FTC Seeks to Exempt Activists From Notice Rules

On September 21, 2020, the Federal Trade Commission (FTC) voted 3-2 to propose changes to its notification rules for significant stock transactions under the Hart-Scott-Rodino (HSR) Act. Currently, activist fund managers are required to provide advance notice to the FTC if they intend to purchase more than $94 million in voting securities in a public company. The HSR rules now exempt planned purchases by passive funds that are solely "for the purpose of investment," provided that the investor has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” The FTC is proposing to exempt activist funds from the HSR rules, provided that they don't purchase more than a 10 percent stake or are significant investors in a competitor or business partner of the target company. The proposed FTC rules are subject to a 60-day comment period.

This rule change would have a negative impact on larger issuers, which can learn through the HSR notification process about an activist fund's plans to acquire a significant stake before the activist crosses the 5 percent Schedule 13D threshold.  


SEC Proposes to Reduce 13F Transparency

On July 10, 2020, the U.S. Securities and Exchange Commission voted to propose amendments to its Form 13F disclosure rules, which would dramatically reduce the number of hedge funds and investment managers that have to report their holdings after each quarter. Under the proposal, the minimum threshold for 13F disclosure would increase by 35 times from $100 million in U.S. equities under management to $3.5 billion. As a result, 4,500 fund managers overseeing $2.3 trillion in assets (or 89 percent of current filers) would no longer have to provide disclosure.

Small and mid-cap issuers, which typically have more smaller fund managers owning their stock, would be more severely impacted by this rule change. For more details on this proposal, please see these FAQs.  

The SEC's proposal does not include of any of the much-needed reforms that NIRI, NYSE, Nasdaq, and other organizations have called for to improve transparency, such as reducing the 45-day reporting period, changing the reporting frequency to monthly, or requiring the disclosure of short positions.  

Commissioner Allison Herren Lee voted against the SEC's proposal, warning that the agency had not fully considered the impact on companies. "The proposal does not address this concern, discuss potentially reduced shareholder engagement, or balance the interests of issuers, and particularly small issuers, against the population of institutional investment managers affected by this proposal, i.e., those with discretion over between $100 million and $3.5 billion," she said, citing NIRI's arguments for reform.  

On August 28, NIRI submitted a joint issuer comment letter to the SEC that was supported by 237 public companies, which have a combined market capitalization of $2.92 trillion. This letter also included 26 IR counseling firms and five other business organizations: Nareit, the Federation of American Hospitals, the Insured Retirement Institute, the Independent Petroleum Association of America, and the Chief Executives for Corporate Purpose's CEO Investor Forum. 

NIRI urges chapters, issuers, and individual IR professionals to send comment letters to the SEC, contact federal lawmakers, and pass along concerns to industry trade groups. NIRI welcomes assistance from anyone who shares our goal of improving ownership transparency.  

If your company plans to submit its own comment letter, it should include data on the number (or the percentage) of your investors that would no longer have to provide quarterly disclosure if the threshold was increased to $3.5 billion. 

The SEC's 13F proposal is subject to a 60-day comment period, which expires on September 29. Comment letters to the SEC should reference "Reporting Threshold for Institutional Investment Managers, Release No. 34-89290; File No. S7-08-20" and may be submitted via the SEC's website at: https://www.sec.gov/cgi-bin/ruling-comments. 

Background on 13F Reporting

Public companies currently operate in an environment of great transparency governed by federal, state, and stock exchange rules and regulations, but the Form 13F ownership disclosure rules that apply to institutional investors have not been updated in decades. NIRI members have expressed overwhelming support for 13F reform in advocacy surveys in conducted in April 2020, August 2018, and August 2016.  

Current SEC rules generally require institutional investment managers to disclose their share ownership positions on a quarterly basis, with an exception made for those that petition the SEC to delay these disclosures on the basis of confidentiality. In 2013, NIRI, the NYSE Group, and the Society for Corporate Governance petitioned the SEC to shorten the 13F reporting deadline from 45 days to two business days after the end of the calendar quarter. 

NIRI also believes that the SEC should require 13F filers to provide public disclosure of their short positions. Section 929X of the Dodd-Frank Act of 2010 requires the SEC to promulgate rules obligating investment managers to publicly report short sale activity at a minimum of once every month. NIRI also believes that the benefits to investors and public companies of long-position reporting justify a similarly substantial increase of the frequency of Form 13F reporting.

NIRI has joined with the NYSE Group in filing a rulemaking petition that seeks a short-position disclosure rule. Nasdaq also has filed a rulemaking petition to require Form 13F filers to report their short positions. 

The outdated 13F reporting rules are a significant impediment to corporate-investor engagement, because companies don’t have timely information on all of their investors’ long and short positions when trying to allocate scarce C-suite or director time among competing investor requests for one-on-one meetings or calls. NIRI believes that companies need to receive more timely and frequent ownership information (ideally on a monthly basis, with no more than a four-day delay), so they can treat investors fairly and effectively manage these engagement requests. 


13D Reform

Current SEC requirements require a Schedule 13D to be filed by any investor or group of investors that becomes a 5 percent holder within 10 days after crossing the 5 percent threshold. Based on technology improvements over the last several decades and the speed at which information now flows, NIRI sees no reason for such a delay in reporting this material shareholder ownership information. NIRI believes reporting rules should be amended to reduce the reporting requirement to four (or less) days from the current 10 days. This reporting requirement should be expanded to include derivative transactions.

In 2017, Senator Tammy Baldwin (D-Wisconsin) introduced a bipartisan bill that sought a four-day filing period under 13D and tighter restrictions on the ability of activist hedge funds to hide their ownership stakes and collude as "wolf packs." NIRI encourages public companies and NIRI chapters to write letters to lawmakers in support of 13D reform. A letter template for public companies that wish to support 13D reform can be found here. In NIRI's 2018 Advocacy Issues Survey, 95 percent of respondents said they "agree" or "strongly agree" with these efforts to modernize the 13D rules. In July 2018, NIRI submitted a statement to the Senate Banking Committee that urges lawmakers to support 13D reform. The NIRI Houston chapter also has written letters in support of S. 1744 to Senators Ted Cruz and John Cornyn


NIRI Statement to the Senate Banking Committee (July 2018) on “Legislative Proposals to Examine Corporate Governance” (see pp. 7-10 for discussion of 13D reform) 

NIRI Houston Letter to Senator John Cornyn in Support of S. 1744 (August 2018).

NIRI Houston Letter to Senator Ted Cruz in Support of S. 1744 (August 2018).

Testimony of Darla Stuckey, President and CEO of the Society of Corporate Governance to the Senate Banking Committee (June 2018) 

Text of S. 1744 (also known as the "Brokaw Act")

Wachtell, Lipton, Rosen & Katz, "Commentary: Holding Activists and Proxy Advisory Firms Accountable?" New York Law Journal (May 2016)

Wachtell, Lipton, Rosen & Katz, Petition for Rulemaking on Schedule 13D of the Securities and Exchange Act of 1934 (March 2011)