Comments on the SEC’s Proposal for Beneficial Ownership Reporting and Security-Based Swaps

Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum.

Recently we filed a comment letter with the Securities and Exchange Commission regarding its proposal to readopt existing rules to preserve the “status quo” with respect to the treatment of security-based swaps under the beneficial ownership reporting rules. Our letter reiterates our belief, as reflected in the rulemaking petition we filed In March with the Commission, that modernization of the beneficial ownership reporting rules is needed in order to compel timely, accurate and complete disclosure of the accumulation of control stakes in public companies. We urge the Commission to undertake a complete overhaul of the rules as promptly as reasonably practicable. Chief among the failings in need of correction are the outdated ten-day reporting window and the overly narrow definition of “beneficial ownership,” which excludes a host of derivative products commonly used by investors to acquire the characteristics of ownership while currently evading reporting requirements.

Our letter also addresses recent claims that the ten-day window should be preserved in order to incentivize hedge funds and other activist investors to accumulate shares in secrecy, at market prices lower than they would face if their intentions became known.  Any claims that this is, was or should be a valid public policy goal reflect a fundamental misapprehension of the Williams Act and its purpose of ensuring that participants in the U.S. securities markets have access to material information about public companies, including potential shifts in corporate control. We encourage the Commission to dismiss these claims for the distractions that they are, and take action to bring the beneficial ownership reporting rules in line with the reality of modern securities markets.

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One Comment

  1. Neil McCarthy
    Posted Saturday, April 30, 2011 at 4:14 pm | Permalink

    Some of us are old enough to remember that Michael Milkin and his once-upon-a-time powerhouse I-bank, Drexel Burnham, were brought down over charges of “stock parking” — which was facilitating evasions of 13D reporting requirements.

    Today you can hire an I-bank to “stock park” for you using derivatives — and the SEC doesn’t care. The timing of 13D reporting is now strictly voluntary, so the original intent of 13D reporitng has been subverted.