The SEC recently adopted rules requiring the use of "plain english" in certain sections of prospectuses and amended the rules regarding the reporting of beneficial ownership. These new rules and amendments are summarized below. If you need further information concerning these developments, please contact Rebecca Bedno or Carol Stubblefield in the New York office.
- Adoption of Plain English Disclosure Rules
The SEC recently adopted new Rule 421(d) under the Securities Act which requires the use of plain English for certain sections of prospectuses prepared by operating companies and mutual funds in connection with their public offerings. The new rule becomes effective on October 1, 1998.
Under the new rule, registrants must use plain English principles in the organization, language and design of the cover page, summary and risk factors section of their prospectuses. The plain English principles include: active voice; short sentences; definite, concrete, everyday words; tabular presentation or "bullet" lists for complex material, whenever possible; no legal jargon or highly technical business terms; and no multiple negatives.
Until the new rule becomes effective, registrants who wish to use the plain English guidelines may participate in the SEC's plain English pilot program. However, the SEC staff will no longer be able to offer expedited review of such filings in 10 days.
A complete copy of the final rule has not yet been released by the SEC, but should be available shortly. The SEC will also release a handbook, setting forth plain English disclosure guidelines, in about six weeks. We will obtain the handbook in the New York office when it is released. Please let Rebecca Bedno or Carol Stubblefield know if you would like to receive a copy.
- Amendments to Beneficial Ownership Reporting Requirements
The SEC has amended Regulation 13D-G which contains the rules relating to reporting of beneficial ownership in publicly-held companies. The short-form Schedule 13G is now available, in lieu of Schedule 13D, to investors who own less than 20% of the class of securities and who can certify that they have not acquired and do not hold the securities for the purpose of or with the effect of changing or influencing the control of the issuer of the securities ("Passive Investor"). Schedule 13G was previously available only to Qualified Institutional Investors and Exempt Investors. The amendments become effective on February 17, 1998.
Under the amended rules, a Passive Investor choosing to file a Schedule 13G must file the initial schedule within 10 days of acquiring beneficial ownership of more than 5% of a class of subject securities. A Passive Investor must amend Schedule 13G within 45 days after the end of the calendar year to report any changes in the information previously reported. In addition, in the course of the year, a Passive Investor must "promptly" amend Schedule 13G if it acquires more than 10% of a class of subject securities or increases or decreases its beneficial ownership by more than 5%.
If a Schedule 13G reporting person determines it holds the securities with a disqualifying purpose or effect or acquires 20% or more of the class of the securities, it must file a Schedule 13D within 10 days. From the time of a change in investment purpose (in the case of a Qualified Institutional Investor or Passive Investor) or the acquisition of 20% of more of the class (in the case of a Passive Investor) until 10 days after the Schedule 13D is filed, the reporting person may not vote or direct the voting of the subject securities or acquire additional beneficial ownership of any equity securities of the issuer or any person controlling the issuer.
A Passive Investor is permitted to file a Schedule 13D instead of a Schedule 13G. A Passive Investor that has lost its eligibility to file on Schedule 13G may re-establish its eligibility once it can certify that it does not have a disqualifying purpose or effect or once its beneficial ownership falls below 20%. If a Schedule 13D reporting person decides to switch to Schedule 13G, a Schedule 13G should be filed to reflect that decision. In such event, no formal amendment to Schedule 13D is required.
The amended rules expand the list of Qualified Institutional Investors who are permitted to report on Schedule 13G to include state and local governmental employee benefit plans, saving associations and church employee benefit plans. The list has also been expanded to allow control persons of Qualified Institutional Investors to report indirect beneficial ownership through the controlled entity on Schedule 13G provided certain requirements are met. The amendments do not expand the class of Qualified Institutional Investors to include foreign institutions. However, a foreign investor may file a Schedule 13G by qualifying as a Passive Investor or can continue to seek no-action relief to report as a Qualified Institutional Investor.
The rules have also been amended to eliminate the requirement that Schedule 13G be sent to the exchanges since most filings are now available electronically.
(Exchange Act Release No. 34-39538, January 12, 1998)