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Changes To SEC Rules Beneficial Ownership Reporting 900X330

Changes to SEC Rules: Beneficial Ownership Reporting

Tuesday, November 14, 2023

On October 10, 2023, the Securities and Exchange Commission (SEC) adopted amendments to the existing beneficial ownership reporting rules.

Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 require that owners of more than 5% of a company’s registered class of voting securities report their ownership on a form known as Schedule D (or, if eligible, on a shorter form known as Schedule G).

The existing rules have not been updated in years, and the amendments just adopted are the SEC’s efforts to ensure that more timely reporting is made to the securities markets. The securities covered are primarily those traded on the New York Stock Exchange (NYSE), NYSE American, NASDAQ, or other U.S. national securities exchanges. Covered owners are those that own 5% of a class of securities, whether the owner has voting power individually, shared with another, or for which the owner can obtain voting rights within 60 days, such as options, warrants or convertible securities. One is deemed to beneficially own the shares if...

  1. The terms of the derivative provide the holder with voting or investment power over the underlying security;
  2. The holder acquired the derivative with the purpose or effect of divesting himself or herself of beneficial ownership so as to avoid the reporting requirements; or
  3. The holder can acquire the underlying security within 60 days, or acquires the right to acquire beneficial ownership of the security with a control purpose, regardless of when that right is exercisable.

If someone is a beneficial owner, they must report that ownership on Schedule 13D (unless they qualify for an exemption permitting reporting on Schedule 13G). Previously, ownership had to be reported within 10 calendar days of becoming a 5% owner. The new amendments require reporting within five business days. If there is a material change to the ownership interest, the old rules required the filing of an amendment “promptly,” which was a loose term. Now, the rules require filing of the amendment within two business days of a material change. Interestingly, the previous rules had the daily cut-off at 5:30 p.m. EST, and the new rules record the filing on the day if done by 10:00 p.m. EST.

An additional factor that should be taken into account is the SEC’s view on what constitutes a “group.” The rules require that when two or more people act together for the purpose of acquiring, holding, or disposing of issuer securities, they are deemed to be treated as one for determining if the 5% threshold is met. The key change in the amendments is that there is now no requirement that there be an “agreement” between the parties. Rather than expressly saying what constitutes a group, the SEC provided seven questions that help to guide the determination of whether a group exists for reporting purposes.

At EQ, we are uniquely equipped to provide insight and value when it comes to changes like this. Our Ownership Intelligence experts equip clients with a 360-degree view of street and registered data that generate powerful insights to provide a greater knowledge per share. Leverage our highly experienced team of experts to unlock the power of your ownership though our access to critical information on key investors.

Finally, to make searching easier for investors and the markets, reporting will need to be done using a structured, machine-readable data language called XML, which is the standard language used by the SEC for most other reporting.

For a transfer agent, the important thing to note is that recordkeeping and reporting are important. It is expected by issuers that transfer agents will maintain the register so an issuer, and its shareholders, will understand who owns the registered securities.

Schedule 13D changes will go into effect 90 days after publication of the amendments in the Federal Register, while Schedule 13G changes will go into effect on September 30, 2024, and the XML filing format will go into effect on December 18, 2024.