Tesla (TSLA) CEO Elon Musk’s disclosure on Monday that he acquired a 9.2% stake in Twitter (TWTR) represents just the type of surprise for investors that U.S. regulators may soon curtail.
In February, the U.S. Securities and Exchange Commission proposed a controversial rule change that it says can “modernize” disclosure rules for investors who buy a large block of a public company’s stock. Electronic filing advances since the rule was adopted in 1968, the agency says, make it possible to more quickly inform shareholders of changes in stock ownership.
The change would cut in half from 10 days to five days the allotted time for shareholders like Musk to publicly reveal their purchases of stock exceeding 5% of a company’s shares.
Eleazer Klein, a securities lawyer and partner with Schulte Roth & Zabel, told Yahoo Finance the issue is driving a stake between corporate America, which largely backs the change along with the SEC, and activist investors who benefit from more days when they can seize potentially underperforming stock and negotiate changes with a company’s management.
“They’re getting a lot of very, very strong pushback,” Klein said about the SEC.
In an SEC filing on Monday, Musk revealed himself as a passive investor in Twitter, the social media platform at the heart of a nearly four-year legal battle between Musk and the agency. On Tuesday, Musk filed a separate disclosure, changing his status to active investor — meaning he can directly or indirectly influence Twitter’s management or its policies — and Twitter announced he would become a member of the company’s board.
Musk’s filings missed the SEC’s deadlines altogether, despite the agency’s current requirement that shareholders who acquire more than 5% ownership in a publicly traded company disclose their interest within 10 days. Musk’s filing came 21 days after he purchased the Twitter shares.
Advocates for the change from 10 days to five, including SEC Chair Gary Gensler, say it would boost transparency for investors, giving them earlier notice of significant changes in company ownership.
“Even if Musk filed on time, by March 24, that means that there was a 10-day period in which investors selling Twitter stock were unaware that Musk was a 9% shareholder,” said Marc I. Steinberg, a law professor with Southern Methodist University and former SEC enforcement attorney.
The change could help level the playing field for shareholders, he said.
“This is clearly material information,” he added. “We see how this impacted Twitter stock.”
Critics argue that the change would strip away the effectiveness of activist investors, who identify and expose underperforming companies. Activists relying on a jump in stock price between the time of their purchase and the time following disclosure of their position should have the time needed to profit from their work, Klein said. Other investors, he said, shouldn’t piggyback off of activists’ work.
“If it comes out too soon, activists are not getting the benefit of the stock jump in price,” Klein said. “The market is.”
In Klein’s view, proponents of the change push a false narrative by suggesting that current SEC rules, enacted in 1968, are outdated, now that filers can submit disclosures electronically.
“They ignore the reality of why [the rule] was adopted,” Klein said. “The SEC, when they adopted the rule back in the ’60s, was looking to find a fair balance for when markets should know an activist’s information. And they decided on 10 days.”
It’s unclear whether Musk qualifies as a traditional activist investor in Twitter, Klein said, given that the company appears to have invited him onto its board. Traditional activists, he explained, generally campaign to replace board members.
The period for comments on the proposed change ends April 11, at which time the agency can choose to adopt the change, or keep the status quo pending further review and comment.
“By increasing the certainty offered to shareholders that their trades are not being made on the basis of incomplete or outdated information the proposed amendment…could in turn enhance market efficiency and liquidity,” the agency said in its proposal.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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