Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 require certain market participants to file reports with the SEC. The reporting obligations under sections 13(d) and 13(g) generally focus on the concept of “beneficial ownership” and depend upon numerous factors, including the class and amount of securities acquired, and the purpose and intent with which the particular position is held. Generally, any person (including any entity) who is the “beneficial owner” of more than 5% of any class of equity securities, as defined in Rule 13d-1(i) of the Exchange Act, is subject to the beneficial ownership reporting requirements of section 13(d) of the Exchange Act.
Definition of “Beneficial Owner”
Beneficial ownership is defined in Rule 13d-3 under the Exchange Act. A person is deemed to beneficially own a security if they, whether directly or indirectly, has sole or shared voting or investment power with respect to the security. “Investment power” includes the power to dispose of, or direct the disposition of, the security. Generally, the right to vote on corporate matters (such as mergers) is deemed voting power. Indirect beneficial ownership is generally found in situations where a person is able to control the decisions of the direct beneficial owner. Aggregation of beneficial ownership and group status a person may have direct or indirect beneficial ownership of a security. The general rule is that a parent company will be attributed with indirect or shared beneficial ownership of any shares beneficially owned by its subsidiaries, and therefore is deemed a beneficial owner of those securities for purposes of section 13(d).
Moreover, persons who agree (whether in writing or not) to act together with respect to acquiring, holding, voting, or disposing of the issuer’s securities (for example, in the case of a shareholders’ agreement) are deemed to be members of a “group” for section 13(d) beneficial ownership reporting purposes. Once a section 13(d) group is formed, each individual member is deemed to beneficially own the securities held by the other members of the group. Thus, a person who only individually beneficially owns 1 % of an equity security but who enters into a voting agreement with twenty other such 1 % owners of equity securities of that same class would, for purposes of the reporting requirements, be deemed to beneficially own 21% of the subject securities (as would every other party to the voting agreement).
Discretion
A firm is deemed to beneficially own the securities held in any account over which the firm has discretion (that is, discretionary accounts). A firm may further be deemed to beneficially own securities held in non-discretionary accounts to the extent the investment adviser has or shares de facto authority to direct the voting or disposition of the securities held in the nondiscretionary account. De facto control is established when the client routinely follows the firm’s advice because the client is unable to evaluate the recommendations and to exercise independent judgment.
Schedule 13D
Schedule 13D is commonly referred to as a “beneficial ownership report.” When a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a Schedule 13D with the SEC. Depending upon the facts and circumstances, the person or group of persons may be eligible to file Schedule 13G, an abbreviated form of Schedule 13D.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.
