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SEC eyes tighter disclosure deadlines for hedge funds building huge stakes in companies

The SEC plans to tighten disclosure deadlines for hedge funds

January 21, 2022: -Securities and Exchange Commission Chairman Gary Gensler said that the regulator is eyeing tighter disclosure deadlines for hedge funds building sizable stakes in companies.

The agency considers changing the rules under which hedge funds disclose that they have acquired 5% of a public company’s stock, Gensler said in a virtual Q&A at the Exchequer Club.

The so-called Schedule 13-D filing is set at ten days, which gives hedge funds over a week to keep buying in secret.

“I would anticipate we’d have something on that,” Gensler said, which that he is worried about “information asymmetry” because the public doesn’t know a big player is buying up shares during the ten days.

“Right now, if you’re crossing the 5% threshold on day one, and you have ten days to file, that activist might in that period, just go higher from five to 6%, or they might go from five to 15%, but there are nine days that the selling shareholders in public don’t know that information,” Gensler said.

The 13D disclosure rule was passed in the 1960s to protect corporate management by informing them of activities from activist shareholders and corporate raiders. In different words, big investors won’t be able to accumulate big stakes in secret to take a company without giving it a chance to defend itself.

Critics of the rule are claiming that the 10-day deadline is too tight and that hedge fund managers have a tougher time which make a profit if they must reveal their strategies to the public so soon.

“It’s material nonpublic information that there’s an activist acquiring stock, who has an intention to influence and generally speaking, there’s a pop if you look at the economics from the day they announced there’s usually a pop in the stock as single-digit percent,” Gensler said. “So the selling shareholders in those days don’t have some material information.”

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