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June 27, 2023

Better Markets Continues To Support SEC Proposal To Increase Transparency And Fairness By Modernizing The Beneficial Ownership Reporting Rules

Better Markets filed a comment letter with the Securities and Exchange Commission in response to the agency’s reopening of the comment period for its proposed rule to modernize reporting requirements for those who acquire large ownership interests in public companies.

Why It Matters.   Under the securities laws, any person who acquires beneficial ownership of more than 5% of a class of securities must disclose that fact by filing a public report with the SEC within 10 days. The basic purpose of the report is to alert companies and other investors that a bid to influence or gain control of the company may be underway. This information can affect the share price of the company since share prices generally rise when large ownership interests are publicly disclosed. As a result, shareholder activists who reach the 5% reporting threshold can accumulate additional shares before the expiration of the 10-day reporting period knowing that the shares are likely if not bound to increase in price. These profits come at the expense of shareholders not yet aware that the stock price will change. The SEC’s proposal would shorten the reporting deadline from 10 days to 5 days and thus shorten the time period during which some investors are at an informational disadvantage. Nonetheless, some activists say that the timelier reporting will hamper their strategic efforts to improve corporate value for the benefit of all shareholders by making their campaigns more costly.

What We Said.  The SEC reopened the comment period in light of additional economic analysis about the impact of the proposed 5-day filing deadline. Nothing in that analysis changes our view, and we continue to support the SEC’s proposal to reduce the reporting deadline from 10 days to 5 days. The information included with the SEC’s reopening of the comment period indicates that shortening the deadline from 10 days to 5 days is unlikely to significantly curtail activist campaigns. The statistics show that two-thirds of activist filers completed acquiring their reported ownership stake by the proposed deadline of 5 days after they reached the 5% beneficial ownership threshold. Statistics show further that 92% of activist filers completed acquiring 90% of their reported ownership stake by the proposed 5-day deadline and 98% of filers completed acquiring 75% of their reported ownership stake by the proposed deadline. This means that a 5-day reporting deadline likely would still enable activists to profit from the informational asymmetry that would exist during the 5-day period before disclosure triggers a stock price increase.  As a result, reducing the reporting deadline to 5 days should not significantly impede activist campaigns while mitigating the harm to selling shareholders. At the same time, the SEC’s analysis confirms that the shorter reporting deadline will help limit the harm that investors suffer when they sell shares without knowing the price will soon increase.

Bottom Line.  Better Markets continues to support the Commission’s efforts to bring greater transparency and fairness to the securities markets by reducing the period between the time activist shareholders acquire a large ownership interest in public companies and the time they must disclose that ownership interest to the public and other investors.

Read the letter here or click the button below.

Comment Letters

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