Activists could ‘go dark’ under new rules
The SEC has proposed threshold for disclosing equity positions should be increased 35-fold to $3.5bn
Do companies deserve to know who their shareholders are?
Ever wonder how people seem to know which kind of stocks investing legends like Warren Buffett own?
Well, the majority of that information comes from disclosures made to Wall Street’s top watchdog.
At the end of every quarter, asset managers who own more than $100m in US equities have to submit something called a 13F filing to the Securities and Exchange Commission. It’s pretty much the only insight we get, at least publicly, on how big investors are positioned.
The details are limited — there is no information on when the stock was acquired or at what price — and the disclosures are made public with a 45-day delay. But it’s something. Groups from academics, to researchers and smaller investors, rely on 13Fs and entire new industries have emerged that are based on these quarterly filings.
Perhaps more importantly, public companies themselves use 13F disclosures to see who their shareholders are and whether any activist hedge funds — say Paul Singer’s Elliott Management or Nelson Peltz’s Trian Partners — are building stakes.
Now the majority of that information is about to disappear. The SEC, under chairman Jay Clayton, has proposed that the threshold for disclosing equity positions should be increased 35-fold to $3.5bn, the first time this would be done since 13Fs were introduced over four decades ago.
Why? The regulator gave a couple of reasons, neither of which people in the industry are really buying. One is that it would remove the burden from smaller managers and save them money. The second is to reflect how much the value of the US equity market has grown — from $1tn in 1975 to more than $35tn today.
But if the SEC wanted to do that, some have questioned why it didn’t adjust for inflation, which would have brought the threshold up to about $450m.
When the proposal was announced earlier this month, it provoked an instant backlash from regulatory experts and lawyers.
Allison Herren Lee, the sole Democratic commissioner on the SEC’s panel of four, told DD’s Ortenca Aliaj that the regulator should have developed a better understanding of how 13F disclosures were used, and by whom, before recommending such a drastic step.
Others have raised concerns about how companies can be expected to interact with shareholders when they don’t know who they are. Under the proposed rules, companies will lose access to 90 per cent of investors. That includes activists who might be pushing the board to make changes.
Perhaps the best example is, Starboard Value. The activist manages about $6bn but it has, at points, overtaken Elliott, one of the world’s best-known and most feared investors, in new campaigns. At the end of March, Starboard had $2.5bn invested in US equities, which would make it exempt from having to report its positions.
The proposal is now open to public comments. And so far the feedback is overwhelmingly against the new rule (though, we have to take those with a pinch of salt). If adopted, legal experts say most activists will be able to “go dark”. Read the full story here.