03/14/2012

Activist Funds on High Alert Over Rule 13D

Activist players including Jana Partners and Pershing Square are gearing up to counter tentative moves by the SEC to shorten the disclosure window for investors that buy large blocks of a company’s stock.

Under the Dodd-Frank Act, the commission has the authority to amend Rule 13D, which currently requires stock investors to disclose stakes of 5% or more within 10 days. Over the past year, SEC officials have hinted at their intentions to shorten the deadline to one calendar day — a move that would pull the rug out from under activist hedge funds that use the existing grace period to amass large stakes without attracting notice.

In a Dec. 15 speech, SEC Chairman Mary Schapiro said the agency recognizes the controversy surrounding the issue and thus would likely start by issuing a so-called concept release outlining a preliminary proposal. More recently, Michele Anderson, head of the SEC’s Office of Mergers and Acquisitions, said investors could expect to see a concept release in the second half.

An informal coalition of prominent asset managers and institutional investors formed last year to track SEC action on Rule 13D and map plans for opposing such efforts. In addition to Jana and Pershing Square, the group includes BlackRock, California State Teachers, Florida State Board, New York Common Fund, TIAA-CREF and T. Rowe Price. Now that it looks like the SEC plans to advance a rule amendment, the coalition has begun reaching out to other major investors, including hedge funds, to strengthen its position.

“We can expect fireworks,” said a market player allied with the coalition.

As a first step, the coalition will likely organize meetings where opponents can discuss their lobbying strategy. But at least one player already is talking about possible legal action. “It’s a certainty if they actually propose the changes,” he said.

Proponents of more immediate disclosure say the current 10-day grace period deprives the market of valuable information and puts smaller investors at a disadvantage. But opponents say shareholders of any size shouldn’t be forced to share their investment strategies with others.

“What they want is activist-only information, about what their plans are for a company,” one market player said. “Shareholders don’t have a duty to tell other shareholders what they’re thinking and why.”

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