The U.S. Securities & Exchange Commission and other market regulators confront a challenging issue: How to effectively monitor and regulate activity in an environment that is both fast-moving and highly complex? The principles and architecture of the Securities Exchange Act of 1934 were created for a much simpler financial world—an analog world—and they struggle to describe and contain the digital world of today. The lightning speed of information flow and trading, the constant innovations in financial products, and the increasing sophistication of active market participants each pose enormous challenges for the SEC; together, even more so. The ongoing controversy over §13(d) reporting exemplifies the many challenges facing the SEC in this regard.
In 2011, then-SEC Chair Mary L. Schapiro announced a broad review of the beneficial ownership rules governing the ownership reporting requirements for equity securities.1 The SEC had been formally petitioned that year to update the Schedule 13D reporting requirements to shorten the reporting window—specific authority for which had been provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010—and broaden the definition of beneficial ownership.2 Unfortunately, §13(d) reform was delayed by the overwhelming volume of rulemaking required under Dodd-Frank.3 A recent letter to Congress signed by several ethics and watchdog groups renewed the call for intervention by lawmakers on this important issue.4 Though the requirements of §13(d) related to the timing of required disclosure unfortunately appear unlikely to be revised in the near future,5 the SEC appears to be keenly aware of the rules’ regulatory shortcomings. The SEC announced eight settlements of §13(d) enforcement actions in March 2015, and it is reportedly investigating a number of situations in which activist funds appear to have informally coordinated their market activity. Section 13(d) is an essential tool for promoting transparency and market integrity. While judicious enforcement in the short term may be helpful, comprehensive reform should be accomplished as soon as practicable.
