he SEC recently settled charges against multiple portfolio managers and advisory firms (each, a “Respondent”) for failing to properly disclose beneficial ownership information under Section 13(d)1 and Section 16(a)2 of the Securities Exchange Act of 1934 (the “Exchange Act”) in connection with a series of joint shareholder activist campaigns relating to various issuers. The SEC alleged that one or more of the Respondents failed to:
- file a Schedule 13D to supersede its previously filed Schedule 13G after engaging in a campaign to change the composition of an issuer’s board of directors and add select directors;3
- disclose in Item 4 of Schedule 13D the shareholder group’s plan, as discussed in numerous emails, for an issuer to sell off an existing line of business;4
- file a timely Schedule 13D despite verbally agreeing to a shareholder group agreement;5
- file or amend its Schedule 13D to disclose the formation of a group after collaborating on a plan to replace an issuer’s entire board of directors with representatives of the group6 and
- disclose the formation and membership of a group on Schedule 13D with respect to an issuer after sharing proprietary research, strategizing to change the issuer’s corporate governance, drafting proxy-solicitation materials and engaging in efforts to be appointed to the issuer’s board of directors.
The Respondents were censured and agreed to pay civil money penalties ranging from $30,000 to $180,000 in settling these charges.
S&K Observations
In light of these settlements, beneficial owners of shares of an issuer are reminded to carefully analyze whether the nature of their beneficial ownership of shares and activity with other beneficial owners with respect to the issuer require timely disclosure of their beneficial ownership, the formation of a group and the purpose of the group’s acquisition or holding of shares under Sections 13 and 16 of the Exchange Act.
______________________________________________________
1 Section 13(d) of the Exchange Act and the rules thereunder require any person or group who directly or indirectly acquires beneficial ownership of more than five percent of certain equity securities to file a statement with the SEC on Schedule 13D, within ten days, disclosing information relating to such beneficial ownership, including the identity of the group’s members and the purpose of the group’s acquisition.
2 Section 16(a) of the Exchange Act and the rules thereunder require any person or group who directly or indirectly acquires beneficial ownership of more than ten percent of certain equity securities to file a statement with the SEC reporting such ownership and changes in ownership.
3 The Respondent’s Schedule 13G filings stated that the shares were “not held for the purpose or with the effect of changing or influencing the control of the issuer.”
4 Instead, the Respondents’ Schedule 13D filings contained an identical standardized disclosure paragraph that the group “may discuss ideas [with one or more stockholders, officers, or directors of the issuer] that, if effected may result in…an extraordinary corporate transaction involving [the issuer] and/or other changes in the board of directors of [the issuer], its operations or its corporate structure.”
5 According to the SEC’s order, the group waited six weeks to execute the shareholder agreement and file a Schedule 13D to “give our team more time to buy stock” and provide the issuer “much less time to do defensive measures to thwart us.” The SEC also alleged that a Respondent was late in filing Form 3 and Forms 4.
6 The SEC also found that certain of the Respondents failed to file a timely Form 3 and Forms 4.
______________________________________________________
If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.
Seward & Kissel Regulatory Compliance (SKRC) offers comprehensive compliance consulting services. Please contact any of the attorneys listed below to learn more about SKRC.
