Oct. 30, 2022
October 30, 2022 The Possible consequences for not implementing these new rules and enforcing them, are dire. I would like to Request that the threshold be lowered to $100 million, as large funds will just split them into smaller lots across multiple institutions to hide them to make them undetectable to the SEC. This also needs to be applied internationally so funds and firms cannot use borders to evade the rules of the market. You have heard of the Cayman Islands right? RIGHT? you NEED look at the entire swap portfolio to determine reporting requirements, not just parts: The Commission should follow the precedent in Rule 13h-1, which identifies large traders using the traders entire position in all NMS securities. The overall picture of a traders appetite for excessive risk can only be formed by looking at their total swap position. Allowing large traders to take on excessive risk via swaps in many different individual securities while avoiding reporting requirements is against the spirit of the rule, and goes against the Commissions prior rulemaking. Security-Based Swap Position include all security-based swaps based on the same underlying security or reference entity, regardless of whether they are debt (including CDS) or equity-based, so that funds and firms cannot evade reporting requirements by using different types of complex financial instruments. I Agree with the definition of security-based swaps and state that it must be appropriately wide to minimize evasion. Perhaps there are others you have not thought of yet to include into this? I Agree with daily reporting and praise the Commissions public release of the data. It empowers citizens to protect themselves from excessive risk and the companies they own from hostile actors. The Commission should absolutely utilize its authority under Section 10B(d) of the Exchange Act to publicly release data. Fraud is widespread, and the resources of the SEC are limited. By allowing the People to see potentially dangerous swap activity, they will be better able to assess the investments they make and observe the dynamics of the market. A more level playing field is absolutely in the public interest, and the damage that can be done via swap activity (e.g., Archegos) necessitates that investors be equipped to defend themselves and the markets they use. There is still the 3% position Credit Suisse has been unable to close out after the Archegos debacle. See page 128 of the Credit Suisse report. Please see https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html Bloomberg terminal showed them having 540,000 puts. This represents 54,000,000 shares of GME Pre their Split Via Dividend. Thats now a total of 216,000,000 shares of a public float of 255,470,000 shares. Retail has now removed approximately 75,581,269 from the DTCC via DRS throught computershare.com direct registration of their securities to make us GENUINE shareholders. There seems to be a Problem that there is an awesomely high number of phantom shares sold out there. You Gary Gensler, Might even go so far as to say it poses an idiosyncratic risk. I did forget to include the 720,000 puts Constancia investimentos LTDA hidden in swap data. That's a whopping extra 288,000,000 shares post split, via dividend for GME shares. Better not forget these ones either hidden in swaps, Just to show the importance of the rule. Kapitalo investimentos LTD have another 397,900 puts as well. That's also a whopping extra 159,160,000 shares of GME post spilt, via dividend. Thats 630,630,000 EXTRA shares sold short, hidden overseas in swaps alone that a simple retail investor like myself has found in JUST 3, yes, that's right, 3 companies. I am still bewildered how the DTC managed to just MAGIC these extra shares out of thin air after the Split Via Dividend that GME did. Computershare certainly not give them that many shares to hand out. This rule MUST be finalized and implemented IMMEDIATELY. The Honorable Gary Gensler Chair U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549-1090 Re: Modernization of Beneficial Ownership Reporting Release Nos. 33-11030 34-94211 File No. S7-06-22 Position Reporting of Large Security-Based Swap Positions Release No. 34-93784 File No. S7-32-10 Dear Chair Gensler, We write to you today to express support for two rules proposed by the Securities and Exchange Commission (SEC or Commission): Modernization of Beneficial Ownership Reporting and Position Reporting of Large Security-Based Swap Positions. If adopted, these rules would improve market transparency, close a number of critical loopholes being exploited by certain investors, and reduce systemic risk. They would achieve this by: 1) reducing the number of days investors have to disclose a 5 percent stake in a public company from 10 days to 5 days 2) requiring disclosure of derivative positions to ensure that they are not used to hide a stake in public company or a large position that could destabilize financial markets and 3) clarifying the circumstances under which two or more investors have formed a group, with a combined ownership stake would need to be disclosed if it exceeds 5 percent. Additionally, by limiting the ability of market participants (primarily activist hedge funds with short-term investing strategies) to abuse outdated reporting requirements, these rules will also benefit workers and retirement saverswhile preserving the ability of shareholders to engage with corporate management regarding environmental, social, and governance (ESG) matters, if they so choose. For these reasons, we support the proposed rules and encourage you to finalize them swiftly. Ending the Abuse of Beneficial Ownership Disclosure Rules 1ES161540 Upon acquiring 5 percent of a public companys stock, current SEC rules give investors 10 days to disclose their plans to the public in a Schedule 13D filing. During the 10-day period, investors are permitted to continue acquiring additional shares. Also during this period, investors may strategically share information about their impending Schedule 13D filing with allies, who are then able to acquire shares at a discount before other market participants learn about the filing.1 Derivative instruments, most of which do not count against the 5 percent threshold, may also be used to boost an investors economic exposure to the companys stock. The activist hedge fund business model is dependent on the return generated by the short-lived stock price increase that often accompanies a 13D filing. Supporters of hedge fund activism argue that the immediate price increase (before anything at the company has changed) is due to the reputation of the investor and its anticipated changes, making the activist entitled to the increase.2 This argument becomes muddled when considered against research that shows the stock price increase is temporary and in fact the company is often in a weaker economic position post-activist intervention.3 The long disclosure period is an international anomaly, which in part explains why the aggressive short-term investment strategies of activist hedge funds that come at the expense of investments needed for long-term, equitable and sustainable growth are more successful in American financial markets than they are abroad.4 In fact, the Commission itself acknowledges that this 10-day period is an outdated relic that was premised on paper filings back in 1968 when Section 13(d) was originally passed. The drafters of the Williams Act in fact emphasized the speed of disclosure was of utmost importance and that investors should be providing disclosures of their positions as soon as reasonably practicable.5 It is only by taking advantage of outdated regulations and loopholes (10-day reporting delay, exclusion of derivatives, and undisclosed coordination with other investors) that activist hedge funds are able to build stakes large enough to center their strategy around the short-term, temporary price spike of their targets without concern for longer-term value creation and growth. The voting power that comes with the stock is also crucial to the business model. Securing the votes to credibly threaten the board with removal gives the activist that ability to force through its agenda. By the time the 13D is filed, the activist may have secured enough voting power 1 Flugum, Ryan and Lee, Choonsik and Souther, Matthew, Shining a Light in a Dark Corner: Does EDGAR Search Activity Reveal the Strategically Leaked Plans of Activist Investors? (May 28, 2020). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SRN: https://ssrn.com/abstract=3612507 2 Lucian Bebchuk Robert J. Jackson, Law and Economics of Blockholder Disclosure, Harvard Business Law Review. July 2011, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1884226. 3 Mark DesJardine and Rodolphe Durand, Disentangling the effects of hedge fund activism on firm financial and social performance, 1054-55, Strategic Management Journal, Feb. 5, 2020, available at https://onlinelibrary.wiley.com/doi/full/10.1002/smj.3126. 4 Australia requires disclosure of any position of 5% or more within two business days if any transaction affects or is likely to affect control or potential control of the issuer. See Corporations Act 2001 (Cth) sec. 671B (Austl.). The United Kingdom imposes a two-trading-day deadline for disclosure of acquisitions in excess of 3% of an issuers securities. See Disclosure Rules and Transparency Rules, Ch. 5 (U.K.). Germany requires a report immediately, but in no event later than four days after crossing the acquisition threshold. See Securities Trading Act, Sept. 9, 1998, BGBL. I at 2708, as amended, pt. 5 (Ger.). Hong Kong securities laws require a report within three business days of the acquisition of a notifiable interest under the law. 5 Doshi, Samir H. Wachtell, Lipton, Rosen Katz. The Timing of Schedule 13D. Jun 23, 2019. https://corpgov.law.harvard.edu/2019/06/23/the-timing-of-schedule-13d/ 2ES161540 without having to engage longer-term shareholdersto threaten the board of directors with a proxy battle if they dont adopt the activists strategy. Benefitting Workers and Retirement Savers By limiting the ability of activist hedge funds to generate financial returns by running their short- sighted investment playbook, these rules will improve outcomes for workers at would-be target companies. A comprehensive study of over 1,300 such campaigns conducted between 2000 and 2016 found that they were associated with: (a) an immediate but short-lived increase in market value and profitability, and an immediate and long-lived decline in operating cash flow (b) decreases in number of employees, operating expenses, RD spending, and capital expenditures and (c) the suppression of corporate social performance.6 The effect on workers was particularly significant, as the study found that after such activist hedge funds acquire ownership, the companys workforce experiences a steady decline4.57 percent in the first year and 7.66 percent by the fifth year. For an average company, this means a loss of 383 to 642 jobs.7 Another detailed study of companies targeted by a specific hedge fund found that target companies performed worse than comparable non-targeted companies over a three-year period, and that this underperformance was tied to a reduction in employment, wages, and overall investment, and an increase in debt and stock buybacks.8 Therefore, not only is the hedge funds activism detrimental for workers and their communities, but also for longer-term investors, who lose money if they hold on to their shares for three years after the beginning of a campaign. Notably, the most significant losses occur after 24 months, a few months after the hedge fund sells their shares of the target company.9 Preserving Shareholder Engagement and ESG Strategies Nothing in either proposed rule would limit the ability of investors to engage with company management. Some investors have argued that preventing them from covertly building large stakes in public companies could chill their ability to engage with management. The truth is that 6 Mark DesJardine and Rodolphe Durand, Disentangling the effects of hedge fund activism on firm financial and social performance, 1054-55, Strategic Management Journal, Feb. 5, 2020, available at https://onlinelibrary.wiley.com/doi/full/10.1002/smj.3126. 7 Id. at 1070. 8 Activist Hedge Fund Risks to Pension Funds: The Case of Elliott Management, 7, SOC Investment Group Communications Workers of America, Sept. 2021, available at https://cwa-union.org/sites/default/files/activist_hedge_fund_risks_to_pension_funds_case_of_elliot_mgt_sept_202 0_socig_and_cwa.pdf. 9 Id. 3ES161540 these investors are not looking for fair engagement, but rather they seek to build enough economic and voting power that they are able to dictate terms to management. Take for example, the cases provided by the very investors calling for the rules to be withdrawn in the name of ESG activism.10 Even the ESG wins purportedly under threat, modest though they are, were achieved through engagement by investors with less than one percent of the public companys stock. It is clear that changing the disclosure threshold would pose no threat to bona fide ESG activism. Not only will these rules not chill ESG activism, they may facilitate corporate social responsibility by limiting the ability of activist hedge funds to target socially responsible firms. Recent research found that activist hedge funds were more likely to target firms with high levels of corporate social responsibilityperhaps because hedge funds consider spending associated with benefits to society at large wasteful.11 It is further illuminating that some of the most impactful ESG investing to datecampaigns that have led to tangible social benefits like the actual closure of coal plants and reductions in carbon emissionshas been done in Australia, where an acquisition of 5 percent must disclosed within 2 business days, far shorter than the 5 days proposed in this rule.12 This provides further evidence that a 10 day window is not needed to use shareholder activism to meaningfully change corporate behavior. In closing, we applaud the Commission for proposing rules that will improve market transparency and reduce systemic risk. Further, by ending the abuse of outdated disclosure requirements, these rules will benefit workers and retirement savers while preserving the ability of shareholders to meaningfully engage with corporate management. For these reasons, we support the proposed rules and encourage you to finalize them swiftly. Sincerely, 10 Letter from Charlie Penner and Bob Eccles to Vanessa Countryman, Secretary, Securities and Exchange Commission, Re: Modernization of Beneficial Ownership Report. 11 Apr 2022. Available at: https://www.sec.gov/comments/s7-06-22/s70622-20123320-279613.pdf 11 Mark DesJardine, Emilio Marti, Rodolphe Durand. Why Activist Hedge Funds Target Socially Responsible Firms: The Reaction Costs of Signaling Corporate Social Responsibility: Academy of Management. 15 Jun 2021. Accessible at: https://journals.aom.org/doi/full/10.5465/amj.2019.0238 12 There, an environmental activist, Cannon-Brookes, acquired over 11 percent of a mining company and pushed for changes in a financial market with far more restrictive disclosure requirements. https://www.ft.com/content/3eb3c42d-d740-460e-a8d8-a9f499f4f1ce?shareType=nongift 4ES161540 Tammy Baldwin United States Senator Sherrod Brown United States Senator Bernard Sanders United States Senator Elizabeth Warren United States Senator Tammy Duckworth United States Senator Jeffrey A. Merkley United States Senator 5ES161540