SEC Tightens 13D Disclosure Rules — And Throws Swaps Into the Mix
“In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company,” said SEC Chair Gary Gensler.
In spite of a massive lobbying blitz by hedge funds, the Securities and Exchange Commission has adopted rules changes that will accelerate disclosure of shareholder activists’ stock and swaps positions.
The amendments, which hedge funds and their allies fought for more than a year and a half, will force activist investors — at least those making a 13D filing of a 5 percent or more ownership of stock in a company — to file within five days instead of the current 10-day window. The rule change gives the hedge fund fewer days to buy shares before letting the world know it intends to push for change.
The new rules also force investors to disclose their cash-settled swaps positions for the first time. Many hedge funds, especially activists, take a portion of their stakes in swaps that will pay off if the stock rises on an activist campaign. Until now, those swaps positions never had to be disclosed.
The SEC is requiring disclosure of those swaps, in part, because observers have indicated that investors can exert influence if they pressure the counterparty to the swaps transaction — typically one of the big banks — “to make certain decisions regarding the voting and disposition of substantial blocks of securities of the reference issuer,” according to the SEC’s guidance on the rules changes.
In general, most investors filing a 13G — which is required for a 5 percent or greater stake even when the holder is not pressing for changes — will also have to make those filings more quickly. Instead of making the disclosure 45 days after the calendar year in which the passive stake is taken, investors will have to disclose such stakes 45 days after the end of the quarter.
The SEC has cast the rule changes as a “modernization” that is necessary in an age of instant communication. “Today’s adoption updates rules that first went into effect more than 50 years ago,” SEC Chair Gary Gensler said in a press release accompanying the rule changes. “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company.”
But the long lag time has benefited activists, who say that amassing enough stock at a low price is necessary to making activism profitable.
Activists have opposed the rules. When they were first proposed, Elliott Management said in a comment letter to the SEC that they “would effectively smother activism in the U.S. capital markets.”
After the rule amendments were proposed in February 2022, hedge fund lobbying groups and executives from firms, including Elliott, Third Point, Millennium Management, D.E. Shaw, PDT Partners, and Citadel, met with SEC officials to protest the changes.
In addition, a new nonprofit called The International Institute of Law and Finance-- which Institutional Investor reported as having at least one hedge fund backer (Pershing Square CEO Bill Ackman) enlisted dozens of academics to argue against the proposals.
The Managed Funds Association President and CEO Bryan Corbett said the group remained “concerned " about the SEC’s justification for narrowing the notification window, as well as the “cost-benefit analysis and guidance” regarding cash-settled derivative securities and the definition of a group.
Hedge funds are widely expected to sue the SEC over the rule.