13D filing 
date, significantly positive returns over the subsequent year.'')); 
see also Christopher Clifford, Value Creation or Destruction? Hedge 
Funds as Shareholder Activists, 14 The Journal of Corporate Finance 
323-336 (2008) (``Firms targeted by activists earn an average 
cumulative abnormal return of 3.4% during the (-2,+2) window around 
the filing date''). For a comprehensive survey of literature on 
hedge fund activism, see also Alon Brav, Wei Jiang, and Rongchen Li, 
Governance by Persuasion: Hedge Fund Activism and Market-based 
Shareholder Influence (December 10, 2021), European Corporate 
Governance Institute--Finance Working Paper No. 797/2021, available 
at https://ssrn.com/abstract=3955116 or http://dx.doi.org/10.2139/ssrn.3955116 (retrieved from SSRN Elsevier database).
    \216\ See Brav et al. (2008), supra note 215.
    \217\ See John Barry, Alon Brav, and Wei Jiang, Hedge Fund 
Activism: Updated tables and figures (Feb. 6, 2020), available at 
https://faculty.fuqua.duke.edu/~brav/HFactivism_March_2019.pdf.
---------------------------------------------------------------------------

    Additionally, academic studies have shown that information 
asymmetry has a first-order effect on liquidity.\218\ Thus, the 
proposed amendment, by reducing information asymmetry, would provide 
incremental benefits to investors in general through the increased 
liquidity of the shares of the companies subject to Schedule 13D 
filings. The Commission implicitly recognized the importance of this 
point when it

[[Page 13882]]

accelerated deadlines for Form 4 and Form 8-K filings, as discussed 
above.\219\
---------------------------------------------------------------------------

    \218\ See, e.g., Lawrence Glosten and Paul Milgrom, Bid, Ask, 
and Transaction Prices in a Specialist Market with Heterogeneously 
Informed Investors, 14 The Journal of Financial Economics 71-100 
(1985).
    \219\ We recognize that the accelerated deadlines apply, in the 
case of Form 8-K filings, to issuers, and rely on different 
statutory authorities compared to deadlines for Schedule 13D 
filings. However, their economic effects on liquidity are similar. 
See also supra note 26.
---------------------------------------------------------------------------

    We also are proposing to amend Rule 13d-2(a) to require that all 
amendments to Schedule 13D be filed within one business day after the 
material change that triggers the amendment obligation. Rule 13d-2(a) 
currently requires a Schedule 13D amendment to be filed ``promptly'' to 
disclose a material change. The benefits of this proposed amendment to 
Rule 13d-2(a) are very similar to the benefits of our proposed 
amendment to Rule 13d-1(a) discussed above. More timely reporting would 
facilitate price discovery in the market, reduce information asymmetry 
and mispricing, and therefore allow investors to make more informed 
investment decisions. In addition, as discussed above, replacing the 
``promptly'' requirement with a bright-line requirement would provide 
greater clarity as to when material changes are to be disclosed, which 
could reduce filer confusion and improve compliance. The positive 
economic effect on the information environment and investor decision-
making associated with our proposed amendment to Rule 13d-1(a) also 
apply to our proposed conforming revisions to Rules 13d-1(e), (f), and 
(g).
ii. Schedule 13G Filing Deadlines
    We are also proposing amendments to Rules 13d-1(b), (c), and (d), 
and Rules 13d-2(b), (c), and (d) to shorten other reporting deadlines 
under Regulation 13D-G, which govern the deadlines for initial Schedule 
13G filings and Schedule 13G amendments.
    As discussed above, currently, under Rules 13d-1(b), (c), and (d), 
for beneficial owners with reporting obligations who are eligible to 
file a Schedule 13G, the filing deadlines for the initial Schedule 13G 
are 45 days after the end of calendar year for QIIs and Exempt 
Investors if they beneficially own more than 5% of a covered class as 
of the last day of the calendar year, and within 10 days of acquiring 
beneficial ownership of more than 5% of a covered class for Passive 
Investors. Under the current rules, QIIs and Exempt Investors may avoid 
beneficial ownership reporting altogether by selling down their 
positions before the end of the year. As discussed in Section 
II.A.4.b., the avoidance of beneficial ownership reporting enabled by 
these reporting deadlines could undermine the informational benefits of 
reporting under Sections 13(d) and 13(g). Together with Section 13(d), 
Section 13(g) was intended to provide a ``comprehensive disclosure 
system of corporate ownership'' applicable to all persons who are the 
beneficial owners of more than 5% of a covered class.\220\ Information 
regarding beneficial ownership is important to the market, regardless 
whether it is disclosed on Schedule 13D or 13G. There is evidence that 
the initial filing of Schedule 13G, like that of Schedule 13D, 
generates a positive stock price reaction, albeit smaller in 
magnitude.\221\ Therefore, the avoidance of beneficial ownership 
reporting on Schedule 13G made possible in part by the extended length 
of time in which certain beneficial owners have to report, if at all, 
could contribute to information asymmetry and mispricing in the market. 
As with the Schedule 13D filings, the prolonged delay in Schedule 13G 
reporting could harm the investors who happen to sell their shares in 
the days before the filing. To address this concern, we are proposing 
to shorten the filing deadlines for an initial Schedule 13G to (1) no 
more than five business days after the end of the month in which their 
beneficial ownership exceeds 5% of a covered class for QIIs and Exempt 
Investors, and (2) five days after acquiring beneficial ownership of 
more than 5% of a covered class for Passive Investors.
---------------------------------------------------------------------------

    \220\ See 43 FR 18484 (Apr. 28, 1978), supra notes 51 and 52.
    \221\ See, e.g., Alex Edmans, Vivian W. Fang, and Emanuel Zur, 
The Effect of Liquidity on Governance, 26.6 The Review of Financial 
Studies 1443-1482 (2013) (finding that Schedule 13G filings generate 
on average approximately 0.8% cumulative abnormal return during the 
(-1,+1) window around the filing date, and more specifically, ``[a] 
13G filing leads to a positive market reaction, a positive holding 
period return, and an improvement in operating performance; all 
these effects are stronger in more liquid firms''); see also 
Christopher Clifford, Value Creation or Destruction? Hedge Funds as 
Shareholder Activists, 14 The Journal of Corporate Finance 323-336 
(2008) (``Firms targeted by passive investors earn an average 
cumulative abnormal return of 1.6% during the (-2,+2) window around 
the filing date.'').
---------------------------------------------------------------------------

    By shortening the initial Schedule 13G deadlines, the proposed 
amendments would reduce the opportunities for these holders to avoid 
their reporting obligations and improve transparency. Academic research 
has provided evidence that Schedule 13G filings contain value-relevant 
information--i.e., they are shown to lead to positive announcement 
returns and improvements in firm operating performance.\222\ Therefore, 
timely reporting of value-relevant information would facilitate price 
discovery and reduce information asymmetry and mispricing in the 
market, benefiting investors and other market participants similar to 
our proposed shortening of the initial Schedule 13D filing deadline.
---------------------------------------------------------------------------

    \222\ See Edmans, Fang, and Zur (2013), supra note 221.
---------------------------------------------------------------------------

    The proposed amendments would also shorten reporting deadlines for 
Schedule 13G amendments under Rules 13d-2(b), (c), and (d). We believe 
the potential benefits of shortening initial Schedule 13G filing 
deadlines discussed above also apply to the accelerated filing of the 
Schedule 13G amendments.
b. Costs
i. Schedule 13D Filing Deadlines
    It could be costly to shorten the deadline for filing the initial 
Schedule 13D under Rule 13d-1(a) as proposed because it may have a 
negative impact on corporate control and related shareholder engagement 
activities. Activists seeking to influence or control an issuer may be 
deterred from undertaking initiatives to engage management or launch 
campaigns because of the reduced gains in stockholder value that 
activists could capture and the earlier warning provided to management 
as a result of the proposed amendments, according to academic 
research.\223\ We discuss these potential effects and mitigating 
factors below.
---------------------------------------------------------------------------

    \223\ See Bebchuk, Jackson, Brav and Jiang (2013), supra note 
211.
---------------------------------------------------------------------------

Facilitating the Use of Low-Threshold Poison Pills
    There is a concern that a shortened reporting deadline could give 
early notice to an issuer's management regarding a potential takeover 
attempt.\224\ This accelerated filing deadline thus may provide 
management with more of an opportunity to quickly deploy defense 
mechanisms, increasing the costs for blockholders to successfully carry 
out their initiatives. Bebchuk et al. (2013) argue that shortening the 
deadline would ``enable incumbents to adopt low-trigger poison pills 
that make it impossible for outside blockholders to accumulate 
additional shares after they cross the five-percent threshold,'' and 
therefore ``deter outside investors from accumulating large blocks of 
stock in public companies.''
---------------------------------------------------------------------------

    \224\ See id.
---------------------------------------------------------------------------

    While we recognize the concern that a shortened reporting deadline 
could aid the use of low-threshold poison pills, the filing deadline's 
impact on shareholder activism through low-threshold poison pills may 
be overstated for several reasons. First, while the use

[[Page 13883]]

of low-threshold (10%-15%) poison pills has increased, such poison 
pills have been scrutinized by courts, academia and industry. Issuers' 
ability to adopt poison pill plans with low triggering thresholds is 
limited by the requirements of state law, with courts in Delaware and 
other jurisdictions scrutinizing poison pill plans under heightened 
judicial standards and at least one court expressing skepticism of a 
poison pill plan that had a 5% triggering threshold.\225\ In addition, 
as discussed above, legal scholars have expressed concern that these 
pills are too restrictive and could negatively affect activist 
investors' profits and incentives and thereby activism.\226\ Kahan and 
Rock (2019) have stated that pills with a threshold of 10% or 15% 
should be permitted depending on the context, and that pills with a 
threshold of less than 10% and pills with a ``wolf-pack'' trigger 
should be regarded as presumptively invalid, because the latter pills 
are ``not a reasonable response to any cognizable threat and impose 
excessive restrictions on the ability of an activist to conduct a 
credible contest and communicate with other shareholders.'' \227\ And 
the long-standing guidance of the proxy advisory firm Institutional 
Shareholder Services is that the ownership trigger cannot be so low as 
to be unduly restrictive and recommending that defensive pills 
generally should have a trigger no lower than 20%.\228\ Pills with 5% 
triggers are extremely rare in practice.\229\
---------------------------------------------------------------------------

    \225\ Williams Cos. Stockholder Litig., 2021 WL 754593, at *2.
    \226\ See Kahan and Rock (2019), infra note 260.
    \227\ Id. at 970.
    \228\ See Paul J. Shim, James E. Langston, and Charles W. Allen, 
Cleary Gottlieb Steen & Hamilton LLP, ISS and Glass Lewis Guidances 
on Poison Pills during COVID-19 Pandemic, Harvard Law School Forum 
on Corporate Governance (April 26, 2020), available at https://corpgov.law.harvard.edu/2020/04/26/iss-and-glass-lewis-guidances-on-poison-pills-during-covid-19-pandemic/.
    \229\ These pills are designed to protect a company's net 
operating loss (``NOL'') and were held to be valid because of tax 
regulations. See Eldar and Wittry (2021), infra note 230; see also 
Versata Enterprises, Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 
2010).
---------------------------------------------------------------------------

    Second, the median reported ownership on initial Schedule 13D 
filings are much lower than the historically conventional triggers of 
about 20%, or recent precedents which tended to cluster in the 10%-15% 
range.\230\ As discussed above, our preliminary analysis of 2020 
filings show that the median reported accumulation was 8.4% for all 
initial Schedule 13D filers. According to Barry, Brav and Jiang (2020), 
the median reported ownership was 6.3% in their sample of hedge fund 
filers.\231\ Because blockholders could potentially accumulate fewer 
shares under the shortened reporting deadline, the reported ownership 
on initial Schedule 13D filings may be even lower than the prevalent 
poison pill triggers, and therefore unlikely to trigger low-threshold 
poison pills.\232\
---------------------------------------------------------------------------

    \230\ See Ofer Eldar and Michael D. Wittry, Crisis Poison Pills, 
10 Rev. Corporate Fin. Stud. 204, 204-251 (2021) (reporting that 
conventional triggers historically have been about 20%, while also 
documenting a lower average trigger of about 12% in their study of 
crisis pills adopted during the Covid-19 pandemic); see also Shim et 
al. (2020), supra note 228.
    \231\ See supra note 217.
    \232\ See also Adam O. Emmerich et al., Fair Markets and Fair 
Disclosure: Some Thoughts on the Law and Economics of Blockholder 
Disclosure, and the Use and Abuse of Shareholder Power, 3 Harv. Bus. 
L. Rev. 135, 154-156 (2013) (``[S]hareholder rights plans play a 
crucial corporate governance role by, among other things, protecting 
shareholders from coercive, partial or two-tier tender offers . . . 
.'').
---------------------------------------------------------------------------

    Moreover, the length of the reporting period is not likely to 
affect the ability of issuers to adopt poison pill plans quickly. For 
example, issuers today already have the ability to implement a poison 
pill plan quickly by having a ``shelf'' poison pill plan that could be 
implemented by the issuer's board as soon as 24 hours after the 
Schedule 13D filing is made.\233\ This would remain true even if we 
reduce the Schedule 13D deadline from 10 days to five days.
---------------------------------------------------------------------------

    \233\ Francis J. Aquila, Adopting a Poison Pill in Response to 
Shareholder Activism (April 2016) (``[W]hen a threat arises, a shelf 
pill can be put into action within 24 hours. Without a shelf pill, 
the Board still has the ability to adopt a poison pill quickly and 
without the need for a shareholder vote. However, having a shelf 
pill increases a company's response time because it has prepared all 
the necessary paperwork in advance.''), available at https://www.sullcrom.com/files/upload/Apr16_InTheBoardroom.pdf.
---------------------------------------------------------------------------

Inhibiting Shareholder Activism
    Shortening the deadline may reduce blockholders' profits from stock 
price increases attributable to corporate governance improvements, and, 
as a result, reduce incentives for them to seek influence or a change 
in control. Blockholders have to expend resources to succeed in their 
bids to replace or influence inefficient management. They bear the 
costs for such initiatives, but share the improvement in corporate 
efficiency and security prices with other investors of the issuer upon 
the disclosure.\234\ By shortening the initial Schedule 13D filing 
deadline, the proposed amendments would reduce opportunities for 
blockholders to profit from their research and time investments that 
motivate large share accumulations, which could be used to acquire more 
shares at lower prices, selectively inform other investors to acquire 
shares or for other purposes. This inability to benefit from the 
observable increase in stock price after the announcement of the 
presence of an activist may reduce their incentive to initiate the 
change. A five-day deadline would nonetheless still allow blockholders 
to profit from their additional information, as contrasted, for 
example, with the original Williams Act amendment requiring prior 
notification.\235\
---------------------------------------------------------------------------

    \234\ See, e.g., Sanford J. Grossman and Oliver D. Hart, 
Takeover Bids, the Free-Rider Problem, and the Theory of the 
Corporation, The Bell Journal of Economics 42-64 (1980) (showing 
that ``shareholders can free ride on the raider's improvement of the 
corporation, thereby seriously limiting the raider's profit''). 
Note, however, that the model in this paper assumes immediate price 
adjustment. See also Bebchuk, Jackson, Brav and Jiang (2013), supra 
note 211.
    \235\ See Bebchuk and Jackson, supra note 17, at 44 (recounting 
the history of the Williams Act).
---------------------------------------------------------------------------

    In addition to blockholders, the proposed change could also be 
costly for general shareholders of companies that are potential targets 
of activist blockholders. There is evidence from the academic 
literature that the presence of blockholders is associated with 
improved outcomes for shareholders.\236\ If blockholders are 
disincentivized from seeking corporate control, it is possible that 
value-increasing corporate changes that could happen otherwise might 
not take place.\237\ The finance literature indicates that companies 
targeted by activist hedge funds, which are a subset of all 
blockholders filing Schedule 13D,\238\ tend to improve productivity 
without increases in wages.\239\ Activists

[[Page 13884]]

also tend to relocate underused assets to more productive uses. 
Additionally, studies show that the mere threat of activism 
incentivizes potential targets to increase payouts to shareholders and 
reduce investment in the long term, as well as improve operating 
performance.\240\
---------------------------------------------------------------------------

    \236\ See, e.g., Marianne Bertrand and Sendhil Mullainathan, Are 
CEOs Rewarded for Luck? The Ones Without Principals Are, 116 
Quarterly Journal of Economics 901-33 (2001); Lucian A. Bebchuk, 
Yaniv Grimstein, and Urs Peyer, Lucky CEOs and Lucky Directors, 65 
Journal of Finance 2363-2401 (2010); James A. Brickley, Ronald 
Lease, and Clifford Smith, Ownership Structure and Voting on 
Antitakeover Amendments, 20 Journal of Financial Economics 267-91 
(1988); Anil Shivdasani, Board Composition, Ownership Structure, and 
Hostile Takeovers, 16 Journal of Accounting and Economics 167-198 
(1993).
    \237\ See Lucian Bebchuk, Alma Cohen, and Allen Ferrell, What 
Matters in Corporate Governance? 22.2 The Review of Financial 
Studies 783-827 (2009) (finding that management entrenchment level 
is ``monotonically associated with economically significant 
reductions in firm valuation as well as large negative abnormal 
returns during the 1990-2003 period''). For more discussion on 
managerial entrenchment and the costs, see Andrei Shleifer and 
Robert W. Vishny, Management entrenchment: The case of manager-
specific investments, 25.1 Journal of Financial Economics 123-139 
(1989).
    \238\ Other subsets of Schedule 13D filers include, for example, 
mutual funds, pension funds, investment advisers, private 
individuals and public companies.
    \239\ See Alon Brav, Wei Jiang, and S. Kim, The Real Effects of 
Hedge Fund Activism: Productivity, Asset Allocation, and Labor 
Outcomes, 28.10 The Review of Financial Studies 2723-2769 (2015).
    \240\ See, e.g., Nikolay Gantchev, Oleg Gredil, and Chotibhak 
Jotikasthira, Governance under the Gun: Spillover Effects of Hedge 
Fund Activism, The Review of Finance 1031-1068 (2018).
---------------------------------------------------------------------------

    While we recognize that a shortened initial Schedule 13D filing 
deadline might have the potential to inhibit shareholder activism 
through reduced incentives, there are several reasons to expect that 
this effect, including its impact on corporate control, would be 
limited. First, academic research has shown that the presence of 
activist blockholders in a company is driven by many factors, including 
the company's size, the extent to which the company is undervalued, the 
liquidity of its stock, its leverage and the ownership stake of its 
officers and directors, among others.\241\ Thus, it is reasonable to 
expect that some of these factors may play a more important role in a 
blockholder's decision to take a stake in a company compared with the 
ability to obtain a large block undetected, or to receive compensation 
in the form of inside knowledge. For example, how undervalued the stock 
of the company is, or the size of the company, may determine the 
willingness of a blockholder to obtain a stake in the company.
---------------------------------------------------------------------------

    \241\ See, e.g., Alex Edmans, Vivian W. Fang and Emanuel Zur, 
The Effect of Liquidity on Governance, 26.6 The Review of Financial 
Studies 1443-1482 (2013); Christopher Clifford and Laura Lindsey, 
Blockholder Heterogeneity, CEO Compensation, and Firm Performance, 
51.5 The Journal of Financial and Quantitative Analysis 1491-1520 
(2016); Brav, Jiang, and Li, (2021), supra note 215.
---------------------------------------------------------------------------

    Second, even with a shortened filing deadline, as proposed, 
blockholders still stand to gain based on their information on the day 
of the filing, as well as on additional information they have regarding 
their plans to acquire more shares. As discussed above, Brav et al. 
(2008) show that the filing day and the following day see an abnormal 
return about 2.0%, and that return continues trending up to a total of 
7.2% in 20 days.\242\ Brav et al. (2008) also suggest that hedge funds 
adopt different strategies regarding announcing their activist intent. 
While some launch aggressive activism only after they have filed a 
Schedule 13D, some hedge funds file a Schedule 13D after publicly 
announcing their activist intent. These varying practices further 
indicate that the gains from share accumulation prior to Schedule 13D 
filings is not the only way for blockholders to profit or succeed in 
their activism.
---------------------------------------------------------------------------

    \242\ See Brav et al. (2008), supra note 215.
---------------------------------------------------------------------------

    Third, based on the statistics shown in academic research, the 
negative impact from the proposed amendments might not be as severe as 
some have suggested. For example, according to Barry et al. (2020), 
approximately 28% of their sample of activist hedge funds filed an 
initial Schedule 13D within five days after crossing the 5% 
threshold.\243\ Additionally, their subsample analysis shows that the 
activist hedge funds that filed with 0-1 days and 2-4 days after 
crossing 5% threshold reported on average 9.6% and 9.7% ownership, both 
of which are actually slightly higher than the overall average of 9.2% 
across all activist hedge fund filings.\244\ Even for funds that 
accumulate large percentage ownership before filing, their ownership 
percentages do not differ by much at the time of the filing. For 
example, the 95% percentile of activist hedge funds that file within 0-
1 days after crossing 5% threshold accumulate 20.5% ownership, which is 
the same as those that file within 8-10 days after crossing the 
threshold. These statistics from the study suggest that a non-trivial 
number of blockholders are already voluntarily filing their initial 
Schedule 13D in what would be a timely manner under our proposed 
amendments, and the percent ownership they are able to accumulate is 
comparable to those who disclose later. These statistics suggest that 
it may be possible to obtain target percentages within the proposed 
filing deadline.\245\ In addition, academic literature suggests that, 
unlike the ``corporate raiders'' of the 1980s who sought direct 
control, today's blockholders' aim is to ``influence'' corporate 
policies and governance, which requires lower levels of ownership.\246\ 
Namely, it seems possible for blockholders to adapt to the proposed 
deadline, albeit at a higher cost for some.\247\ Although the 
circumstances were not identical, lowering the statutory reporting 
threshold from 10% to 5% in 1970 did not appear to inhibit the increase 
in hostile takeovers and issuer deployment of corresponding defensive 
measures in the following decades--indeed, corporate America 
experienced a takeover wave in the 1980s.\248\
---------------------------------------------------------------------------

    \243\ See Barry, Brav and Jiang (2020), supra note 217 (studying 
hedge fund activism events over the period 1994-2016).
    \244\ Id. at 12.
    \245\ The 95th percentile of share accumulation reported in 
Barry et al. (2020) is approximately 20.5%. Brav et al (2021), in 
describing trends in activism, note an increased importance of hedge 
fund activism, characterized by lower stakes than those acquired by 
``corporate raiders'' who sought direct control in the 1980s. See 
Brav, Jiang, and Li (2021), supra note 215.
    \246\ See Brav, Jiang, and Li (2021), supra note 215.
    \247\ It is possible that larger shareholders are more likely to 
be able to accumulate target amounts at faster speeds. The speed of 
accumulation could also depend on the size and liquidity of the 
target issuer. Therefore, the proposed amendments could affect 
smaller blockholders, or blockholders who are trying to acquire 
shares in less liquid firms, more than others.
    \248\ See Andrei Shleifer and Robert W. Vishny, Takeovers in the 
'60s and the '80s: Evidence and Implications, Strategic management 
journal 12.S2 (1991): 51-59 (``The American economy has experienced 
two large takeover waves in the postwar period: one in the 1960s and 
one in the 1980s. Both waves had a profound impact on the structure 
of corporate America. The dominant trend in the '60s was 
diversification and conglomeration. The '80s takeovers, in contrast, 
reversed this process and brought American corporations back to 
greater specialization.'').
---------------------------------------------------------------------------

    Fourth, regarding a shorter reporting window's effects on 
shareholder activism, some scholars contend that the concerns discussed 
above are overstated, because a shorter reporting window may negatively 
affect short-term oriented activism more than the long-term oriented 
activism. Short-term oriented activism could be suboptimal for long-
term shareholders, and therefore the shortened deadline might provide 
some benefit or incur less costs to long-term shareholders by 
encouraging more long-term focused activism.\249\ Specifically, these 
scholars assert that blockholders do not always have a superior 
strategy--sometimes these investors could be short-term focused, and 
incumbent management does not necessarily embody entrenchment.\250\ 
They argue that

[[Page 13885]]

shortening the reporting window would not necessarily disincentivize 
shareholder activism per se--while it might disincentivize short-term 
focused shareholder activism because blockholders could experience 
reduced profit in the short-term, it should matter less to blockholders 
who truly believe they could improve the firm value in the long-term. 
Shortening the initial Schedule 13D reporting window has thus been 
recommended as an approach to encourage longer-term holdings and deter 
short-term activists without necessarily insulating managements from 
shareholder accountability.\251\ Therefore, from this viewpoint, to the 
extent that the proposed amendments could encourage blockholders to 
focus on long-term value creation, they could improve corporate 
control.\252\ We note that while the literature shows that a price 
increase in a window around a Schedule 13D reporting event does not 
reverse in the long term, providing evidence opposite to this 
view,\253\ the determination of long-term returns (e.g., over a year or 
more after the Schedule 13D filing), and whether there is indeed an 
increase in value in the long term that can be attributed to a 
particular filing, is inherently more complicated.
---------------------------------------------------------------------------

    \249\ See Coffee and Palia (2016), supra note 19, at 596 (``To 
sum up, the arguments against `closing the window' work only if one 
assumes both that activists are the hero of the story and that they 
generate value for all shareholders. Neither assumption seems sound, 
at least without substantial qualification. Nor does the fear that 
closing the window will chill activism sound convincing. Activists 
are reaping record returns at present; the number of such campaigns 
is accelerating, and fears for their future seem premature.'').
    \250\ See Coffee and Palia (2016), supra note 19, at 592 
(``[A]ctivists do not always need to have a superior strategy; 
indeed, some may seek to launch an activist campaign largely to roil 
the waters on the premise that noisy activism will be read by the 
market as signaling a possible takeover or restructuring. Even when 
the proposed change is flawed, those who purchase shares in the 
target firm before the filing of a Schedule 13D and exit at an early 
point will likely profit handsomely.''), and at 593 (``If management 
is in fact motivated today to maximize the firm's stock price, 
attempts to limit management's discretion through sudden and 
concealed activist campaigns would not necessarily lead to optimal 
outcomes. Also, because management generally has better information 
than outsiders--coupled with a strong incentive to maximize the 
firm's stock price--one can no longer begin from the premise that 
investment projects favored by management are the product of an 
inefficient preference for `empire-building.' If that premise was 
justified in its time that time is now past.'').
    \251\ Id. at 594.
    \252\ See Coffee and Palia (2016), supra notes 249 and 250.
    \253\ See supra note 215.
---------------------------------------------------------------------------

    Shortening the initial Schedule 13D filing deadline could also 
increase compliance costs for beneficial owners who have an obligation 
to file an initial Schedule 13D. These beneficial owners could incur a 
one-time cost to update their information technology system to monitor 
the share accumulations and generate alerts and reports in time to 
accommodate the rule change. They may also need to allocate more 
resources on an ongoing basis to monitor their holdings so that they 
can meet their obligation to file an initial Schedule 13D. These 
compliance costs could be significant for certain filers (e.g., those 
whose share accumulations need to be aggregated across different time 
zones or jurisdictions).
    We believe the proposed amendment to Rule 13(a)(4) of Regulation S-
T, which would extend the Schedule 13D and 13G filing ``cut-off'' time 
from 5:30 p.m. to 10 p.m., should mitigate the additional compliance 
costs for Schedule 13D filers resulting from the proposed amendments to 
Rules 13d-1(a), (e), (f), and (g). We do not think the proposed 
amendment to Rule 201(a) of Regulation S-T would have any significant 
cost or benefit. While the proposed amendment would make temporary 
hardship exemptions unavailable to filers of Schedules 13D and 13G, as 
discussed in Section II.A.6.b., the proposed treatment is consistent 
our treatment of Forms 3, 4 and 5, and the proposed amendments to Rule 
13(a)(4) should avoid the need for such hardship exemptions.
    Finally, we note that the compliance costs and mitigating factors 
discussed above also would apply to our proposed amendments to Rule 
13d-2(a) that would shorten the filing deadline for Schedule 13D 
amendments.
ii. Schedule 13G Filing Deadlines
    Accelerated Schedule 13G filings (for both initial filings and 
amendments) under our proposed amendments to Rules 13d-1(b), (c), and 
(d) and Rules 13d-2(b), (c), and (d) could potentially impose costs on 
filers. These costs may appear to be significant for QIIs because the 
proposed amendments to Rules 13d-1(b) and 13d-2(b) and (c) would 
significantly shorten the filing deadlines for these holders and 
potentially increase their filing frequency. Under the proposed 
amendments to Rules 13d-1(b) and 13d-2(b), QIIs would be required to 
file an initial and amended Schedule 13G, respectively, no more than 
five business days after the end of the month in which their beneficial 
ownership exceeds 5% of a covered class or a material change occurs. 
This deadline is significantly shorter than the current deadline of 45 
days after the end of the calendar year for both an initial and amended 
Schedule 13G filing. In addition, under the proposed amendments to Rule 
13d-2(c), QIIs would be required to file an amendment to their Schedule 
13G within five days after the date on which their beneficial ownership 
exceeds 10% of a covered class, or increases or decreases by more than 
5% of the covered class once across the 10% threshold, rather than the 
current requirement of 10 days after the end of the relevant month.
    While shortening the filing deadlines could improve the timeliness 
of Schedule 13G reporting and market efficiency, it could also 
negatively impact some filers, particularly some QIIs (e.g., mutual 
funds or hedge funds). The existing academic literature identifies free 
riding and front running as explanations for why more timely disclosure 
would negatively impact fund performance, and provides evidence that 
mutual funds experienced reduced returns after the Commission required 
more frequent portfolio disclosure.\254\ The finding of a reduction in 
returns may be attributable to several factors, according to the 
literature. First, more timely filings may reveal a fund's proprietary 
information or trading strategies to other market participants, thus 
allowing those participants to free ride by copying the fund's 
strategies without incurring a cost to research, identify and devise 
profitable strategies.\255\ Funds typically need to expend considerable 
resources to research and identify promising investments, and profits 
from the research take time to accrue. For example, it is estimated 
that it could take 12 to 18 months for mutual funds to profit after the 
date a newly acquired stock is first added to a fund's portfolio. 
Therefore, more timely disclosure would provide free-riding 
opportunities for other investors to mimic or reverse engineer a fund's 
strategy, which could ultimately diminish a fund's return.\256\ Second, 
more timely disclosure could increase the risk that funds would be 
front run by outside investors. Specifically, more timely disclosure 
could potentially allow professional investors to better understand a 
fund's strategies and anticipate trades of the fund. Therefore, those 
professional investors may attempt to trade ahead of the funds to 
capture the temporary

[[Page 13886]]

impact on prices of traded securities.\257\ As a result, funds could 
see an increase in trading costs and a decrease in returns.
---------------------------------------------------------------------------

    \254\ See infra notes 255-257 for academic literature; see also 
Final Rule: Shareholder Reports and Quarterly Portfolio Disclosure 
of Registered Management Investment Companies, 17 CFR parts 210, 
239, 249, 270, and 274, Release Nos. 33-8393; 34-49333; IC-26372; 
File No. S7-51-02 [69 FR 11244 (March 9, 2004)], available at 
https://www.sec.gov/rules/final/33-8393.htm#IIB4. Notably, the 
Commission decided to adopt the quarterly disclosure requirement 
with a 60-day delay as opposed to the 45-day delay or monthly 
reporting as some had suggested, citing the concerns that ``more 
frequent portfolio holdings disclosure and/or a shorter delay for 
release of this information may expand the opportunities for 
predatory trading practices that harm fund shareholders.''
    \255\ See Russ Wermers, The Potential Effects of More Frequent 
Portfolio Disclosure on Mutual Fund Performance, 7.3 Perspective 1-
11 (2001).
    \256\ Id.; see also Mary Margaret Frank, James M. Poterba, 
Douglas A. Shackelford, and John B. Shoven, Copycat Funds: 
Information Disclosure Regulation and the Returns to Active 
Management in the Mutual Fund Industry, 47.2 The Journal of Law and 
Economics 515-541 (2004) (``[W]hile these actively managed funds 
earned higher returns before expenses than their associated copycat 
funds, after expenses copycat funds earned statistically 
indistinguishable, and possibly higher, returns.''); Vikas Agarwal, 
Kevin A. Mullally, Yuehua Tang, and Baozhong Yang, Mandatory 
Portfolio Disclosure, Stock liquidity, and Mutual Fund Performance, 
70.6 The Journal of Finance 2733-76 (2015) (finding that more 
informed mutual funds, especially those holding stocks with greater 
information asymmetry, experience greater performance deterioration 
after the Commission increased mutual fund periodical filing from 
semi-annual to quarterly in 2004).
    \257\ See Wermers (2001), supra note 255; see also Sophie Shive, 
and Hayong Yun, Are Mutual Funds Sitting Ducks? 107.1 Journal of 
Financial Economics 220-237 (2013) (providing evidence on front 
running behavior by showing that hedge funds trade on expected 
mutual fund flows, and showing that this type of anticipatory 
trading is stronger after 2004 when quarterly portfolio disclosure 
was required of mutual funds).
---------------------------------------------------------------------------

    While most of the literature focuses on mutual fund portfolio 
disclosure when discussing the tradeoff between timely reporting and 
fund performance, we believe the tradeoff between timely reporting and 
fund performance can be applied to the Schedule 13G reporting by QIIs. 
The proposed amendment to the initial Schedule 13G deadline (shortening 
the deadline to five business days after the end of the applicable 
month) would be a significant change for QIIs considering both the 
current deadline (45 days after the applicable calendar year) and the 
filing requirements for other forms that QIIs generally file (including 
the 60-day deadline for Form N-Q as discussed above, and the 45-day 
deadline for Form 13F). The accelerated deadline under the proposed 
amendments could reveal valuable information about a fund's investment 
strategies, facilitate free riding and front running behaviors, and 
therefore potentially reduce a fund's returns and harm fund 
shareholders. In the long run, the proposed accelerated disclosure 
requirements could reduce incentives for funds to collect and process 
information, leading to market inefficiency.
    We recognize that the proposed accelerated filing requirements 
could potentially increase the risks of free riding or front running 
for certain Schedule 13G filers. However, we also note that Schedule 
13G filings are different from portfolio disclosures such as Form N-Q 
or Form 13F. Schedule 13G filings do not have a set frequency and do 
not require a disclosure of a fund's entire portfolio. Thus, these 
filings are unlikely to provide information with the level of precision 
and predictability needed for free riding or front running purposes. 
Therefore, we believe the risks of increased free riding and front 
running as a result of the proposed amendments are likely to be low.
    Shortening Schedule 13G filing deadlines could also generate 
compliance costs for filers. QIIs may incur a one-time cost to update 
their information technology systems to monitor share accumulations and 
generate alerts and reports in time to accommodate the rule change. 
They may also need to allocate more resources on an ongoing basis to 
monitor material changes so they can meet their obligations to file 
amendments to Schedule 13G. However, as mentioned in Section II.A.3.b., 
because these holders with reporting obligations typically have 
compliance systems to monitor Schedule 13G filing obligations on at 
least a monthly basis (e.g., in case their holdings exceed more than 
10% at the end of the month), the ongoing cost could be mitigated. 
Overall, we believe the compliance costs to QIIs should be minor.
    For Passive Investors, the filing deadline for an initial Schedule 
13G would be shortened from 10 days to five days under the proposed 
amendment to Rule 13d-1(c). The proposed amendment to Rule 13d-2(b) 
would accelerate the filing deadline for Schedule 13G amendments from 
the current standard of 45 days after the end of the calendar year to 
within five business days of the end of the month in which a material 
change occurs. In addition, the proposed amendment to Rule 13d-2(d) 
would change the Schedule 13G amendment deadline for Passive Investors 
from the current ``promptly'' standard to five days after the date on 
which their beneficial ownership exceeds 10% of a covered class, or 
increases or decreases by more than 5% once across the 10% threshold. 
Similar to QIIs, Passive Investors may incur a one-time cost to update 
their information technology systems to monitor share accumulations in 
order to accommodate the rule change. They may also need to allocate 
more resources to monitor material changes on an ongoing basis so they 
can meet their obligations to file amendments to Schedule 13G in a more 
timely manner.
    Exempt Investors would be required to file an initial and amended 
Schedule 13G no more than five business days after the end of the month 
in which their beneficial ownership exceeds 5% or a material change 
occurs under the proposed amendments to Rules 13d-1(d) and 13d-2(b), as 
compared to the current deadlines of 45 days after the end of calendar 
year for both initial and amended Schedule 13G filings. As a result, 
Exempt Investors may also incur one-time and continuing compliance 
costs as a result of the proposed amendments.
    Passive Investors and Exempt Investors should not incur the 
economic costs associated with the risk of free-riding and front-
running that QIIs would, because they do not actively manage their 
portfolios like QIIs do. However, the compliance costs to Passive 
Investors and Exempt Investors may be relatively higher than those to 
QIIs. Specifically, neither Passive Investors nor Exempt Investors 
currently need to monitor their beneficial ownership levels on a 
monthly basis as QIIs do to determine whether their holdings exceed 
more than 10% at the end of the month and trigger an initial Schedule 
13G filing pursuant to Rule 13d-1(b)(2).
    For all Schedule 13G filers, an increase in compliance costs may 
reduce their incentive to invest in smaller public companies, where 
equity holdings could more easily cross the 5% threshold. This could 
ultimately reduce the liquidity of these issuers' equity securities and 
potentially their incentives to be listed on an exchange.
    We are unable to quantify the potential increase in costs related 
to the proposed shortened Schedule 13D and 13G filing deadlines due to 
the lack of data. For example, we lack data to estimate how the 
proposed amendments would affect blockholders' ability to initiate 
corporate change because such ability would depend on their target 
share accumulation level, the liquidity of their target stocks and 
their acquisition plans. Regarding Schedule 13G filings, the potential 
increase in costs would depend on a filer's investment strategy and 
frequency of disclosure after the rule change. Because we do not have 
all the inputs for these variables, we cannot provide a reasonable 
estimate for these costs.
2. Proposed Amendment to Rule 13d-3
a. Benefits
    The proposed amendment to Rule 13d-3 would deem holders of certain 
cash-settled derivative securities as beneficial owners of the 
reference securities in a covered class. Overall, we believe this 
proposed amendment could improve transparency, promote market stability 
and ultimately enhance investor protection.
    First, the proposed amendment could benefit investors and other 
market participants by providing improved transparency regarding 
persons with significant economic interests in an issuer's equity 
securities and potential control intent. Under current Rule 13d-3, it 
is possible for holders of cash-settled derivative securities to 
acquire economic exposure to substantial blocks of securities without 
public disclosure because those instruments generally do not convey 
voting or investment power over the reference equity security. However, 
academic literature has raised concern over the ``hidden ownership''

[[Page 13887]]

through cash-settled equity-based derivatives, because in many cases, 
holders of such derivative securities may have the de facto ability to 
procure votes quickly when needed.\258\ According to these studies, 
counterparties to these derivative contracts commonly hedge their risks 
by purchasing the reference shares related to these contracts and, at 
the end of the contract when those share are no longer needed, sell the 
shares to reduce their exposure.\259\ It is convenient, and sometimes 
even expected (e.g., in the U.K.), for counterparties to sell these 
shares back to their customers, the holders of the cash-settled 
derivative securities.\260\ Alternatively, the holder of the derivative 
security and the counterparty can always try to modify the terms of a 
derivative security to settle the contract by transferring the 
reference securities instead of cash. Therefore, cash-settled 
derivative securities could ultimately be settled in kind. This 
optionality allows holders of the derivatives to have the ability to 
influence or control an issuer without triggering public disclosure. 
Indeed, there have been takeover attempts using this de facto ability 
to quickly acquire shares.\261\
---------------------------------------------------------------------------

    \258\ See Henry T.C. Hu, and Bernard Black, Hedge Funds, 
Insiders, and the Decoupling of Economic and Voting Ownership: Empty 
Voting and Hidden (Morphable) Ownership, 13.2-3 Journal of Corporate 
Finance 343-367 (2007); see also Pierre-Henri Conac, Cash-Settled 
Derivatives as a Takeover Instrument and the Reform of the EU 
Transparency Directive, in The European Financial Market in 
Transition 49-68 (2011).
    \259\ See, e.g., Pierre-Henri Conac (2011), at 51 (stating 
``[a]lthough it seems that CSDs [cash-settled derivatives] are not 
equivalent for the investor to holding the shares, the reality can 
be quite different. The reason is that banks do not want to face the 
risk that the price of the share increases and they have to pay the 
difference. Therefore, in order to hedge their risk, they usually 
purchase the underlying shares relating to the CSDs. At the end of 
the contract, the banks will normally sell their shares in the 
market in order to pay to the investor the difference with the price 
at the beginning of the contract. Even if the bank does not do so, 
it will not keep the shares once the contract terminates since it 
usually has no use of the shares. This is especially the case if the 
CSDs relate to a large number of shares, unless the bank is 
interested in keeping an exposure to this company which is usually 
not the case. Then, nothing prevents the investor from purchasing 
the shares that the bank is selling in the open market. 
Alternatively, the investor and the bank can decide before the end 
of the contract to modify it in order that the contract will not be 
settled in cash but will be settled physically by delivery of the 
underlying shares. Therefore, if the bank holds the shares in order 
to hedge its risk, the investor is during the life of the CSD a 
quasi-shareholder, except that subject to the contractual agreement, 
he usually does not control the voting rights attached to the shares 
held by the bank.''); see also Eugenio de Nardis, and Matteo 
Tonello, Know your shareholders: the use of cash-settled equity 
derivatives to hide corporate ownership interests, Conference Board 
Director Notes No. DN-009, 2010 (stating ``The derivatives dealer 
(i.e., the short party in the derivatives transaction) often holds 
the underlying securities as a hedge against its short position. 
Especially in those cases where the equity swap involves a 
substantial amount of shares of a single company, hedging with 
matched shares may be the only commercially sound choice for the 
dealer, as alternative hedging strategies are likely to be limited 
and more expensive.'').
    \260\ See Henry T.C. Hu and Bernard Black (2007), supra note 258 
(stating that in the U.K., it is ``frequently the expectation'' of a 
long equity swap holder that the dealer would ``ensure'' that shares 
are available to be voted by its customer or sold to the customer on 
closing out the swap). But see Marcel Kahan and Edward Rock, Anti-
Activist Poison Pills, 99 B.U. L. Rev. 915, 948-953 (2019) (taking a 
different view regarding cash-settled derivative securities' 
effectiveness in achieving activists' objectives in the context of 
poison pills and arguing that synthetic equity confers no voting 
rights, and hence poses no threats that should be counted toward a 
poison pill triggering threshold).
    \261\ See, e.g., The Case of Volkswagen, The Hedge Fund Journal, 
Nov. 2008 (available at https://thehedgefundjournal.com/the-case-of-volkswagen/). While most of the examples referenced in this 
discussion involve European transactions or cash-settled security-
based-swaps (which are excluded from the proposed amendments), the 
underlying mechanism for exercising influence over the voting, 
acquisition or disposition of reference securities is the same as 
for other cash-settled derivative securities. See also supra Section 
II.B.1 and note 88.
---------------------------------------------------------------------------

    Holders of cash-settled derivative securities could also influence 
or control an issuer in other ways. For example, they might try to 
influence the counterparties to vote any hedged shares according to 
their desire. Additionally, any shares used in a hedge would be 
eliminated from the universe of voting shares as a result of the 
derivative contract, altering the balance of the voting power.\262\ Of 
course, there is no guaranteed success through these approaches. 
However, significant economic interest could confer some credibility 
upon the activist with other shareholders,\263\ which could increase 
the likelihood of success.
---------------------------------------------------------------------------

    \262\ See Wachtell Petition, supra note 16.
    \263\ See Marcel Kahan and Edward Rock (2019), supra note 260, 
at 950 (``While synthetic equity entails no voting rights, it 
enables an activist shareholder to increase its economic stake and 
confers some credibility upon the activist with other shareholders 
(albeit presumably less than actual share ownership).'').
---------------------------------------------------------------------------

    Section 13(d) requires public disclosure of the rapid accumulation 
of sizable positions linked to equity ownership by investors with 
potential control intent. As discussed above, information related to a 
potential change in corporate control is material to the market, and 
withholding the information could lead to information asymmetry and 
mispricing in the market.\264\ Therefore, by expanding the scope of 
beneficial ownership to include certain holders of cash-settled 
derivative securities, the proposed amendments would address concerns 
regarding large shareholders using ``hidden ownership'' to avoid their 
reporting obligations. Treating such holders as beneficial owners also 
would reduce information asymmetries and enhance investor protection. 
Greater transparency would allow investors to make more informed 
investment decisions and help other market participants to better 
evaluate securities.
---------------------------------------------------------------------------

    \264\ See supra Section III.C.1.A.i.
---------------------------------------------------------------------------

    Enhanced disclosure could also promote market stability. Rapid 
accumulation of large equity positions could impact the liquidity of a 
covered class, and the lack of disclosure could prevent the market from 
incorporating that liquidity risk into the pricing for the security. 
Therefore, an unwinding of the positions could lead to excessive 
volatility and adversely impact the stock price of an issuer.
b. Costs
    Deeming certain holders of cash-settled derivative securities to be 
a beneficial owner may result in new entrants to the Sections 13(d), 
13(g), and 16 reporting systems, and thus generate increased costs for 
those who previously were not subject to these regulations. These 
persons may incur more extensive and ongoing compliance costs due to 
their reporting obligations under these provisions. For example, as 
discussed in Section II.B.2., a person who holds a derivative security 
with variable delta would need to calculate the delta on a daily basis, 
for purposes of determining the number of equity securities that such 
person will be deemed to beneficially own. In addition, persons who 
would become ten percent holders as a result of proposed Rule 13d-3(e) 
would be subject to Section 16(b)'s short-swing profit liability and 
Section 16(c)'s short sale prohibitions.
    The proposed amendment could also potentially reduce the incentive 
to use cash-settled derivatives for hedging purposes, especially when 
hedging large positions. The financial institutions that serve as 
counterparties to cash-settled derivatives could be negatively affected 
because the reduced use of cash-settled derivatives could result in 
loss in revenue. However, we believe the impact on hedging incentives 
should be limited. If holders of derivative securities have an economic 
reason to use derivative securities to limit their market risk 
exposure, the potential compliance costs should be small compared to 
the downside of not using them. In addition, we are proposing Rule 13d-
6(d) to provide that two or more persons will not be deemed to have 
formed a group under Section 13(d)(3) or 13(g)(3) solely by virtue of 
their entrance into an agreement governing the terms of a derivative

[[Page 13888]]

security. This proposed exemption seeks to avoid impediments to certain 
financial institutions' ability to conduct their business in the 
ordinary course, which, we believe, could mitigate some of the costs 
imposed on financial institutions.
    We are unable to quantify these costs related to beneficial 
ownership disclosure, because we lack data on the current use of cash-
settled derivative securities to provide reasonable estimates on how 
such use would change.
3. Proposed Amendments to Rules 13d-5 and 13d-6
a. Benefits
    The Commission is proposing a series of amendments to Rule 13d-5 to 
clarify and affirm its operation as applied to two or more persons who 
``act as'' a group under Sections 13(d)(3) and (g)(3) of the Exchange 
Act.\265\ Current Rule 13d-5(b) states that when two or more persons 
``agree to act together'' for the purpose of acquiring, holding, voting 
or disposing of equity securities of an issuer, then the group that is 
formed has acquired beneficial ownership of the securities. The intent 
of the rule, together with Sections 13(d)(3) and (g)(3), is to prevent 
investors from coordinating to circumvent the 5% threshold in Sections 
13(d) and (g). However, recent academic research has underscored 
concerns that groups of blockholders may work together to gain control 
of corporate boards without making appropriate disclosure.\266\
---------------------------------------------------------------------------

    \265\ See supra Section II.C.
    \266\ See, e.g., Carmen X.W. Lu, Unpacking Wolf Packs, 125 Yale 
L.J. 773, 775-76, 777 (2016) (observing that wolf packs, which may 
not be deemed groups by some courts despite ``empirical and 
anecdotal evidence of coordination'' if there is not ``specific 
evidence of coordination,'' are able to evade Section 13(d) 
reporting if, for instance, ``each of the activist investors 
acquires less than a five percent stake in the target''); see also 
John C. Coffee, Jr. and Darius Palia, supra notes 19 and 143.
---------------------------------------------------------------------------

    The proposed amendments would remove the potential for Rule 13d-
5(b) to be construed as requiring that an express or implied agreement 
exists between two or more persons before a group can be formed. By 
clarifying and affirming that an express or implied agreement is not 
needed to subject a group to regulation under Section 13(d) or 13(g), 
the proposed amendments would avoid misinterpretation of the rule, help 
ensure that the law is applied as it was intended to be, and improve 
transparency. Investors and other market participants would benefit to 
the extent that they receive more timely disclosure to make more 
informed investment decisions or better evaluate securities as a result 
of the proposed amendments.
b. Costs
    To the extent that blockholders misinterpreted Rule 13d-5 as 
requiring an express or implied agreement before they are required to 
report their collective holdings, these blockholders may incur a cost 
as a result of the proposed amendments. For example, blockholders 
seeking to coordinate with other investors for corporate influence or 
control might no longer be able to avoid reporting because there is no 
express or implied agreement among the members. These blockholders 
would thus incur additional compliance costs related to the filing of 
Schedule 13D. Considering that the proposed amendments would also 
shorten the filing deadlines for Schedule 13D, it could be particularly 
costly for members to keep track of the shares purchased as a group and 
coordinate among themselves in order to file on time. Additionally, 
such a group of blockholders, to the extent its beneficial ownership 
exceeded 10% of a covered class, would be deemed a ``beneficial owner'' 
as defined under Rule 16a-1(a)(1). Under our administration of Section 
16, each group member would be considered a 10% holder subject to 
Sections 16(a), (b), and (c). Thus, such blockholders may incur 
additional compliance costs for their filing obligations under Section 
16.
    Further, it could be more costly for blockholders to use group 
formation to influence or change corporate control, to the extent that 
they misinterpreted Rule 13d-5 as requiring an express or implied 
agreement, because they would no longer be able to accumulate shares at 
a pre-disclosure price as they might have done under such a 
misimpression. As we have discussed in Section III.C.1.b., if earlier 
disclosure were made, stock prices would likely increase, and, 
therefore, blockholders would have to acquire shares at a higher price 
and the profit they would expect to receive would be reduced. As a 
result, it is possible that the proposed amendments could chill 
shareholder engagement. Reduced shareholder engagement may result in 
less monitoring of an issuer's management by shareholders. Because of 
the principal-agent relationship between investors and management in a 
corporation, there may exist conflicts between management of the issuer 
and investors.\267\ Thus, less monitoring by investors as a result of 
reduced shareholder engagement could negatively affect firm value. 
However, we note that these are the costs blockholders or large 
shareholders should have incurred anyway when forming a group for 
purposes of Section 13(d), and in this regard, the proposed amendments 
would not expand, but rather would clarify and affirm, the 
applicability of existing reporting obligations.
---------------------------------------------------------------------------

    \267\ See Michael C. Jensen, and William H. Meckling, Theory of 
the firm: Managerial behavior, agency costs and ownership structure, 
3.4 Journal of financial economics 305-360 (1976).
---------------------------------------------------------------------------

    Additionally, by removing any potential misimpression that an 
agreement must exist for determining whether a group is formed, the 
proposed amendments could potentially chill shareholder communications 
in general, as shareholders may be uncertain whether their coordination 
constitutes ``acting as'' a group. As discussed in Section II.D.1., 
shareholders may choose to communicate with one another regarding an 
issuer's performance or a certain policy matter, and they may take 
similar action with respect to the issuer or its securities, such as 
aligning their voting of shares at the issuer's annual meeting with 
respect to one or more proposals. We recognize the potential risk of 
chilling such communications. We therefore are also proposing 
amendments to Rule 13d-6 to exempt certain actions taken by two or more 
persons from the scope of Sections 13(d)(3) and 13(g)(3). In addition 
to proposed Rule 13d-6(d), which we discussed in Section III.C.2.b 
above, proposed Rule 13d-6(c) would provide that two or more persons 
will not be deemed to have acquired beneficial ownership of, or 
otherwise beneficially own, an issuer's equity securities as a group 
solely because of their concerted actions related to an issuer or its 
equity securities, including engagement with one another or the issuer. 
This exemption would only be available if such persons, when taking 
such concerted actions, are not directly or indirectly obligated to 
take such actions and communications among or between such persons are 
not undertaken with the purpose or the effect of changing or 
influencing control of the issuer. This exemption would, therefore, 
exclude activity that is not contemplated within the purpose of Section 
13(d). Additionally, to the extent beneficial owners qualify for and 
rely on the proposed exemptions in Rule 13d-6, those exemptions may 
offset any potential increase in the number of persons who become 10% 
holders as a result of our proposed amendments to Rule 13d-5. Thus, the 
proposed

[[Page 13889]]

exemptions in Rule 13d-6 may lower the potential compliance costs 
associated with filings under Section 16 that are generated by the 
proposed amendments to Rule 13d-5. We believe the proposed exemption 
could alleviate the concern that the proposed amendments to Rule 13d-5 
could chill communications among shareholders and shareholders' 
engagement with issuers for reasons that do not implicate the purpose 
of Section 13(d).
    We are unable to quantify the costs of our amendments related to 
group formation. Because we lack data on how many groups may not be 
reporting beneficial ownership because of the misimpression that an 
agreement is required, we cannot provide reasonable estimates on how 
such reporting practices would change.
4. Proposed Amendments to Item 6 of Schedule 13D
    Item 6 of Schedule 13D provides that beneficial owners must 
describe ``any contracts, arrangements, understandings or relationships 
(legal or otherwise)'' with respect to any securities of the issuer, 
and cash-settled derivative securities have not been expressly 
identified in the list of examples. The proposed amendment would make 
it explicit that cash-settled derivative securities (including cash-
settled security-based swaps) that use the issuer's securities as a 
reference security are included among the types of contracts, 
arrangements, understandings and relationships that must be disclosed.
    We believe the proposed amendment is consistent with the proposed 
amendment to Rule 13d-3 discussed in Section II.B. We also believe it 
is consistent with our goal of modernizing the beneficial ownership 
reporting requirements and improving their operation and efficacy. 
Given that the baseline disclosure requirement was set forth in 1968, 
and the derivative securities market has evolved significantly since 
then, investors would benefit if the language of the disclosure 
requirement reflects current market practice and the range of 
instruments that should be disclosed as contemplated by Section 
13(d)(1)(E). By revising Item 6 to clarify what instruments are 
covered, the proposed amendments could improve compliance with Rules 
13d-1(a) and 13d-101, and reduce potential ambiguity as well as 
litigation risk for filers. To the extent that the proposed amendment 
would enhance beneficial ownership reporting, investors and the market 
would benefit. However, filers could incur additional compliance costs, 
to the extent that they have not already been providing such 
disclosure.
5. Proposed Structured Data Requirement for Schedules 13D and 13G
    The proposed amendments would require all disclosures reported on 
Schedules 13D and 13G other than the exhibits to be submitted using a 
structured, machine-readable data language--specifically, in 13D/G-
specific XML. Currently, Schedules 13D and 13G are submitted in HTML or 
ASCII, neither of which is a structured data language; as such, the 
disclosures currently reported on Schedules 13D and 13G are not 
machine-readable. This aspect of the proposed amendments is expected to 
benefit investors and markets by facilitating the use and analysis, 
both by the public and by the Commission, of the ownership disclosures 
reported by filing persons on Schedules 13D and 13G, compared to the 
current baseline. We expect this would improve the public dissemination 
and accessibility of material information about potential change of 
control transactions.
    We anticipate that the incremental costs associated with requiring 
reporting persons to submit the information disclosed on Schedules 13D 
and 13G in 13D/G-specific XML, compared to the baseline of submitting 
the Schedules in in HTML or ASCII, would be relatively low. Because we 
would provide reporting persons with the option of using a fillable web 
form that converts inputted disclosures into 13D/G-specific XML, the 
proposed structuring requirement would not impose upon filers without 
structured data experience the implementation costs of establishing 
related compliance processes and expertise. Filers who choose to submit 
directly in 13D/G-specific XML rather than use the web form may incur 
the aforementioned implementation costs, with costs varying based on 
their prior experience with encoding and transmitting structured 
disclosures.

D. Anticipated Effects on Efficiency, Competition and Capital Formation

    We believe the proposed amendments together could have a positive 
effect on market efficiency, but there may be some offsetting effects 
as well. As discussed above, currently, large shareholders could use 
the 10-day window to accumulate a level of beneficial ownership far 
exceeding the 5% threshold before reporting. They could seek to avoid 
the 5% reporting threshold through the use of cash-settled derivative 
securities or refrain from communicating or undertaking actions that 
could result in the formation of groups. By shortening Schedule 13D and 
13G filing deadlines, expanding the scope of beneficial ownership to 
include holders of certain cash-settled derivative securities, and, 
clarifying and affirming that an actual agreement is not needed for the 
formation of a group, the proposed amendments could help ensure that 
large shareholders, including groups, comply with the reporting 
threshold, and therefore improve disclosure regarding material 
information related to potential changes of corporate control. More 
timely and enhanced disclosure would reduce information asymmetry and 
mispricing in the market, thereby improving liquidity and market 
efficiency. More efficient prices and more liquid markets help allocate 
capital to its most efficient uses. By making material information 
available to the public sooner, and reducing the differential access to 
information, the proposed amendments could increase public trust in 
markets, thereby aiding in capital formation. Finally, we believe that 
the proposed amendments could promote competition in that those who 
delay reporting would not have an advantage over similarly situated 
shareholders who report earlier. Furthermore, lowering information 
asymmetry could also increase competition among market participants. 
For example, if blockholders selectively reveal information, this gives 
some market participants advantages over others.
    On the other hand, we recognize that some aspect of the proposed 
amendments could increase the costs of accumulating large blocks of 
shares. If some investors choose not to trade when they otherwise might 
have, capital formation, and therefore market efficiency, could be 
harmed. However, this cost would be offset by increased liquidity that 
arises from reducing information asymmetry.
    Furthermore, because accumulating large blocks may be more 
expensive, investors may be less incentivized to do so. To the extent 
that large blocks aid in monitoring managerial behavior or facilitating 
changes in corporate control for inefficient management, capital 
formation could be adversely effected. By reducing the ability of 
blockholders to engage in ``tipping,'' enhanced disclosure also would 
lower private benefits from accumulating blocks, potentially reducing 
the incentives for blockholders to initiate corporate change. However, 
while rents to the business of initiating corporate change may fall, 
general access to information

[[Page 13890]]

would increase, offsetting the effects described.

E. Reasonable Alternatives

1. Alternative Filing Deadlines
    As an alternative to the proposed amendments, we considered 
alternative filing deadlines for an initial Schedule 13D. For example, 
we considered filing deadlines that are longer than the proposed five 
days but shorter than the current 10-day deadline. These alternatives 
would reduce the compliance costs for filers, especially those with 
operations in different jurisdictions or time zones. They would also 
allow blockholders to accumulate more shares before making their 
filings, reducing the concern that the five-day deadline could 
discourage shareholder activism and encourage management entrenchment. 
However, these alternatives would result in less timely reporting, and 
be less beneficial to investors, other market participants and the 
overall efficiency of the market. We also considered filing deadlines 
that are shorter than the proposed five-day deadline. These alternative 
deadlines would provide more timely reporting to investors and market. 
However, they could have more negative effects on shareholder activism.
    We also considered shortening the deadline for QIIs to file an 
initial Schedule 13G to 45 days after the end of the quarter, instead 
of the proposed deadline of five business days after the end of the 
applicable month. This approach would be more in line with the current 
portfolio reporting requirement for institutional investors and mutual 
funds for Form 13F and Form N-Q, and could reduce the potential risk of 
free riding or front running as discussed in Section III.C.1.b.ii and 
the costs to QIIs as a result. On the other hand, similar to the 
alternative Schedule 13D deadline, this alternative Schedule 13G 
deadline would provide less timely disclosure compared to the proposed 
approach, and thus be of less benefit to investors and the market.
2. Tiered Approach and Purchasing Moratorium
    We understand that certain persons who would be required to file a 
Schedule 13D under a shortened deadline could view an earlier deadline 
as a means of forfeiting a proprietary trading strategy or minimizing 
the opportunity to earn a return that is high enough to offset their 
research costs and litigation, reputational and investment risks. 
Rather than shortening the deadline in all instances, we also 
considered a tiered approach, such as maintaining the 10-day deadline 
for acquisitions of greater than 5% but no more than 10% while 
instituting a shorter deadline if beneficial ownership exceeds 10%. We 
also considered whether the deadline for the initial Schedule 13D 
filing should vary based on a particular characteristic of the issuer, 
such as its market capitalization or trading volume. A tiered approach 
would affect fewer filers than the proposed deadlines discussed above, 
and thus would be less costly. A tiered approach also would result in 
less timely reporting than the proposed approach, providing less 
benefit to investors and the market.
    Finally, we also considered maintaining the 10-day deadline if the 
filer ``stands still'' by not acquiring additional beneficial ownership 
once the 5% threshold has been crossed and until the Schedule 13D is 
filed. This approach would differentiate between investors seeking to 
establish a small minority stake and those seeking to exert influence 
or accumulate a control position, including beneficial ownership 
amounting to a majority or more of the covered class. While this 
approach would be the most effective in enforcing the 5% threshold, it 
could also be the most costly in terms of its impact on shareholder 
activism. It would effectively place a speed bump on blockholders' 
acquisitions, and provide opportunities for management to defend and 
entrench themselves. In addition, it might be operationally difficult 
to ensure that the purchases of the shares add up to no more than 5%, 
especially when shares are purchased from different sources, or 
purchases are made by different entities. Further, this alternative 
would not increase the timeliness of Schedule 13D reporting, and thus 
would not provide the same benefits to investors and the market as the 
proposal. Rather than propose a deadline based upon a person's 
willingness to abstain from making additional acquisitions once the 5% 
threshold has been crossed, we instead have solicited comment on the 
efficacy of such an alternative while taking into account the 
operational difficulties associated with a person's attempt to acquire 
no more than the minimum reportable amount of beneficial ownership.
3. Consolidate Beneficial Ownership Reporting
    We also considered consolidating beneficial reporting into one 
form, Schedule 13D (i.e., by eliminating Schedule 13G). This approach 
would include a reduction in some of the compliance burdens applicable 
to former Schedule 13G filers that would now be required to file a 
Schedule 13D. For example, because there would be only one form, former 
Schedule 13G filers would no longer need to monitor their eligibility 
continuously. Also, with the new deadlines for Schedule 13D, no need 
would exist to amend the other filing deadlines applicable to (former) 
Schedule 13G filers. However, this alternative would further accelerate 
the filing for former Schedule 13G filers, and exacerbate the concerns 
about free-riding and front-running risks these filers could face as 
discussed above, potentially reducing their profits and increasing 
their costs.
4. Section 16 Rule Amendment
    We considered amending Rule 16a-1(a)(1) to avoid the application of 
proposed Rule 13d-3(e) to the determination as to whether a person is a 
10% holder under Section 16. More specifically, under this alternative, 
a holder of the cash-settled derivative securities covered by proposed 
Rule 13d-3(e) would be deemed the beneficial owner for purposes of 
Sections 13(d) and (g), but not the beneficial owner of those reference 
securities for purposes of determining whether that person is a 10% 
percent holder under Section 16. This alternative could reduce the 
costs of proposed Rule 13d-3(e) and its impact on Section 16 reporting 
obligations. However, the alternative approach could also potentially 
create two standards for determining beneficial ownership, potentially 
leading to confusion in the market and concerns regarding whether the 
rule is applied differentially to different groups of filers. Also, 
investors and the market would receive less informative Section 16 
disclosures under the alternative as compared to the proposed approach, 
and the disclosures would thus be less beneficial.
5. Modify Scope of Structured Data Requirement
    We also considered modifying the scope of the proposed structured 
data requirement for Schedules 13D and 13G. For example, we considered 
narrowing the requirement to include only the quantitative disclosures 
reported on Schedules 13D and 13G. Narrowing the scope of the 
structuring requirement to include only the quantitative disclosures 
could provide a clearer focus on those data points that could 
potentially be used most widely for market-level aggregation, 
comparison and analysis. However, the non-quantitative disclosures on 
Schedules

[[Page 13891]]

13D and 13G, such as textual narratives and identification checkboxes, 
also would be valuable for data users to access and analyze in an 
efficient and automated manner. In addition, the incremental cost 
savings to filers of requiring only quantitative disclosures to be 
structured would be low given the availability of a fillable web form 
in which filers would be able to input both quantitative and non-
quantitative Schedule 13D and 13G disclosures.

F. Request for Comment

    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed amendments 
and alternatives thereto, and whether the proposed amendments, if 
adopted, would promote efficiency, competition and capital formation or 
have an impact on investor protection. In addition, we also seek 
comment on alternative approaches to the proposed amendments and the 
associated costs and benefits of these approaches. Commenters are 
requested to provide empirical data, estimation methodologies, and 
other factual support for their views, in particular, on costs and 
benefits estimates. Specifically, we seek comment with respect to the 
following questions:
    92. Would the proposed amendments shortening Schedule 13D filing 
deadlines negatively affect shareholder activism? If yes, are there any 
other reasons for such effects besides the ones we have discussed? 
Would such effects be more or less significant than our assessment? 
Would the benefits justify the costs? Are you aware of any data or 
methodology that could help us quantify the effects? Are there any 
factors that could mitigate these effects besides the ones we 
discussed? Is it fair to presume that blockholders generally have the 
ability to adapt to a five-day filing deadline given the fact that a 
number of them are already filing on this deadline voluntarily?
    93. Studies observe share accumulations well above 10% of an issuer 
in the 95th percentile of the data set. Is it fair to presume that 
those accumulations are for purposes other than shareholder activism? 
If so, what are those purposes? What are the outcomes of such 
accumulations? If not, and such high accumulations were made for the 
purposes of activism, what motivates abnormally high accumulation at 
the time of 13D filings?
    94. Would the proposed amendments shortening Schedule 13G filing 
deadlines increase the risk of free-riding or front-running for 
Schedule 13G filers? Would such effects be more or less significant 
than our assessment? Are there any other costs associated with these 
proposed amendments besides the ones we have identified? Would the 
benefits justify the costs? Are you aware of any data or methodology 
that could quantify the costs?
    95. Would the proposed amendments to Rule 13d-3 regarding cash-
settled derivative securities negatively affect the use of derivative 
instruments? Would such effect be more or less significant than our 
assessment? Are there any other economic effects associated with these 
proposed amendments that we have not discussed? Would the benefits 
justify the costs? Are you aware of any data or methodology that could 
help quantify the costs? To what extent do holders of derivative 
securities have the ability to influence or direct the voting, 
acquisition or disposition of shares acquired by the counterparty to 
hedge its position? Is it common for the holder to acquire the hedge 
securities from the counterparty and/or the counterparty to settle its 
positions with shares (rather than cash)? Please provide any data to 
support your view.
    96. Would the proposed amendments affirming our view on group 
formation have negative effects on shareholder activism, engagement and 
communication? Would such effects be more or less significant than our 
assessment? Are there any other economic effects associated with these 
proposed amendments that we have not discussed? Would the benefits 
justify the costs? Are you aware of any data or methodology that could 
help quantify the costs?
    97. Would the proposed amendments requiring submission of all 
disclosures (other than exhibits) on Schedules 13D and 13G in a 
structured, machine-readable data language (specifically 13D/G-specific 
XML) increase the accessibility and usability of those disclosures by 
investors and markets? Would this effect consequently improve 
transparency and reduce any existing information asymmetries related to 
beneficial ownership reporting on Schedules 13D and 13G? What are the 
incremental compliance costs associated with the structuring 
requirements? Would those costs be mitigated by the availability of an 
online web form that would render manually inputted disclosures into 
13D/G-specific XML, as discussed? How, if at all, would the nature and 
magnitude of benefits and costs change if the scope of the proposed 
structuring requirement were modified (for example, by requiring 
structuring of only quantitative disclosures)? Are there any other 
economic effects associated with these proposed amendments that we have 
not discussed? Would the benefits justify the costs? Are you aware of 
any data or methodology that can help quantify the costs?
    98. Are there any other costs and benefits to market participants 
that are not identified or are misidentified in the above analysis?
    99. Would the proposed amendments affect efficiency, competition 
and capital formation as we have discussed? Would such effects be more 
or less significant than our assessment? Are there any other effects on 
efficiency, competition and capital formation that are not identified 
or are misidentified in the above analysis? Are you aware of any data 
or methodology that can help quantify these effects?
    100. Are there any other costs and benefits associated with 
alternative approaches that are not identified or misidentified in the 
above analysis? Should we consider any of the alternative approaches 
outlined above instead of the proposed amendments? Which approach and 
why?
    101. Are there any other alternative approaches to improve Section 
13(d) and (g) disclosure that we should consider? If so, what are they 
and what would be the associated costs or benefits of these alternative 
approaches?

IV. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules, schedules and forms that would be 
affected by the proposed amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\268\ We are submitting the proposed 
amendments to the Office of Management and Budget (``OMB'') for review 
in accordance with the PRA.\269\ The hours and costs associated with 
maintaining, disclosing or providing the information required by the 
proposed amendments constitute paperwork burdens imposed by such 
collection of information. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \268\ 44 U.S.C. 3501 et seq.
    \269\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The titles for the affected collections of information are:
     ``Regulation 13D and Regulation 13G; Schedule 13D and 
Schedule 13G'' (OMB Control No. 3235-0145);

[[Page 13892]]

     ``Form 3--Initial Statement of Beneficial Ownership of 
Securities'' (OMB Control No. 235-0104);
     ``Form 4--Statement of Changes In Beneficial Ownership'' 
(OMB Control No. 3235-0287); and
     ``Form 5--Annual Statement of Beneficial Ownership'' (OMB 
Control No. 3235-0362).
    These schedules and forms contain item requirements that outline 
the information a reporting person must disclose. Compliance with the 
information collections is mandatory. Responses to the information 
collections are not kept confidential and there is no mandatory 
retention period for the information disclosed.

B. Incremental and Aggregate Burden and Cost Estimates for the Proposed 
Amendments to Rules 13d-2, 13d-3, 13d-5, and 13d-101

    Below we estimate the incremental and aggregate effect on paperwork 
burden as a result of certain of our proposed amendments. To fully 
analyze the impact of our proposed amendments, our estimates generally 
constitute the upper limit of the amount of paperwork burden that 
potentially could be incurred by the parties affected by our proposed 
amendments, specifically with respect to our proposed amendments to 
Rules 13d-2, 13d-3, 13d-5, and 13d-101. In deriving our estimates, we 
recognize that the burdens would likely vary among individual 
respondents based on a number of factors, including the nature and 
conduct of their business.
    We believe that the proposed amendments potentially could increase 
the number of responses to the existing collection of information for 
Schedules 13D and 13G as well as Forms 3, 4 and 5. For example, the 
proposed amendments to Rule 13d-2(b) with respect to the standard that 
requires an amendment to Schedule 13G could potentially increase the 
filing frequency for Schedule 13G amendments.\270\ Similarly, our 
proposed amendments to Rules 13d-3 and 13d-5 potentially could result 
in additional persons becoming subject to Regulation 13D-G and Section 
16 which would result in those persons being required to make initial 
and amended Schedule 13D and Schedule 13G filings and Form 3, 4, and 5 
filings.\271\
---------------------------------------------------------------------------

    \270\ See supra Section III.C.1.b.ii. For example, Rule 13d-2(b) 
currently requires that a Schedule 13G be amended 45 days after the 
calendar year-end in which any change occurred to the information 
previously reported. Under our proposed amendment to Rule 13d-2(b), 
a Schedule 13G would have to be amended five business days after the 
end of the month in which a material change occurred to the 
information previously reported. Although an amendment under Rule 
13d-2(b) currently is required for ``any'' change in the information 
previously reported, that rule only requires that one amendment be 
filed annually, if at all. Under the proposed revisions to that 
rule, although the standard for determining an amendment obligation 
would only arise upon a ``material'' change to the information 
previously reported, the rule changes could theoretically result in 
numerous amendments being filed on an annual basis, with as many as 
12 Schedule 13G amendments being filed annually pursuant to Rule 
13d-2(b).
    \271\ See supra Sections III.C.2.b and 3.b. For example, a 
holder of cash-settled derivative securities may be deemed the 
beneficial owner of more than 5% of a covered class or a 10% holder 
as a result of the application of proposed Rule 13d-3(e). In 
addition, two or more persons may be deemed to have formed a group 
that beneficially owns more than 5% of a covered class or a 10% 
holder as a result of the application of our proposed amendments to 
Rule 13d-5, particularly with respect to the tipper-tippee 
relationships that are the subject of proposed Rule 13d-5(b)(1)(ii). 
The group, therefore, may have to comply with Section 13(d) and 
Section 16.
---------------------------------------------------------------------------

    For purposes of this PRA, we estimate that there could be an 
additional 36,702 annual responses to the collection of information 
under Regulation 13D-G \272\ as a result of the proposed amendments, 
36,190 of which would be attributable to our proposed amendments to 
Rule 13d-2,\273\ 83 of which would be attributable to our proposed 
amendment to Rule 13d-3,\274\ and 429 of which would be

[[Page 13893]]

attributable to our proposed amendments to Rule 13d-5.\275\ We also 
estimate that there would be an additional 2,197 Forms 3 filed, an 
additional 33,821 Forms 4 filed, and an additional 594 Forms 5 filed as 
a result of the proposed amendments.\276\
---------------------------------------------------------------------------

    \272\ To the extent that a person or entity incurs a burden 
imposed by Regulation 13D-G, it is encompassed within the collection 
of information estimates for Regulation 13D-G. This burden includes 
the preparation, filing, processing and circulation of initial and 
amended Schedules 13D and 13G.
    \273\ The current OMB inventory for Regulation 13D-G reflects 
8,587 annual responses. As discussed in Section III.B.2 supra, a 
total of 54,601 total Schedule 13D and 13G filings were made during 
calendar year 2020. See supra notes 201-202 and accompanying text. 
Of those filings, 31,221, or 57.18%, were Schedule 13G amendments. 
Id. Upon further review of that data set, we note that 25,642, or 
82.13%, of those filings were made within the first 45 days of 
calendar year 2020. For purposes of this PRA estimate, therefore, we 
assume that 57.18% of the 8,587 annual responses in the current OMB 
inventory for Regulation 13D-G, or 4,910 responses, are Schedule 13G 
amendments. Of those 4,910 responses, we assume that 67%, or 3,290 
responses, were made pursuant to Rule 13d-2(b). Our proposed 
amendment to Rule 13d-2(b) could result in 12 Schedule 13G 
amendments being filed annually pursuant to Rule 13d-2(b), as 
compared to the one annual amendment currently required by Rule 13d-
2(b). See supra note 270. As such, for purposes of this PRA, we 
estimate that there would be 39,480 Schedule 13G amendments filed 
annually pursuant to Rule 13d-2(b) as a result of our proposed 
amendments (calculated by multiplying (x) the 3,290 annual responses 
currently attributable to Rule 13d-2(b) by (y) 12), resulting in 
36,190 additional responses to the collection of information under 
Regulation 13D-G (calculated as the difference between (x) the 
39,480 annual responses estimated to be attributable to Rule 13d-
2(b) as a result of the proposed amendments and (y) the 3,290 annual 
responses currently attributable to Rule 13d-2(b)). We note, 
however, that this estimate likely reflects the upper limit of the 
potential increases in the number of annual Regulation 13D-G 
responses as a result of our proposed amendments to Rule 13d-2(b) 
because (1) the proposed amendments would revise Rule 13d-2(b) to 
require a Schedule 13G be amended only for a ``material'' change to 
the information previously reported, as compared to the current 
requirement that an amendment be filed for ``any'' change to the 
information previously reported and (2) the information previously 
reported by many Schedule 13G filers may not change materially on a 
monthly basis.
    \274\ For purposes of this PRA estimate, we assume that the 
proposed amendment to Rule 13d-3 potentially would lead to an 
increase in the number of Schedule 13D filings. We do not expect 
that the number of Schedule 13G filings would increase given that 
proposed Rule 13d-3(e)(1)(i)(C) would deem a person to be a 
beneficial owner only if such person held the derivative securities 
with the purpose or effect of changing or influencing the control of 
the issuer of the relevant covered class, or in connection with or 
as a participant in any transaction having such purpose or effect. 
Consequently, Exempt Investors are the only type of Schedule 13G 
filer that could be deemed beneficial owners of a cash-settled 
derivative security's reference covered class under proposed Rule 
13d-3(e) and continue to report beneficial ownership on Schedule 
13G. We believe, however, that certain persons filing a Schedule 13G 
as an Exempt Investor, such as founders of companies and early 
investors in an issuer's class of equity securities who made their 
acquisition before the class was registered under Section 12 of the 
Exchange Act, already control or may be in a position to control the 
issuer, and generally would not have a need to acquire or hold cash-
settled derivative securities to effectuate influence or control 
over an issuer. Exempt Investors also may seek to avoid acquiring 
beneficial ownership of more than 2% of a covered class as a result 
of application of proposed Rule 13d-3(e) given that such an 
acquisition could not only jeopardize their eligibility to rely upon 
the Section 13(d)(6)(B) exemption, but also reduce or eliminate 
their capacity to acquire any shares with voting rights during the 
twelve month period in which the availability of the exemption is 
measured. As discussed in Section III.B.2 supra, there were a total 
of 10,542 Schedule 13D filings made in calendar year 2020. See supra 
notes 201-202 and accompanying text. Those 10,542 filings comprised 
19.3% of the total number of Schedule 13D and 13G filings (54,601) 
made in calendar year 2020. Id. Applying that percentage to the 
current OMB inventory for Regulation 13D-G, we assume that 1,657 (or 
19.3%) of the 8,587 annual responses are Schedule 13D filings. As 
noted in Section III.C.2.b supra, we lack data on the current use of 
cash-settled derivative securities. Based on the number of Schedule 
13D filings that were made in 2020, however, we assume that the 
proposed amendment to Rule 13d-3 could result in a 5% increase in 
the number of Schedule 13D filers. As such, we estimate that there 
would be 83 additional responses to the collection of information 
under Regulation 13D-G as a result of our proposed amendment to Rule 
13d-3 (calculated by multiplying (x) the 1,657 estimated number of 
Schedule 13D filings in the OMB inventory by (y) 5%). We note, 
however, that our analysis may overestimate the potential increase 
in the number of annual Regulation 13D-G responses as a result of 
our proposed amendment to Rule 13d-3. For example, it is possible 
that those derivative holders that may beneficially own more than 5% 
of a covered class as a result of proposed Rule 13d-3(e) would have 
eventually acquired beneficial ownership of more than 5% of such 
covered class in the same calendar year even absent application of 
proposed Rule 13d-3(e). In such cases, although application of 
proposed Rule 13d-3(e) would accelerate the point in time at which 
such person's initial Schedule 13D filing obligation arose, it would 
not necessarily cause additional persons to become Schedule 13D 
filers. In addition, it is possible that persons who use such 
derivatives may take steps to avoid becoming beneficial owners--or 
minimize or entirely eliminate the use of such derivatives--in order 
to avoid a Schedule 13D filing obligation if proposed Rule 13d-3(e) 
were adopted.
    \275\ As discussed in Section III.C.3.b supra, because we lack 
data on how many groups may not be reporting beneficial ownership 
because of the misimpression that an agreement is required, we 
cannot provide reliable estimates on how such reporting practices 
would change. For purposes of this PRA estimate, however, we assume 
that our proposed amendments to Rule 13d-5 could result in a 5% 
increase in the number Schedule 13D and 13G filers. As such, based 
on the current OMB inventory for Regulation 13D-G, which reflects 
8,587 annual responses, we estimate that the number of responses 
will be increased by 429 filings (calculated by multiplying (x) the 
current 8,587 annual responses by (y) 5%). We note, however, that 
our analysis may overestimate the potential increase in the number 
of annual Regulation 13D-G responses as a result of the adoption of 
our proposed amendments to Rule 13d-5 because such adoption may 
incentivize persons to take steps to avoid triggering a requirement 
to report beneficial ownership. For example, two or more persons who 
collectively beneficially own in excess of 5% of a covered class may 
avoid coordination that could result in them being found to have 
``act[ed] as'' a group for the purpose of acquiring, holding or 
disposing of a covered class absent reliance on an exemption. In 
addition, our proposed amendments to Rule 13d-6 would create new 
exemptions under which two or more persons will not be deemed to 
have acquired beneficial ownership of, or otherwise beneficially 
own, an issuer's equity securities as a group. As such, to the 
extent beneficial owners qualify for and rely on the proposed 
exemptions in Rule 13d-6, those exemptions may offset any potential 
increase in the number of annual Regulation 13D-G responses as a 
result of the adoption of our proposed amendments to Rule 13d-5.
    \276\ The current OMB inventories for Forms 3, 4 and 5 reflect 
21,968, 338,207 and 5,939 annual responses, respectively. As 
discussed above, our proposed amendments to Rules 13d-3 and 13d-5 
could increase the number of persons required to make Form 3, 4 and 
5 filings. See supra note 271 and accompanying text. For purposes of 
this PRA estimate, we assume that any increase in the number of Form 
3, 4 and 5 filings will correspond with our estimated increase in 
the number of Schedule 13D filings as a result of our proposed 
amendment to Rule 13d-3, which is 5%, and the increase in the number 
of Schedule 13D and 13G filings as a result of our proposed 
amendment to Rule 13d-5, which is also 5%. See supra notes 274 and 
275. Taking the sum of these percentages (10%) and applying that sum 
percentage to the current OMB inventories for Forms 3, 4 and 5, we 
estimate that the number of responses will be increased by 2,197, 
33,821 and 594 for Forms 3, 4 and 5, respectively. But see supra 
notes 274 and 275 for a discussion of why this analysis may 
overestimate the potential increase in the number of annual Form 3, 
4 and 5 responses as a result of our proposed amendments to Rules 
13d-3 and 13d-5.
---------------------------------------------------------------------------

    In addition to a potential increase in the number of annual 
responses, we expect that the proposed amendments would change the 
estimated burden per response for Regulation 13D-G.\277\ For both 
Schedule 13D and Schedule 13G filers, we expect that the proposed 
structured data requirements would increase the estimated burden per 
response by requiring that the disclosures in those schedules be made 
using the 13D/G-specific XML. For Schedule 13D filers, we expect that 
the amendment to Rule 13d-3 would increase the estimated burden per 
response if such filers hold cash-settled derivative securities as a 
result of the calculations required by proposed Rule 13d-3(e) to 
determine the number of reference securities that such filers would be 
deemed to beneficially own pursuant to that proposed rule.\278\ 
Finally, for Schedule 13D, we expect that the amendments to Item 6 of 
Schedule 13D potentially could increase the estimated burden per 
response by specifying that disclosure is required under Item 6 for the 
use of cash-settled derivative securities with respect to an issuer's 
securities.\279\
---------------------------------------------------------------------------

    \277\ We do not expect that the proposed amendments would change 
the estimated burden per response for Form 3, 4, or 5 because the 
proposed amendments would not alter the filing deadlines for those 
forms or the type or form of the information required to be 
disclosed.
    \278\ Although applicable to both current and potential Schedule 
13D and 13G filers, we assume that the proposed amendment to Rule 
13d-3, if adopted, would affect only the burden hours for Schedule 
13D filers, and not for Schedule 13G filers. See supra note 274 for 
a discussion of why we do not believe that the proposed amendment to 
Rule 13d-3 would impact Schedule 13G filers.
    \279\ We further expect, however, that this potential increase 
may be offset by the proposed amendment to Item 6 that would delete 
the ``including but not limited to'' proviso.
---------------------------------------------------------------------------

    The burden estimates were calculated by estimating the number of 
parties we anticipate would expend time, effort and/or financial 
resources to generate, maintain, retain, disclose or provide 
information in connection with the proposed amendments and then 
multiplying by the estimated amount of time, on average, such parties 
would devote in response to the proposed amendments. The following 
table summarizes the calculations and assumptions used to derive our 
estimates of the aggregate increase in burden corresponding to the 
proposed amendments.

 PRA Table 1--Calculation of Increase in Burden Hours Resulting From the
                           Proposed Amendments
------------------------------------------------------------------------
                                       Schedule 13D       Schedule 13G
                                       filings (A)        filings (B)
------------------------------------------------------------------------
Number of Responses \a\...........              1,823             43,466
Burden Hours Per Response \b\.....               4.29               3.69
Column Total \c\..................              7,821            160,390
                                   -------------------------------------
Aggregate Increase in Burden Hours
 \d\..............................                 140,799
------------------------------------------------------------------------
\a\ As discussed in Section III.B.2 supra, there were 54,601 total
  Schedule 13D and 13G filings during calendar year 2020, comprised of
  10,542 Schedule 13D filings and 44,059 Schedule 13G filings. See supra
  notes 201-202 and accompanying text. We note, therefore, that 19.3% of
  the filings were Schedule 13D filings and 80.7% of the filings were
  Schedule 13G filings. Applying those percentages to the current OMB
  inventory for Regulation 13D-G, we assume that 1,657 (or 19.3%) of the
  8,587 annual responses are Schedule 13D filings and that the remaining
  6,930 (or 80.7%) are Schedule 13G filings. When taking into account
  the potential effects of the proposed amendments, if adopted, we
  estimate that (1) the number of Schedule 13D filings could increase by
  10% (166 additional filings) as a result of the proposed amendments to
  Rules 13d-3 and 13d-5 and (2) the number of Schedule 13G filings could
  increase by 5% (346 additional filings) as a result of the proposed
  amendments to Rule 13d-5 and 36,190 as a result of the proposed
  amendments to Rule 13d-2. See supra notes 273-275.

[[Page 13894]]

 
\b\ The current OMB inventory reflects a total of 27,412 annual burden
  hours for Regulation 13D-G. When applied to the current OMB inventory
  of 8,587 annual responses, this results in an average of 3.19 burden
  hours per Schedule 13D or 13G filing. We use these per filing burden
  hours as a baseline for estimating the burden impact of the proposed
  amendments. For the proposed structured data requirements, we estimate
  they would increase the burden per response for both Schedule 13D and
  13G filers by 0.5 burden hours. Our assumption is that the burden
  would be greatest in the first year after adoption, as filers adjust
  to the new requirement and update their Schedule 13D and 13G
  preparation and filing processes accordingly. We estimate that the
  burden of the proposed structured data requirement would be 1 hour in
  the first year and 0.25 hours in each of the following two years for a
  three-year average of 0.5 burden hours. For the proposed amendment to
  Rule 13d-3, we estimate they would increase the burden per respondent
  by 0.5 hours. Our assumption is that the burden would be the greatest
  in the first year after adoption, as filers adjust to the new
  requirements and develop systems and processes to determine the amount
  of their beneficial ownership as a result of their holdings of cash-
  settled derivative securities. We estimate that the burden of the
  proposed amendment to Rule 13d-3 would be 1 hour in the first year and
  0.25 hours in each of the following two years for a three-year average
  of 0.5 burden hours. Although we expect that the burden of complying
  with the requirements of proposed Rule 13d-3(e) (including, in
  particular, the requirements in the notes to proposed Rule 13d-3(e)(2)
  that the relevant calculations be performed on a daily basis) would be
  greater than the burden of complying with the structured data
  requirements, we also expect that a relatively small percentage of all
  Schedule 13D filers hold cash-settled derivative securities and,
  therefore, Rule 13d-3(e) would only apply to a subset of Schedule 13D
  filers (whereas the structured data requirements would apply to all
  Schedule 13D and 13G filers). As such, we believe that it is
  appropriate to adjust the burden per respondent accordingly. Finally,
  for the proposed amendments to Item 6 of Schedule 13D, we estimate
  they would increase the burden per respondent by 0.1 hours. Although
  these proposed amendments could, in some cases, substantially increase
  the amount of disclosure made pursuant to Item 6, we believe that this
  estimate accurately reflects that only a relatively small percentage
  of all Schedule 13D filers hold cash-settled derivative securities
  and, therefore, would be required to make additional disclosures. In
  addition, we also expect that any increased burden may be somewhat
  offset by the proposed amendment to Item 6 that would delete the
  ``including but not limited to'' proviso. Taken together, we estimate
  that the proposed amendments could increase the annual burden hours
  per Schedule 13D filing by 1.1 hours and increase the annual burden
  hours per Schedule 13G filing by 0.5 hours. When added to the current
  average of 3.19 burden hours per Schedule 13D or 13G filing, we
  estimate that if the proposed amendments were adopted, the average
  burden hours per Schedule 13D filing would be 4.29 hours and the
  average burden hours per Schedule 13G filing would be 3.69 hours.
\c\ Derived by multiplying the number of responses in each column by the
  burden hours per response.
\d\ Derived by adding together the column totals (168,211 hours) and
  subtracting from that sum the total annual burden hours for Regulation
  13D-G currently reflected in the OMB inventory (27,412 hours).

    The table below illustrates the incremental change to the total 
annual compliance burden in hours and in costs \280\ as a result of the 
proposed amendments. The table sets forth the percentage estimates we 
typically use for the burden allocation for each response.
---------------------------------------------------------------------------

    \280\ Our estimates assume that 75% of the burden is borne by 
the reporting persons and 25% is borne by outside professionals at 
$400 per hour. We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour.

      PRA Table 2--Calculation of Aggregate Increase in Burden Hours Resulting From the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
 Total number of                         Increase in                           Increase in        Increase in
    estimated      Total increase in   burden hours per     Increase in        professional       professional
    responses         burden hours         response        internal hours         hours              costs
(A) [dagger]                    (B)                  (C) =(D) = (B) x 75%    (E) = (B) x 25%   (F) = (E) x $400
                   [dagger][dagger]
----------------------------------------------------------------------------------------------------------------
          45,289            140,799                  3            105,599             35,200        $14,080,000
                                      [dagger][dagger][
                                               dagger]
----------------------------------------------------------------------------------------------------------------
[dagger] This number reflects an estimated increase of 36,702 annual responses to the existing Regulation 13D-G
  collection of information. See supra notes 272-275 and accompanying text. The current OMB PRA inventory
  estimates that 8,587 responses are filed annually for Regulation 13D-G.
[dagger][dagger] Calculated as the sum of annual burden increases estimated for Schedule 13D and 13G filings.
  See supra PRA Table 1.
[dagger][dagger][dagger] The estimated increases in Columns (C), (D) and (E) are rounded to the nearest whole
  number.

    Finally, the table that follows summarizes the requested paperwork 
burden for Regulation 13D-G that will be submitted to OMB for review in 
accordance with the PRA, including the estimated total reporting 
burdens and costs, under the proposed amendments.

                                                   PRA Table 3--Requested Paperwork Burden for Regulation 13D-G Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                         Current burden                                                  Program change                                                  Revised burden
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
   Current annual                                                 Increase in number      Increase in          Increase in
      responses       Current burden hours  Current cost burden      of responses        internal hours     professional costs    Annual responses        Burden hours           Cost burden
(A)                                 (B)                    (C)   (D)            (E)        minus>
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
            8,587                27,412          $32,894,000               36,702              105,599          $14,080,000                45,289               133,011           $46,974,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 See supra notes 272-275 and accompanying text.
 From Column (D) in PRA Table 2.
 From Column (F) in PRA Table 2.

    In addition, the requested increase in the paperwork burden for 
Forms 3, 4, and 5 that will be submitted to OMB for review in 
accordance with the PRA will be 1,099 hours, 16,911 hours and 594 
hours, respectively, and zero dollars for each Form.\281\
---------------------------------------------------------------------------

    \281\ These amounts are calculated based on the estimated number 
of additional Forms 3, 4, and 5 filed as a result of the proposed 
amendments--2,197, 33,821 and 594, respectively, see supra note 276 
and accompanying text--multiplied by the current OMB inventory 
number of hours per response. The current OMB inventory indicates 
that there are 0.5 burden hours associated with each Form 3 and Form 
4 filing and one burden hour associated with each Form 5 filing. The 
current OMB inventory also indicates that there are $0 of burden 
dollars associated with each Form 3, 4, and 5 filing.
---------------------------------------------------------------------------

    Given the number of variables that are highly specific to the 
unique

[[Page 13895]]

circumstances of each type of person affected by the proposed 
amendments, our ability to predict the magnitude of corresponding costs 
and burdens with any precision is limited. Therefore, we encourage 
public commenters to consider our assessment and provide additional 
information and, where available, data that would be helpful in 
deriving our estimates for purposes of the PRA.
Request for Comment
    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
     Evaluate the accuracy and assumptions and estimates of the 
burden of the proposed collection of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy of the comments to Vanessa A. 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549, with reference to File No. S7-06-22. Requests 
for materials submitted to the OMB by us with regard to these 
collections of information should be in writing, refer to File No. S7-
06-22 and be submitted to the Securities and Exchange Commission, 
Office of FOIA Services, 100 F Street NE, Washington, DC 20549. Because 
the OMB is required to make a decision concerning the collections of 
information between 30 and 60 days after publication, a comment to the 
OMB is best assured of having its full effect if the OMB receives it 
within 30 days of publication.

V. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\282\ the Commission must advise OMB as to 
whether the proposed amendments constitute a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results, 
or is likely to result, in:
---------------------------------------------------------------------------

    \282\ Public Law 104-121, Title II, 110 Stat. 857 (1996); 5 
U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether the proposed amendments would be a 
``major rule'' for purposes of SBREFA. We solicit comment and empirical 
data on: (a) The potential effect on the U.S. economy on an annual 
basis; (b) any potential increase in costs or prices for consumers or 
individual industries; and (c) any potential effect on competition, 
investment or innovation. Commenters are requested to provide empirical 
data and other factual support for their views to the extent possible.

VI. Regulatory Flexibility Act Certification

    The RFA requires Federal agencies, in promulgating rules, to 
consider the impact of those rules on small entities. Section 603(a) of 
the Administrative Procedure Act,\283\ as amended by the RFA, generally 
requires the Commission to undertake a regulatory flexibility analysis 
of all proposed rules, or proposed rule amendments, to determine the 
impact of such rulemaking on ``small entities.'' \284\ Section 605(b) 
of the RFA states that this requirement shall not apply to any proposed 
rule or proposed rule amendment which, if adopted, would not have a 
significant economic impact on a substantial number of small 
entities.\285\
---------------------------------------------------------------------------

    \283\ 5 U.S.C. 603(a).
    \284\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in 17 CFR 240.0-10. See Final 
Definitions of ``Small Business'' and ``Small Organization'' for 
Purposes of the Regulatory Flexibility Act, Release No. 34-18452 
(Jan. 28, 1982) [47 FR 5215 (Feb. 4, 1982)].
    \285\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes: (1) When used with reference to an ``issuer'' or 
a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; \286\ or (2) a broker-dealer with 
total capital (net worth plus subordinated liabilities) of less than 
$500,000 on the date in the prior fiscal year as of which its audited 
financial statements were prepared pursuant to 17 CFR 240.17a-5(d) 
(``Rule 17a-5(d)''),\287\ or, if not required to file such statements, 
a broker-dealer with total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and is not affiliated with any person (other than a natural 
person) that is not a small business or small organization.\288\ An 
investment company, including a business development company,\289\ is 
considered to be a ``small business'' if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\290\
---------------------------------------------------------------------------

    \286\ See 17 CFR 240.0-10(a).
    \287\ Rule 17a-5(d).
    \288\ See 17 CFR 240.0-10(c).
    \289\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
    \290\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    Although the proposed amendments would apply to beneficial owners 
regardless of their size, we believe that the vast majority of the 
beneficial owners that would be subject to the proposed amendments 
would not be small entities for purposes of the RFA. For example, the 
proposed amendments to the filing deadlines in Rules 13d-1 and 13d-2, 
as well as the proposed amendments to Rules 13 and 201 of Regulation S-
T and the proposed structured data requirements, only would impact 
persons who beneficially own more than 5% of a covered class. In 
addition, the proposed amendment to Rule 13d-3 would apply to holders 
of cash-settled derivative securities; we believe that persons who hold 
such derivatives are generally larger, sophisticated investors. 
Similarly, while the proposed amendments to Rule 13d-5 could apply to 
numerous smaller persons who individually, absent formation of a group 
pursuant to the proposed amendments, would not beneficially own more 
than 5% of a covered class, we believe that persons

[[Page 13896]]

who take concerted actions that would implicate the proposed amendments 
generally would be larger, sophisticated investors. That same belief 
applies to the exemptions contained in the proposed amendments to Rule 
13d-6.
    For the foregoing reasons, the Commission certifies, pursuant to 5 
U.S.C. 605(b), that the proposed amendments, if adopted, would not have 
a significant economic impact on a substantial number of small entities 
for purposes of the RFA. We invite commenters to address whether the 
proposed amendments would have a significant economic impact on a 
substantial number of small entities, and, if so, what would be the 
nature of any impact on small entities. We request that commenters 
provide empirical data to illustrate the extent of the impact. Such 
comments will be considered in the preparation of any final rules (and 
in a Final Regulatory Flexibility Analysis if one is needed) and will 
be placed in the same public file as comments on the proposed 
amendments themselves.

VII. Statutory Authority

    We are proposing the rule amendments contained in this release 
under the authority set forth in Sections 3(a), 3(b), 13, 16, and 23(a) 
of the Exchange Act.

List of Subjects

17 CFR Part 232

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Securities.

17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II, of the Code of Federal Regulations as 
follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
1. The general authority citation for part 232 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *


Sec.  232.13   [Amended]

0
2. Amend Sec.  232.13(a)(4) by:
0
a. Removing the words ``or a Schedule 14N'' and adding ``, a Schedule 
14N'' in their place; and
0
b. Adding the phrase ``, or a Schedule 13D or Schedule 13G, inclusive 
of any amendments thereto (Sec. Sec.  240.13d-101 and 240.13d-102 of 
this chapter),'' immediately preceding ``submitted by direct 
transmission''.


Sec.  232.201   [Amended]

0
3. Amend Sec.  232.201(a) introductory text by:
0
a. Removing the word ``or'' that immediately precedes ``an Asset Data 
File''; and
0
b. Adding after the phrase ``Asset Data File (as defined in Sec.  
232.11),'' the phrase ``or a Schedule 13D or Schedule 13G (Sec. Sec.  
240.13d-101 and 240.13d-102 of this chapter)''.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
4. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.13d-3 is also issued under Public Law 111-203 Sec.  
766, 124 Stat. 1799 (2010).
* * * * *
0
5. Amend Sec.  240.13d-1 by revising paragraphs (a), (b)(2), (c) 
introductory text, (d), (e)(1) introductory text, (f)(1), (g), and (i) 
to read as follows:


Sec.  240.13d-1   Filing of Schedules 13D and 13G.

    (a) Any person who, upon acquiring directly or indirectly the 
beneficial ownership of any equity security of a class which is 
specified in paragraph (i) of this section, is directly or indirectly 
the beneficial owner of more than five percent of the class shall, 
within five days after the date of the acquisition, file with the 
Commission, a statement containing the information required by Schedule 
13D (Sec.  240.13d-101).
    (b) * * *
    (2) The Schedule 13G filed pursuant to paragraph (b)(1) of this 
section shall be filed within five business days after the end of the 
month in which the person became obligated under paragraph (b)(1) of 
this section to report the person's beneficial ownership as of the last 
day of the month, provided, that it shall not be necessary to file a 
Schedule 13G unless the percentage of the class of equity security 
specified in paragraph (i) of this section beneficially owned as of the 
end of the month is more than five percent.
    (c) A person who would otherwise be obligated under paragraph (a) 
of this section to file a statement on Schedule 13D (Sec.  240.13d-101) 
may, in lieu thereof, file with the Commission, within five days after 
the date of an acquisition described in paragraph (a) of this section, 
a short-form statement on Schedule 13G (Sec.  240.13d-102). Provided, 
that the person:
* * * * *
    (d) Any person who, as of the end of any month, is or becomes 
directly or indirectly the beneficial owner of more than five percent 
of any equity security of a class specified in paragraph (i) of this 
section and who is not required to file a statement under paragraph (a) 
of this section by virtue of the exemption provided by Section 
13(d)(6)(A) or (B) of the Act (15 U.S.C. 78m(d)(6)(A) or 78m(d)(6)(B)), 
or because the beneficial ownership was acquired prior to December 22, 
1970, or because the person otherwise (except for the exemption 
provided by Section 13(d)(6)(C) of the Act (15 U.S.C. 78m(d)(6)(C))) is 
not required to file a statement, shall file with the Commission, 
within five business days after the end of the month in which the 
person became obligated to report under this paragraph (d), a statement 
containing the information required by Schedule 13G (Sec.  240.13d-
102).
    (e)(1) Notwithstanding paragraphs (b) and (c) of this section and 
Sec.  240.13d-2(b), a person that has reported that it is the 
beneficial owner of more than five percent of a class of equity 
securities in a statement on Schedule 13G (Sec.  240.13d-102) pursuant 
to paragraph (b) or (c) of this section, or is required to report the 
acquisition but has not yet filed the schedule, shall immediately 
become subject to paragraph (a) of this section and Sec.  240.13d-2(a) 
and shall file a statement on Schedule 13D (Sec.  240.13d-101) within 
five days if, and shall remain subject to those requirements for so 
long as, the person:
* * * * *
    (f)(1) Notwithstanding paragraph (c) of this section and Sec.  
240.13d-2(b), persons reporting on Schedule 13G (Sec.  240.13d-102) 
pursuant to paragraph (c) of this section shall immediately become 
subject to paragraph (a) of this section and Sec.  240.13d-2(a) and 
shall remain subject to those requirements for

[[Page 13897]]

so long as, and shall file a statement on Schedule 13D (Sec.  240.13d-
101) within five days after the date on which the person's beneficial 
ownership equals or exceeds 20 percent of the class of equity 
securities.
* * * * *
    (g) Any person who has reported an acquisition of securities in a 
statement on Schedule 13G (Sec.  240.13d-102) pursuant to paragraph (b) 
of this section, or has become obligated to report on the Schedule 13G 
(Sec.  240.13d-102) but has not yet filed the Schedule, and thereafter 
ceases to be a person specified in paragraph (b)(1)(ii) of this section 
or determines that it no longer has acquired or holds the securities in 
the ordinary course of business shall immediately become subject to 
paragraph (a) or (c) of this section (if the person satisfies the 
requirements specified in paragraph (c)) and Sec.  240.13d-2(a), (b), 
or (d), and shall file, within five days thereafter, a statement on 
Schedule 13D (Sec.  240.13d-101) or amendment to Schedule 13G, as 
applicable, if the person is a beneficial owner at that time of more 
than five percent of the class of equity securities.
* * * * *
    (i)(1) For the purpose of this section, the term ``equity 
security'' means any equity security of a class which is registered 
pursuant to section 12 of that Act, or any equity security of any 
insurance company which would have been required to be so registered 
except for the exemption contained in section 12(g)(2)(G) of the Act, 
or any equity security issued by a closed-end investment company 
registered under the Investment Company Act of 1940; provided, such 
term shall not include securities of a class of non-voting securities.
    (2) For the purpose of this section, the term ``business day'' 
means any day, other than Saturday, Sunday, or a Federal holiday, from 
6 a.m. to 10 p.m., eastern time.
* * * * *
0
6. Amend Sec.  240.13d-2 by:
0
a. Revising paragraphs (a), (b), (c), and (d); and
0
b. Removing the parenthetical authority citation at the end of the 
section.
    The revisions read as follows:


Sec.  240.13d-2   Filing of amendments to Schedules 13D or 13G.

    (a) If any material change occurs in the facts set forth in the 
Schedule 13D (Sec.  240.13d-101) required by Sec.  240.13d-1(a), 
including, but not limited to, any material increase or decrease in the 
percentage of the class beneficially owned, the person or persons who 
were required to file the statement shall file or cause to be filed 
with the Commission an amendment disclosing that change within one 
business day after that change. An acquisition or disposition of 
beneficial ownership of securities in an amount equal to one percent or 
more of the class of securities shall be deemed ``material'' for 
purposes of this section; acquisitions or dispositions of less than 
those amounts may be material, depending upon the facts and 
circumstances.
    (b) Notwithstanding paragraph (a) of this section, and provided 
that the person filing a Schedule 13G (Sec.  240.13d-102) pursuant to 
Sec.  240.13d-1(b) or (c) continues to meet the requirements set forth 
therein, any person who has filed a Schedule 13G (Sec.  240.13d-102) 
pursuant to Sec.  240.13d-1(b), (c), or (d) shall amend the statement 
within five business days after the end of each month if, as of the end 
of the month, there are any material changes in the information 
reported in the previous filing on that Schedule, including, but not 
limited to, any material increase or decrease in the percentage of the 
class beneficially owned; provided, however, that an amendment need not 
be filed with respect to a change in the percent of class outstanding 
previously reported if the change results solely from a change in the 
aggregate number of securities outstanding. Once an amendment has been 
filed reflecting beneficial ownership of five percent or less of the 
class of securities, no additional filings are required unless the 
person thereafter becomes the beneficial owner of more than five 
percent of the class and is required to file pursuant to Sec.  240.13d-
1.
    (c) Any person relying on Sec.  240.13d-1(b) that has filed its 
initial Schedule 13G (Sec.  240.13d-102) pursuant to Sec.  240.13d-1(b) 
shall, in addition to filing any amendments pursuant to Sec.  240.13d-
2(b), file an amendment on Schedule 13G (Sec.  240.13d-102) within five 
days after the date on which the person's direct or indirect beneficial 
ownership exceeds 10 percent of the class of equity securities. 
Thereafter, that person shall, in addition to filing any amendments 
pursuant to Sec.  240.13d-2(b), file an amendment on Schedule 13G 
(Sec.  240.13d-102) within five days after the date on which the 
person's direct or indirect beneficial ownership increases or decreases 
by more than five percent of the class of equity securities. Once an 
amendment has been filed reflecting beneficial ownership of five 
percent or less of the class of securities, no additional filings are 
required by this paragraph (c).
    (d) Any person relying on Sec.  240.13d-1(c) that has filed its 
initial Schedule 13G (Sec.  240.13d-102) pursuant to Sec.  240.13d-1(c) 
shall, in addition to filing any amendments pursuant to paragraph (b) 
of this section, file an amendment on Schedule 13G (Sec.  240.13d-102) 
within one business day after acquiring, directly or indirectly, 
greater than 10 percent of a class of equity securities specified in 
Sec.  240.13d-1(d), and thereafter within one business day after 
increasing or decreasing its beneficial ownership by more than five 
percent of the class of equity securities. Once an amendment has been 
filed reflecting beneficial ownership of five percent or less of the 
class of securities, no additional filings are required by this 
paragraph (d).
* * * * *
0
7. Amend Sec.  240.13d-3 by:
0
a. Revising paragraph (d) introductory text;
0
b. Adding paragraph (e); and
0
c. Removing the parenthetical authority citation at the end of the 
section.
    The revision and addition read as follows:


Sec.  240.13d-3   Determination of beneficial owner.

* * * * *
    (d) Notwithstanding the provisions of paragraphs (a), (c), and (e) 
of this section:
* * * * *
    (e)(1)(i) A person shall be deemed to be the beneficial owner of a 
number of securities for purposes of Sections 13(d) and 13(g) of the 
Act, calculated in accordance with paragraph (e)(2) of this section, in 
a class of equity securities if that person holds a derivative 
security, as defined in Sec.  240.16a-1(c) (Rule 16a-1(c)), other than 
a security-based swap as defined by section 3(a)(68) of the Act (15 
U.S.C. 78c(a)(68)) and the rules and regulations thereunder in this 
part:
    (A) That references such class of equity securities;
    (B) To the extent that such derivative security is required to be 
settled exclusively in cash and holding such security has not otherwise 
resulted in a determination that the person is a beneficial owner under 
this section; and
    (C) That is held with the purpose or effect of changing or 
influencing the control of the issuer of such class of equity 
securities, or in connection with or as a participant in any 
transaction having such purpose or effect.
    (ii) Any securities not outstanding which are referenced by such 
derivative security shall be deemed to be

[[Page 13898]]

outstanding for the purpose of computing the percentage of outstanding 
securities of the class owned by such person but shall not be deemed to 
be outstanding for the purpose of computing the percentage of the class 
by any other person.
    (2)(i) The number of securities that a person shall be deemed to 
beneficially own pursuant to paragraph (e)(1) of this section shall be 
the larger of (in each case as applicable):
    (A) The product that is obtained by multiplying {x{time}  the 
number of securities by reference to which the amount payable under the 
derivative security is determined by {y{time}  the delta of the 
derivative security; and
    (B) The number that is obtained by {x{time}  dividing the notional 
amount of the derivative security by the most recent closing market 
price of the reference equity security, and then {y{time}  multiplying 
such quotient by the delta of the derivative security.
    (ii) For the purpose of this section, the term ``delta'' means, 
with respect to a derivative security, the ratio that that is obtained 
by comparing {x{time}  the change in the value of the derivative 
security to {y{time}  the change in the value of the reference equity 
security.
    Note 1 to Paragraph (e)(2). For purposes of determining the number 
of equity securities that a person shall be deemed to beneficially own 
pursuant to this paragraph (e), only long positions in derivative 
securities should be counted. Short positions in derivative securities 
should not be netted against long positions or otherwise taken into 
account.
    Note 2 to Paragraph (e)(2). For purposes of determining the number 
of equity securities that a person shall be deemed to beneficially own 
pursuant to this paragraph (e), the calculation in clause (x) of 
paragraph (e)(2)(i)(B) of this section should be performed on a daily 
basis.
    Note 3 to Paragraph (e)(2). If a derivative security does not have 
a fixed delta, then a person who holds such derivative security should 
calculate the delta on a daily basis, for purposes of determining the 
number of equity securities that such person shall be deemed to 
beneficially own pursuant to this paragraph (e), based on the closing 
market price of the reference equity security on that day.
0
8. Revise Sec.  240.13d-5 to read as follows:


Sec.  240.13d-5   Acquisition of beneficial ownership.

    (a) A person who becomes a beneficial owner of securities shall be 
deemed to have acquired such beneficial ownership for purposes of 
section 13(d)(1) of the Act, whether such acquisition was through 
purchase or otherwise. However, executors or administrators of a 
decedent's estate generally will be presumed not to have acquired the 
beneficial ownership held by the decedent's estate until such time as 
such executors or administrators are qualified under local law to 
perform their duties.
    (b)(1)(i) When two or more persons act as a group under section 
13(d)(3) of the Act, the group shall be deemed to have acquired 
beneficial ownership, for purposes of section 13(d) of the Act, of all 
equity securities of an issuer beneficially owned by any such persons 
as of the date of the group's formation.
    (ii) A person that is or will be required to report beneficial 
ownership on Schedule 13D (Sec.  240.13d-101) who, in advance of making 
such filing, directly or indirectly discloses to any other market 
participant the non-public information that such filing will be made, 
acts as a group with such other person or persons within the meaning of 
section 13(d)(3) of the Act to the extent such information was shared 
with the purpose of causing such other person or persons to acquire 
equity securities of the same class for which the Schedule 13D will be 
filed, and such group will be deemed to have acquired any beneficial 
ownership held in the same class by its members as of the earliest date 
on which such other person or persons acquired beneficial ownership 
based on such information.
    (iii) A group regulated as a person pursuant to section 13(d)(3) of 
the Act shall be deemed to have acquired beneficial ownership, as 
determined under paragraph (a) of this section and for purposes of 
sections 13(d)(1) and (2) of the Act, if any member of the group 
becomes the beneficial owner of additional equity securities in the 
same class beneficially owned by the group after the date of the 
group's formation. The beneficial ownership so acquired shall be 
reported as being held by the group through the earlier of {x{time}  
the date of the group's dissolution or {y{time}  the date of that 
member's withdrawal from the group.
    (iv) Notwithstanding paragraph (b)(1)(iii) of this section, a group 
regulated under section 13(d)(3) of the Act shall not be deemed to have 
acquired beneficial ownership, as determined under paragraph (a) of 
this section, if a member of the group becomes the beneficial owner of 
additional equity securities in the same class beneficially owned by 
the group after the date of group formation through a sale by or 
transfer from another member of the group.
    (2)(i) When two or more persons act as a group under section 
13(g)(3) of the Act, the group shall be deemed to have become the 
beneficial owner, for purposes of sections 13(g)(1) and (2) of the Act, 
of all equity securities of an issuer beneficially owned by any such 
persons as of the date of group formation notwithstanding the absence 
of an acquisition subject to section 13(d) of the Act.
    (ii) A group regulated as a person pursuant to section 13(g)(3) of 
the Act shall be deemed to have become the beneficial owner, for 
purposes of sections 13(g)(1) and (2) of the Act, if any member of the 
group becomes a beneficial owner of additional equity securities in the 
same class held by the group after the date of the group's formation 
and through the earlier of {x{time}  the date of the group's 
dissolution or {y{time}  the date of that member's withdrawal from the 
group.
    (iii) Notwithstanding paragraph (b)(2)(ii) of this section, a group 
regulated under section 13(g)(3) of the Act shall not be deemed to have 
become the beneficial owner of additional equity securities in the same 
class beneficially owned by the group if a member of the group becomes 
the beneficial owner of additional such equity securities in that same 
class after the date of the group's formation through a sale by or 
transfer from another member of the group.
0
9. Revise Sec.  240.13d-6 to read as follows:


Sec.  240.13d-6   Exemption of certain acquisitions.

    (a) The acquisition of securities of an issuer by a person who, 
prior to such acquisition, was a beneficial owner of more than five 
percent of the outstanding securities of the same class as those 
acquired shall be exempt from section 13(d) of the Act; provided, that:
    (1) The acquisition is made pursuant to preemptive subscription 
rights in an offering made to all holders of securities of the class to 
which the preemptive subscription rights pertain;
    (2) Such person does not acquire additional securities except 
through the exercise of his pro rata share of the preemptive 
subscription rights; and
    (3) The acquisition is duly reported, if required, pursuant to 
section 16(a) of the Act and the rules and regulations thereunder in 
this part.
    (b) A group shall be deemed not to have acquired any equity 
securities beneficially owned by the other members of the group solely 
by virtue of their concerted actions relating to the

[[Page 13899]]

purchase of equity securities directly from an issuer in a transaction 
not involving a public offering; provided, that:
    (1) All the members of the group are persons specified in Sec.  
240.13d-1(b)(1)(ii);
    (2) The purchase is in the ordinary course of each member's 
business and not with the purpose nor with the effect of changing or 
influencing control of the issuer, nor in connection with or as a 
participant in any transaction having such purpose or effect, including 
any transaction subject to Sec.  240.13d-3(b);
    (3) There is no agreement among, or between any members of the 
group to act together with respect to the issuer or its securities 
except for the purpose of facilitating the specific purchase involved; 
and
    (4) The only actions among or between any members of the group with 
respect to the issuer or its securities subsequent to the closing date 
of the non-public offering are those which are necessary to conclude 
ministerial matters directly related to the completion of the offer or 
sale of the securities.
    (c) Two or more persons shall not be deemed to have acquired 
beneficial ownership of, for purposes of section 13(d) of the Act, or 
otherwise beneficially own, for purposes of section 13(g) of the Act, 
an issuer's equity securities as a group under sections 13(d)(3) or 
13(g)(3) of the Act solely because of their concerted actions with 
respect to such issuer's equity securities, including engagement with 
one another or the issuer or acquiring, holding, voting or disposing of 
the issuer's equity securities; provided, that:
    (1) Communications among or between such persons are not undertaken 
with the purpose or the effect of changing or influencing control of 
the issuer, and are not made in connection with or as a participant in 
any transaction having such purpose or effect, including any 
transaction subject to Sec.  240.13d-3(b); and
    (2) Such persons, when taking such concerted actions, are not 
directly or indirectly obligated to take such actions.
    (d) Two or more persons who, in the ordinary course of their 
business, enter into a bona fide purchase and sale agreement setting 
forth the terms of a derivative security, as defined in Sec.  240.16a-
1(c) (Rule 16a-1(c)), with respect to a class of equity securities 
shall not be deemed to have acquired beneficial ownership of, for 
purposes of section 13(d)(1) of the Act and Sec.  240.13d-5, or 
otherwise beneficially own, for purposes of section 13(g) of the Act, 
any such equity securities of the issuer referenced in the agreement as 
a group under sections 13(d)(3) or 13(g)(3) of the Act; provided, that 
such persons did not enter into the agreement with the purpose or 
effect of changing or influencing control of the issuer, or in 
connection with or as a participant in any transaction having such 
purpose or effect, including any transaction subject to Sec.  240.13d-
3(b).
0
10. Amend Sec.  240.13d-101 by revising Item 6 to read as follows:


Sec.  240.13d-101   Schedule 13D--Information to be included in 
statements filed pursuant to Sec.  240.13d-1(a) and amendments thereto 
filed pursuant to Sec.  240.13d-2(a).

* * * * *
    Item 6. Contracts, Arrangements, Understandings or Relationships 
With Respect to Securities of the Issuer. Describe any contracts, 
arrangements, understandings, or relationships (legal or otherwise) 
among the persons named in Item 2 and between such persons and any 
person with respect to any securities of the issuer, including any 
class of such issuer's securities used as a reference security, in 
connection with any of the following: Call options, put options, 
security-based swaps or any other derivative securities, transfer or 
voting of any of the securities, finder's fees, joint ventures, loan or 
option arrangements, guarantees of profits, division of profits or 
loss, or the giving or withholding of proxies, naming the persons with 
whom such contracts, arrangements, understandings, or relationships 
have been entered into. Include such information for any of the 
securities that are pledged or otherwise subject to a contingency the 
occurrence of which would give another person voting power or 
investment power over such securities except that disclosure of 
standard default and similar provisions contained in loan agreements 
need not be included.
* * * * *

    By the Commission.

    Dated: February 10, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-03222 Filed 3-9-22; 8:45 am]
BILLING CODE 8011-01-P