NIRI Opposes FTC Proposal 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 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 "de minimis" (under 10 percent of a company's securities) 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 notification rules, provided that they are not significant investors in a competitor or business partner of the target company. 

This FTC proposal would have a negative impact on mid-cap and 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 ownership threshold under the SEC's Schedule 13D rules. The FTC rule change and the loss of this early-warning mechanism for companies is especially troubling, given that the 13D rules, which have not been updated in more than 40 years, contain numerous loopholes that enable activists to form “wolf packs” and use derivatives to conceal their positions and avoid triggering the 13D threshold. Even after obtaining a 5 percent stake, an activist can continue to secretly acquire a company’s shares for another 10 days before disclosure. NIRI has endorsed U.S. Senator Tammy Baldwin’s "Brokaw Act" bipartisan legislation to modernize the 13D rules by reducing the 10-day filing period to four business days and by closing the loopholes for derivatives and wolf packs.   

NIRI has submitted a comment letter that opposes the FTC's proposal. NIRI thanks the four NIRI chapters and seven issuers that joined this letter. 

 

Retail Investors Call for 13F Reform

On January 29, 2021, retail investor Pawel Chomicki posted a petition on Change.org that urges the SEC to modernize its 13F rules and require the disclosure of short positions. For more on this petition, please see this IR Magazine article. Among the signers are Reddit users who have mobilized to buy up shares in GameStop, AMC Entertainment, and other companies shorted by hedge funds.

 

Clayton: No Plans to Finalize 13F Proposal 

On Nov. 17, 2020, Chairman Jay Clayton confirmed that the U.S. Securities and Exchange Commission has no plans to finalize the SEC's controversial 13F proposal before he leaves the agency at the end of the year. Clayton's acknowledgment came during questioning at a hearing before the U.S. Senate Banking Committee.  
 
Bloomberg News, citing people familiar with the matter, reported on October 27 that the SEC was planning to withdraw its proposed amendments to its Form 13F disclosure rules. 
 
NIRI is pleased to hear that the SEC has listened to the nearly unanimous views of the hundreds of issuers, investors, and associations that objected to this proposal. Overall, the SEC received more than 2,260 comments and letters on 13F; 99 percent opposed the SEC's proposed amendments, according to Goldman Sachs.   

In particular, NIRI thanks the 250 public companies, 28 counseling firms, and five other associations that signed on to NIRI letters opposing these proposed rules. Those letters can be found here and here. The 250 issuers that participated in this effort have a combined market capitalization of almost $3 trillion. NIRI also was joined by 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.

Under the SEC's proposal, the minimum threshold for 13F disclosure would have increased 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 have been excused from providing disclosure.

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 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

Resources

Ryan Flugum, Choonsik Lee, and Matthew E. Souther, "Shining a Light in a Dark Corner: EDGAR Search Activity Reveals the Strategically Leaked Plans of Activist Investors," June 2020.

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)