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Congress Takes Aim at ‘Predatory’ Activist Hedge Funds

The Brokaw Act — named after the site of a Starboard Value campaign — would force investors to disclose sizable company stakes within four days of buying them, and identify when working in groups.

  • Amy Whyte

The U.S. Senate is considering new legislation to tighten regulation of activist hedge funds through increased transparency and disclosure requirements.

The Brokaw Act, a bipartisan financial reform bill introduced by Senators Tammy Baldwin (D-WI) and David Perdue (R-GA), would force individuals and mangers to file 13(d) forms within four days of acquiring more than 5 percent of a company’s shares. Currently, investors have 10 days to do so.

The legislation would also require disclosure of short positions of more than 5 percent within four days and identify coordinated groups of hedge funds, known as “wolf packs,” as a single group, basing disclosure requirements on the size of the group’s cumulative stake rather than hedge funds’ individual holdings.

“This bipartisan legislation updates Depression-era rules to address the financial abuses being carried out by activist hedge funds who promote short-term gains at the expense of workers, taxpayers, and local communities,” said Senator Baldwin in a statement Thursday. “The Brokaw Act will increase transparency and strengthen oversight of predatory hedge funds.”

[II Deep Dive: How Firms Fight Back Against Activists]

The legislation is named for Brokaw, Wisconsin. The village, Senator Baldwin’s office claims, faces insolvency after activist firm Starboard Value bought the Wausau Paper Company and closed a century-old local mill. Starboard Value “demanded short-term returns like buybacks at the expense of investments in workers, R&D, and the company’s long-term future,” the statement continued. The proposal would “fight against increasing short-termism” in the U.S. economy, Baldwin’s office added.

An earlier version of the Brokaw Act, co-sponsored by senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), was introduced in March 2016, but failed to reach a vote before the 114th Congress ended on January 3, 2017.

The Senate committee on banking, housing, and urban affairs is currently reviewing the 2017 proposal.

The Brokaw Act’s supporters include Home Depot — recently targeted by sustainable investment firm Arjuna Capital over lead paint — and the labor organization AFL-CIO.