The SEC imposes stricter disclosure necessities for hedge funds that construct giant stakes in corporations

Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), speaking during a Senate Committee on Banking, Housing and Urban Affairs hearing in Washington, D.C., Tuesday, September 14, 2021.

Bill Clark | Bloomberg | Getty Images

Securities and Exchange Commission Chairman Gary Gensler said on Wednesday that the regulator is looking to tighten disclosure requirements for hedge funds that acquire sizable stakes in companies.

The agency is considering changing the rules by which hedge funds disclose that they've acquired 5% of a public company's stock, Gensler said during a virtual Q&A at the Exchequer Club in Washington, D.C.

The so-called Schedule 13-D filing is currently set at 10 days, giving hedge funds more than a week to buy in secret.

"I assume we have something to add to that," Gensler said, adding that he's worried about "information asymmetry" because the public doesn't know there's a big player that's out there during the 10-day Deadline buys shares.

“Right now, if you broke the 5 percent threshold on day one and have 10 days to file a filing, that activist could just go from 5 percent to 6 percent over that period, or it could go from 5 percent to 15 percent. , but there are nine days when the selling shareholders in the public sphere don't know that information," Gensler said.

The 13D Disclosure Rule was enacted in the 1960s to protect corporate leaders by providing notification of activities by activist shareholders and corporate robbers. In other words, big investors couldn't secretly amass large stakes to take over a company without giving it a chance to defend itself.

Critics of the rule have claimed that the 10-day limit is already too tight and that hedge fund managers have a harder time turning a profit when they have to disclose their strategies to the public so early.

“It is material non-public information that there is an activist acquiring stock who intends to make an impact and generally there is a pop if you look at the economy from the day they announced …usually there's a pop in the stock in at least a single-digit percentage range," Gensler said. "So the selling shareholders don't have any material information these days."