SEC disclosure changes press activists to reveal big stakes faster

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Hedge funds and other activist investors looking to sway US public companies will have to report large stakes they have built within five days rather than 10, in the first overhaul to disclosure timelines in decades.

The rules adopted by the Securities and Exchange Commission on Tuesday will apply to investors amassing stakes of more than 5 per cent in a company. The SEC said its reporting timelines for investors with and without the intent of influencing control of a business had not been amended since 1968 and 1977 respectively.

The rules, which come as the SEC heightens scrutiny of the ballooning private funds industry, will most heavily affect activist investors such as Elliott Investment Management and Trian Partners. Shorter deadlines could hamper such investors’ ability to build stakes above the 5 per cent mark in secret and diminish the profits they often gain once their positions become public.

The SEC said the updated disclosure process was aimed at informing investors and the market more quickly in the wake of technological changes that have swept across Wall Street in the intervening decades. 

“Frankly, these deadlines from half a century ago feel antiquated,” Gary Gensler, SEC chair, said in a statement. “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.”

The agency has halved the deadline for investors with “control intent” to reveal a stake of more than 5 per cent to five business days. Such investors will have to file disclosure amendments within two business days, up from the one business day the SEC initially proposed. 

The rules have also shortened deadlines for investors with no “control intent”, such as qualified institutional investors. These must now report significant stakes within 45 days after the end of a calendar quarter rather than a calendar year. Passive investors, meanwhile, must make disclosures within five business days, down from 10.

The SEC said it would extend its “cut-off” filing times from 5:30pm to 10pm Eastern Time to “ease filers’ administrative burdens”.

Under the rules, investors crossing the 5 per cent threshold will now have to disclose all their interests in a company, including security-based swaps, which is how activist investors tend to build stakes secretly. 

In a letter opposing the SEC’s initial proposal, Elliott Investment Management last year said the measures would “[harm] shareholder activism” and accused the regulator of “deploy[ing] disclosure as a weapon against activists”.

But Stephen Hall, legal director and securities specialist at Better Markets, a financial reform advocacy group, on Tuesday said the final rule was a “welcome step” that would “increase transparency and fairness for all market participants”.

Additional reporting by Brooke Masters in New York