The U.S. Securities & Exchange Commission and other market regulators confront a challenging issue: How to effectively monitor and regulate activity in an environment that is both fast-moving and highly complex? The principles and architecture of the Securities Exchange Act of 1934 were created for a much simpler financial world—an analog world—and they struggle to describe and contain the digital world of today. The lightning speed of information flow and trading, the constant innovations in financial products, and the increasing sophistication of active market participants each pose enormous challenges for the SEC; together, even more so. The ongoing controversy over §13(d) reporting exemplifies the many challenges facing the SEC in this regard.

In 2011, then-SEC Chair Mary L. Schapiro announced a broad review of the beneficial ownership rules governing the ownership reporting requirements for equity securities.¹ The SEC had been formally petitioned that year to update the Schedule 13D reporting requirements to shorten the reporting window—specific authority for which had been provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010—and broaden the definition of beneficial ownership.² Unfortunately, §13(d) reform was delayed by the overwhelming volume of rulemaking required under Dodd-Frank.³ A recent letter to Congress signed by several ethics and watchdog groups renewed the call for intervention by lawmakers on this important issue.⁴ Though the requirements of §13(d) related to the timing of required disclosure unfortunately appear unlikely to be revised in the near future,⁵ the SEC appears to be keenly aware of the rules' regulatory shortcomings. The SEC announced eight settlements of §13(d) enforcement actions in March 2015, and it is reportedly investigating a number of situations in which activist funds appear to have informally coordinated their market activity. Section 13(d) is an essential tool for promoting transparency and market integrity. While judicious enforcement in the short term may be helpful, comprehensive reform should be accomplished as soon as practicable.

Reporting Is Not Timely or Thorough

The reporting regime under §13(d) of the Securities Exchange Act is, as it stands, woefully inadequate. Section 13(d) fails to require timely or thorough disclosure. In a world of instant information, the deadline for filing a Schedule 13D remains 10 calendar days after crossing the 5 percent ownership threshold.⁶ This window is large enough for material developments to occur in secret, undermining the regulatory goals of investor protection and market efficiency. Exacerbating this issue is the fact that the investor can continue to make acquisitions during the 10-day period even after crossing the 5 percent ownership threshold. Hedge funds and other activists have, in recent years, used this gap to accumulate large positions and gather support among fellow investment funds. The target company, the other shareholders, and the market have been none the wiser until the activists had amassed positions and influence well in excess of 5 percent. Though the 5 percent threshold is recognized as an important trigger for market disclosure, the 10-day window permits accumulators to continue acquiring additional shares without the market price reflecting the impact of such accumulation.