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The modernization of the Beneficial Ownership reporting has been a long-discussed topic by the Securities and Exchange Commission (“SEC”) in the U.S. It therefore comes as no surprise that the adoption of amendments to Regulation 13D-G a few days ago is big news, as a large number of investors will have to comply with the updated rules.

But what is beneficial ownership reporting about? Pursuant to Regulation 13D-G and Exchange Act Sections 13(d) and 13(g), an investor who beneficially owns more than 5% of a covered class of equity securities is required to publicly file either a Schedule 13D or a Schedule 13G. Those investors with control intent file Schedule 13D, whilst those investors without a control intent, i.e., Qualified Institutional Investors (QIIs) and Passive Investors, as well as Exempt Investors, file Schedule 13G.

Accelerated filing deadlines will increase costs

SEC Chair, Gary Gensler, highlights the fact that the rules governing beneficial ownership reporting haven’t been amended for half a century, and hence, it is imperative that the filing deadlines are shortened. Such an approach is consistent with the need to reduce information asymmetries in today’s financial markets, as material information will be spread in a more timely manner. At the other end of the scale, by accelerating the filing deadlines for Schedules 13D and 13G, smaller investors will have to pay the price for speedier filings.

The deadlines will be shortened for both initial and amended Schedule 13D-G filings. More specifically:

• The deadline for initial Schedule 13D filings is shortened to five (5) business days, while Schedule 13D amendments will have to be filed within two (2) business days;
• For QIIs and Exempt Investors, the initial Schedule 13G filing deadline is set as 45 days after the end of the calendar quarter in which beneficial ownership exceeds 5% of the covered class;
• For Passive Investors, the initial Schedule 13G filing deadline is set as five (5) business days;
• All Schedule 13G filers are required to file an amendment 45 days after the calendar quarter in which a material change occurred and;
• Schedule 13G amendment obligations for QIIs and Passive Investors are accelerated when their beneficial ownership exceeds 10% or increases or decreases by 5%.

Plus, the filing “cut-off” time is extended to 10 p.m. Eastern time, as a counterweight to the new shortened deadlines.

Disclosure of certain cash-settled derivatives provides clarity as to the calculation requirements

Next to the adopting release, SEC also issued guidance which sheds light on the inclusion of certain cash-settled derivatives, as Schedule 13D disclosure requirements needed clarification in this respect. This practically means that the scope of the beneficial ownership reporting rules is broadened for the sake of transparency. Now, Schedule 13D filers are required to disclose interests in all derivative securities – including cash-settled derivative securities – that use the issuer’s equity security as a reference security. Despite this, opposing voices are raised with regard to the ambiguity of the framework provided[1] which could very well result in incorrect filings.

The term “group” is further analyzed together with its related exemptions

The circumstances under which two (2) or more persons have formed a “group” that would be bound by the obligations arising from the beneficial ownership reporting are also discussed in the guidance. Investors need to be aware of the criteria determining the group formation and for that reason, clarification is given. The mere presence of an express agreement between two or more persons is not the sole factor that suffice for the formation of a group, as concerted actions are required, too, for the purpose of acquiring, holding, or disposing of securities of an issuer. Again, certain questions have been left unanswered, the main one being the importance (or not) of an “express agreement” in the group formation, as it is important for filers not to miss a filing.

The use of a structured, machine-readable data language for Schedule 13D and 13G means additional effort for filers

Schedule 13D and 13G filers would have to devote additional effort to prepare the final report for submission, given that a structured, machine-readable data language will now be required. Under this structured data requirement, only the exhibits to Schedules 13D and 13G will remain unstructured. The use of an XML-based language implies the necessity to gain expertise in preparing these submissions. Third-party vendors equipped with professionally trained staff can be of great assistance to investors in this regard. Nevertheless, from the standpoint of the Commission, all the information received is expected to be analyzed in a smoother manner due to the homogeneity of the data language.

When are investors expected to comply with the amendments?

The amendments will become effective 90 days after publication in the Federal Register, meaning that Schedule 13D filers will need to comply by mid-to-late January 2024. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. For instance, a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024, if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G. Compliance with the structured, machine-readable data requirement for Schedules 13D and 13G will be required on December 18, 2024.

The amendments will become effective 90 days after publication in the Federal Register, meaning that Schedule 13D filers will need to comply by mid-to-late January 2024. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. For instance, a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024, if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G. Compliance with the structured, machine-readable data requirement for Schedules 13D and 13G will be required on December 18, 2024.

However, early compliance with this requirement is welcome, and Schedule 13D and 13G filers may begin to voluntarily comply with the structured data requirement on December 18, 2023.

All in all, these developments seem to modernize the beneficial ownership regime in the US, but, at the same time, add to the complexity of the daily work conducted by in-house compliance teams. Third-party vendors, like Confluence, can assist with the preparation of correct and timely filings with their experienced professionals, as they are closely monitoring regulatory amendments and are well-prepared in advance. Missed, incorrect or late filings can cost investors a great deal of money, but third-party vendors can help them avoid those significant fines imposed by the SEC.

[1] Commissioner Hester M. Peirce, “Appropriating Appropriate Asymmetries: Statement on Modernization of Beneficial Ownership Reporting Rule”, 10 October 2023.

The private fund regulatory landscape just got more complex with the August 23 SEC adoption of these long-awaited private fund rules, which were first proposed 18 months ago in the face of industry pushback. These rules align with the agenda by SEC Chairman Gary Gensler, who has been steadfast in his commitment to enacting a proposed rule. The rules address the risks and harm to investors and funds identified by the SEC, such as conflicts of interest, lack of transparency, and lack of governance mechanisms.

Notably, although included in the initial rule proposal, no changes were made to private fund liability rules, which would have made it much easier for LPs to sue GPs

With the final rules enacted and a long and varied runway of compliance dates, now is the critical time for Advisers to prepare, build and implement a plan for successful compliance implementation.

9 Key Takeaways from These New Rules:

Please refer to the SEC Related Materials for complete information.

Key Compliance Dates:

Conclusion: Time to Buckle up with Foresight and Planning

• Evaluating the rule’s impact,
• Updating policies and procedures,
• Planning processes for distribution and consents,
• Planning for recordkeeping changes,
• Conducting Annual Fund Audit,
• Developing disclosures,
• Planning processes, content and disclosures related to Statement distribution,
• Revisiting fund fees and expenses,
• Reviewing side letter terms, among other measures,
• Operational changes,
• Planning and Conducting testing,
• Conducting Training,
• Documenting the Annual Review in writing,
• Among Others

Although the compliance period varies among managers, as noted above, we are likely to see a significant impact on future SEC examinations and enforcement activities.

Advisers need to prepare for change with the new regulations as emphasized by Chair Gensler’s analogy to the evolution of the boxing champion from Rocky to Creed during the August 23 meeting (U.S. Securities and Exchange Commission, 2023)

To learn more about how to prepare for implementation of the Private Fund Rule and to learn more about Confluence’s Compliance Services and regulatory reporting solutions, contact us at info@confluence.com

Disclaimer: The information contained in this communication is for informational purposes only. The opinions expressed herein are those of the author and do not necessarily reflect those of Confluence. Confluence is not providing legal, financial, accounting, compliance, or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

The SEC Division of Examinations (“EXAMS”) issued a Risk Alert describing EXAMS’ risk-based approach for selecting registered investment advisers to examine and determining the scope of examinations. The Risk Alert included an example of a typical initial request for documents and information, as well as examples of additional information that EXAMS may request during the examination process. The Alert identified three (3) components used to assess an adviser’s risks and scoping examinations:

• Selecting firms to examine;
• Selecting examination focus areas; and
• Selecting documents to request.

Selecting Firms to Examine

Given the size and variety of the adviser population, EXAMS utilizes a dynamic risk-based approach for selecting advisers to examine and determining the scope of the examination. EXAMS’ approach is designed to adapt to changes in markets conditions, industry practice, and investor preferences. An adviser may be selected for an examination to evaluate the risks present at a particular firm, to respond to events that pose risks to investors and markets, or to evaluate how registrants are responding to new regulatory requirements. Roughly 15% of the more than 15,000 registered advisers are examined in any particular year.

EXAMS selects advisers for examinations for a variety of reasons. The reasons include firm-specific risk factors and/or factors such as a tip, complaint, or referral, or the staff’s interest in a particular compliance risk area. The annual priorities published by EXAMS provide a guide for understanding the topics on which EXAMS may focus.

With respect to specific risk factors, EXAMS uses data analytics to identify an adviser’s products and services and assess the associated risk. EXAMS considers firm-specific risk factors based on a particular adviser’s business activities, conflicts of interest, and regulatory history. For example, consideration may be given to prior examination observations such as repetitive deficient practices or other significant compliance program concerns, the length of time since registration or an adviser’s last exam, or media reports that either involve or impact a firm. 

Selecting Examination Focus Areas

After an adviser is selected for examination, EXAMS evaluates risk factors to determine the scope of the examination. Reviews of an adviser’s compliance program generally include a review of the adviser’s operations, disclosures, conflicts of interest, and compliance practices with respect to core areas including custody and safekeeping of client assets, marketing and advertising, valuation, portfolio management, fees and expenses, as well as brokerage and best execution.

Selecting Documents to Request

An examination typically begins with a letter from EXAMS notifying an adviser of the exam and a request to produce documents. The scope of the information requested varies depending on the focus areas of the examination. The Risk Alert included an attachment with the staff’s typical initial request for documents and information. That attachment and the full risk alert can be found at the link below:

SEC.gov | Risk Alert: Investment Advisers: Assessing Risks, Scoping Examinations, and Requesting Documents

Takeaways from the Risk Alert

The next step is to test and evaluate your policies and their effectiveness. Testing is also a means of determining whether a firm is retaining required records and they are accessible for production when requested.

The final step is education. Share the information discussed in the Risk Alert with management teams and supervised persons so that the firm is prepared for a regulatory examination.

To learn more about the examination process, industry practices, and how to prepare, please use the link below: