Once an investor acquires at least 5 percent of a company’s stock, the investor currently has a 10-day window to announce their holdings to the Securities and Exchange Commission (SEC) per a 1968 regulatory rule. However, some officials believe that delay can lead to leaks, and they are pushing the SEC to change the disclosure time.
Following a Wall Street Journal investigation into the tactics of activist investors, some insiders have taken exception with the 10-day window. According to these officials, activist investors can “leak” their plans to certain favored investors, who can then act on the knowledge before it needs to be reported.
“The SEC’s job is to promote market fairness for all investors,” said Sen. Charles Grassley (R.-IA) on the Judiciary Committee. “If the rules don’t reflect how the markets work today and allow some investors an unfair advantage over others, the agency needs to update those rules,” he said, according to the WSJ. Otherwise, they can “become obsolete and lead to potential market unfairness.”
One proposed fix to this plan, submitted to the SEC in 2011 by law firm Wachtell, Lipton, Rosen & Katz, is to cut the 10-day window to one. This way, the firm said, the SEC could cut down on “market manipulation and abusive tactics.”
Although current SEC Chairman Mary Jo White has not publicly commented on the proposed changes, past SEC leadership sees revamping the rules as a good idea. Former SEC Chairman Mary Schapiro told the WSJ on March 27 that the 10-day rule was “a perfect candidate for modernization and rethinking.” She also said in 2011, “We think it’s important to modernize our rules, and we are considering whether they should be changed in light of modern investment strategies and innovative financial products.” She said she did not have time to change the rule during her tenure because of the issues surrounding Dodd-Frank.
According to Schapiro, activist investors in opposition to rule changes argue that “there is no evidence that changes in trading technologies and practices have led to significant increases in predisclosure accumulations of large ownership stakes.”
Activist investors have been taking a lot of heat recently. On March 27, SEC Commissioner Daniel Gallagher called for changes in the SEC’s policy with activist investors, and Delaware Chief Justice Leo Strine proposed that activist investors be forced to pay a fee every time they attempt to submit a proposal.
For more on corporate governance and what in-house counsel need to know, check this out: