SEC Requires Faster Disclosure for Activist Funds

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The Securities and Exchange Commission (SEC) may soon require hedge fund managers to disclose more quickly the holdings they have in the companies whose management they are trying to influence.

Currently, activist investors must submit a public Schedule 13D filing to the SEC within 10 days of owning more than 5% of the stock of a public company when they have plans to communicate some strategic option for the company.   However, the regulator may cut the required number of days.

Although, it is unclear how much the SEC would seek to cut the filing time to, the regulator believes that giving activists 10 full days may be outdated, since it has been in place for over 40 years.    The current reporting requirement may provide opportunities for investors to obtain a sizeable stake in the company before they are obliged to make any public disclosure.

According to some experts, any reduction would hurt activist funds and help the companies targeted by them.     A smaller window would make it harder for hedge funds and others to acquire large stakes in companies and give those targets extra time to prepare a counterattack.

In other words, if someone has a large position and intends to make change at the company, the sooner the company knows about it the more effective they are in their response campaign.      When an activist is pressing for changes, a few extra days or even hours and minutes can have an enormous impact because it gives the companies additional time to prepare.     

In addition, other existing or potential shareholders would like to know that a large investor plans to launch an activist campaign so they can buy into the stock, which is likely to rise in price after the public filing.    Or investors in a particular company may be more reticent to sell their shares knowing that a large activist investor is seeking to buy them.

On the other hand, shorter time period to file could create additional costs for activist investors and add complications to an already complex SEC filing.    All this may discourage some campaigns by frequent and occasional activist investors.

Also, it will make a complex filing difficult to put together accurately on a timely basis.     When 13Ds filling becomes more difficult, it will most likely make a bigger hassle for hesitant value investor activists.    Consequently, less people will chose to be activists, which might be damaging to the investment marketplace.     

The clear implication is that it will make it more difficult for an activist to build a 5% position if he has price targets.   In addition, it will likely encourage more use of option-related strategies that some funds use.

Anna Timone (195 Posts)

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