The SEC recently settled an enforcement action against a private fund manager (the Sponsor) wherein the Sponsor was charged with violations of Section 13(d)(2) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 13d-2 thereunder for failing to update a Schedule 13D filing in a timely manner.1
The Sponsor, on behalf of funds it managed, acquired approximately 7% of a public company’s outstanding common stock and filed a Schedule 13D with the SEC in July 2016 (the 2016 filing). The 2016 filing stated that the acquisition was for “investment purposes” and that based on discussions with company management, the funds could “explore a possible acquisition or restructuring” of the company. In response to Item 4(a) of Schedule 13D, which requires a filer to indicate whether there is a plan or proposal to dispose of the securities, the funds stated that they did not have any such plan, although they generally reserved the right to do so. No transaction ultimately occurred, and by June 2019 the Sponsor decided to dispose of its entire position through two large sales in July and August 2019. The Sponsor filed a Schedule 13D amendment on behalf of the funds reflecting the sales on September 6, 2019.
Section 13(d)(2), together with Rule 13d-2 thereunder, require persons who have filed a Schedule 13D to publicly disclose any material change to facts reported within the schedule by promptly filing an amendment. The SEC considers material changes to include (i) the sale of 1% or more of the outstanding securities subject to a Schedule 13D and (ii) a filer’s change in stated investment intentions. The SEC found that the Sponsor should have promptly filed an amendment to the Schedule 13D to reflect the change in intent when it abandoned its efforts to acquire the company and determined to sell its position. In addition, the 2016 filing should have been amended to reflect the sale of 1% or more of the company’s outstanding common stock when the Sponsor conducted the first block sale on July 1, 2019. The Sponsor eventually filed a Schedule 13D amendment on September 6, 2019, more than two months after its decision to liquidate its holdings and the initial block sale.
While the Sponsor had compliance policies and procedures in place to seek to ensure that Schedule 13D filings were made in a timely manner, the employees responsible for such filings had come to rely on outside counsel to identify when such filings were required. Because outside counsel had not been retained during the process of selling the stake in the company, the Sponsor employees neglected to consider whether amendments were needed.
As a result of the settlement, the Sponsor was ordered to cease and desist from further violations of Section 13(d)(2) and Rule 13d-2 and paid a $100,000 civil penalty.
In light of this action, fund managers should review their internal policies and procedures to make sure they have sufficient processes in place to identify circumstances requiring Schedule 13D and other Exchange Act filings.