Dissenting Statement on Proposed Modernization of Beneficial Ownership Reporting

This proposal is characterized as modernization, but it fails to contend fully with the realities of today’s markets or the balance embodied in Section 13(d) of the Exchange Act.  The proposed amendments acknowledge some of the challenges, but do not fully grapple with or resolve them in a consistent manner.  Accordingly, I do not believe the proposed amendments are prudent and respectfully dissent. 

Congress passed the Williams Act and enacted Section 13(d) in response to hostile takeovers in the form of cash tender offers in the 1960s.[1]  The Williams Act balanced shareholders’ interest in learning of potential changes in corporate control with the benefit of allowing the party seeking to engage in a change in control of the company to keep that information private.  The balance—requiring a person who has acquired five percent of a class of shares to file within ten days of that acquisition—recognizes both the need for other shareholders to know of the impending change in control and the need to allow the person seeking control to reap some of the benefit of the work it did in determining that a change in control would be beneficial. 

Ten days is not a magic number.  As Congress recognized when it authorized us to shorten the number of days, it might not be the right number.  But to move from ten to five requires a justification, and the one included in the proposal is not compelling.  The release suggests that shortening the ten-day reporting window to five days is appropriate given the significant technological advances that have occurred since 1968, when Section 13(d) was enacted.  Given that the ten-day window does not seem to be based on the limitations of 1960s technology,[2] why should we consider technological advancements as a deciding factor in our consideration of the reporting window?

The Commission more generally sees an inconsistency between the ten-day filing period and how quickly today’s markets move.[3]  Market participants receive and process information quickly and can build up large positions rapidly.  In recognition of these changes, the Commission has shortened reporting timelines imposed for Section 16 reports and Form 8-Ks, and foreign jurisdictions also have shorter timelines for reports comparable to Schedule 13D.  Of course, reports by insiders and issuers are distinguishable from reports by investors, and foreign markets’ regulatory choices might not be appropriate for our markets. 

The crux of the Commission’s justification, however, seems to be that shareholders need to have confidence that their trades are not being made based on stale information.[4]  Presuming that stock prices generally rise when a Schedule 13D is filed, this theory of investor harm posits that a shareholder who sells during the ten-day window would be harmed by not knowing that someone else had acquired a large stake in the company; if the Schedule 13D had been filed, she might have sold at a higher price or re-evaluated whether to sell at all.  The Commission invents investor harm and unduly paints the selling shareholder as a victim; she chose to transact at the prevailing market price on the date she sought liquidity.  Are there other pieces of information that other market participants have that might have informed her decision?  Sure, but information disparities make markets function.  Issuers and insiders have reporting obligations to resolve the problem of information asymmetry between these groups, who have privileged access to information, and investors.  Apart from the Williams Act requirements, investors, on the other hand, generally do not have disclosure obligations with respect to information they have, including their own ownership positions and plans.  We want to encourage investors to ferret out information and find undervalued companies.  Indeed, information asymmetries in this sense—where investors have equal access to disclosure from the issuer and insiders, but come to different conclusions about the long term prospects of a company based on their respective due diligence—are a feature, not a bug, of our capital markets. 

While the release acknowledges that there must be a balancing of interests between timely dissemination of the five percent ownership threshold and preserving an incentive structure for investors to seek change of control at under-performing companies, it summarily concludes that the proposed amendments will achieve the proper balance.  While “many Schedule 13D filers currently do not avail themselves of the full 10-day filing period,”[5] over 55 percent of Schedule 13Ds filed in 2020 were made on Day 10 or later.[6]  My former colleague Rob Jackson, along with Professor Lucian Bebchuk, advised the Commission in 2012 that shortening the reporting window “cannot be justified by an appeal to general intuitions about market transparency or by the claim that tightening is required to achieve the objectives of the Williams Act.”[7]  Regrettably, I think we attempt to do just that with this release. 

The release also makes a number of other policy choices that I hope commenters will address.  The proposed expansion of the definition of beneficial ownership to cover certain cash-settled derivative securities lacks sufficient justification given that these securities do not convey ownership or voting rights.  The proposed amendments to Rule 13d-3 appear to be based on concerns raised in academic literature that focus on transactions in foreign jurisdictions and security-based swaps, both of which are excluded from the scope of these rules.  Perhaps commenters will provide evidence establishing a clearer link between ownership of cash-settled derivatives and the potential to change control of the issuer.  On the other hand, the release takes a very narrow view of the pressure placed on companies by institutional activists.  Proposed Rule 13d-6(c) contains a broad exemption for groups engaged in concerted actions related to an issuer or its equity securities, and the release cites as an example the following behavior that presumably would fit within the proposed exemption:

[I]nstitutional investors or shareholder proponents may wish to communicate and consult with one another regarding an issuer’s performance or certain corporate policy matters involving one or more issuers. Subsequently, those investors and proponents may take similar action with respect to the issuer or its securities, such as engaging directly with the issuer’s management or coordinating their voting of shares at the issuer’s annual meeting with respect to one or more company or shareholder proposals.[8] 

Given the kind of activism that occurs today, will that exemption swallow the rule?  As others have pointed out, our markets are different than when the Williams Act was adopted.[9]  Hostile takeovers are less frequent, institutional shareholders are more dominant, and activist investors rely on methods other than taking control to force change at companies.

I look forward to reviewing the public’s comments on the proposal.  Thank you to the staff of the Division of Corporation Finance, Division of Trading and Markets, Division of Investment Management, Division of Economic and Risk Analysis, and the Office of the General Counsel for your work on this release.  I will be very interested to hear what commenters have to say about the proposal.  Is ten days right?  Is five days right?  Or is some number in between better?