SEC Chair Gary Gensler during a conference said that he has directed staff to come up with a draft proposal that would update the rule surrounding beneficial ownership of a company’s stock, among other efforts to enhance transparency of the capital markets.
Beneficial owners of more than 5 percent of a public company’s equity securities who have control intent have 10 days to report their holdings on Schedule 13D under SEC rules. In 1968, Congress required large shareholders to disclose information that helps the public understand their ability to influence or control a company.
Rule Not Updated for Over 50 Years
The commission has not updated the reporting deadline in half a century, Gensler said at the 11th Annual International Financial Services Forum held virtually on June 23, 2021.
“Those rules might’ve been appropriate for the 1970s, but I have my doubts about whether they continue to make sense given the rapidity of current markets and technologies,” he explained. “I’ve asked staff how we might update these rules, including possibly shortening reporting deadlines.”
Problems with Archegos
He said the commission should also make derivative holdings more transparent.
“Another area is around security-based swaps — essentially, derivatives on individual companies that provide exposure to the company without traditional equity ownership,” Gensler said. “The disclosures there aren’t as robust as they are in the rest of the market. The collapse in March of the family office Archegos Capital Management is a reminder of why that could be relevant.”
Archegos Capital Management LP, a family office that did not file Form 13F with the SEC, defaulted on margin calls in late March, causing banks that worked with the investment firm to suffer large losses following stock fire sale. Archegos had assets of only around $10 billion, but its real exposure to stocks was more, with some reports estimating it at $50 billion.
Family offices are established by wealthy families to manage their investments and provide tax, estate planning, and other services to family members.
Hedge funds and other investors with at least $100 million in assets under management must fill out Form 13F 45 days following the end of each quarter to report their holdings. But it does not require disclosure of short positions or certain complex derivatives, which Archegos had.
Moreover, Gensler said more transparency in short selling is needed.
“We have unused authorities in that space that were granted by Congress nearly a dozen years ago,” he said, referring to Section 929X(a) of the Dodd-Frank Act. Sec. 929X of PL111-203
The financial reform law directed the commission to “prescribe rules providing for the public disclosure of the name of the issuer and the title, class, CUSIP number, aggregate amount of the number of short sales of each security, and any additional information determined by the Commission following the end of the reporting period. At a minimum, such public disclosure shall occur every month.”
In addition, Gensler said he has asked staff to consider whether the commission should enhance transparency related to stock buybacks.
“When investors cannot access critical information, particularly when some other market participants may have such information, such information asymmetry can increase risk and reduce liquidity,” he said. “I believe we should update the transparency regimes to better reflect current business models and practices.”
This article originally appeared in the June 28, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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