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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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 rules548 (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).
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 predecessor549 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
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.
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