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By Yin Wilczek
April 16 — Three transparency advocates have called on Congress to amend the federal securities laws to shorten the 10-day beneficial ownership reporting requirements.
In an April 15 letter addressed to the chairmen and ranking members of the House Financial Services Committee and the Senate Banking Committee, the groups charged that the current rules allow “activist investors to secretly buy large stakes in companies before initiating hostile take overs, depriving the market of material information and significantly disadvantaging ordinary investors.”
To forestall such activity, Congress should reduce the reporting window from 10 days to one, said the groups—the Citizens for Responsibility and Ethics in Washington, the Government Accountability Project and New Rules for Global Finance.
There also should be a two-business day “cooling-off period” following the public filing on an initial Schedule 13D, during which “acquirers would be prohibited from acquiring additional beneficial ownership,” the groups told the lawmakers.
Given that the Securities and Exchange Commission “has demonstrated no inclination to act, Congress should hold hearings on this issue and draft legislation codifying these changes into the law,” the groups said.
SEC spokesman John Nester declined to comment.
Section 13(d)(1) of the 1934 Securities Exchange Act requires those who acquire beneficial ownership of certain securities to file a disclosure statement with the SEC within 10 days of the acquisition. Section 929R of the Dodd-Frank Wall Street Reform and Consumer Protection Act allows the SEC to shorten the 10-day disclosure period if it deems it necessary.
There is a pending rulemaking petition from Wachtell Lipton Rosen & Katz LLP dating back to March 2011 asking the SEC to shorten the reporting deadline. Officials from the SEC Division of Corporation Finance have acknowledged that the beneficial ownership reporting rules are outdated, and then-chairman Mary Schapiro had intended a broad review of the requirements in 2012 but the initiative was pushed to the backburner by mandated rulemakings.
A senior official from Corp. Fin. said last year that although it is not an active rulemaking, the staff continues to mull a possible update of the rules.
This issue has been around for years and is not something that the SEC likely will act upon any time soon, John Olson, a Washington-based partner in Gibson Dunn & Crutcher LLP, told Bloomberg BNA.
While Wachtell has actively pushed for a shortening of the 10-day window, “activist investors and investor advocacy groups and some academics who believe that activists provide a valuable check on management argue that the reporting delay, which allows accumulations often well above 5 percent between the time the threshold is crossed and the time of filing, is beneficial because it allows activists to build bigger positions without notifying the market and increasing their cost of acquisition,” Olson noted.
“The SEC is caught in the middle and will take its time in coming to a conclusion,” he added.
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The letter is available at http://www.citizensforethics.org/page/-/PDFs/Legal/Letters/4-15-15-10_Day_Rule_Banking_Letter.pdf?nocdn=1.
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