Schedules 13D and 13G: Answers to the Most Common Questions
Last week, ACA Insight provided answers to problematic regulatory filings questions for Forms 13F and 13H. Below we provide answers to commonly asked questions about Schedules 13D and 13G. Use the answers to make sure you complete your regulatory filings accurately and completely.
You may save yourself some time and aggravation if you do. The SEC has been increasingly scrutinizing filings to ensure they are correct, charging 34 corporate owners, individuals and advisory firms last September with failing to comply with a number of reporting requirements, including filing Schedule D and Schedule G. Thirty-three of the parties charged settled with the SEC, collectively paying $2.6 million in fines. The eight advisers collectively agreed to pay civil money penalties of more than $600,000. Penalties for individual advisers ranged from $60,000 to more than $100,000 (ACA Insight, 9/22/14).
The schedules and who has to file
Section 13(d) of the Exchange Act generally requires a beneficial owner of more than 5 percent of a class of voting equity securities registered under the Exchange Act to file Schedule 13D.
Schedule 13G is a short-form alternative to Schedule 13D that is available to certain investors who beneficially own more than 5 percent of a class of a registered equity security passively, that is, without the purpose of changing or influencing control of the issuer. Investors may qualify to file Schedule 13G under Rule 13d-1(b) or 13d-1(c).
Questions and answers
Following are some of the most common questions raised in regard to completing and filing Schedules 13D and 13G.
What is the difference between Schedule 13D and Schedule 13G? The main difference between Schedule 13D and Schedule 13G is the type of investor submitting the filing. An activist investor typically files a Schedule 13D and a passive investor files a Schedule 13G. Also, the filing deadlines and information required differ between Schedule 13G and Schedule 13D.
If I am a registered investment adviser who passively owns 8 percent of an equity security, can I wait until year-end to file a Schedule 13G? Typically, a registered investment adviser can rely on Rule 13d-1(b) for the answer to this question. Filing requirements for this rule state that if you exceed 10 percent for the first time in a security at the end of a month, the initial Schedule 13G is required within 10 days of that month end. An initial annual filing is required within 45 days of year end if you exceed 5 percent in a security at year end. Therefore, since you are a registered investment adviser, you can likely wait and file at year-end provided you are still above 5 percent and do not exceed the 10 percent threshold. "Please note that if an individual client or fund goes over 5 percent, an adviser may not be able to rely on Rule 13d-1(b) and may have to rely on Rule 13d-1(c), under which you are required to file within 10 days of exceeding 5 percent," ACA Compliance Group senior regulatory filings coordinator Amanda Perigo said.
If a separate account exceeds 5 percent beneficial ownership, does that trigger a Schedule 13G filing? "Generally, a separate account would not have voting power or dispositive power in cases where it is delegated to the investment adviser," ACA Compliance Group senior principal consultant Jessica Huelbig said. However, a person shall also be deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days, including but not limited to any right to acquire through the exercise of any option, warrant or right; through the conversion of a security; pursuant to the power to revoke a trust, discretionary account, or similar arrangement; or pursuant to the automatic termination of a trust, discretionary account or similar arrangement. "So in other words, if the separate account can fire the adviser and vote or dispose of the shares within 60 days, then a Schedule 13G is likely required," she said. "Since these situations are somewhat unique in nature, we recommend that the client seek advice from outside counsel and also speak with the separate account owner to determine the best approach."
If a private fund individually exceeds 5 percent beneficial ownership, does that trigger a Schedule 13G filing? "We generally recommend that an adviser file a 13G within 10 days if one of their private funds exceeded 5 percent on its own pursuant to Rule 13d-1(c), because a private fund is not one of the eligible persons listed in A-K of Rule 13d-1(b)," said Perigo. Firms may be able to rely on Rule 13d-1(b) even if one of their funds exceeds 5 percent by making an argument that the fund has delegated investment discretion to the RIA or to a general partner that has delegated discretion to the RIA so the RIA would be deemed to have beneficial ownership. However, if the private fund can technically fire the general partner/adviser and acquire beneficial ownership within 60 days, then it may be deemed a beneficial owner. Firms should generally defer to outside counsel on this question.
Who should be listed as Beneficial Owners/ Reporting Persons? Rule 13d-3 under the Exchange Act defines "beneficial ownership" broadly to include, among other things, the power to direct the voting of a security, the power to direct the disposition of a security, and the right to acquire beneficial ownership within 60 days, including through an option or by the conversion of a different security. "The individuals or entities that ‘control’ an investment adviser who has beneficial ownership are typically deemed to be beneficial owners due to their control," Perigo said. Control generally means 25% or more ownership.
What is an equity security for Schedule 13D/G purposes? Per Rule 13d-1, an equity security is generally the voting equity shares of any security registered under Section 12 of the Exchange Act and shares of closed-end investment companies registered under the Investment Company Act. Typically, foreign securities are not considered equity securities since they are not registered. However, U.S. exchange-traded securities related to a foreign company (such as an ADR or ADS) may trigger 13G reporting. "To determine whether a particular equity security may trigger a Schedule 13G or 13D filing, firms may consider searching the company on EDGAR to see if it is registered under Section 12 of the Exchange Act," said Huelbig. "Firms may also reference public company filings in EDGAR to determine the total number of shares outstanding when calculating their total beneficial ownership." As a reminder, any options, warrants, or other derivatives that could be exercised within 60 days and result in ownership of the underlying security should be taken into account when computing total beneficial ownership.
Should options and other derivatives be included in the Schedule 13G calculation? According to the Rule, an adviser is deemed to have beneficial ownership if it has the right to acquire a security within 60 days through an option, right or warrant. To the extent a filer owns the common stock and options (which are exercisable within 60 days), Perigo said, "the standard methodology to compute the beneficial ownership that we see our clients use is: (Common Stock Owned By Filer + Exercisable Options Owned by Filer)/(Common Stock Outstanding + Exercisable Options Owned By Filer)."
Are swaps considered an equity security? With respect to swaps, they are typically not reportable on Schedules 13D or 13G since the holder does not actually own the company, does not have any voting power or discretionary power to trade the company, and only has exposure to the equity of the company in a synthetic way. However, in some instances swaps may need to be counted toward the beneficial ownership calculation. Situations involving swaps differ from client to client, therefore clients should defer to outside counsel on whether a particular swap position is reportable on a Schedule 13G or 13D.
Can beneficial ownership of an exchange-traded fund trigger Schedule 13G filing requirements? Although ETFs are eligible to be reported under Section 13, there is no-action relief relating to ETFs that exempts them from the reporting requirements of Section 13(d) provided that the ETF trades at or close to NAV. "If the ETF currently trades close to NAV, you can report it on Schedule 13G, but you are not required to under the no-action relief," said Huelbig. Follow the advice of your legal counsel to make this determination.