Referencing Section 929R of the Dodd-Frank Act and a petition for rulemaking that Wachtell, Lipton, Rosen & Katz submitted to the SEC earlier this year, the hedge fund industry urged the Commission to conduct a comprehensive review of the existing Exchange Act beneficial ownership regime and the potential implications of any changes to the regime before embarking on any proposed rulemaking under Sections 13(d) and 13(g). In a letter to the SEC, the Managed Funds Association said that such a review would be consistent with the policy intent underlying Section 929R, which neither requires the Commission to enact changes to Section 13, nor sets a deadline by which it must undertake its review.
The MFA also emphasized that reporting on holdings in public companies through the Schedules 13D and 13G regimes does not exist in a vacuum, but is part of a broader regulatory framework that balances the interests of all investors, current shareholders and the boards and management of public companies. In the view of the MFA, this broader regulatory framework includes proxy rules and related modernization initiatives, tender offer rules and other aggregate and position level transparency reforms, and involves a host of interrelated issues concerning the relationships between corporate management and shareholders, the market for corporate control, secondary market capital allocation and price discovery.
The MFA noted that the SEC, in a prior release, has referred to proposals to modernize reporting under Sections 13(d) and 13(g) and that recent press coverage has indicated that the Commission staff may be considering acting upon the Wachtell Proposal in the near future. In the view of the MFA, the changes to existing law requested in the Wachtell Proposal could have significant long-term consequences to all investors in public companies and to the orderly functioning of the capital markets.
The hedge fund association said that the Commission should only make changes to the rules under Section 13(d) in furtherance of a clearly defined set of policy objectives that endeavor to balance the interests of all investors, and that are supported by rigorous empirical evidence demonstrating that such rules would achieve the objectives
The Wachtell Proposal requests that the Commission initiate a rulemaking project regarding the beneficial ownership reporting rules under Section 13, specifically shortening the reporting deadline and expanding the definition of beneficial ownership under the reporting rules. The firm believes that the current reporting regime fails to fulfill its stated legislative purpose of alerting investors in securities markets to potential changes in corporate control and to provide them with an opportunity to evaluate the effect of these potential changes. Further, the firm also believes that the current narrow definition of beneficial ownership and the ten-day reporting lag after the Section 13(d) ownership reporting threshold is crossed facilitate market manipulation and abusive tactics.