Rare Icahn and Ackman agreement: keeping the status quo in investment disclosure rules

February 12, 2013
February 12, 2013

One of the few things activist investors Carl Icahn and Bill Ackman agree on is not wanting to see US regulators change current rules on how soon shareholders have to alert the public about stock accumulated in a public company, which a powerful corporate law firm has proposed revising.

The Securities and Exchange Commission is slated to soon unveil its discussion topics and solicit public comment on a proposed change to the current 13D filing regulations, which could substantially decrease the time investors have to report their holdings in a company once they hit a 5% ownership threshold from 10 days to one day. The discussion topics will likely show which way the SEC is leaning on the proposal.

The current system is used by hedge funds and activist investors like Icahn and Ackman—who have battled each other on TV, in lawsuits and investments—to stealthily build up a stake in a firm before they have to go public.

If the SEC looks like it agrees with the proposed change, opponents say it will help entrench management and be a disincentive for investors to get involved in companies they see as needing an overhaul because the risk won’t match the potential financial profit.

In 2011, law firm Wachtell, Lipton, Rosen & Katz filed a petition to the SEC suggesting the shortening of the 10 days to one day. Wachtell is known for representing corporations against activists and takeover defense situations.

The law firm argued that the current rules for 13D filings allow for “market manipulation” because an investor could build a stake substantially larger than 5% during the 10-day window they have to report their holdings. That ability potentially allows that particular investor to reap big profits, and hurts other investors who don’t know about the stake build up and sell their shares in that time frame, Wachtell argued. The law firm pointed to the example of Ackman’s Pershing Sqaure build up in JC Penney reaching a 16% stake before he had to file a 13D disclosure in 2010, on which he made $490 million in less than a year into his investment.

Typically when an investor like Ackman reports a 13D stake in a company, the stock for that firm goes up because shareholders anticipate a breakup, sale or other major change that could bring more value to the shares. Activist shareholders like Jana Partners and Pershing Square argue they are taking on the financial risk of investing in an ailing company and a profit incentive is needed for them to take on that role.

Jana and Pershing Square teamed up with large asset managers like BlackRock and big pension funds like the California State Teachers’ Retirement System to fight the proposed change and lobbied the SEC to maintain the status quo.

Another proposed rule change could have similar impact if it goes into effect. The New York Stock Exchange, along with two other groups, filed a petition on Feb. 1 to the SEC to change the reporting rules for many investors from 45 days to two days after the end of a quarter. Investors who have a portfolio totaling at least $100 million have to publicize their holdings through a 13F filing within 45 days of the last day of a quarter.

The NYSE group is also suggesting that 13F filers should report their holdings on a monthly basis instead of a quarterly one, arguing that technological advancements make the longer reporting period unnecessary. Opponents of the rule say it’s not about the technology, but balancing the burdens of reporting versus the benefits.

It’s worth noting that the SEC takes a notoriously long time before making changes to regulations. It’s taken the SEC two years to decide to solicit public comment on the proposed 13D rule change. It will be even longer before the SEC decides what to do.

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