SEC rules require activist investors to disclose more quickly

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SEC rules require activist investors to disclose more quickly

The SEC has issued new rules that require activist investors to disclose more quickly when they've made an aggressive play to buy up a target company's shares or certain derivatives based on those shares.

The rule will require investors who have plans to buy a company to disclose within five business days if they have acquired 5% or more interest in a company, down from 10 calendar days.

The SEC also said that derivatives that provide investors with significant economic interest in a company or which have certain conversion features will count toward the 5% computation.

The move was designed to protect investors who would otherwise not be aware that an activist investor is building up a substantial position in a company, which could greatly affect the value of their stock holdings.

Elon Musk's takeover of Twitter last year highlighted the importance of these standards, when he failed to report on time that he acquired more than 5% of Twitter's shares. Since then, Musk has renamed the company X.

Musk was able to accumulate a greater share of the company at a lower price by failing to report those purchases on time, as news of his intentions would have sent the stock market soaring. It may also have cost investors who were unlucky enough to sell their shares during that time.

The SEC has filed a civil suit alleging that Musk, who has been identified as a potential investor, should appear in federal court to provide testimony related to an ongoing investigation of potential securities laws violations related to the Twitter deal. The new rules would not affect Musk's investigation and will only apply to future transactions.

SEC Chairman Gary Gensler said last year that he was worried about the 'information asymmetry' between activist and ordinary investors in these kinds of situations.

The final rule was slightly watered down from that proposed last year, which would have given investors just five calendar days, instead of five business days, to report 5% interest in a company. It also abandoned a rule that would have more strict defined which derivatives count toward the 5% calculation.