Shorter Schedule 13D Reporting Deadlines may be on the horizon

The Chairman of the Securities and Exchange Commission (SEC) recently gave a speech at London City Week. During the speech, he discussed three key areas on the reform agenda at the SEC. One of those areas was on transparency, and in particular, the area of beneficial ownership and Schedule 13D reporting.

Schedule 13D reporting requires any person(s) who acquire beneficial ownership of more than 5% of a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, to report that acquisition on a Schedule 13D within 10 days to the SEC.

It is this reporting deadline which the Chairman of the SEC has suggested could be amended. He believes that although the deadline may have been appropriate for the 1970s, when Congress mandated that large shareholders of public companies disclose information to increase transparency, it may no longer be adequate due to the rapidity of current markets. It is for this reason that he has requested SEC staff review how the rules could be updated to provide for a shortened reporting deadline. This could mean that in the not-too-distant future, the SEC moves towards the shorter reporting deadlines.

There are two schools of thought when it comes to the shortening of the deadline. Off the bat, it makes sense to shorten the deadline – when the rules were first introduced, we were in an era of snail mail and paper filings. Now, with technology and electronic filings, the 10-day reporting deadline appears to be outdated.

A shorter deadline would make it harder for activist investors to remain in the shadows as they buy up large holdings of stock in companies. In turn, shortening the reporting deadline would significantly enhance transparency and the protection of investors, by alerting them to potential changes in corporate control in a more timely manner.

In the competing camp, it is believed that a short reporting deadline deprives investors of the necessary time to accumulate their stakes without market forces ratcheting up the share price to complete their investment.

Whilst the SEC are considering amendments to reporting deadlines, hopefully, they will also address some ambiguities within the rules. Although there is a whole myriad of US statutes and rules which lack clarity and are open to interpretation, as we are discussing reporting deadlines, lets focus on that area.

Firstly, the meaning of 10 “days” within the rules – it seems commentators are divided, with some stating that filers have ten calendar days to file and others claiming that it is business days that are relevant. Market practice generally understands “days” to mean calendar days.

Secondly, the SEC should address the ambiguous “promptly” reporting deadline also found within the Schedule 13D rules. Under Rule 13d-2(a), if “any material change occurs…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 promptly file” the amendment with the SEC. Market practice generally understands “promptly” to mean within two business days.