SEC Should Shorten the 13F Reporting Period, Not 13D

Wachtell Lipton Rosen & Katz, a law firm that usually represents companies against hostile takeovers, is circulating a petition to shorten the 13D reporting period to 1 day. Currently activist hedge funds had to disclose their positions and intent on a form called 13D within 10 days of acquiring a 5% position in the target company. Previously we published an article detailing how Pershing Square and Vornado acquired an additional 17% position in JC Penney during the 10 days before they filed the 13D form. Wachtell is trying to prevent these kinds of situations, so that the target firms and their incompetent/entrenched managements can defend themselves better against activist shareholders.

There are inefficiencies in the capital markets and hedge funds spend considerable resources to uncover them. The profit they make motivates them to look for these opportunities. Existing shareholders of these companies benefit from these activities. Among those who do not benefit are, of course, short sellers and incompetent/entrenched managers of the target companies. If the reporting period of the 13D form is shortened then this may encourage hedge funds to share their ideas with fellow hedgies so that each hedge fund separately can build a 5% position without notifying anyone. That’s what Bill Ackman did with JC Penney. Pershing Square and Vornado acted in concert and each built the initial 5% position at the same time. That wasn’t a coincidence.

If a ten day reporting period is enough for hedge funds to acquire significant positions, we believe it’s more appropriate to shorten the reporting period of 13F forms. Currently hedge funds have up to 45 days to report their positions to the SEC. Also, hedge funds don’t have to report their short positions. We believe they should report those positions too.