A group of Wachtell, Lipton, Rosen & Katz partners believes the U.S. Securities and Exchange Commission is dragging its heels on making changes to its reporting rules that could rein in activist investors.
Since a group of Wachtell partners led by litigator Theodore Mirvis first petitioned the SEC three years ago seeking a change to the agency’s rules on beneficial reporting, “activist hedge funds have grown more brazen in exploiting the existing reporting rules to the disadvantage of ordinary investors,” Mirvis and fellow partners Andrew Brownstein, Adam Emmerich, David Katz, and David Karp wrote in a post on the Harvard Law Forum on Corporate Governance and Financial Regulation.
Specifically, the Wachtell lawyers want to see the reporting deadline of 10 days be shortened and the definition of what constitutes beneficial ownership expanded.
“We believe that the current narrow definition of beneficial ownership and the 10-day reporting lag after the Section 13(d) ownership reporting threshold is crossed facilitate market manipulation and abusive tactics,” Mirvis and colleagues wrote in their 2011 rulemaking petition to the SEC.
In their post, “Activist Abuses Require SEC Action on Section 13(d) Reporting,” Mirvis and his fellow partners point to a recent Wall Street Journal story that highlighted some of the issues reside within beneficial ownership filings. One example: When a hedge fund exploits negative news about a company to acquire its shares on the cheap, then relays word of its investment to others who can also invest in the 10-day period—before the hedge fund’s original investment becomes public and stock prices inevitably rise.
“In an era of high-frequency trading,” Mirvis and colleagues write, “the 10-day reporting window adopted by the Williams Act in 1968 simply makes no sense. It is time for the SEC to act on our petition to shorten the reporting window to one day, to adopt a ‘cooling-off period’ of two business days following the public filing of an initial Schedule 13D, during which acquirers would be prohibited from acquiring additional beneficial ownership, and to modernize the definition of “beneficial ownership” under the Section 13 reporting rules to prevent activists from acquiring significant influence and control using a variety of stealth techniques and derivative instruments to evade Section 13D reporting requirements.”