\362\ See supra notes 317-322 and accompanying text.
---------------------------------------------------------------------------

    We believe that shifting from the proposed one-business day
deadline to a two-business day deadline will address those concerns and
provide beneficial owners with adequate time to prepare and file a
Schedule 13D amendment. Relevantly, several commenters, including some
that generally opposed the proposed amendment, recommended that the
Commission adopt a two-business day deadline under Rule 13d-2(a).\363\
We agree with those commenters that a two-business day deadline, as
compared to a one-business day deadline, would be less onerous for
beneficial owners while at the same time ensuring that investors and
markets are provided with material information disclosed in Schedule
13D amendments in a sufficiently prompt manner. We also believe that
giving beneficial owners additional time, as compared to the proposed
deadline, to prepare their Schedule 13D amendments will reduce the risk
of erroneous or incomplete filings, addressing a concern that some
commenters expressed with respect to the proposed one-business day
deadline and helping to preserve the utility of those filings.\364\
---------------------------------------------------------------------------

    \363\ See supra note 348 and accompanying text.
    \364\ See supra notes 323-326 and accompanying text.
---------------------------------------------------------------------------

    Further, as discussed above, Rule 13d-2(b) currently requires that
an amendment be filed within 45 days of calendar year-end if there were
any changes to the information previously reported on Schedule 13G
during that year. Similar to our amendments to the

initial Schedule 13G filing deadlines under Rule 13d-1(b) and (d), we
are revising Rule 13d-2(b) to require that a Schedule 13G amendment
pursuant to that rule be filed within 45 days after calendar quarter-
end if, during that quarter, there were any material changes to the
information previously reported (rather than five business days after
the end of the month in which a material change occurred, as proposed).
Thus, there are two components to our amendment to Rule 13d-2(b): we
are both shortening the deadline for the filing of a Schedule 13G
amendment and adding an express qualifier to require an amendment only
if there is a material change to the information previously reported.
    We believe that accelerating the Schedule 13G amendment deadline
will help ensure the information reported is timely and useful.\365\
Numerous supporting commenters also echoed this point.\366\ We note,
however, that several commenters asserted that the proposed month-end-
based deadline would be unduly burdensome for Schedule 13G filers and
that such burdens are not sufficiently mitigated by any technological
advancements to justify adopting the proposed deadline,\367\
reiterating many of the concerns that were expressed about the proposed
amendments to Rule 13d-1(b) and (d).\368\
---------------------------------------------------------------------------

    \365\ Proposing Release at 13857.
    \366\ See supra note 308 and accompanying text.
    \367\ See supra notes 314-316, 338-342 and accompanying text.
    \368\ See supra section II.A.2.
---------------------------------------------------------------------------

    To mitigate those concerns, and to conform to the initial Schedule
13G filing deadlines applicable to QIIs and Exempt Investors under Rule
13d-1(b) and (d),\369\ we are instead adopting a quarter-end-based
deadline for Schedule 13G amendments under Rule 13d-2(b). This change
from the proposal comports with the recommendations that several
commenters that opposed the proposed amendment to Rule 13d-2(b) made to
the Commission.\370\ Consistent with the comments provided on the
proposed amendments to Rule 13d-1(b) and (d), we note that those
commenters that suggested a quarter-end-based Schedule 13G amendment
deadline recommended various different numbers of days after quarter-
end for the deadline.\371\ Taking into consideration those various
recommendations, as we noted in the context of our amendments to Rule
13d-1(b) and (d),\372\ we believe that 45 days is the appropriate
length of time because it aligns with the filing deadline for Form 13F,
and many institutional investment managers who file a Schedule 13G are
already reviewing and assessing their holdings on a quarterly basis in
order to prepare Form 13F filings. In addition, although most of the
other amended Schedule 13D and 13G filing deadlines will be expressed
in ``business days,'' we believe the potential compliance benefits of
aligning the Schedule 13G amendment deadline with the Form 13F filing
deadline justify using calendar days rather than business days.\373\
---------------------------------------------------------------------------

    \369\ We believe that aligning the Schedule 13G amendment
deadline under Rule 13d-2(b) with the new quarter-end Schedule 13G
filing deadlines for Exempt Investors and QIIs under Rule 13d-1(b)
and (d) will promote compliance with those rules, as it preserves
the uniformity currently in effect with respect to the year-end
filing deadlines under those rules.
    \370\ See supra notes 352-353 and accompanying text.
    \371\ See letters from Dodge & Cox (recommending a filing
deadline of 45 days after quarter-end); IAA (same); ICI I (same);
SSC (recommending a filing deadline of 20 business days for QIIs
after quarter-end).
    \372\ See supra section II.A.2.c.
    \373\ See letter from IAA (recommending that the Commission
express deadlines consistently in either calendar days or business
days across all of the Schedule 13D and 13G initial and amendment
filing deadlines, where the deadlines are less than 45 days to
promote compliance by making it simpler and less confusing to keep
track of the various deadlines).
---------------------------------------------------------------------------

    Even for those Schedule 13G filers that are not Form 13F filers,
the 45-day period after calendar quarter-end deadline will be familiar
given that they currently must file their Schedule 13G amendment 45
days after calendar year-end.\374\ As such, we believe that many of
those beneficial owners are well-positioned to submit their Schedule
13G filings 45 days after calendar quarter-end, and we expect that this
change from the proposal will produce the same benefits and mitigate
opposing commenters' concerns to the same degree as our amendments to
Rule 13d-1(b) and (d).\375\
---------------------------------------------------------------------------

    \374\ In addition, the amended deadline may result in the same
amount of time to file as under the current rules, depending on the
quarter in which the filing obligation is triggered. That is, if a
material change occurs to the information previously reported on
Schedule 13G between Oct. 1 (the beginning of the fourth calendar
quarter) and Dec. 31 (both calendar year-end and the end of the
fourth calendar quarter), then the filer would have the same amount
of time to prepare and submit their Schedule 13G amendment under
both the current and amended Rule 13d-2(b).
    \375\ Id. See supra note 273 for a discussion of why we believe
that it is appropriate to accelerate the Schedule 13G filing
deadlines, notwithstanding some commenters' assertion that the
Commission did not substantiate its concerns regarding Schedule 13G
reporting gaps and QIIs selling down positions before the end of a
reporting period to avoid a Schedule 13G filing. See supra note 339
and accompanying text.
---------------------------------------------------------------------------

    Finally, we also are revising the text of Rule 13d-2(b), as
proposed, to substitute the term ``material'' in place of the term
``any'' to serve as the standard for determining the type of change
that will trigger an amendment obligation under Rule 13d-2(b). As
discussed in the Proposing Release, this change is merely intended to
codify the Commission's previously stated view that there is an
inherent materiality standard in the provisions governing Schedule 13G
filings.\376\ We note that several commenters requested that the
Commission clarify what constitutes a ``material change,'' with some of
those commenters recommending that the Commission deem a change in
beneficial ownership of less than five percent to not be ``material''
for purposes of Rule 13d-2(b).\377\ The term ``material,'' however,
already is defined in Rule 12b-2 \378\ and is a familiar, established
concept in the Federal securities laws.\379\ As such, we do not believe
it is necessary or advisable to adopt a new materiality standard for
purposes of Schedule 13G amendments under Rule 13d-2(b) or to provide
an express safe harbor from the application of Rule 13d-2(b) for
certain specified de minimis changes in beneficial ownership.
---------------------------------------------------------------------------

    \376\ See Proposing Release at 13858; see also supra note 306
and accompanying text.
    \377\ See supra note 356 and accompanying text.
    \378\ 17 CFR 240.12b-2 (stating that the term ``material,'' when
used to qualify a requirement for the furnishing of information as
to any subject, limits the information required to those matters to
which there is a substantial likelihood that a reasonable investor
would attach importance in determining whether to buy or sell the
securities registered).
    \379\ See, e.g., Basic Inc. v. Levinson, 485 U.S. 224, 231-32
(1988) (noting that the U.S. Supreme Court ``explicitly has defined
a standard of materiality under the securities laws'' to mean that
``there must be a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as
having significantly altered the `total mix' of information made
available'' (quoting TSC Industries, Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976))).
---------------------------------------------------------------------------

    We recognize that Rule 13d-2(a) provides that a ``material change''
for purposes of that rule includes ``any material increase or decrease
in the percentage of the class beneficially owned'' and provides that
``[a]n acquisition or disposition of beneficial ownership of securities
in an amount equal to one percent or more of the class of securities
shall be deemed `material' for purposes of this section.'' \380\ We
also note, however, that these are non-exclusive circumstances in which
an amendment obligation has been triggered.\381\ Thus, although this

language in Rule 13d-2(a) provides guidance for beneficial owners to
determine when a Schedule 13D amendment obligation arises under that
rule, it is fundamentally different from the express safe harbor that
some commenters requested with respect to the Schedule 13G amendment
obligation under Rule 13d-2(b). Further, because both Rule 13d-2(a) and
(b) will now share the same materiality standard for determining when
an amendment is due, the language in Rule 13d-2(a), including the
statement that ``[a]n acquisition or disposition of beneficial
ownership of securities in an amount equal to one percent or more of
the class of securities shall be deemed `material,' '' is equally
instructive for purposes of determining what changes are material under
Rule 13d-2(b).
---------------------------------------------------------------------------

    \380\ 17 CFR 240.13d-2(a).
    \381\ Id. (providing that a material change includes, ``but [is]
not limited to,'' a ``material increase or decrease in the
percentage of the class beneficially owned'' and that ``acquisitions
or dispositions of less than [one percent of the class of
securities] may be material, depending upon the facts and
circumstances'').
---------------------------------------------------------------------------

4. Rule 13d-2(c) and (d)
    Rule 13d-2(c) governs the amendment obligation for QIIs whose
beneficial ownership exceeds 10 percent of a covered class. Under Rule
13d-2(c), QIIs are required to file an amendment to their Schedule 13G
within 10 days after the end of the first month in which their
beneficial ownership exceeds 10 percent of a covered class, calculated
as of the last day of the month. Once across the 10 percent threshold,
QIIs are further required under current Rule 13d-2(c) to file
additional amendments within 10 days after the end of the first month
in which their beneficial ownership increases or decreases by more than
five percent of the covered class, calculated as of the last day of the
month.
    Rule 13d-2(d) governs the amendment obligation for Passive
Investors whose beneficial ownership exceeds 10 percent of a covered
class. Under current Rule 13d-2(d), Passive Investors are required to
``promptly'' file an amendment to their Schedule 13G upon acquiring
greater than 10 percent of a covered class. Once across the 10 percent
threshold, Passive Investors are further required under current Rule
13d-2(d) to file additional amendments ``promptly'' if their beneficial
ownership increases or decreases by more than five percent of the
covered class.
    The amendment obligations arising under Rule 13d-2(c) and (d) are
in addition to the general amendment requirement in Rule 13d-2(b),
which is discussed in more detail in section II.3 above. To comply with
Rule 13d-2(c) and (d), QIIs and Passive Investors, depending on their
beneficial ownership levels, may have to amend their Schedule 13G
filings more frequently and do so throughout the year.
a. Proposed Amendments
    In connection with the proposed amendment to Rule 13d-2(b),\382\
the Commission proposed to amend Rule 13d-2(c) to require that QIIs
file an amendment to their Schedule 13G within five days after the date
on which their beneficial ownership exceeds 10 percent of a covered
class, rather than 10 days after the end of the month. Similarly, once
across the 10 percent threshold, the proposed amendment would have
required QIIs to file additional amendments five days after the date on
which their beneficial ownership increases or decreases by more than
five percent of the covered class, rather than 10 days after the end of
the month. The Commission intended that these amendments, when
considered in the context of the proposed amendment to Rule 13d-2(b),
would preserve the utility of Rule 13d-2(c) as a provision that
provides the market with earlier notice of QIIs' beneficial ownership
exceeding 10 percent of a covered class and, thereafter, upon their
beneficial ownership of the covered class increasing or decreasing by
more than five percent.\383\ The Commission also expressed the view
that the imposition of such an accelerated deadline is appropriate in
the context of our proposed amendment to Rule 13d-2(c) because the high
thresholds in that rule--10 percent beneficial ownership of a covered
class and any subsequent five percent increase or decrease in
beneficial ownership--warranted that the amendment be rapidly
disseminated to the market.\384\ And, consistent with its rationale for
proposing to shorten the other deadlines, the Commission noted that
QIIs may have access to the same technology as other Schedule 13D and
13G filers to satisfy this deadline, especially given the size and
sophistication of the persons eligible to file as QIIs.\385\
---------------------------------------------------------------------------

    \382\ See supra section II.A.3.a.
    \383\ Proposing Release at 13858.
    \384\ Id.
    \385\ Id.
---------------------------------------------------------------------------

    The Commission also proposed to amend Rule 13d-2(d) to change the
amendment filing deadline from the ``promptly'' standard to one
business day after the date on which an amendment obligation arises.
The Commission proposed this amendment for substantially the same
reasons it proposed to shorten the filing deadline for the initial
Schedule 13G \386\ and change the filing deadline for Schedule 13D
amendments.\387\
---------------------------------------------------------------------------

    \386\ See supra section II.A.2.a.
    \387\ See supra section II.A.3.a.
---------------------------------------------------------------------------

b. Comments Received
    Commenters expressed a variety of views regarding the proposed
amendments to Rule 13d-2(c) and (d). A number of commenters supported
the proposed amendments.\388\ Some of those commenters supported the
proposed amendments for many of the same reasons they supported the
revising the other Schedule 13D and 13G filing deadlines.\389\
---------------------------------------------------------------------------

    \388\ See, e.g., letters from AFREF (expressly supporting only
the proposed amendment to Rule 13d-2(d)); Anonymous 3; Anonymous 5;
Anonymous 11; Anonymous 12; Anthony R.; C. Robinson; Engineer;
FedEx; Freeport-McMoRan; HMA I; J. Pieper; J. Soucie; Jonah; Juan;
Mark C.; Mike; Nasdaq; P. Worts; Todd.
    \389\ See supra notes 38-40, 43-44 and accompanying text; see
also supra notes 211, 308 and accompanying text.
---------------------------------------------------------------------------

    Some supporting commenters also expressed their expectation that
the proposed amendments to Rule 13d-2(c) and (d) would not impose
significant costs to beneficial owners of more than five percent of a
covered class.\390\ One commenter asserted that the proposed amendments
would be consistent in balancing the need for adequate disclosures to
investors with burdens placed on filers to accurately prepare required
disclosures.\391\ This commenter also supported the proposed amendments
based on changes in technology and developments in the financial
markets.\392\
---------------------------------------------------------------------------

    \390\ See, e.g., letters from Anonymous 11; Freeport-McMoRan; J.
Soucie.
    \391\ See letter from FedEx.
    \392\ See id.
---------------------------------------------------------------------------

    Several commenters opposed the proposed amendments to Rule 13d-2(c)
and (d).\393\ Some of those commenters opposed the proposed amendments
for many of the same reasons they opposed revising the other Schedule
13D and 13G filing deadlines.\394\
---------------------------------------------------------------------------

    \393\ See, e.g., letters from A. Day; ABA; AIMA; B. Mason; Dodge
& Cox; EEI (opposing only the proposed amendment to Rule 13d-2(d));
ICI I; MFA; MSBA (same); Perkins Coie; SSC (opposing only the
proposed amendment to Rule 13d-2(c)); TIAA (same).
    \394\ See supra notes 99, 101-102, 226, 236, 243, 247, 250, 327
and accompanying text.
---------------------------------------------------------------------------

    In addition, some commenters also expressed concern that the
proposed amendment to Rule 13d-2(c) would impose significant and
unnecessary additional reporting burdens on QIIs, including costs
related to enhancing their systems to comply with potential

intra-month reporting.\395\ Another commenter asserted that retaining
the current Schedule 13G amendment filing deadline under Rule 13d-2(c)
would be consistent with the Commission's historical recognition that
beneficial ownership by QIIs does not raise the same concerns as
beneficial ownership by investors that hold positions with a control
intent and, therefore, it is appropriate to minimize the reporting
burdens on QIIs.\396\
---------------------------------------------------------------------------

    \395\ See, e.g., letters from ABA; ICI I; MFA. One commenter
noted that proposed amendment represents a radical change for QIIs
as it will require them to shift from monitoring and reporting
Schedule 13G positions on a monthly basis to a daily basis. See
letter from MFA. The commenter also stated that the proposed
amendment would be particularly burdensome for algorithmic traders
whose investments are in a perpetual state of flux. Id.
    \396\ See letter from ICI I.
---------------------------------------------------------------------------

    With respect to the proposed amendment to Rule 13d-2(d), one
commenter asserted that the proposed one business day deadline is
unreasonable given that many Passive Investors require assistance of
counsel and that a filing under that rule may require input by multiple
parties before being filed.\397\ One commenter stated that the proposed
amendment would compromise the accuracy of Schedule 13G amendments and
also would not allow for the possibility that a necessary approver or
signer may not be available.\398\
---------------------------------------------------------------------------

    \397\ See letter from MSBA.
    \398\ See letter from EEI.
---------------------------------------------------------------------------

    Commenters also criticized the Commission's justifications for the
proposed amendments to Rule 13d-2(c) and (d). For example, several
commenters disagreed with the Commission's technological advancement-
based justifications for the proposed amendments,\399\ some of whom
raised many of the same concerns that they expressed with respect to
the proposed amendments to the other Schedule 13D and 13G filing
deadlines.\400\ One commenter also noted that Passive Investors
generally do not have access to specialized technology that would make
it practical for them to file an amended Schedule 13G on the proposed
accelerated basis.\401\ And, some commenters asserted that the costs of
the proposed amendments to Rule 13d-2(c) and (d) would exceed their
benefits.\402\
---------------------------------------------------------------------------

    \399\ See, e.g., letters from Dodge & Cox; IAA; ICI I; MSBA.
    \400\ See supra notes 92-94, 220, 223 and accompanying text.
    \401\ See letter from MSBA.
    \402\ See letters from ABA; MFA. One commenter stated that
because QIIs do not have any control intent, the timing of their
beneficial ownership reporting is not a source of meaningful
concern. See letter from ABA.
---------------------------------------------------------------------------

    Commenters also made some recommendations regarding the proposed
amendments. For example, one commenter that generally opposed the
proposed amendment to Rule 13d-2(c) recommended that the Commission
require that Schedule 13G amendments pursuant to that rule be filed
within 45 days after the end of a quarter, consistent with the
amendment frequency for Form 13F.\403\
---------------------------------------------------------------------------

    \403\ See letter from IAA.
---------------------------------------------------------------------------

    Some commenters that opposed the proposed amendment to Rule 13d-
2(d) recommended a two-business day deadline under that rule,\404\ with
one commenter asserting that such a deadline would be less onerous for
investors yet would ensure the accuracy and transparency of the
information in their filings.\405\ One such commenter expressed the
view that the Commission should require that Schedule 13G amendments
under Rule 13d-2(d) be filed promptly, but within no more than some
period of time (e.g., between two and four business days).\406\ Another
opposing commenter suggested that the Commission require that Schedule
13G amendments pursuant to Rule 13d-2(d) be filed within 10 business
days because Passive Investors ``lack control intent and certify to
that effect.'' \407\
---------------------------------------------------------------------------

    \404\ See letters from EEI; Perkins Coie.
    \405\ See letter from EEI.
    \406\ See letter from ABA.
    \407\ See letter from IAA. The commenter further noted that
``Passive Investors (and QIIs) who lose eligibility to file on
Schedule 13G--for example, by changing to a control intent--
currently have 10 calendar days . . . to file their initial Schedule
13D reflecting this change in intent'' and that ``[i]t seems
inconsistent with the materiality of the information disclosed to
require Passive Investors who remain passive to file a Schedule 13G
amendment in a shorter timeline than formerly-Passive Investors who
have to file a Schedule 13D.'' Id.
---------------------------------------------------------------------------

c. Final Amendments
    We are amending Rule 13d-2(c) and (d) to revise the Schedule 13G
amendment filing deadlines under those rules. In response to commenter
concerns, however, we are making some changes from the proposed
deadlines. Specifically, we are adopting a filing deadline of five
business days \408\ after the end of the first month in which an
amendment obligation is triggered under Rule 13d-2(c) and two business
days after the date on which an amendment obligation is triggered under
Rule 13d-2(d).
---------------------------------------------------------------------------

    \408\ See supra note 134 for a discussion of the new definition
of ``business day'' that we are adopting for purposes of Regulation
13D-G.
---------------------------------------------------------------------------

    As noted above, Rule 13d-2(c) currently requires QIIs to file a
Schedule 13G amendment within 10 days after the end of the first month
in which their beneficial ownership exceeds 10 percent of a covered
class and, once across the 10 percent threshold, within 10 days after
the first month in which their beneficial ownership increases or
decreases by more than five percent. Although the Commission proposed
to revise Rule 13d-2(c) to shorten the filing deadline to five days
after the date on which an amendment obligation arises under that rule,
we are instead retaining the month-end-based filing deadline and
shortening that deadline from 10 days after month-end to five business
days after month-end. The Commission based its proposed deadline under
Rule 13d-2(c), in large part, on the proposal to shorten the Schedule
13G amendment deadline under Rule 13d-2(b) from a calendar year-end-
based deadline to a month-end-based deadline.\409\ Therefore, if we had
adopted the Commission's proposed amendment to Rule 13d-2(b), then Rule
13d-2(c), in its current form--which as noted above requires that QIIs
file a Schedule 13G amendment within 10 days after the end of the first
month in which the triggering event occurs--would not be of any value.
---------------------------------------------------------------------------

    \409\ See Proposing Release at 13858 (stating that the proposed
amendments to Rule 13d-2(c), ``when considered in the context of our
proposed amendment to Rule 13d-2(b), preserve the utility of Rule
13d-2(c) as a provision that provides the market with earlier notice
of'' significant changes in QIIs' beneficial ownership).
---------------------------------------------------------------------------

    As discussed above, however, we did not adopt the Commission's
proposed month-end-based deadline under Rule 13d-2(b).\410\ Instead, we
revised Rule 13d-2(b) to require that a Schedule 13G amendment be filed
within 45 days after the end of a calendar quarter in which a material
change occurs to the information previously reported. Because Rule 13d-
2(b) will have a quarter-end-based filing deadline, the month-end-based
deadline in Rule 13d-2(c) will continue to have utility as a provision
that provides the market with earlier notice of QIIs' beneficial
ownership exceeding 10 percent of a covered class and, thereafter, upon
their beneficial ownership increasing or decreasing by more than five
percent. In addition, we expect that retaining the month-end-based
deadline in Rule 13d-2(c) will address the concerns that several
commenters expressed about the burdens that the proposed amendment
would impose on QIIs.\411\
---------------------------------------------------------------------------

    \410\ See supra section II.A.3.c.
    \411\ See supra notes 394-396 and accompanying text.
---------------------------------------------------------------------------

    Notwithstanding those commenters' concerns, we believe it is
appropriate to accelerate the filing deadline in Rule 13d-2(c) in order
for investors to receive material information in a timely manner

in light of the technological advancements and other developments in
the financial markets \412\ in the more than 40 years since the 10-day
deadline was adopted.\413\ As such, we are shortening Rule 13d-2(c)'s
filing deadline from 10 days after month-end to five business days
after month-end. Because the deadline is being expressed in ``business
days'' instead of ``days,'' \414\ and given the size and sophistication
of the persons eligible to file as QIIs, we do not expect that this new
filing deadline under Rule 13d-2(c) will be unduly burdensome.
---------------------------------------------------------------------------

    \412\ See supra notes 138-144 and accompanying text for some
examples of those advancements and developments.
    \413\ See Filing and Disclosure Release (adopting the
predecessor to current Rule 13d-2(c)).
    \414\ The five-business day deadline after month-end, as
compared to a hypothetical five-calendar day deadline, will give
beneficial owners additional time before their Schedule 13G
amendment is due if the filing period encompasses days that are not
business days (i.e., Saturday, Sunday, or a Federal holiday).
---------------------------------------------------------------------------

    In addition, as discussed above, Rule 13d-2(d) currently requires
that Passive Investors file a Schedule 13G amendment promptly upon
acquiring beneficial ownership of more than 10 percent of a covered
class and, once across the 10 percent threshold, promptly upon
increasing or decreasing their beneficial ownership by more than five
percent. As with the Schedule 13D amendment deadline under Rule 13d-
2(a), the Commission proposed to change the deadline under Rule 13d-
2(d) from the ``promptly'' standard to one business day.\415\ For the
same reasons that we changed the filing deadline for Schedule 13D
amendments to two business days,\416\ and to retain the historical
consistency with that deadline, we also are amending Rule 13d-2(d) to
change the amendment filing deadline from the current ``promptly''
standard to two business days after the date on which an amendment
obligation arises.
---------------------------------------------------------------------------

    \415\ See Proposing Release at 13858.
    \416\ See supra section II.A.3.c.
---------------------------------------------------------------------------

5. Rules 13(a)(4) and 201(a) of Regulation S-T
    Regulation 13D-G states that Schedules 13D and 13G should be
prepared in accordance with Regulation S-T, which governs the
preparation and submission of documents filed electronically on the
Commission's EDGAR system.\417\ In accordance with 17 CFR 232.12,
electronic filings may be submitted to the Commission Monday through
Friday, except Federal holidays, from 6 a.m. to 10 p.m. Eastern
Time.\418\ Under Rule 13(a) of Regulation S-T, however, most filings
must be submitted by direct transmission commencing on or before 5:30
p.m. Eastern Time in order to be deemed filed on the same business
day.\419\ Most filings submitted by direct transmission commencing
after 5:30 p.m. will be deemed filed as of the next business day.\420\
Rule 13(a)(4) of Regulation S-T, however, sets forth certain exceptions
from that 5:30 p.m. ``cut-off'' time. Specifically, it provides that
certain filings--namely, Forms 3, 4 and 5, Form 144, and Schedule 14N--
``submitted by direct transmission on or before 10 p.m. [Eastern Time]
shall be deemed filed on the same business day.'' \421\ Rule 13(a)(4),
therefore, effectively extends the ``cut-off'' time for these filings
from 5:30 p.m. to 10 p.m.
---------------------------------------------------------------------------

    \417\ The preamble to Regulation 13D-G states, in relevant part,
that ``[t]his regulation should be read in conjunction with
Regulation S-T (part 323 of this chapter), which governs the
preparation and submission of documents in electronic format'' (all
capitalized letters in the original).
    \418\ 17 CFR 232.12(c).
    \419\ See 17 CFR 232.13(a)(2).
    \420\ Id.
    \421\ 17 CFR 232.13(a)(4). Rule 13(a)(3) also provides the same
accommodation for registration statements or any post-effective
amendment thereto filed pursuant to 17 CFR 230.462(b) (``Rule
462(b)''). See 17 CFR 232.13(a)(3).
---------------------------------------------------------------------------

    In addition, Rule 201 of Regulation S-T and 17 CFR 232.202 (``Rule
202 of Regulation S-T'') address hardship exemptions from EDGAR filing
requirements, and Rule 13(b) of Regulation S-T addresses the related
issue of filing date adjustments. A filer may obtain a temporary
hardship exemption under current Rule 201 of Regulation S-T if it
experiences unanticipated technical difficulties that prevent the
timely submission of an electronic filing by submitting a properly
formatted paper copy of the filing under cover of Form TH.\422\
Alternatively, instead of pursuing a hardship exemption, a filer may
request a filing date adjustment under Rule 13(b) of Regulation S-T.
That rule addresses circumstances in which a filer attempts in good
faith to file a document with the Commission in a timely manner, but
the filing is delayed due to technical difficulties beyond the filer's
control.\423\ In those instances, the filer may request a filing date
adjustment.\424\ The staff may grant the request if it appears that the
adjustment is appropriate and consistent with the public interest and
the protection of investors.\425\
---------------------------------------------------------------------------

    \422\ 17 CFR 232.201(a).
    \423\ 17 CFR 232.13(b).
    \424\ Id.
    \425\ Id.
---------------------------------------------------------------------------

a. Proposed Amendments
    In the Proposing Release, the Commission proposed to amend Rule
13(a)(4) of Regulation S-T to provide that any Schedule 13D or Schedule
13G, including any amendments thereto, submitted by direct transmission
on or before 10 p.m. Eastern Time on a given business day will be
deemed filed on the same business day.\426\ Conversely, under the
proposed amendment, any Schedule 13D or 13G filing not submitted by
direct transmission by 10 p.m. on its due date will be assigned a
filing date of the next business day, and for purposes of compliance
with the applicable reporting requirements, would be considered late.
The Commission proposed this extension of the ``cut-off'' time to ease
filers' administrative burdens in connection with the proposed
accelerated filing deadlines for Schedule 13D and 13G filings,
including those filers located in different time zones.\427\
---------------------------------------------------------------------------

    \426\ Notwithstanding the proposed extension of the time period
in which accepted Schedule 13D and 13G filings may be made and still
be considered timely, the Commission stated that filer support hours
would not be extended. Proposing Release at 13859, n.82. Thus, filer
support would continue to remain available only until 5:30 p.m.
Eastern Time as is currently the case.
    \427\ Proposing Release at 13859.
---------------------------------------------------------------------------

    The Commission also proposed to amend Rule 201(a) of Regulation S-T
to remove a Schedule 13D or 13G filer's ability to rely on a temporary
hardship exemption under that rule. The Commission noted that this
proposal would be consistent with the treatment of Forms 3, 4, and 5,
which have a 10 p.m. ``cut-off'' time under Rule 13(a)(4) of Regulation
S-T and are ineligible for a temporary hardship exemption under Rule
201(a) of Regulation S-T.\428\ The Commission also based this proposal
on the following factors: the relative ease of using the EDGAR on-line
filing system; the proposed extended 10 p.m. Eastern Time filing
deadline; the limited value to the public of paper filings; and the
availability of a filing date adjustment under the same circumstances
as a temporary hardship exemption would have been available but for the
proposed amendment.\429\
---------------------------------------------------------------------------

    \428\ Id.
    \429\ Id. at 13859-60.
---------------------------------------------------------------------------

b. Comments Received
    Commenters largely supported the proposed amendments to Rules
13(a)(4) and 201(a) of Regulation S-T,\430\ with only one commenter
expressly opposing the proposed amendment to Rule 201(a)

of Regulation S-T.\431\ One of the supporting commenters asserted that
additional time to file would be critical under the Commission's
proposed acceleration of the Schedule 13D and 13G filing
deadlines.\432\ Another supporting commenter noted that the proposed
amendment to Rule 13(a)(4) would conform to the section 16 filing
deadlines and help ease the compliance burdens of shortened filing
deadlines and time zone differences.\433\
---------------------------------------------------------------------------

    \430\ See letters from EIM I (supporting only the proposed
amendment to Rule 13(a)(4)); Engineer; Hoak (same); IAA (same); ICI
I.
    \431\ See letter from EIM I.
    \432\ See letter from ICI I.
    \433\ See letter from IAA.
---------------------------------------------------------------------------

    Some commenters also made recommendations in connection with the
proposed amendments to Rules 13(a)(4) and 201(a) of Regulation S-T. One
supporting commenter recommended that the Commission extend filer
support hours beyond 6 p.m. Eastern Time.\434\ Another commenter, which
neither clearly supported nor opposed the proposed amendment to Rule
201(a), stated that it would not object to making a temporary hardship
exemption unavailable to Schedules 13D and 13G filers as long as a
filer may request a filing date adjustment under Rule 13(b) of
Regulation S-T if it experiences unanticipated technical difficulties
that prevent the timely submission of an electronic filing.\435\
---------------------------------------------------------------------------

    \434\ See letter from ICI I.
    \435\ See letter from IAA.
---------------------------------------------------------------------------

c. Final Amendments
    We are amending Rules 13(a)(4) and 201(a) of Regulation S-T as
proposed. Thus, the filing ``cut-off'' time for Schedules 13D and 13G
under Rule 13(a)(4) of Regulation S-T will be extended from 5:30 p.m.
to 10 p.m. Eastern Time. In addition, the temporary hardship exemption
under Rule 201(a) of Regulation S-T will be made unavailable for
Schedule 13D and 13G filers. Schedule 13D and 13G filers will, however,
remain eligible to request a filing date adjustment under Rule 13(b) of
Regulation S-T.\436\
---------------------------------------------------------------------------

    \436\ One commenter requested that we allow Schedule 13D and 13G
filers to request a filing date adjustment under Rule 13(b) of
Regulation S-T if they experience unanticipated technical
difficulties. See supra note 435 and accompanying text. For example,
as noted above and consistent with the Commission's statement in the
Proposing Release, ``[f]iling date adjustments may . . . be made if
a filer is unable to submit its Schedule 13D or 13G as a result of
an EDGAR outage . . . under Rule 13(b) of Regulation S-T on the
grounds that such outage constitutes technical difficulties beyond
the filer's control.'' Proposing Release at 13860, n.84.
---------------------------------------------------------------------------

    We are adopting these amendments as proposed for the same reasons
the Commission discussed in the Proposing Release,\437\ which were
largely supported by the commenters.\438\ We note that a commenter also
requested that we extend filer support hours beyond 6 p.m. Eastern
Time.\439\ As the Commission noted in the Proposing Release, however,
the amendment to Rule 13(a)(4) of Regulation S-T mirrors the existing
filing ``cut-off'' time for Forms 3, 4, and 5.\440\ In extending the
filing ``cut-off'' time for those forms, the Commission declined to
extend filer support hours.\441\ We also decline to do so here in light
of the relative ease of using the EDGAR on-line filing system, the
extension of the ``cut-off'' time by four and a half hours, and the
availability of a filing date adjustment if the filer experiences
unanticipated technical difficulties as previously described.
---------------------------------------------------------------------------

    \437\ See Proposing Release at 13859-60 (``We are proposing to
amend Rule 201(a) of Regulation S-T to make temporary hardship
exemptions unavailable to filers of Schedules 13D and 13G because
of: The relative ease of using the EDGAR on-line filing system; the
proposed extended 10 p.m. eastern time filing deadline; the limited
value to the public of paper filings; and the availability of a
filing date adjustment under the same circumstances as a temporary
hardship exemption would have been available but for the proposed
amendment.''); see also supra section II.A.5.a.
    \438\ See supra section II.A.5.b.
    \439\ See supra note 434 and accompanying text.
    \440\ Proposing Release at 13859, n.82.
    \441\ See Mandated Electronic Filing and Website Posting for
Forms 3, 4 and 5, Release No. 34-47809 (May 7, 2003) [68 FR 25788 at
25793 (May 13, 2003)] (``[W]e have amended Rule 13(a) to provide
that any Form 3, 4 or 5 submitted by direct transmission on or
before 10 p.m. Eastern time is deemed filed on the same business
day. However, filer support hours will not be correspondingly
extended . . . .'').
---------------------------------------------------------------------------

B. Proposed Amendment to Rule 13d-3 Regarding the Use of Cash-Settled
Derivative Securities

    Neither section 3(a) nor section 13(d) of the Exchange Act defines
the term ``beneficial owner'' or ``beneficial ownership.'' Regulation
13D-G similarly does not expressly define those terms. To provide
clarity, the Commission adopted Rule 13d-3, which provides standards
for the purpose of determining whether a person is a beneficial owner
subject to section 13(d) and section 13(g).\442\ Over the years, some
observers have raised concerns about the ability of investors in cash-
settled derivative securities to influence or control an issuer by, for
example, pressuring a counterparty to the derivative transaction to
make certain decisions regarding the voting and disposition of
substantial blocks of securities of the reference issuer.\443\ To
address these and related concerns,\444\ the Commission proposed new
Rule 13d-3(e).
---------------------------------------------------------------------------

    \442\ Adoption of Beneficial Ownership Disclosure Requirements,
Release No. 34-13291 (Feb. 24, 1977) [42 FR 12342 (Mar. 3, 1977)].
The Commission emphasized that ``[a]n analysis of all relevant facts
and circumstances in a particular situation is essential in order to
identify each person possessing the requisite voting power or
investment power.'' Id. at 12344.
    \443\ See, e.g., Maria Lucia Passador, The Woeful Inadequacy of
Section 13(d): Time for a Paradigm Shift?, 13 VA. L. & Bus. Rev.
279, 296-99 (2019) (``[I]n the recent past, cash-settled equity
derivatives--mainly call and security-based options--were frequently
used not only with a speculative and hedging purpose, but also with
the immediate, explicit, and specific aim of silently accumulating a
leading (or even control) position in public companies.''); Wachtell
Petition, supra note 139, at 8 (``Even in the absence of voting or
dispositive power, participants in large hedging transactions gain
influence in a number of ways. . . . [V]oting of the shares may be
subject to counterparty influence or control, either directly or
because the counterparty is motivated to vote the hedged shares in a
way that will please the investor and induce them to continue to
transact with such counterparty. . . . Even those derivatives that
are characterized as `cash-settled' may ultimately be settled in
kind, creating further market pressure as the participants need to
acquire shares for such settlement.'').
    \444\ Proposing Release at 13861.
---------------------------------------------------------------------------

1. Proposed Amendment
    The Commission proposed to add new paragraph (e) to Rule 13d-3 to
deem certain holders of cash-settled derivative securities, other than
SBS, to be the beneficial owners of the reference covered class.
Proposed Rule 13d-3(e)(1) would have treated a holder of a cash-settled
derivative security, excluding SBS, as the beneficial owner of the
equity securities in the covered class referenced by the cash-settled
derivative security if such person held the cash-settled derivative
security with the purpose or effect of changing or influencing the
control of the issuer of the class of equity securities, or in
connection with or as a participant in any transaction having that
purpose or effect.\445\ The Commission included this control-based
standard in proposed Rule 13d-3(e) to ease the administrative burdens
associated with the application of this proposed provision by employing
a familiar standard under Regulation 13D-G.\446\ In addition, proposed
Rule

13d-3(e) would have set forth the formula for calculating the number of
equity securities that a holder of a cash-settled derivative security
would be deemed to beneficially own.\447\
---------------------------------------------------------------------------

    \445\ Proposing Release at 13862. Proposed paragraph (e)(1) also
would have included a provision stating that any securities that are
not outstanding but are referenced by the relevant cash-settled
derivative security would be deemed to be outstanding for the
purpose of calculating the percentage of the relevant covered class
beneficially owned by the holder of the derivative security. Id. at
13862-63. Those reference securities, however, would not have been
deemed to be outstanding for the purpose of any other person's
calculation of the percentage of the covered class it beneficially
owns. Id.
    \446\ Id. (noting that ``the concept `purpose or effect of
changing or influencing the control of the issuer' is a familiar one
under Regulation 13D-G, both in the context of determining whether a
person is a beneficial owner under Rule 13d-3 and for purposes of
determining whether a beneficial owner is eligible to report on
Schedule 13G in lieu of Schedule 13D under Rule 13d-1'').
    \447\ See id. at 13863 (describing that formula and providing
illustrative examples of its application). The Commission also
proposed three notes to Rule 13d-3(e) that would have clarified the
application of the proposed rule's formula. Id. at 13863-64.
---------------------------------------------------------------------------

    In proposing Rule 13d-3(e), the Commission noted that non-SBS cash-
settled derivative securities held with the purpose or effect of
changing or influencing control of the issuer may be used to influence
the voting, acquisition, or disposition of any shares the holder's
counterparty may have acquired in a hedge, proprietary investment, or
otherwise.\448\ The Commission also stated that a non-SBS cash-settled
derivative holder's probability of success in exerting influence or
control over the issuer of the reference security may increase given
that any voting power the derivative holder held would be magnified by
minimizing the number of shares that potentially could be voted against
the holder's plans or proposals.\449\ Finally, the Commission
recognized that holders of non-SBS cash-settled derivative securities
may position themselves to acquire any reference securities that the
counterparty may acquire to hedge the economic risk of that
transaction.\450\ The Commission also noted that holders of non-SBS
cash-settled derivative securities may present their economic positions
to persuade an issuer or its shareholders to engage with them.\451\ The
Commission concluded, therefore, that these persons' holdings of non-
SBS cash-settled derivative securities may implicate the policies
underlying section 13(d).\452\
---------------------------------------------------------------------------

    \448\ Id. at 13862.
    \449\ Id. The Commission acknowledged the possibility that
derivative counterparties may have a business relationship to
develop and protect, and thus may ultimately cast votes in
accordance with the preference of the derivative holder or not vote
the shares. See id.
    \450\ Id.
    \451\ Id.
    \452\ Id. (citing the Filing and Disclosure Release, which notes
that section 13(d)'s legislative history indicates that the purpose
of that section is ``to provide information to the public and the
affected issuer about rapid accumulations of its equity securities''
by ``persons who would then have the potential to change or
influence control of the issuer.'').
---------------------------------------------------------------------------

2. Comments Received
    Commenters were divided on proposed Rule 13d-3(e). Many commenters
expressed general support for the proposed amendment.\453\ A number of
these commenters indicated that proposed Rule 13d-3(e) would add needed
market transparency.\454\ One commenter expressed the view that the
proposal would mitigate what it described as ``hidden risk
concentration.'' \455\ Another commenter stated that the proposal would
provide ``the markets more generally with full information'' and allow
stockholders to better assess whether to support or oppose activists'
proposals.\456\ Some commenters asserted that an investment fund used
derivatives (reportedly forward purchase contracts) to conceal an
economic interest in an issuer that it later converted into a
profitable beneficial ownership stake ultimately reported on Schedule
13D.\457\
---------------------------------------------------------------------------

    \453\ See, e.g., letters from Andres Loubriel (Feb. 19, 2022)
(``A. Loubriel''); AFL-CIO; AFREF; AFREF, et al.; Anonymous (Feb.
25, 2022) (``Anonymous 7''); Better Markets I; Convergence; Dan
Pierce (Feb. 20, 2022) (``D. Pierce''); Freeport-McMoRan; FundApps;
HMA I; Justin G. (Feb. 19, 2022) (``Justin G.''); Labor Unions; Mark
C.; NIRI; P. Worts; PL Salvati; Henry T Hu, Allan Shivers Chair in
the Law of Banking and Finance at the University of Texas Law School
(Apr. 11, 2022) (``Prof. Hu''); Robert Rutkowski (Apr. 12, 2022)
(``R. Rutkowski''); Samuel Ryan, Senior Battery Test Engineer, ESS
Inc. (Feb. 18, 2022) (``S. Ryan''); SCG; Sen. Baldwin, et al.; T.
Reilly; Todd; WLRK I; WLRK II; see also Letter Type C.
    \454\ See, e.g., letters from AFL-CIO; AFREF; Better Markets I;
Convergence; D. Pierce; FundApps; Justin G.; Labor Unions; NIRI; P.
Worts; PL Salvati; Prof. Hu; SCG; WLRK I; WLRK II.
    \455\ See letter from Better Markets I.
    \456\ See letter from WLRK II.
    \457\ See letters from NIRI; SCG.
---------------------------------------------------------------------------

    Opposing commenters, by contrast, raised numerous objections to
proposed Rule 13d-3(e).\458\ Some of these commenters questioned
whether there was a sound basis for the proposal.\459\ One commenter
asserted that the proposal was not based on empirical analysis or
``evidence to establish . . . an actual problem in the marketplace''
and is a ``solution in search of a problem.'' \460\ Other commenters
asserted that holders of cash-settled derivative securities should not
be deemed beneficial owners because such derivative securities confer
no control or influence over the voting or disposition of the reference
equity securities.\461\ Some commenters asserted that in actuality, a
counterparty would not look to the derivative holder as to whether to
acquire for hedging purposes, or how to vote and/or dispose of, any
securities of the reference class or that doing so would be contrary to
market practice and/or standard industry legal documentation.\462\
Several opposing commenters asserted that investors in cash-settled
derivative securities already may be subject to regulation as
beneficial owners under existing Rule 13d-3 in applicable circumstances
or that the Commission could proceed via interpretation or other means
and without a rule amendment.\463\ Similarly, one commenter stated that
it may not be necessary to deem investors in cash-settled derivative
securities beneficial owners if the Commission is satisfied that
derivative counterparties can effectively and irrevocably contract out
of the right to convert such derivatives to either physical ownership
of underlying shares or any other form of voting rights.\464\
---------------------------------------------------------------------------

    \458\ See, e.g., letters from ABA; AIMA; B. Mason; CIRCA I;
CIRCA III; EIM I; IAA; ICI I; ICM; J. Kennedy; MFA; Robert
Plesnarski, O'Melveny & Myers LLP (June 27, 2023) (``O'Melveny &
Myers''); Perkins Coie; Prof. Gordon; Profs. Bishop and Partnoy I;
Profs. Bishop and Partnoy II; Profs. Bishop and Partnoy III; Profs.
Eccles and Rajgopal; SIFMA; SIFMA AMG; SIFMA & SIFMA AMG; STB; TIAA.
We note that several commenters expressed concern that proposed Rule
13d-3(e) would ``[a]ssign[] voting rights to derivative holders.''
See, e.g., letter from Susanne Trimbath, Ph.D., Economist, Author,
Retired Professor (June 24, 2023); see also Letter Type B; Letter
Type D, available at https://www.sec.gov/comments/s7-06-22/s70622-typed.htm; Letter Type E, available at https://www.sec.gov/comments/s7-06-22/s70622-typee.htm. For avoidance of doubt, we note that
neither proposed Rule 13d-3(e) nor any of the other Proposed
Amendments, nor any of the final amendments we are adopting, would
have that effect.
    \459\ See letters from CIRCA I; MFA; Profs. Bishop and Partnoy
III; SIFMA; SIFMA AMG.
    \460\ See letter from EIM I.
    \461\ See letters from ABA; AIMA; CIRCA I; EIM I; IAA; MFA; STB;
TIAA.
    \462\ See letters from ABA; CIRCA I; EIM I; O'Melveny & Myers;
SIFMA; SIFMA AMG; STB.
    \463\ See letters from AIMA; CIRCA I; EIM I; IAA; ICI I; MFA;
Profs. Bishop and Partnoy II; Profs. Bishop and Partnoy III; SIFMA;
SIFMA AMG. One commenter expressly recommended that the Commission
issue interpretive guidance on this point. See letter from Profs.
Bishop and Partnoy II; see also letter from Profs. Bishop and
Partnoy III. Similarly, another commenter suggested that the
Commission ``publish clarifying guidance explaining that the
beneficial ownership determination for all cash-settled derivatives
is consistent with the treatment of SBS, as described in the 2011
Release.'' See letter from IAA. The ``2011 Release'' that the
commenter refers to is Beneficial Ownership Reporting Requirements
and Security-Based Swaps, Release No. 34-64628 (June 8, 2011) [76 FR
34579 (June 14, 2011)], which we henceforth refer to as the
``Security-Based Swaps Release.''
    \464\ See letter from Wm. Robertson Dorsett, Columbia Law School
(Feb. 11, 2022).
---------------------------------------------------------------------------

    In addition, some opposing commenters expressed concerns regarding
proposed Rule 13d-3(e) related to the APA or the Commission's statutory
authority to adopt the proposal. For example, some commenters said that
the proposal represents an inappropriate expansion of the applicable
statutory provisions \465\

or would be arbitrary and capricious, if adopted.\466\ Further, one
commenter emphasized that ``[b]y focusing on speculative harms; failing
to engage seriously with the question whether new or different rules
were needed to combat them; and failing to consider costs, the Proposed
Rule falls short of providing a sound justification for the proposals
being made.'' \467\ The commenter stated that ``[f]or these reasons,
the Commission has not satisfied its obligations under sections 3(f)
and 23(a)(2) of the Exchange Act.'' \468\
---------------------------------------------------------------------------

    \465\ See letters from ABA; IAA; MFA; Wm. Robertson Dorsett,
Columbia Law School (Apr. 11, 2022). One of these commenters also
stated that the proposal would be inconsistent with the Commission's
interpretation in the Security-Based Swaps Release. See letter from
MFA. Another commenter questioned the Commission's authority to
adopt proposed Rule 13d-3(e) ``when Rule 13d-3(a) and all relevant
authority relating to an understanding of beneficial ownership has
historically required a showing of control over the voting or the
disposition of securities.'' See letter from ABA.
    \466\ See letter from EIM I.
    \467\ See letter from SIFMA; see also letter from SIFMA & SIFMA
AMG.
    \468\ See letter from SIFMA. The commenter also recommended that
the Proposed Amendments be revised and re-proposed for notice and
comment. See id.
---------------------------------------------------------------------------

    Finally, some opposing commenters discussed other concerns
regarding proposed Rule 13d-3(e). Some commenters expressed concern
that the proposal would inhibit activist investment strategies.\469\
Other commenters expressed concern that the proposed rule, including
its ``change of control'' standard, is overly broad, unclear, and would
be difficult to administer.\470\ Many commenters indicated that the
proposal's computational methodology, including the need to conduct
daily calculations, would be complex or increase the compliance burden
of the rule.\471\ In addition, one commenter noted that the ``concept
of beneficial ownership is used . . . in many other federal and state
laws and rules, as well as in contracts'' and, therefore, ``expanding
the definition of `beneficial ownership' '' as proposed in Rule 13d-
3(e) could have ``significant unintended consequences.'' \472\ Further,
another commenter indicated that the proposed rule's expansion of the
scope of the matters that may give rise to beneficial ownership ``could
result in potential and significant overreporting by [investment]
advisers, leading to unfounded inferences from public filings that
holders of cash-settled derivatives may have voting and investment
power over securities that they do not, in fact, have, nor do they have
the right to acquire.'' \473\
---------------------------------------------------------------------------

    \469\ See letters from CIRCA I; MFA.
    \470\ See letters from ABA; CIRCA I; EIM I; IAA; MFA; Perkins
Coie; SIFMA; SIFMA AMG; TIAA; see also IAC Recommendations (stating
that the proposed rule, together with the Commission's proposed 17
CFR 240.10B-1 (``Rule 10B-1''), could ``cause confusion in the
markets and make compliance difficult for market participants'' and
recommending that the two proposed rules be better aligned).
    \471\ See letters from ABA; AIMA; IAA; ICI I; Profs. Bishop and
Partnoy I; SIFMA; SIFMA AMG; SIFMA & SIFMA AMG; STB; TIAA; see also
letter from MFA & NAPFM.
    \472\ See letter from ICI I.
    \473\ See letter from IAA; see also letters from MFA and Perkins
Coie that expressed similar concerns about excessive beneficial
ownership reporting and potential market confusion even though the
persons holding cash-settled derivatives ordinarily have mere
economic exposure and no power to vote a reference security or
influence or change control of an issuer.
---------------------------------------------------------------------------

3. Commission Guidance
    We are not adopting proposed paragraph (e) to Rule 13d-3 to deem
certain holders of cash-settled derivative securities as beneficial
owners of the reference covered class. Consistent with the views
expressed by several commenters, we have determined that Commission
guidance on the applicability of existing Rule 13d-3 to cash-settled
derivative securities, similar to the guidance provided in the
Security-Based Swaps Release,\474\ would provide sufficient
clarity.\475\
---------------------------------------------------------------------------

    \474\ See supra note 463 and accompanying text.
    \475\ See letter from IAA; see also letter from Profs. Bishop
and Partnoy II (stating that, under existing Rule 13d-3, holders of
cash-settled derivative securities may be subject to regulation as
beneficial owners of the reference equity securities in applicable
circumstances, and recommending that the Commission not adopt
proposed Rule 13d-3(e) but instead issue ``guidance on cash-settled
derivatives'' and ``articulat[e] how the Commission's current rules
continue to prohibit problematic conduct related to the [Proposing
Release]'').
---------------------------------------------------------------------------

    The Commission explained in the Security-Based Swaps Release the
circumstances under which a holder of a SBS may become a beneficial
owner as determined under Rule 13d-3. It noted that ``our existing
regulatory regime may require the reporting of beneficial ownership''
in cases in which a SBS (1) ``confers voting and/or investment power
(or a person otherwise acquires such power based on the purchase or
sale of a [SBS]),'' (2) ``is used with the purpose or effect of
divesting or preventing the vesting of beneficial ownership as part of
a plan or scheme to evade the reporting requirements,'' or (3) ``grants
a right to acquire an equity security.'' \476\ Although the
determination under Rule 13d-3 as to whether the holder of any cash-
settled derivative security is the beneficial owner of the reference
covered class ultimately will depend on the relevant facts and
circumstances, the above-described reasoning in the Security-Based
Swaps Release (the three elements of which correspond to Rule 13d-3(a),
(b), and (d)(1), respectively) provides an instructive analytical
framework with respect to cash-settled derivative securities.
---------------------------------------------------------------------------

    \476\ Security-Based Swaps Release at 34582.
---------------------------------------------------------------------------

    As is the case with persons holding cash-settled SBS, Rule 13d-3
similarly may be applied to holders of non-SBS cash-settled derivatives
\477\ to treat those persons as beneficial owners in applicable
instances. Although non-SBS derivative securities settled exclusively
in cash generally are designed to represent only an economic interest,
discrete facts and circumstances could arise where the holder of these
securities may have voting or investment power as described in Rule
13d-3(a) or otherwise could be deemed to be a beneficial owner as
determined under Rule 13d-3(b) or (d), as described below. First, under
Rule 13d-3(a), to the extent a non-SBS cash-settled derivative security
provides its holder, directly or indirectly, with exclusive or shared
voting or investment power, within the meaning of that rule, over the
reference covered class through a contractual term of the derivative
security or otherwise, the holder of that derivative security may
become a beneficial owner of the reference covered class. Second, to
the extent a non-SBS cash-settled derivative security is acquired with
the purpose or effect of divesting its holder of beneficial ownership
of the reference covered class or preventing the vesting of that
beneficial ownership as part of a plan or scheme to evade the reporting
requirements of section 13(d) or 13(g), the derivative security may be
viewed as a contract, arrangement, or device within the meaning of
those terms as used in Rule 13d-3(b). The holder of such cash-settled
derivative security, therefore, may be deemed a beneficial owner under
Rule 13d-3(b) in this context. Finally, under Rule 13d-3(d)(1), a
person is deemed a beneficial owner of an equity security if the person
(1) has a right to acquire beneficial ownership of the equity security
within 60 days or (2) acquires the right to acquire beneficial
ownership of the equity security with the purpose or effect of changing
or influencing the control of the issuer of the security for which the
right is exercisable, or in connection with or as a participant in any
transaction having such purpose or effect, regardless of when the right
is

exercisable.\478\ As the Commission stated in the Security-Based Swaps
Release, Rule 13d-3(d)(1) applies regardless of the origin of the right
to acquire the equity security.\479\ If such a right originates in a
derivative security that is nominally ``cash-settled'' or from an
understanding in connection with that derivative security, Rule 13d-
3(d)(1) would apply.
---------------------------------------------------------------------------

    \477\ Some commenters expressed the view that non-SBS cash-
settled derivatives only represent an economic interest and that
section 13 generally should not or does not apply to these
securities. See letters from ABA; IAA; MFA; Perkins Coie.
    \478\ See Rule 13d-3(d)(1)(i). The first prong described above
(i.e., the lead-in of Rule 13d-3(d)(1)(i)) applies to any ``right to
acquire,'' including but not limited to those enumerated in Rule
13d-3(d)(1)(i)(A) through (D). The second prong described above
(i.e., the proviso of Rule 13d-3(d)(1)(i)) applies to any ``security
or power'' specified in Rule 13d-3(d)(1)(i)(A) through (C), thereby
excluding Rule 13d-3(d)(1)(i)(D) (namely, ``any right to acquire . .
. pursuant to the automatic termination of a trust, discretionary
account or similar arrangement'') from the types of securities or
powers that, if held, can result in the holder being deemed a
beneficial owner regardless of when the right is exercisable. Thus,
the holder of any right to acquire beneficial ownership as described
in Rule 13d-3(d)(1)(i)(D) will be subject to being deemed a
beneficial owner pursuant to Rule 13d-3(d)(1) if the right creates
an entitlement to acquire securities of the underlying covered class
within 60 days.
    \479\ Security-Based Swaps Release at 34582.
---------------------------------------------------------------------------

C. Proposed Amendments to Rule 13d-5

    In the Proposing Release, the Commission proposed to amend Rule
13d-5 to, among other things:
     Revise Rule 13d-5(b)(1) to remove the potential
implication that it sets forth the exclusive legal standard for group
formation under section 13(d)(3) or 13(g)(3);
     Add new paragraph (b)(1)(ii) to specify that if a person,
in advance of filing a Schedule 13D, discloses to any other person that
such filing will be made and such other person acquires securities in
the covered class for which the Schedule 13D will be filed, those
persons will have formed a group within the meaning of section
13(d)(3); and
     Add new paragraph (b)(2)(i) to specify that when two or
more persons ``act as'' a group under section 13(g)(3) of the Act, the
group will be deemed to have become the beneficial owner, for purposes
of section 13(g)(1) and (2) of the Exchange Act, of the beneficial
ownership held by its members.
    Rather than adopt these amendments, we instead are issuing guidance
on the operation of existing Rule 13d-5(b) and sections 13(d)(3) and
13(g)(3) that clarifies and affirms that, among other matters, two or
more persons who ``act as'' a group for purposes of acquiring, holding,
or disposing securities may be treated as a group.
    In addition to the foregoing, we are adopting certain amendments to
Rule 13d-5 that the Commission included in the Proposing Release.
Specifically, we are:
     Adding new paragraph (b)(1)(ii) to specify that a group
subject to reporting obligations under section 13(d) shall be deemed to
acquire any additional equity securities acquired by a member of the
group after the group's formation;
     Adding new paragraph (b)(1)(iii) to carve out from
paragraph (b)(1)(ii) any intra-group transfers of equity securities;
     Adding new paragraph (b)(2)(i) to specify that a group
regulated under section 13(g) shall be deemed to acquire any additional
equity securities acquired by a member of the group after the group's
formation;
     Adding new paragraph (b)(2)(ii) to carve out from
paragraph (b)(2)(i) any intra-group transfers of equity securities;
     Redesignating current Rule 13d-5(b)(1) as Rule 13d-
5(b)(1)(i) to accommodate the inclusion of these amendments, but
otherwise not altering the substance of that rule; and
     Making other technical changes to Rule 13d-5.\480\
---------------------------------------------------------------------------

    \480\ See supra note 22.
---------------------------------------------------------------------------

    Those amendments, as well as our guidance, are discussed in more
detail below.
1. Proposed Rule 13d-5(b)(1)(i), (b)(2)(i), and (b)(1)(ii)
a. Proposed Amendments
    In the Proposing Release, the Commission proposed to amend Rule
13d-5 to track the statutory text of sections 13(d)(3) and (g)(3) and
specify that two or more persons who ``act as'' a group for purposes of
acquiring, holding, or disposing of securities are treated as a
group.\481\ Specifically, the Commission proposed to redesignate Rule
13d-5(b)(1) as Rule 13d-5(b)(1)(i) and revise it to, among other
things, remove the reference to an agreement between two or more
persons and instead indicate that when two or more persons act as a
group under section 13(d)(3), the group will be deemed to have acquired
beneficial ownership of all of the equity securities of a covered class
beneficially owned by each of the group's members as of the date on
which the group is formed. The Commission also proposed new Rule 13d-
5(b)(2)(i), which would contain nearly identical language to proposed
Rule 13d-5(b)(1)(i), with conforming changes to address circumstances
in which two or more persons act as a group under section 13(g)(3) and
the group is deemed to become the beneficial owner of all of the equity
securities of a covered class beneficially owned by each of the group's
members as of the date on which the group is formed.
---------------------------------------------------------------------------

    \481\ Proposing Release at 13868-69.
---------------------------------------------------------------------------

    The Commission proposed these amendments, among other things, to
(1) make clear that ``the determination [under sections 13(d)(3) and
13(g)(3)] as to whether two or more persons are acting as a group does
not depend solely on the presence of an express agreement and that,
depending on the particular facts and circumstances, concerted actions
by two or more persons for the purpose of acquiring, holding or
disposing of securities of an issuer are sufficient to constitute the
formation of a group,'' and (2) eliminate any potential for Rule 13d-
5(b)(1) to be misconstrued as the definition of a group and
consequently used as a basis to narrow the application of sections
13(d)(3) and 13(g)(3).\482\
---------------------------------------------------------------------------

    \482\ Id.
---------------------------------------------------------------------------

    In addition, the Commission proposed to amend Rule 13d-5 to include
new paragraph (b)(1)(ii). The proposed paragraph would provide that a
person who shares information about an upcoming Schedule 13D filing
such person is or will be required to make with respect to a covered
class, to the extent this information is not yet public and was
communicated with the purpose of causing others to make purchases of
securities of the same covered class, and a person who subsequently
purchases securities of that class based on this information, will have
formed a group within the meaning of section 13(d)(3).
b. Comments Received
    Commenters expressed a wide range of views on proposed Rule 13d-
5(b)(1)(i) and (b)(2)(i).\483\ A number of commenters supported the
amendments.\484\ One supporting commenter expressed the view that the
proposed amendments would ensure that the terms of sections 13(d) and
(g) will be applied as originally intended.\485\ Another commenter
observed that the proposed amendments appear designed to simply adhere
to the underlying statutory language in the Exchange Act.\486\ One
commenter stated

that it supported the proposed amendments and observed that, under the
proposed amendments, compliance with the group formation rules would
not depend on whether an express or implied agreement exists among the
parties that are acting together.\487\ One commenter asserted that the
proposed amendments ``could prevent sophisticated investors from
skirting reporting requirements when coordinating accumulations of
significant stakes'' which could ``help[ ] ensure retail investors have
fair insight.'' \488\
---------------------------------------------------------------------------

    \483\ Although commenters generally focused on proposed Rule
13d-5(b)(1)(i) and did not explicitly address proposed Rule 13d-
5(b)(2)(i), given the substantial similarity of those proposed
rules, we treat comments on proposed Rule 13d-5(b)(1)(i) as also
applying to proposed Rule 13d-5(b)(2)(i) unless the comment letter
stated otherwise.
    \484\ See letters from AFREF; AFREF, et al.; BRT; Freeport-
McMoRan; Labor Unions; Nasdaq; NIRI; P. Worts; Perkins Coie; R.
Rutkowski; SCG; Sen. Baldwin, et al.; T. Reilly; WLRK I; WLRK II.
    \485\ See letter from NIRI.
    \486\ See letter from WLRK II.
    \487\ See letter from SCG.
    \488\ See letter from P. Worts.
---------------------------------------------------------------------------

    Several commenters expressed views rejecting criticism that the
proposed amendments would interfere with shareholder activism or
collaboration.\489\ One of these commenters disagreed with the
contention by other commenters that such amendments would prevent the
build-up of ownership stakes and chill shareholder communications.\490\
Another commenter disagreed with concerns that the proposal ``would put
mainstream institutional investors at risk of being deemed part of a
group simply because they take a meeting with an activist or management
and indicate that they may be inclined to vote in favor of their
proposed course of action.'' \491\ This commenter further stated that
it did not view the proposal as propounding a definition of ``group''
that would consider a ``regular passive institutional investor'' as a
member of a group with an activist simply because it met with an
activist, heard its proposed plans, and signaled it would likely use
its voting power to support the activist's proposed campaign.\492\ One
commenter stated a similar view, asserting that nothing in the proposal
would limit the ability of investors to engage with company
management.\493\
---------------------------------------------------------------------------

    \489\ See letters from AFL-CIO; Sen. Baldwin, et al.; WLRK II.
    \490\ See letter from Sen. Baldwin, et al.
    \491\ See letter from WLRK II.
    \492\ See id.
    \493\ See letter from Sen. Baldwin, et al.
---------------------------------------------------------------------------

    In addition, although the IAC did not make a recommendation with
respect to the proposed amendments to Rule 13d-5 ``because of a lack of
consensus on the effects of the proposed definition of a `group' and
how that would impact shareholder communication,'' the IAC stated that
it ``agree[d] with the SEC's description of existing case-law regarding
the definition of `group' '' and ``would support the inclusion of such
description in any final rulemaking regarding Schedule 13D reporting to
highlight to market participants the scope of such case law when
considering the applicability of the `group' rules.'' \494\
---------------------------------------------------------------------------

    \494\ See IAC Recommendations.
---------------------------------------------------------------------------

    Numerous commenters opposed the proposed amendments, largely
because, in their view, the proposed amendments would eliminate a
requirement that there be some form of ``agreement'' among members of a
group.\495\ Some opposing commenters expressed the view that the
proposal--particularly the removal of some form of an ``agreement''--
would exceed the Commission's authority under the Exchange Act or raise
concerns under the APA or the U.S. Constitution.\496\ One commenter
asserted that eliminating the ``agreement'' requirement in determining
whether a group has been formed would contravene the plain meaning of
the statutory text, disregard the legislative history, and depart from
``long-established'' judicial precedent.\497\ The same commenter
asserted that the initial adoption of Rule 13d-5, with what the
commenter described as its express requirement for an agreement to
exist in order to establish group status, simply reflected the
Commission's affirmation of established judicial precedent, not an
unwarranted departure from the statutory language.\498\ A number of
commenters expressed similar points of view, and, among other things,
used canons of construction or statutory analysis to assert that
persons can only ``act as'' a group under section 13(d)(3) if an
agreement exists among the group members.\499\ Another commenter
suggested the absence of the term ``agreement'' from section 13(d)(3)
did not restrict the Commission's capacity to use the term ``agree'' in
Rule 13d-5(b) because administrative rulemakings commonly include
language not present in a statute in order to implement congressional
intent.\500\
---------------------------------------------------------------------------

    \495\ See letters from Andrew L. Stern, SEIU (Apr. 11, 2022)
(``A. Stern''); ABA; AIMA; Steven M. Rothstein, Managing Director,
Ceres Accelerator for Sustainable Capital Markets, Ceres, Inc. (Apr.
11, 2022) (``Ceres''); CIRCA I; CIRCA III; Dodge & Cox; EIM I; HMA
II; IAA; ICI I; ICM; MFA; Neuberger Berman Group LLC (Apr. 11, 2022)
(``NBG''); O'Melveny & Myers; Benjamin Edwards, Associate Professor
of Law, University of Nevada, Las Vegas, William S. Boyd School of
Law, Sarah C. Haan, Professor of Law and Cary Martin Shelby,
Professor of Law, Washington and Lee University School of Law,
Geeyoung Min, Assistant Professor of Law, Michigan State University
College of Law, Faith Stevelman, Professor of Law, New York Law
School (Apr. 12, 2022) (``Prof. Edwards, et al.''); Prof. Gordon;
David H. Webber, Professor of Law and Paul M. Siskind Scholar,
Boston University School of Law (Apr. 11, 2022) (``Prof. Webber'');
Profs. Bishop and Partnoy I; Profs. Bishop and Partnoy II; Profs.
Bishop and Partnoy III; Halit Coussin, Chief Legal Officer & Chief
Compliance Officer, Pershing Square Capital Management, L.P. (Apr.
11, 2022) (``PSCM''); Rice Management; SIFMA; SIFMA AMG; SIFMA &
SIFMA AMG; SSC; STB; TRP.
    \496\ See letters from CIRCA I; EIM I; ICI I; MFA; Prof.
Edwards, et al.; PSCM; SIFMA.
    \497\ See letter from EIM I.
    \498\ See id.
    \499\ See letters from CIRCA I; EIM I, MFA; SIFMA; SIFMA AMG.
    \500\ See letter from PSCM.
---------------------------------------------------------------------------

    Some opposing commenters expressed concern that the proposed
amendments would introduce a standard that was overly broad and that
could chill or eliminate shareholder communications with other
shareholders, issuers' management and/or other parties.\501\ One
commenter expressed the view that the proposal could deter investors
from engaging in ``socially valuable activism'' and noted that to the
extent that the proposed rules resulted in restraints on shareholder
communications, that may lead to claims that the proposed rules burden
investors' First Amendment rights.\502\ The commenter also stated that
the Commission ``should take care to minimize any burdens on investors'
expression.'' \503\ Other commenters anticipated that under the
proposed amendments, ordinary course business transactions or
conversations, without more, could result in a finding of group
formation.\504\ One commenter raised the concern that the proposed rule
would produce disruptive collateral consequences, including in relation
to ownership reporting under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 Act as it is uncertain whether being deemed a
member of a group would deprive an investor of relying on the ``passive
investor'' exemption from the antitrust notification requirements under
that statute.\505\ A number of commenters also asserted that the
proposed amendments would prompt litigation over whether communications
between parties resulted in group formation.\506\ Some commenters
expressed the view that the resulting increase in uncertainty that
would be caused by the proposed amendments also would result in
additional legal exposure under

Exchange Act section 16 for persons alleged to have formed a
group.\507\
---------------------------------------------------------------------------

    \501\ See letters from A. Stern; ABA; Ceres; CIRCA I; Dodge &
Cox; EIM I; IAA; MFA; NBG; Prof. Edwards, et al.; Prof. Gordon;
Prof. Webber; Profs. Bishop and Partnoy II; Rice Management; SIFMA;
STB; TRP; see also letter from MFA & NAPFM.
    \502\ See letter from Prof. Edwards, et al.
    \503\ Id.
    \504\ See letters from HMA II; IAA; MFA; Perkins Coie; Prof.
Gordon; Profs. Bishop and Partnoy I; SIFMA; SIFMA AMG; SSC; TRP.
    \505\ See letter from PSCM.
    \506\ See letters from ABA; Dodge & Cox; EIM I; Prof. Edwards,
et al.; Prof. Gordon; PSCM; Rice Management; SIFMA.
    \507\ See letters from ABA; EIM I; SIFMA; see also letter from
MFA & NAPFM.
---------------------------------------------------------------------------

    Opposing commenters also criticized the proposed amendments as
inconsistent with those Federal court opinions that have addressed the
standard for group formation.\508\ One commenter asserted that courts
have recognized an ``agreement'' as being a necessary element of group
formation based on the need for a ``workable compromise'' between the
regulatory objective of having a statute's policies implemented, on one
hand, and the market's need for clear rules, on the other hand.\509\
Another commenter expressed concern that the proposed amendments would,
in its view, dispense ``with more than 40 years of practice and court
decisions'' and replace them ``with a vague, circular rule . . .
impossibly burdensome to market participants.'' \510\ One commenter
noted that Federal courts ``have consistently held that the existence
of an agreement is necessary to establish the existence of a `group'
under Section 13(d).'' \511\ Other commenters expressed the view that
the existing standards in Rule 13d-5(b) have worked well for decades or
are not in need of reform.\512\ Notwithstanding these and other similar
criticisms,\513\ we note that multiple opposing commenters recognized
that, even today, the determination of whether or not a group exists is
ultimately dependent upon the facts and circumstances.\514\
---------------------------------------------------------------------------

    \508\ See letters from AIMA; CIRCA I; EIM I; ICI I; MFA; PSCM;
SIFMA; SIFMA AMG.
    \509\ See letter from SIFMA.
    \510\ See letter from SIFMA AMG.
    \511\ See letter from EIM I (``Until now, courts have sensibly
required and the markets have understood that there must be an
agreement (whether implicit or explicit) between shareholders before
they could be legally found to be a group and subject to the
consequences of such a finding.'').
    \512\ See letters from AIMA; EIM I; ICI I; Profs. Bishop and
Partnoy II; PSCM; SSC; STB.
    \513\ See letters from AIMA; CIRCA I; ICI I; MFA; PSCM.
    \514\ See letters from EIM I; ICI I; Profs. Bishop and Partnoy
I; PSCM; SIFMA; STB.
---------------------------------------------------------------------------

    A number of commenters offered suggestions on how the Commission
should proceed with respect to the proposed amendments.\515\ Some
commenters expressed the view that the Commission should set forth more
specific parameters of what joint conduct or communications may result
in group formation.\516\ A few commenters offered alternative language
to be used in any revision the Commission may ultimately adopt.\517\
One commenter encouraged the Commission to consider exempting QIIs from
any new ``group formation'' provisions so long as QIIs act consistently
with the requirements of Rule 13d-1(b).\518\ One commenter suggested
that the Commission adopt the equivalent of an exemption from section
16 for any groups formed pursuant to the proposed amendments.\519\
Another commenter suggested that the proposed amendments should not be
adopted unless a safe harbor is created for securities dealing
activities.\520\ One commenter recommended no change to the proposal
but expressed the view that the proposed rules would not interfere with
shareholder rights to engage in, among other things, shareholder
activism on ESG issues, collaboration on shareholder proposals under 17
CFR 240.14a-8 (``Rule 14a-8''), and ``vote no'' initiatives and any
concerns regarding the filing obligations of such investor groups could
be clarified by the Commission in an explanatory statement issued with
any final rule.\521\ Another commenter stated the Commission should
consider whether the public dissemination of information on message
boards or through media interviews, and, by extension, social media
platforms, could result in group formation.\522\ A number of commenters
recommended no change be made to current Rule 13d-5(b)(1),\523\ which,
according to some of these commenters, would result in retention of the
``agreement'' standard. One commenter made reference to existing Rule
13d-5(b) and advocated for the Commission to retain what it referred to
as the ``current `group' definition,'' including the requirement that
there be an agreement to act as a group, because the current provision
does not: (1) chill shareholder engagement; (2) create the challenge to
determine whether a group has been formed or if an exemption applies;
or (3) make activist campaigns more difficult to pursue.\524\
---------------------------------------------------------------------------

    \515\ See letters from ABA; AFREF; AIMA; HMA II; IAA; ICI I;
Labor Unions; MFA; Perkins Coie; Profs. Bishop and Partnoy II
(expressing the view that it would be sufficient for the Commission
to issue guidance instead of adopting a rule change and recommending
that the Commission take the position that it ``intends to enforce
the `group' definition as it stands''); SIFMA; SSC; STB; TRP.
    \516\ See letters from ABA; HMA II; IAA; Perkins Coie; TRP.
    \517\ See letters from ABA; MFA.
    \518\ See letter from ABA.
    \519\ See letter from SIFMA. One commenter, which generally
supported the proposal, similarly recommended that the Commission
address concerns that the proposal could result in a ``regular
passive institutional investor'' becoming a member of a group with
an activist simply because it met with the activist, heard its
proposed plans, and signaled that it would likely use its voting
power to support the activist's proposed campaign. See letter from
WLRK II.
    \520\ See letter from SIFMA.
    \521\ See letter from Labor Unions.
    \522\ See letter from STB.
    \523\ See letters from AIMA; ICI I; SIFMA; SSC.
    \524\ See letter from AIMA.
---------------------------------------------------------------------------

    Commenters also expressed differing views on proposed Rule 13d-
5(b)(1)(ii). Some commenters expressly supported the proposal.\525\ One
commenter stated that because information about a planned Schedule 13D
filing is clearly material to investors, it makes sense to deem tippers
and tippees to be acting as a group even without an explicit
agreement.\526\ Another commenter, while expressing the view that
modifications should be made to the Commission's overall proposed
amendments relating to group formation, stated that the ``definition of
who should constitute a `group' under the proposal . . . should only
apply to the sharing of material nonpublic information related to not
yet disclosed large positions instead of efforts to improve the long-
term corporate governance of companies.'' \527\
---------------------------------------------------------------------------

    \525\ See letters from Perkins Coie; R. Rutkowski; Reilly Steel,
Ph.D. Candidate, Department of Politics, Princeton University, and
Zohar Goshen, Jerome L. Greene Professor of Transactional Law,
Columbia Law School (May 22, 2023) (``R. Steel and Prof. Goshen'')
(supporting the proposal conditionally, if Congress does not take
the action that the commenter recommended as the primary course of
action and if the Commission actively enforces the proposed rule and
seeks expansive remedies); SCG.
    \526\ See letter from SCG.
    \527\ See letter from R. Rutkowski.
---------------------------------------------------------------------------

    Other commenters opposed the proposal.\528\ One commenter analyzed
the proposed rule text and observed that linking ``indirectly
discloses'' to the ``with the purpose of causing'' clause appears
intended to establish a presumption, for all practical purposes, that
an acquisition by ``such other person'' was ``based on such
information.'' \529\ Another commenter similarly expressed the view
that such a rule would be unfair given that an adviser may also have
independently determined to acquire or even continue to hold the same
securities and disclosure of the imminent Schedule 13D may have been
outside of the adviser's control and without his or her input or
expression of approval.\530\

Another commenter similarly asserted that the proposed rule would place
those who receive information from a blockholder at risk of
inadvertently becoming subject to group reporting obligations in
circumstances that were ``never intended to be covered by Section 13.''
\531\
---------------------------------------------------------------------------

    \528\ See letters from Dodge & Cox; EIM I; HMA I (stating its
belief that ``straightforward application of existing law'' is
sufficient); IAA; PSCM (citing proposed Rule 13d-5(b)(1)(iii) but
apparently referring to proposed Rule 13d-5(b)(1)(ii)); SIFMA; SIFMA
AMG.
    \529\ See letter from SIFMA AMG (adding that this apparent
presumption would be unfair, inappropriate, and poorly tailored, and
citing to the example of a client acquiring shares from a dealer who
also coincidentally acquires shares).
    \530\ See letter from IAA (observing that that adoption of any
such rule would be unfair absent some intent to form a group because
certain parties could be restricted from buying shares just because
a third party told an adviser that it was going to file a Schedule
13D).
    \531\ See letter from PSCM.
---------------------------------------------------------------------------

    Some commenters provided recommendations to revise the
proposal.\532\ One commenter suggested the Commission alternatively
``impose a prohibition on tipping by an activist as soon as it reaches
the 5 percent disclosure threshold until it files a Schedule 13D.''
\533\ One commenter recommended that the Commission address concerns
that the proposal could result in a passive institutional investor
becoming a member of a group with an activist simply because it met
with the activist, heard its proposed plans, and signaled that it would
likely use its voting power to support the activist's proposed campaign
by revising proposed Rule 13d-5(b)(1)(ii) to include its suggested
alternative text.\534\ One commenter, who neither clearly supported nor
opposed the proposal, stated that it would be ``deeply troubled if the
Commission were to invent a new, extremely difficult to establish
element to insider trading law, such as a requirement that the
recipient of the tip have an intention of coordinating with the tipper
or make its purchases in reliance on the non-public information that
the tipper provided.'' \535\ A commenter objected to the concept of
``indirect'' disclosure within proposed Rule 13d-5(b)(1)(ii) on grounds
that the term ``indirect'' is ``intrinsically ill-defined'' and could
create a presumption that certain transactions in the ordinary course
of a market-making business were executed ``based on such [indirect]
information.'' \536\ Another commenter similarly suggested that the
rule, if adopted, should only apply to situations where an express or
implied intent by parties exists to form a group.\537\
---------------------------------------------------------------------------

    \532\ See letters from AIMA; IAA; Prof. Gordon; SIFMA; SIFMA
AMG; STB.
    \533\ See letter from Prof. Gordon; see also letter from R.
Steel and Prof. Goshen.
    \534\ See letter from WLRK II. Another commenter, which objected
to the proposed amendments to Rule 13d-5 in the Proposing Release,
specifically responded to that commenter's recommended alternative,
intimating that the Commission should not adopt this suggested
change for a variety of reasons. See letter from Profs. Bishop and
Partnoy II.
    \535\ See letter from HMA I.
    \536\ See letter from SIFMA.
    \537\ See letter from IAA.
---------------------------------------------------------------------------

    Commenters also expressed observations concerning the collateral
consequences to an investor that received information about an
impending Schedule 13D filing. One commenter implicitly asked the
Commission to consider that once the tippee has the information,
``[t]his quasi-lock-up period not only discourages other shareholders
from meeting with the activist but also, effectively, removes the
liquidity these other shareholders may provide to the market in that
issuer.'' \538\ Another commenter suggested the rule should clarify for
how long a recipient of information that a Schedule 13D filing would be
forthcoming must remain ``frozen'' from making further purchases,
particularly if such filing does not get filed in the near term.\539\
---------------------------------------------------------------------------

    \538\ See letter from AIMA.
    \539\ See letter from STB.
---------------------------------------------------------------------------

c. Commission Guidance
    As noted above, we are not adopting proposed Rule 13d-5(b)(1)(i)
and (ii) and (b)(2)(i). The Commission's stated objectives were to (1)
align the text of Rule 13d-5(b) with the statutory provisions that it
serves to implement while clarifying and affirming its application and
operation and (2) provide clarity on whether a group is formed if a
person shares information about an upcoming Schedule 13D filing that
the person is or will be required to make.\540\ The proposed amendments
were not intended to change how the Commission views what is meant by
``act as a group'' for purposes of sections 13(d)(3) and 13(g)(3). They
were intended to codify through a rule amendment our views that ``the
determination of whether two or more persons are acting as a group does
not depend solely on the presence of an express agreement and that,
depending on the particular facts and circumstances, concerted actions
by two or more persons for the purpose of acquiring, holding or
disposing of securities of an issuer are sufficient to constitute the
formation of a group.'' \541\ Several commenters generally shared our
view that the formation of a group does not depend on the presence of
an express agreement.\542\ However, some commenters raised objections
to the proposal based on their view that the amendments could result in
a group being formed for purposes of sections 13(d)(3) and 13(g)(3)
absent some evidence of agreement, arrangement, understanding, or
concerted action. That was not the Commission's intent. Upon
consideration of the comments received, we believe that the better
approach is not to adopt the proposed amendment to Rule 13d-5 but
instead to provide guidance as to the application of the existing legal
standard established in sections 13(d)(3) and 13(g)(3) with respect to
the formation of a group.\543\
---------------------------------------------------------------------------

    \540\ See Proposing Release at 13869.
    \541\ Id. at 13868-69.
    \542\ See, e.g., letters from EIM I (``[A]n agreement can be
constituted informally, and without a writing. The Commission, in
adopting Rule 13d-5 in 1977, selected the word `agreement' rather
than `contract' for a reason--an agreement is a less formal
arrangement, which is consistent with the requirement of Section
13(d)(3) that the persons `act together.'''); PSCM (``Courts,
whether looking to the existence of an agreement out of an
interpretation that Rule 13d-5(b) requires it, or as an
administrable evidentiary standard for establishing action in
concert, have interpreted the term `agreement' broadly to include
informal and unwritten arrangements, and have relied on
circumstantial evidence in order to establish that some manner of
agreement existed.''); SIFMA (``[T]he existence of a group surely
does not depend on the intent of the members to create and wear the
label of a `Section 13(d) group.' It does, however, depend on an
intent to take the coordinated actions that will create that
relationship.''). Cf., letter from ABA (explaining that an agreement
need not be ``written'' or ``formal'' and acknowledging that Rule
13d-5(b) could be modified to add ``arrangement or understanding''
to address any concern that the term ``agreement'' has been
misconstrued in the context of Rule 13d-5(b)).
    \543\ In addition to the guidance set forth in this section, we
provide additional guidance in section II.D.3 in connection with the
discussion regarding our final disposition of the proposed
exemptions under Rule 13d-6.
---------------------------------------------------------------------------

i. Background of the Regulatory Framework
    Sections 13(d)(3) and 13(g)(3) are identical, and each of these
provisions provides that ``[w]hen two or more persons act as a . . .
group for the purpose of acquiring, holding, or disposing of securities
of an issuer, such . . . group shall be deemed a `person.' '' As the
Commission noted in the Proposing Release, Congress enacted these
provisions based on two practical considerations.\544\ First, sections
13(d)(1) and 13(g)(1), by their terms, apply to, and impose filing
obligations upon, a single ``person.'' \545\ Second, Congress
recognized the need to protect against the evasion of disclosure
requirements by persons who collectively sought to change or influence
control of an issuer yet who each acquired and held an amount of

beneficial ownership at or just below the reporting threshold.\546\
---------------------------------------------------------------------------

    \544\ See Proposing Release at 13865.
    \545\ Because sections 13(d)(3) and 13(g)(3) ``deem'' a group to
be a single ``person,'' the correct articulation of how the
statutory framework applies in this context is to a ``person,
including any group'' and not a ``person or group.'' Thus, under
sections 13(d) and 13(g) and Regulation 13D-G, groups are regulated
no differently from natural persons or companies described in the
definition of ``person'' under section 3(a)(9) of the Exchange Act.
    \546\ Section 13(d)(3) was enacted to prevent ``easy avoidance
of section 13(d)'s disclosure requirements by a group of investors
acting together in their acquisition or holding of securities.'' S.
Rep. No. 550, at 8 (1967); H.R. No. 1711, at 8-9 (1968); see also
113 Cong. Rec. Bill S. 510 (Jan. 18, 1967) (noting that the specific
provision applicable to groups was added to ``close the loophole
that now exists which allows a syndicate, where no member owns more
than 10 percent, to escape the reporting requirements of the
Securities Exchange Act'').
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    Congress sought to address this problem of coordinated
circumvention by deeming two or more persons to be one person for
purposes of sections 13(d) and 13(g). Based on the statutory treatment
of two or more persons as if they were a single person when they ``act
as'' a group for at least one of the three purposes specified in the
statutory provisions (i.e., acquiring, holding, or disposing of
securities of an issuer), the beneficial ownership collectively held by
the group members is imputed to the group. If the aggregate amount of
beneficial ownership exceeds five percent of a covered class, the group
may be required to file a beneficial ownership report. The
determination of which statutory provision (i.e., section 13(d)(3) or
13(g)(3)) applies to a group depends on whether a non-exempt
acquisition of beneficial ownership has been made that can be imputed
to the group and, when on its own or added to any other beneficial
ownership held by the group, results in the group's beneficial
ownership exceeding five percent of the covered class. If such an
acquisition occurs, the group is subject to regulation under section
13(d).\547\ If no such acquisition attributable to the group has
occurred, but the collective amount of beneficial ownership held by the
group members exceeds five percent of a covered class at the end of a
calendar year under current rules \548\ (or at the end of a calendar
quarter based on the amendments to Rule 13d-1 we are adopting in this
release), the group is subject to section 13(g).
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    \547\ The operative term ``after acquiring'' in section 13(d)(1)
makes the application of section 13(d) contingent upon the existence
of an acquisition. Determining that an acquisition has occurred--in
particular, an acquisition that is neither exempt nor otherwise not
recognized under section 13(d)(1)--is thus necessary to establish
the application of section 13(d).
    \548\ See 17 CFR 240.13d-1.
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ii. Guidance
    Neither the statute nor our rules provide a definition of a
``group.'' The appropriate legal standard for determining whether a
group is formed is found in sections 13(d)(3) and 13(g)(3). While some
may view the language of Rule 13d-5(b) as providing a definition of
``group,'' we reiterate that neither the current rule nor its
predecessor \549\ was designed or adopted by the Commission to serve as
a substitute for the legal standard expressly stated in sections
13(d)(3) and 13(g)(3) for determining when two or more persons form a
group.\550\
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    \549\ The predecessor rule, Rule 13d-6, was redesignated Rule
13d-5 in 1978. See Filing and Disclosure Release. Unless otherwise
noted, references to Rule 13d-5 in this section of the release also
refer to the predecessor Rule 13d-6.
    \550\ When proposing Rule 13d-5(b), the Commission did not
present the rule as a proposed definition of ``group,'' solicit
comment on the sufficiency or any limitations of any such
definition, or use any reference to the term ``group'' in the
proposed rule text. See Disclosure of Corporate Ownership, Release
No. 34-11616 (Aug. 25, 1975) [40 FR 42212 (Sept. 11, 1975)].
Instead, the Commission explained that it was proposing to define
the term ``acquisition'' to address certain technical issues with
respect to section 13(d) and the determination of the due date for a
Schedule 13D.
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    Whether two or more persons have formed a group as contemplated by
sections 13(d)(3) and 13(g)(3) depends on a determination of whether
they acted together for the purpose of ``acquiring,'' ``holding,'' or
``disposing of'' securities of an issuer.\551\ Such persons could be
viewed as acting together if they are taking concerted actions in
furtherance of any of these purposes.\552\ The determination depends on
an analysis of all the relevant facts and circumstances and not solely
on the presence or absence of an express agreement, as two or more
persons may take concerted action or agree informally.\553\ This
approach is consistent with the statutory language of sections 13(d)(3)
and 13(g)(3) and with the purpose of these statutory provisions.\554\
It also is consistent with views previously expressed by courts and the
Commission, which have determined that groups were established by
activities that fell short of an express agreement.\555\ Indeed, the
Commission recognizes that for a finder of fact, including the
Commission itself, to determine that a group has been formed under
section 13(d)(3) or 13(g)(3), the evidence must show, at a minimum,
indicia, such as an informal arrangement or coordination in
furtherance, of a common purpose to acquire, hold, or dispose of
securities of an issuer. If two or more persons took similar actions,
that fact is not conclusive in and of itself that a group has been
formed.\556\ We therefore disagree with the comments raising
constitutional concerns, as well as the comments concerning the scope
of our authority under the Exchange Act and the APA. We note, however,
that those comments were directed at the proposed amendment to Rule
13d-5 and the belief that the contemplated rule change meant the
Commission was taking a position that a group could be formed without
some type of an agreement, arrangement, understanding, or concerted
action. As explained above, this is not the Commission's view, and we
are not adopting the proposed amendment to Rule 13d-5. Further, the
commenters' concerns are not implicated by the guidance we provide
here.
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    \551\ The Commission, in adopting Rule 13d-5(b)(1), indicated
that it viewed the term ``holding'' as subsuming the term
``voting,'' but nevertheless expressly referenced the term
``voting'' in the rule for the avoidance of doubt. See Proposing
Release at 13869 n.135 (citing Filing and Disclosure Release at
18492).
    \552\ See, e.g., SEC v. Levy, 706 F. Supp. 61, 69 (D.D.C. 1989)
(``In order to find that a `group' exists under Section 13(d)(3), a
court must find that two or more people have formed a combination in
support of a common objective.''); In the Matter of John A. Carley,
Release No. 34-50695 (Nov. 18, 2004) (``A group need not be formally
organized, nor memorialize its intentions in writing . . . . All
that is required is that its members combine in furtherance of a
common objective.''); In the Matter of John Joslyn, Joseph Marsh, P.
David Lucas, Steven Sybesma, Stanley Thomas and Jon Thompson,
Release No. 34-50588 (Oct. 26, 2004).
    \553\ Proposing Release at 13868.
    \554\ Both the House and Senate Reports accompanying the bill
reflect an effort to prevent circumvention of the reporting
threshold in this situation with the inclusion of a provision ``that
would prevent a group of persons who seek to pool their voting or
other interests from evading the . . . statute because no one
individual owns more than [five] percent.'' See Disclosure of
Corporate Equity Ownership, H.R. Rep. No. 1711, at 9 (1968) and Full
Disclosure of Corporate Equity Ownership and in Corporate Takeover
Bid, S. 510, Report of the S. Comm. On Banking and Currency, 90th
Cong. 1, 8 (1967). As such, the reports noted that section 13(d)(3)
``is designed to obtain full disclosure of the identity of any
person or group obtaining the benefits of ownership [b]y reason of
any contract, understanding, relationship, agreement or other
arrangement'' (emphasis added). S. Rep. No. 550, at 8 (1967); H.R.
Rep. No. 1711, at. 8-9 (1968), as reprinted in 1968 U.S.C.C.A.N.
2811, 2818. Id.
    \555\ Group activity may be demonstrated by circumstantial
evidence. See Proposing Release at 13868, n. 132 (citing SEC v.
Savoy Indus., Inc., 587 F.2d 1149, 1162 (D.C. Cir. 1978) and noting
as indicia of group formation: (1) the presence of a common plan or
goal, Fin. Gen. Bankshares, Inc. v. Lance, 1978 WL 1082, at *9
(D.D.C. 1978); (2) ``considerable dissatisfaction'' with certain
officers and a ``desire to reduce'' those officers' role in company
management, Id. at *10; (3) strategy meetings with, among others,
attorneys, SEC v. Levy, 706 F. Supp. 61, 70 (D.D.C. 1989); (4) a
pattern of coordinated stock purchases, Hallwood Realty Partners, LP
v. Gotham Partners, LP, 286 F.3d 613, 618 (2d Cir. 2002); (5) the
solicitation of others to join the group, Wellman v. Dickinson, 682
F.2d 355 363-364 (2d Cir. 1979), cert. denied sub. nom. Dickinson v.
SEC, 460 U.S. 1069 (1983); or (6) the existence of communications
between and among group members. Gen. Aircraft Corp. v. Lampert, 556
F.2d 90, 95 (1st Cir. 1977)); see also supra note 482.
    \556\ The Commission recognizes that inadvertent or coincidental
contact would not be sufficient to satisfy the standard given the
absence of volitional acts made in concert or in coordination with
others.

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    Relatedly, we recognize the concern expressed by some commenters
that the Commission's proposal to amend Rule 13d-5 could chill
shareholder engagement, with, some commenters asserted, shareholders
unable to communicate freely with each other or with the issuer's
management without forming a group. In response to some of the concerns
raised by commenters, we provide guidance below on the application of
the current legal standard found in section 13(d)(3) and 13(g)(3) to
certain common types of shareholder engagement activities.\557\
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    \557\ Each illustration assumes that the rules adopted in this
release are in effect and that the securities of the subject company
are in a covered class.
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    Question: Is a group formed when two or more shareholders
communicate with each other regarding an issuer or its securities
(including discussions that relate to improvement of the long-term
performance of the issuer, changes in issuer practices, submissions or
solicitations in support of a non-binding shareholder proposal, a joint
engagement strategy (that is not control-related), or a ``vote no''
campaign against individual directors in uncontested elections) without
taking any other actions?
    Response: No. In our view, a discussion whether held in private,
such as a meeting between two parties, or in a public forum, such as a
conference that involves an independent and free exchange of ideas and
views among shareholders, alone and without more, would not be
sufficient to satisfy the ``act as a . . . group'' standard in sections
13(d)(3) and 13(g)(3). Sections 13(d)(3) and 13(g)(3) were intended to
prevent circumvention of the disclosures required by Schedules 13D and
13G, not to complicate shareholders' ability to independently and
freely express their views and ideas to one another. The policy
objectives ordinarily served by Schedule 13D or Schedule 13G filings
would not be advanced by requiring disclosure that reports this or
similar types of shareholder communications. Thus, an exchange of views
and any other type of dialogue in oral or written form not involving an
intent to engage in concerted actions or other agreement with respect
to the acquisition, holding, or disposition of securities, standing
alone, would not constitute an ``act'' undertaken for the purpose of
``holding'' securities of the issuer under section 13(d)(3) or
13(g)(3).
    Question: Is a group formed when two or more shareholders engage in
discussions with an issuer's management, without taking any other
actions?
    Response: No. For the same reasons described above, we do not
believe that two or more shareholders ``act as a . . . group'' for the
purpose of ``holding'' a covered class within the meaning of those
terms as they appear in section 13(d)(3) or 13(g)(3) if they simply
engage in a similar exchange of ideas and views, alone and without
more, with an issuer's management.
    Question: Is a group formed when shareholders jointly make
recommendations to an issuer regarding the structure and composition of
the issuer's board of directors where (1) no discussion of individual
directors or board expansion occurs and (2) no commitments are made, or
agreements or understandings are reached, among the shareholders
regarding the potential withholding of their votes to approve, or
voting against, management's director candidates if the issuer does not
take steps to implement the shareholders' recommended actions?
    Response: No. Where recommendations are made in the context of a
discussion that does not involve an attempt to convince the board to
take specific actions through a change in the existing board membership
or bind the board to take action, we do not believe that the
shareholders ``act as a . . . group'' for the purpose of ``holding''
securities of the covered class within the meaning of those terms as
they appear in sections 13(d)(3) or 13(g)(3). Rather, we view this
engagement as the type of independent and free exchange of ideas
between shareholders and issuers' management that does not implicate
the policy concerns addressed by section 13(d) or section 13(g).
    Question: Is a group formed if shareholders jointly submit a non-
binding shareholder proposal to an issuer pursuant to Exchange Act Rule
14a-8 for presentation at a meeting of shareholders?
    Response: No. The Rule 14a-8 shareholder proposal submission
process is simply another means through which shareholders can express
their views to an issuer's management and board and other shareholders.
For purposes of group formation, we do not believe shareholders
engaging in a free and independent exchange of thoughts about a
potential shareholder proposal, jointly submitting, or jointly
presenting, a non-binding proposal to an issuer in accordance with Rule
14a-8 (or other means) should be treated differently from, for example,
shareholders jointly meeting with an issuer's management without other
indicia of group formation. Accordingly, where the proposal is non-
binding, we do not believe that the shareholders ``act as a . . .
group'' for the purpose of ``holding'' securities of the covered class
within the meaning of those terms as they appear in section 13(d)(3) or
13(g)(3). Assuming that the joint conduct has been limited to the
creation, submission, and/or presentation of a non-binding
proposal,\558\ those statutory provisions would not result in the
shareholders being treated as a group, and the shareholders' beneficial
ownership would not be aggregated for purposes of determining whether
the five percent threshold under section 13(d)(1) or 13(g)(1) had been
crossed.
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    \558\ The conclusion reflected in this example assumes the Rule
14a-8 or other non-binding shareholder proposal is submitted jointly
and without ``springing conditions'' such as an arrangement,
understanding, or agreement among the shareholders to vote against
director candidates nominated by the issuer's management or other
management proposals if the non-binding proposal is not included in
the issuer's proxy statement or, if passed, not acted upon favorably
by the issuer's board.
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    Question: Would a conversation, email, phone contact, or meetings
between a shareholder and an activist investor that is seeking support
for its proposals to an issuer's board or management, without more,
such as consenting or committing to a course of action,\559\ constitute
such coordination as would result in the shareholder and activist being
deemed to form a group?
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    \559\ Examples of the type of consents or commitments given in
furtherance of a common purpose to acquire, hold (inclusive of
voting), or dispose of securities of an issuer could include the
granting of irrevocable proxies or the execution of written consents
or voting agreements that demonstrate that the parties had an
arrangement to act in concert.
---------------------------------------------------------------------------

    Response: No. Communications such as the types described, alone and
without more, would not be sufficient to satisfy the ``act as a . . .
group'' standard in sections 13(d)(3) and 13(g)(3) as they are merely
the exchange of views among shareholders about the issuer. This view is
consistent with the Commission's previous statement that a shareholder
who is a passive recipient of proxy soliciting activities, without
more, would not be deemed a member of a group with persons conducting
the solicitation.\560\ Activities that extend beyond these types of
communications, which include joint or coordinated publication of
soliciting materials with an activist investor might, however, be
indicative of group formation,

depending upon the facts and circumstances.
---------------------------------------------------------------------------

    \560\ Amendments to Beneficial Ownership Reporting Requirements,
Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854, 2858 (Jan. 16,
1998)].
---------------------------------------------------------------------------

    Question: Would an announcement or a communication by a shareholder
of the shareholder's intention to vote in favor of an unaffiliated
activist investor's director nominees, without more, constitute
coordination sufficient to find that the shareholder and the activist
investor formed a group?
    Response: No. We do not view a shareholder's independently-
determined act of exercising its voting rights, and any announcements
or communications regarding its voting decision, without more, as
indicia of group formation. This view is consistent with our general
approach towards the exercise of the right of suffrage by a shareholder
in other areas of the Federal securities laws.\561\ Shareholders,
whether institutional or otherwise, are thus not engaging in conduct at
risk of being deemed to give rise to group formation as a result of
simply independently announcing or advising others--including the
issuer--how they intend to vote and the reasons why.
---------------------------------------------------------------------------

    \561\ For example, public announcement of a voting intention
qualifies for the exclusion from the definition of solicitation
under 17 CFR 240.14a-1(l)(2)(iv).
---------------------------------------------------------------------------

    Question: If a beneficial owner of a substantial block of a covered
class that is or will be required to file a Schedule 13D intentionally
communicates to other market participants (including investors) that
such a filing will be made (to the extent this information is not yet
public) with the purpose of causing such persons to make purchases in
the same covered class, and one or more of the other market
participants make purchases in the same covered class as a direct
result of that communication, would the blockholder and any of those
market participants that made purchases potentially become subject to
regulation as a group?
    Response: Yes. To the extent the information was shared by the
blockholder with the purpose of causing others to make purchases in the
same covered class and the purchases were made as a direct result of
the blockholder's information, these activities raise the possibility
that all of these beneficial owners are ``act[ing] as'' a ``group for
the purpose of acquiring'' securities of the covered class within the
meaning of section 13(d)(3). Such purchases may implicate the need for
public disclosure underlying section 13(d)(3) and these purchases could
potentially be deemed as having been undertaken by a ``group'' for the
purpose of ``acquiring'' securities as specified under section
13(d)(3).\562\ Given that a Schedule 13D filing may affect the market
for and the price of an issuer's securities, non-public information
that a person will make a Schedule 13D filing in the near future can be
material.\563\ By privately sharing this material information in
advance of the public filing deadline, the blockholder may incentivize
the market participants who received the information to acquire shares
before the filing is made.\564\ Such arrangements also raise investor
protection concerns regarding perceived unfairness and trust in
markets.\565\ The final determination as to whether a group is formed
between the blockholder and the other market participants will
ultimately depend upon the facts and circumstances, including (1)
whether the purpose of the blockholder's communication with the other
market participants was to cause them to purchase the securities and
(2) whether the market participants' purchases were made as a direct
result of the information shared by the blockholder.
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    \562\ While each group member individually bears a reporting
obligation arising under Rule 13d-1(k)(2), a tippee would not become
a member of a group, and thus would not incur a reporting
obligation, until it makes a purchase of securities of the same
covered class in response to having been tipped even if the tippee
already is a beneficial owner of that class.
    \563\ See Alon Brav, Wei Jiang, Frank Partnoy, and Randall S.
Thomas, Hedge Fund Activism, Corporate Governance and Firm
Performance, 61 J. Fin. 1729 (2008) (finding on average an abnormal
short-term return of 7% over the window before and after a Schedule
13D filing); Marco Brecht, Julian Franks, Jeremy Grant, and Hammes
F. Wagner, The Returns to Hedge Fund Activism: An International
Study, Center for Economic Policy Research, Discussion Paper No.
10507 (Mar. 15, 2015).
    \564\ See, e.g., Susan Pulliam, Juliet Chung, David Benoit, and
Rob Barry, Activist Investors Often Leak Their Plans to a Favored
Few, Wall St. J. (Mar. 26, 2014), available at https://www.wsj.com/articles/SB10001424052702304888404579381250791474792 (``Activists,
who push for broad changes at companies or try to move prices with
their arguments, sometimes provide word of their campaigns to a
favored few fellow investors days or weeks before they announce a
big trade, which typically jolts the stock higher or lower.'').
    \565\ For example, any near-term gains made by these other
investors attributable to information about the impending filing may
cause uninformed shareholders who sell at prices reflective of the
status quo to question the efficacy of existing regulatory
framework. Even though the demand to acquire shares in the covered
class may increase as a direct result of the blockholder's
communications, and in turn increase the prices at which selling
shareholders exit, such prices may be discounted in comparison to
the price such shareholders would have realized had the information
about the impending Schedule 13D filing been public. See, e.g. John
C. Coffee, Jr. & Darius Palia, The Wolf at the Door: The Impact of
Hedge Fund Activism on Corporate Governance, 41 J. Corp. L. 545, 596
(2016) (explaining that ``the gains that activists make in trading
on asymmetric information--before the Schedule 13D's filing--come at
the expense of selling shareholders [and] represent[ ] another
wealth transfer''). Consequently, this informational imbalance
could, to the extent some perceive it to be unfair, diminish trust
in markets. See, e.g., Georgy Chabakauri et al., Trading Ahead of
Barbarians' Arrival at the Gate: Insider Trading on Non-Inside
Information (Colum. Bus. Sch. Rsch. Paper, Jan. 2022), available at
https://ssrn.com/abstract=4018057 (finding a significant concurrence
between purchases of stock by insiders of the issuer and purchases
by an activist in the 60 days, and particularly in the last 10 days,
preceding a Schedule 13D filing).
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2. Proposed Rule 13d-5(b)(1)(iii) and (b)(2)(ii)
a. Proposed Amendments
    The Commission proposed to amend Rule 13d-5 to expressly impute
acquisitions made by a group member after the date of group formation
to the group once the collective beneficial ownership among group
members exceeds five percent of a covered class.\566\ Specifically,
proposed Rule 13d-5(b)(1)(iii) would provide that a group under section
13(d)(3) will be deemed to have acquired beneficial ownership of equity
securities of a covered class if any member of the group becomes the
beneficial owner of additional equity securities of such covered class
after the date of the group's formation. Similarly, proposed Rule 13d-
5(b)(2)(ii) would contain nearly identical language, with conforming
changes to address circumstances in which a member of a group under
section 13(g)(3) becomes the beneficial owner of additional equity
securities of a covered class after the date of the group's formation.
The Commission noted that absent an express provision that would treat
post-formation acquisitions of beneficial ownership by group members as
acquisitions by the group, the Commission or other affected parties
must prove the acquisition is attributable to the group.\567\
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    \566\ As the Commission noted, groups may form at a time when a
class of equity securities is not yet registered under section 12 or
the aggregate beneficial ownership held by the membership in the
group on the date of its formation is 5% or below of a covered
class. See Proposing Release at 13870. Expressly capturing post-
formation acquisitions of beneficial ownership by group members
therefore can become important for purposes of assessing whether a
group intentionally tried to evade the reporting process,