U.S. Reporting Obligations For Owners and Traders of U.S. Securities
The following memorandum is a reminder regarding certain U.S. federal securities law reporting requirements in connection with ownership of, or exercise of investment discretion over, securities registered in the U.S. In recent years, the failure to file or update such reports has been an increasing focus of enforcement activity by the U.S. Securities and Exchange Commission (“SEC”).
Initial filing requirements commonly applicable to passive investors not involved in management or control of an issuer are summarized in the table below, with explanations of each following the table:
| Form | Who must file | Trigger | First filing deadline |
| Schedule 13G or Schedule 13D | Any shareholder | Beneficial ownership of more than 5% of a class of U.S. registered equity security | 10 days after initial acquisition |
| Form 3 | Any shareholder | Beneficial ownership of more than 10% of a class of U.S. registered equity security that is not a foreign private issuer | 10 days after initial acquisition |
| Form 13F | Any “institutional investment manager” (as defined below) | Investment discretion of $100 million or more of equity securities listed on a U.S. stock exchange | Feb. 14 to report holdings as of Dec. 31 of the prior year (if trigger reached at the end of any calendar month of that prior year) |
| Form 13H | Any “large trader” (as defined below) | Trades in U.S. listed equity securities (including options) of either (i) two million shares or shares valued at $20 million during any calendar day, or (ii) 20 million shares or shares valued at $200 million during any calendar month | Promptly |
Schedules 13G and 13D
Schedule 13G is a “short form” required to be filed within 10 days after acquisition of direct or indirect “beneficial ownership” of more than 5% of a class of equity securities registered under the Securities Exchange Act of 1934 (“Exchange Act”), which includes but is not limited to equity securities listed on a U.S. stock exchange, so long as:
• The securities are acquired and held for investment purposes only, meaning that they were not acquired “with any purpose, or with the effect, of changing or influencing the control of the issuer” or in connection with or as a participant in any transaction having that purpose or effect; and
• The investor beneficially owns less than 20% of the class of equity securities.
This filing is required irrespective of whether the issuer of the equity security registered in the U.S. is a domestic U.S. company or a foreign private issuer.
Under the rules of the Exchange Act, “beneficial ownership” of a security is broadly defined to include any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares (or the right to acquire within 60 days):
• Voting power which includes the power to vote, or to direct the voting of, such security (at a shareholder meeting or otherwise); and/or
• Investment power which includes the power to dispose, or to direct the disposition of, such security.
Due to the broad definition of “beneficial owner”, the SEC has stated that beneficial ownership by subsidiaries that hold securities generally should be attributed to the controlling parent entities. With such attribution, the holdings of a parent and its subsidiary or subsidiaries are aggregated to determine whether the 5% filing threshold has been exceeded. However, where the organizational structures of the parent and related entities are such that the voting and investment powers are exercised independently, attribution may not be required for determining whether the 5% filing threshold has been exceeded.[1]
In general, amendments to Schedule 13G must be filed annually by February 14 to report any changes in the information previously reported, or promptly upon acquiring greater than 10% of the class of equity securities, and then promptly thereafter upon increasing or decreasing its beneficial ownership by more than 5% of the class of equity securities.
In addition, a Schedule 13D (this is a “long form” requiring much more detailed disclosure) must be filed within 10 days if:
• The investor’s purpose or effect is no longer passive, but rather the investor seeks to change or influence control of the issuer or in connection with or as a participant in any transaction having that purpose or effect (followed by a 10-day cooling off period during which voting the securities or acquiring additional securities is prohibited); or
• The investor’s holdings increase to 20% or more of the outstanding shares of the issuer (followed by a 10-day cooling off period during which voting the securities or acquiring additional securities is prohibited).
In general, amendments to Schedule 13D must be filed promptly to report material changes in the information previously reported.
Forms 3 and 4
Upon becoming (i) a direct or indirect beneficial holders of more than 10% of a class of equity securities registered under the Exchange Act, or (ii) a director or officer of the issuer of such securities, a Form 3 must be filed with the SEC within 10 days reporting such person’s “pecuniary interest”[2] (or lack thereof) in such securities.
After a Form 3 has been filed, all changes in ownership thereafter must be reported on Form 4 within two (2) business days of such change.
Under the “short-swing profit rule” of Section 16, any profits realized by a 10% holder (as well as by any director or officer of the issuer of such securities) as a result of short-swing transactions (defined as any purchase or sale within six months of each other for so long as one holds 10% or remains an officer or director) are recoverable by the issuer of such securities. In addition, 10% holders, directors and officers are prohibited from selling such shares short or when the securities sold are not delivered within specified time periods.
Note that these Section 16 obligations do not apply to foreign private issuers (i.e., the forms described above need not be filed and no “short-swing profit rule” applies for holdings in equity securities of foreign private issuers registered in the U.S.)
Form 13F
A quarterly report of certain equity holdings is required on Form 13F by any “institutional investment manager” which exercises investment discretion with respect to equity securities that are listed on a national stock exchange in the U.S. if such securities have an aggregate fair market value of $100 million or more on the last trading day of any month of the preceding calendar year (with the initial quarterly Form 13F due within 45 days after the end of such calendar year).
This filing is required irrespective of whether the issuer of the equity security or option listed in the U.S. is a domestic U.S. company or a foreign private issuer. The SEC publishes a list of applicable securities each quarter which may be used to prepare Form 13F.
“Institutional investment managers” include entities that buy and sell for their own accounts (such as banks and insurance companies), and persons or entities that have investment discretion over the accounts of others (such as investment advisors and certain trustees). It does not matter whether the institutional investment manager is located in the U.S. or outside the U.S.
A parent is deemed to have investment discretion with respect to all accounts over which a subsidiary exercises investment discretion. A parent may file on behalf of a subsidiary only if the subsidiary does not have an independent filing obligation under the rules. Otherwise, both parent and subsidiary must file (with special rules so that holdings in the same securities need not be listed twice).
Form 13H
Certain “large traders” in equity securities (including options) listed on a national stock exchange in the U.S. must promptly file Form 13H (and must do so thereafter on an annual basis). A “large trader” is defined as any person or entity that directly or indirectly, including through other persons or entities which it controls, (i) exercises investment discretion over one or more accounts (including such person’s own account(s)), and (ii) conducts trades through one or more U.S. registered broker dealers in such accounts that in the aggregate meet the following daily or monthly trading activity thresholds:
• During any calendar day, trades either two million shares or shares with a fair market value of $20 million; or
• During any calendar month, trades either 20 million shares or shares with a fair market value of $200 million.
This filing is required irrespective of whether the issuer of the equity security or option listed in the U.S. is a domestic U.S. company or a foreign private issuer. The SEC will assign each large trader an identification number, which must then be provided to the trader’s broker dealers.
Form 13H itself requires information related to the large trader’s business, affiliates, other SEC filings, regulatory status, organizational structure, and the names of broker-dealers where the large trader has accounts. Form 13H does not, however, require disclosure of specific trading information. The obligation to file Form 13H is imposed on the ultimate parent company after aggregating the trading activity of all entities controlled by such parent, unless each such entity files separately. Form 13H filings are confidential and do not appear on the SEC’s public website.
A large trader must generally file its initial Form 13H promptly after effecting aggregate transactions equal to or greater than the trading activity thresholds described above, and then annually thereafter. In addition, an amendment to Form 13H is required promptly at the end of a calendar quarter in which any of the information contained in a Form 13H becomes inaccurate for any reason.
[1] SEC Exchange Act Release No. 34-39538 (Jan. 12, 1998). Whether voting and investment powers are exercised independently, according to the SEC, is based on the facts and circumstances. One circumstance in which beneficial ownership may not be required to be aggregated according to the SEC is when the entities have in place “information barriers” that ensure that voting and investment powers are exercised independently among the parent and its affiliated entities, assuming certain other conditions are met.
[2] “Pecuniary interest” is defined as “the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities.” Those who manage funds for others may be considered to have a pecuniary interest in the funds they manage if they earn certain types of performance fees.
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Please note that the above is a general summary only. SEC rules should be consulted before making a determination as to any specific circumstances that may arise. For additional information please contact Adv. Perry Wildes [perry@gkh-law.com] or any other member of our U.S. securities group.
