§ 5.10 Reporting of Fund Positions

• Jurisdiction: United States
• Publication year: 2022

§ 5.10 Reporting of Fund Positions

[1]—Section 13 Reporting

[a]—Schedule 13D—Five-Percent Beneficial Owners

Section 13(d) of the Exchange Act ("Section 13") requires a "beneficial owner" that acquires more than 5% of a class of any voting, "equity securities" registered under Section 12 of the Exchange Act ("Registered Securities") to file with the SEC within ten days of any such acquisition a statement on Schedule 13D describing such acquisition and containing certain other information, including a description of any plans or proposals that the "beneficial owner" may have to influence control of the issuer. An "equity security" is defined as:

"any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust; any security future on any such security; or any security convertible, with or without consideration into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any put, call, straddle, or other option or privilege of buying such a security from or selling such a security to another without being bound to do so."⁶³⁸

[i]—Calculation of Beneficial Ownership

Under Rule 13d-3(a), "a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares" voting power and/or investment power with respect to such security. Voting power includes the power to vote, or to direct the voting of, a security, whereas investment power includes the power to dispose, or the power to direct the disposition, of a security. A manager and its principals may be deemed to be the beneficial owners of any Registered Securities held in the fund or in client accounts (and proprietary accounts) if such manager has or shares voting or investment power over the Registered Securities.

Rule 13d-3(d)(1)(i) provides that a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of that security within sixty days (or at any-time for a non-passive investor). For example, a person is deemed to beneficially own equity securities that it has the right to acquire within sixty days by virtue of: (1) the exercise of any option, warrant or right; (2) the conversion of any security; or (3) the power to revoke a trust, discretionary account or similar arrangement. One important exception to the sixty-day rule provides that any person who has a right to acquire beneficial ownership of a security with the purpose or effect of altering or influencing control of the issuer, or in connection with or as a participant in any transaction having such purpose or effect, is deemed to be a beneficial owner of the security immediately at the time of acquisition of the derivative security. Also, a person does not beneficially own Registered Securities underlying a derivative security if the right to acquire the underlying Registered Security is subject to a material contingency outside the control of such person that cannot be waived (e.g., the requirement to obtain a governmental approval or the effectiveness of a registration statement). Such a right does not create beneficial ownership even where these material contingencies could be met within the sixty-day period. Similarly, material closing conditions, the satisfaction of which are outside of the control of a purchaser, generally must be fulfilled before a purchaser of Registered Securities will be deemed to have beneficial ownership of Registered Securities.

[ii]—Formation of a "Group"

All Registered Securities of the same class beneficially owned by a person, regardless of the form of beneficial ownership, must be aggregated in calculating the number of shares beneficially owned by such person. When two or more persons agree to act together for the purpose of acquiring, holding, voting, or disposing of an issuer's securities, that group is deemed to be a "person," and the group will be deemed to have beneficial ownership of any shares beneficially owned by the members of the group. Some examples of cases where group membership has been found are where simultaneous purchases are made transactions that are identical (except for the amount), coordinated stock purchases, and purchases of stock through a common representative. It is possible that funds, their manager and the principals may be deemed to have formed a group. Funds, their manager and principals may also form a group with an unaffiliated shareholder if they agree to act together which another shareholder with respect the voting, acquisition, disposition or holding of Registered Securities. If considered a group, the Registered Securities held by the group members must be aggregated when determining whether the 5% threshold has been crossed. For this reason, communications and activities with other shareholders should be closely monitored.

To calculate its beneficial ownership percentage, a potential filer should divide the total number of shares of the Registered Securities beneficially owned (directly and indirectly) by the filer plus the total number of shares of such class of Registered Securities that the filer has the right to acquire within sixty days (or at any time for non-passive investors) (i.e., shares obtainable upon the exercise or conversion of a derivative security) by the total number of shares of such class of Registered Securities that are outstanding plus the total number of shares of such class of Registered Securities that the filer has the right to acquire within sixty days (or at any-time for non-passive investors) that are not currently outstanding.

[iii]—Amendments

After the initial filing of a Schedule 13D, the Schedule 13D must be amended "promptly" in the event of any "material change" in the facts set forth therein. "Promptly" is not defined under the rules but has been interpreted by courts in light of facts and circumstances and has generally been determined to be within two business days. An increase or decrease in a reporting person's beneficial ownership by 1% or more is deemed "material" for purposes of the Schedule 13D. An amendment must also be filed when the plans or proposals of the reporting persons materially change (e.g., from nominating board representatives to acquiring a controlling stake in the issuer) or other material information in the Schedule 13D changes.

[b]—Schedule 13G—Qualified Institutional Investors and Passive Investors

Passive investors are generally permitted to report their beneficial ownership of Registered Securities on Schedule 13G, in lieu of Schedule 13D, so long as such beneficial ownership is not acquired with the purpose, or with the effect, of changing or influencing control of the issuer; or in connection with, or as a participant in, any transaction having that purpose or effect. As in the case of a Schedule 13D, a Schedule 13G must be filed by passive investors with the SEC within ten days after the acquisition of more than 5% of a class of Registered Securities. A passive investor's Schedule 13G must be amended: (1) within forty-five days after the end of a calendar year if there are changes in the information reported in the previous filing (provided that an amendment need not be filed with respect to a change in the percent of ownership for a class of Registered Securities if the change results solely from a change in the aggregate number of shares outstanding); (2) "promptly" after a filer's beneficial ownership exceeds 10%; and (3) after filing for a greater than 10% position, "promptly" after the filer's beneficial ownership of the relevant class increases or decreases by more than 5%.

Certain types of institutional investors, including registered investment advisers, may use a Schedule 13G to report investments held in the ordinary course of business and not for the purpose, or with the effect, of changing or influencing control of the issuer; nor in connection with, or as a participant in, any transaction having such purpose or effect. In such cases, the initial filing is due within forty-five days after year-end, and is only necessary to the extent that the reporting person's beneficial ownership of the Registered Securities exceeded 5% of the relevant class as of such year-end. Notwithstanding the foregoing, to the extent such person's beneficial ownership exceeds 10% before such year-end, the person would be required to make their initial filing within ten days after the end of the month in which the 10% threshold is exceeded, computed as of the last day of the month. Persons availing themselves of these reporting provisions are also required to notify persons on whose behalf the reporting person holds, on a discretionary basis, securities exceeding 5% of the class, of any acquisition or transaction on behalf of such other person which might be reportable by that person under Section 13(d). Institutional investors filing under these provisions are required to amend their existing Schedule 13Gs: (1) within forty-five days after the end of a calendar year if there are changes the information reported in the previous filing (provided that an amendment need not be filed with respect to a change in the percent of ownership for a class of Registered Securities if the change results solely from a change in the aggregate number of shares outstanding); (2) within ten days after the end of any month if, as of the last day of that month, the filer's beneficial ownership of the relevant class exceeds 10%; and (3) after filing for a greater than 10% position, within ten days after the end of any month if, as of the end of that month, the filer's beneficial...