State Regulated Investment Managers And "Passive Investors" Will Benefit From Expanded Availability Of Schedule 13G

Rule --16a-1 is Amended For

State-Registered Investment

Managers

February 26, 1998

On January 12, 1998, the Securities and Exchange Commission ("SEC") adopted amendments to Rules 13d-1, 13d-2, 13d-3 and 16a-1 and Schedules 13D and 13G under the Securities Exchange Act of 1934 (the "Exchange Act") which greatly reduce beneficial ownership reporting obligations for two new categories of investors:

(a) State-registered investment managers; and

(b) "Passive Investors" (including unregistered investment managers).

SEC Regulation 13D (which includes Rules 13d-1, 13d-2 and 13d-3) requires every investor who acquires beneficial ownership of more than 5% of a security registered under the Exchange Act (i.e., a publicly traded security) to file a report of such ownership and of changes in holdings with the SEC. Prior to the adoption of the amended rules, only "Qualified Institutional Investors" (defined below) were eligible to use the short-form Schedule 13G to file these reports. All others were required to use the long-form Schedule 13D.

Effective February 17, 1998, in the interest of reducing the burdens of time and expense associated with filings on Schedule 13D, the SEC made the short-form Schedule 13G available to the two new classes of investors described above and relieved state-registered investment managers of their reporting obligations and short-swing profit recovery liability under Section 16 of the Exchange Act. The consequences of these amendments for state-registered investment managers and for Passive Investors are separately discussed in greater detail below.

STATE-REGISTERED INVESTMENT MANAGERS

Expanded Availability of Schedule 13G

Under Section 203A of the National Securities Markets Improvement Act of 1996 (the "Improvement Act"), only certain investment managers are eligible to register with the SEC under the Investment Advisers Act of 1940 (the "Advisers Act").¹ Prior to the adoption of these amendments to Regulation 13D, only investment managers who (i) were registered with the SEC and (ii) who could certify that they acquired registered securities in the ordinary course of business and without the purpose or effect of influencing control over an issuer have been permitted to file ownership reports on Schedule 13G as "Qualified Institutional Investors." The SEC has liberalized the filing requirements by now allowing those managers who are prohibited from registering with the SEC but who are registered under state investment adviser statutes² to file beneficial ownership reports on Schedule 13G as Qualified Institutional Investors.³ Investment managers who remain outside the Qualified Institutional Investor definition (i.e., those who are not registered with the SEC or any state regulatory agency by reason of one or more available exemptions) may, nevertheless, be eligible to use Schedule 13G as Passive Investors (see PASSIVE INVESTORS, below).

Initial Filing, Amendment and Dissemination Obligations

Filing. While the Regulation 13D amendments enlarge the group of Qualified Institutional Investors who may file on Schedule 13G, they did not significantly change the reporting obligations of Qualified Institutional Investors. Qualified Institutional Investors must file a Schedule 13G within forty-five (45) days after year-end (i.e., by February 14th) if they acquired beneficial ownership of more than 5% of a registered security during the preceding calendar year and continued to maintain such ownership at year-end. However, if beneficial ownership exceeds 10% before the end of the calendar year, an initial Schedule 13G must be filed within ten (10) days after the end of the first month in which the 10% threshold was exceeded. Prior to the Regulation 13D amendments, a state-registered investment manager would have had to file a Schedule 13D within ten (10) days of acquiring beneficial ownership of more than 5% of a registered security.

Amendment. The filing requirements for Schedule 13G amendments by Qualified Institutional Investors have, however, been changed. As before, a Qualified Institutional Investor must file an amendment to its Schedule 13G within forty-five (45) days of year-end if there are any changes in the information reported in the previous filing. Now, though, if a Qualified Institutional Investor's beneficial ownership exceeds 10%, it must file an amendment within ten (10) days after the end of the month in which the 10% threshold was crossed, and thereafter within ten (10) days after the end of each month during which ownership increases or decreases by more than 5% from that most recently reported. Thus, while Qualified Institutional Investors are now required to amend their Schedules 13G more frequently than before, Schedule 13G requirements remain far less burdensome than those that apply to Schedule 13D. Schedule 13D amendments must be filed "promptly" upon any material change in an investor's holdings, including an increase or decrease of as little as 1% depending on the facts and circumstances.

Dissemination. Regulation 13D dissemination requirements have also been relaxed. While both Schedules 13G and 13D are required to be filed with the SEC electronically under Regulation S-T, the amended Regulation 13D requires that a copy of Schedule 13G be sent only to the issuer of the security. Copies no longer have to be sent to the exchanges or NASDAQ, if the security trades there. Copies of Schedules 13D, on the other hand, must still be sent to each exchange on which the security is traded.

PASSIVE INVESTORS

Expanded Availability of Schedule 13G

The SEC has created a never-before-recognized group of investors who are eligible to report on the short-form Schedule 13G. Now, any beneficial owner of more than 5% but less than 20% of a registered security who can certify that the shares were not acquired and are not being held in order to exert control over the issuer ("Passive Investor"⁴), may utilize Schedule 13G to report his holdings. This category would include those investment managers who are eligible to register with the SEC, but relying on exemption from both federal and state registration requirements, remain unregistered,⁵ as well as those who are prohibited from registering with the SEC, and relying on exemptions from registration requirements in their home states, also remain unregistered (collectively, "unregistered investment managers"). Although unregistered investment managers and other Passive Investors will benefit from the availability of Schedule 13G, as discussed below, the reporting and amendment obligations of Passive Investors are somewhat more stringent than those of Qualified Institutional Investors.

Foreign investors may also benefit from the amendments. Prior to the adoption of the Regulation 13D amendments, non-U.S. Qualified Institutional Investors could only file on Schedule 13G if they obtained either an exemption order from the SEC or a no-action position from the Division of Corporate Finance. Now, however, these same foreign investors are free to qualify as Passive Investors and file Schedule 13G without having to obtain special permission from the SEC first. Foreign investors that would rather file Schedule 13G as Qualified Institutional Investors rather than as Passive Investors may continue to seek no-action relief from the SEC under current practices.

Initial Filing, Amendment and Dissemination Obligations

Passive Investors choosing to take advantage of Schedule 13G must file that schedule, in lieu of the more comprehensive Schedule 13D, within ten (10) calendar days after acquiring beneficial ownership of more than 5% but less than 20% of a registered security. Passive Investors will only be required to file "promptly"⁶ any amendments to their Schedules 13G (in addition to an annual report of any smaller changes to be filed within 45 calendar days of the end of the year in which such changes occurred) when their ownership of a given security exceeds 10%, and thereafter, upon any increase or decrease of more than 5%. In effect, the new rule permits Passive Investors to amend in a similar manner, but more promptly than, Qualified Institutional Investors reporting on Schedule 13G. By comparison, Schedule 13D must be amended each time there is a change in ownership of more than 1%.

As discussed in the section on Qualified Institutional Investors, Passive Investors filing on Schedule 13G will also benefit from the simplified dissemination requirements established by the Regulation 13D amendments.

MAKING THE SWITCH TO SCHEDULE 13G

Another benefit of the amended Rules is the ease with which Qualified Institutional Investors and Passive Investors may switch to the use of Schedule 13G. An investor who currently files on Schedule 13D may start to report on Schedule 13G by simply filing an initial Schedule 13G, which will be deemed an amendment to its last Schedule 13D. No separate amendment to the Schedule 13D is necessary. Conversely, should an investor lose its status as a Qualified Institutional Investor or Passive Investor by either changing its investment purpose or, in the case of Passive Investors, by crossing the 20% beneficial ownership threshold, the amended Regulation 13D requires that a Schedule 13D be filed within 10 calendar days of the event. Upon such a change in investment purpose (or an increase in holdings beyond 20% in the case of Passive Investors), a "cooling-off" period will begin and last for ten (10) calendar days from the filing of a Schedule 13D. During the cooling-off period, the reporting person is prohibited from voting or directing the voting of the subject securities or acquiring additional beneficial ownership of the issuer. If the same investor re-establishes its eligibility to use Schedule 13G, it may switch back to the use of Schedule 13G by simply filing another initial Schedule 13G.

RULE 16a-1 AMENDMENTS

Also effective as of February 17, 1998 are amendments to SEC Rule 16a-1. Rule 16a-1 provides which "beneficial owners" of registered securities must report changes in their holdings pursuant to Section 16(a) of the Exchange Act. Rule 16a-1's definition of exempt investors is identical to Regulation 13D's definition of Qualified Institutional Investors (see Footnote 3), and has been similarly amended. Accordingly, state-registered investment managers are now exempt from the reporting requirements of Section 16(a) applicable to beneficial owners of 10% or more of a registered security and from liability under the short-swing profit recovery provisions of Section 16(b) of the Exchange Act. Generally, non-exempt beneficial owners (including Passive Investors) of 10% or more of a registered security must file initial ownership reports on Form 3 and reports of changes in ownership and holdings on Forms 4 and 5, and are subject to short-swing profit recovery liability.

For more information, please contact Howard Neuman or Kristin McVeety in the firm's New York office at (212)818-9200.

Footnotes:

Eligible investment managers are those who (i) have "assets under management" of $25 million or more; (ii) advise registered investment companies; (iii) are not regulated or required to be regulated by the State in which they maintain their principal office; or (iv) meet one of several provided exemptions.
Although the SEC Release explaining the expansion of the term Qualified Institutional Investors stated that Qualified Institutional Investor status is now available to all investment managers who are prohibited from registering with the SEC (which group includes both state-registered managers and managers exempt from state registration), the text of amended Regulation 13D allows only those investment managers "registered . . . under the laws of any state" to qualify. The underlying policy continues to be that only those investment managers who have subjected themselves to either a federal or state regulatory regime may "qualify" as institutional investors and enjoy the less comprehensive reporting requirements afforded by Schedule 13G.
The amended Regulation 13D now includes as Qualified Institutional Investors, brokers and dealers registered under the Exchange Act; banks; insurance companies; investment companies registered under the Investment Company Act of 1940; persons registered as investment advisers under the Advisers Act or under the laws of any state; employee benefit plans subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), and any plans maintained primarily for the benefit of state and local government employees; a savings association as defined in the Federal Deposit Insurance Act; a church plan that is excluded from the definition of an investment company in the Investment Company Act of 1940; and certain other institutional investors.
Specifically, the SEC defines "Passive Investors" as those who "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 issuers of the securities."
For example, an investment manager with fewer than fifteen clients may be exempt from registration with the SEC even if it has more than $25,000,000 of assets under management. Many states have similar "de minimis" exemptions. In New York, for example, registration is not required unless an investment manager has forty or more clients.
The SEC has not offered a definition of "prompt" for this purpose. Schedule 13G filers must make their own determination on a case-by-case basis, depending upon the "materiality," or the impact, the change in information will have on the securities markets.