The Securities and Exchange Commission (SEC) is investigating some activist hedge funds whether worked together in targeting companies and failed to disclose their arrangements, according to report from the Wall Street Journal.
According to the report, the latest action by the SEC was part of its wide-ranging effort to promote transparency.
People familiar with the situation told WSJ that the Enforcement Division of the SEC recently launched multiple investigations and requested several hedge funds to provide information. The SEC wants to find out if the hedge funds coordinated their actions in targeting companies without submitting proper disclosures.
Michael Zimmerman’s Prentice Capital is having a strong year
Prentice Capital was up 15.3% net last month, bringing its year-to-date gain to 49.4% net. Prentice touted its ability to preserve capital during market downturns like the first quarter of this year and the fourth quarter of 2018. Q3 2020 hedge fund letters, conferences and more Background of Prentice Capital The fund utilizes a low Read More
Under the federal securities laws, investors who agreed together to buy, sell, or vote securities are required to disclose their agreements, and to designate themselves as a group if they collectively own at least 5% of a company or soliciting votes from other shareholders.
The regulations were designed to prevent hedge funds with huge stakes in a company from exercising influence without taking responsibilities to make the playing field equal to smaller shareholders.
Barrington Capital Group and Macellum Capital Management recently disclosed their arrangement to win board seats at Children’s Place.
A rare move by the SEC
The WSJ noted that the move of the SEC to open investigations against activist investors because it appears to have taken a hands-off approach to regulating them.
Activist investors recently became a major force in corporate America given their strategy of acquiring significant stakes in companies and demanding changes—increasing stock buybacks, cutting costs, selling assets and other measures.
During a conference in March, Michele Anderson, head of mergers & acquisitions division at SEC likened the process of amending the regulations related to activist disclosures as “peeling an onion,” which means addressing one issue reveals another.
SEC wants to ensure that filings by activists are accurate
Recently, the SEC stepped up its inquiry on trading disclosures. Its investigation on activist hedge funds is part of the broad effort of the Commission. It also increased its coordination with its enforcement division and corporate-finance officials responsible for reviewing filings by companies and investors.
In March, the SEC filed charges against eight corporate insiders who failed to update their regulatory filings related to their stock ownership. The people agreed to settle that charges without denying or admitting the allegations of the Commission.
During the same period, the SEC sent a letter of inquiry to Bulldog Investors whether it has agreements or understandings with Foundation Asset Management regarding its proxy fight for board seats at Stewart Information Services.
Phil Goldstein, the co-founder of Bulldog Investors said his firm had no arrangements related to trading or voting shares. According to him, it is not surprising if several activist hedge funds are attracted to invest in underperforming companies.
Goldstein said, “If you go to a Grateful Dead concert, you’re going to find a lot of Grateful Dead fans. They’re not a group. They just like the same music.”
SEC Chairman Mary Jo White recently stated that the Commission is focused on ensuring that the filings of activist hedge funds are accurate.
“Our role at the SEC is not to determine whether activist campaigns are beneficial or detrimental in any given circumstance. Rather, the agency’s central focus is making sure that shareholders are provided with the information they need and that all play by the rules,” said White.