Adam O. Emmerich, David M. Silk, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Emmerich, Mr. Silk, Mr. Niles, and Oluwatomi O. Williams. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).
The SEC has proposed an amendment to Form 13F that would exempt from filing all money managers holding less than $3.5 billion of “13(f) securities.” The threshold would apply without regard to the fund’s overall size or total assets under management. Increasing the threshold to $3.5 billion from the current cut-off of $100 million would slash the number of reporting filers by 90%, from 5,089 to 550, effectively abolishing Form 13F as a reporting system for most investors, including many activist and event-driven hedge funds, and preserve it only for the largest index funds and asset managers.
Form 13F generally requires investment managers holding more than $100 million of such 13(f) securities (typically Exchange-traded equity securities, certain options and warrants, shares of closed-end investment companies and certain convertible debt securities) to disclose their holdings within 45 days of the end of each quarter, and is often the primary means by which investors, companies and other market participants first learn or verify that an activist hedge fund is accumulating or has accumulated a significant (but less than 5%) position in a target company’s stock. Because many activists do not own $3.5 billion of 13(f) securities, adoption of this revision would permit them to “go dark” and make it significantly more difficult to determine whether an activist, or a “wolf pack” of activists, owns a stake in a company. Indeed, as we have previously discussed, activist “tipping” could well result in only the wolf pack—and not the target company or other shareholders—being aware of the ownership stake until the moment that the activist strike occurs.
