A 2024 Compliance Roadmap for SEC Regulation 13D-G Amendments and Rule 13f-2

By: William Graham and Jerry Zhang

“In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company,” stated Securities and Exchange Commission (SEC) Chair Gensler in a recent press release announcing the SEC’s attempt to modernize the 50-year old shareholding disclosure rules.

The Securities and Exchange Commission has, therefore, adopted several amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (“Exchange Act”). The amendments to these rules, which are meant to provide transparency to the ownership of shares of public companies, update the requirement for “market participants to provide more timely information on their positions to meet the needs of investors in today’s financial markets,” as the release states. In addition, SEC Rule 13f-2 is new and introduces a requirement to report short holdings in registered securities.

Regulation 13D-G

Updates to filing deadlines and formats
At the forefront of these changes is the update to filing deadlines and formats, as Schedules 13D and 13G have had their filing deadlines shortened in light of the ability to report digitally. Specifically, the deadline for 13D filings has been reduced from ten calendar days to five business days, with amendments required within two business days. Similarly, many deadlines for 13G filings (such as the initial filing deadline for passive investors) have also been lowered to five business days. Moreover, the frequency of certain 13G filings has increased to quarterly, rather than annually. Both 13D and 13G filings must be submitted in a strict, structured, and machine-readable XML data format.

Clarification on derivative securities reporting

Further refining the scope of reportable instruments, the SEC has clarified its guidance concerning the requirement to include certain derivative securities, specifically stating that pre-existing rules may cause the holder to be considered a beneficial owner of an underlying class of equities for their holdings in cash-settled non-SBS (security-based swap) derivative securities.

Rule 13f-2

New Short Reporting Requirements
The SEC has adopted Rule 13f-2, which creates an obligation for institutional investment managers to report position data via Form SHO. The reporting requirement is triggered for a short position in a specific share class that crosses the reporting threshold. For an SEC-registered security or a security issued by a reporting company issuer (section 15(d) filer), the threshold is evaluated against the average gross short position held in that share class for each trading day (at the close of regular trading hours) over a given month. If such average meets or exceeds $10 million USD or 2.5 percent of shares outstanding, then Form SHO must be filed within 14 calendar days from the end of the month. If the security is not SEC-registered nor issued by a reporting company issuer, then the report is required if the position meets or exceeds $500,000 USD in value at the end of any settlement date during the month.

Further, where certain Broker-Dealers have certain market making exemptions which exclude them from reporting SHO activity as it pertains to specific transaction activity, modifications to Consolidated Audit Trail (CAT) reporting will suffice in providing the appropriate transparency to the regulators.

Implementation Timeline and Industry Preparation
The amendments to Regulation 13D-G have been in effect since February 5th, 2024. However, Schedule 13G filing deadlines will not be enforced until September 30th, 2024, and the updated filing formats will not be required until December 18th, 2024. Given the reiterated guidance to use the existing rules surrounding cash-settled non-SBS derivative securities, market participants will need to correctly classify their existing positions to ensure accurate reports.

In response, Droit is developing mandates within its Adept platform to facilitate compliance with the updated SEC 13D-G standards. These initiatives, vetted through Endoxa—a consortium of six Tier 1 financial institutions, are aimed at establishing a consensus-based approach to disclosure eligibility. This consensus-based approach will ensure that firms are aggregating their holdings in a manner that is consistent with their industry peers.

In addition to the Adept eligibility service, Droit’s report generation service can ensure that any 13D and 13G filings conform to the new required format. With an initial release of an Adept mandate for SEC 13D-G at the end of Q1 and additional logic for 13f-2 released mid-April, Droit is engaged with the Endoxa consortium as well as industry bodies in order to ensure that the logic is further enhanced with feedback from market participants in the coming months.

The path forward
As the industry adapts to these changes, the collective effort towards a consensus-based approach and the utilization of advanced platforms like Adept underscore the commitment to maintaining rigorous compliance standards. The amendments to SEC Regulation 13D-G represent a critical step in aligning shareholding disclosure practices with the pace of today’s financial markets, ensuring transparency and accountability.

For firms navigating this transition, staying informed and engaged with regulatory updates is key to ensuring a smooth adaptation to the new requirements. As deadlines approach, leveraging the support and resources available through a consensus-based approach and technology solutions will be vital in achieving compliance and sustaining operational integrity in the evolving regulatory landscape.

For more information on managing your shareholder disclosure obligations, please click here.