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US activist investors and Icahn cry foul over proposed stock disclosure rule

March 3 (Reuters) – Activist investors including Carl Icahn say a U.S. proposal that would require them to disclose 5% stakes in companies days earlier than current rules could prevent them from creating the large positions they need for successful campaigns.

The Securities and Exchange Commission (SEC) proposed the new rule last month in a bid to reduce the information advantages the $18 trillion private equity industry has over retail investors.

The rule would halve to five days the time investors have to disclose when they have bought at least 5% of a public company. This news often sends the stock jumping as activists like Icahn, Starboard Value and Elliott Management announce that they will use the stakes to push for changes, such as selling businesses or adding members to the board of directors.

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Because campaigners spend millions of dollars on research and legal fees, they say they often need 7% to 9% of a target’s stock to make campaigns viable. With the shorter reporting window, accumulating that much stock might be too expensive to be profitable.

The long-term impact of the SEC’s proposal, activists said, would be to reduce the number of such campaigns, weakening an important force for holding companies accountable to shareholders and making the best use of their capital, which benefits all investors.

“It’s a sad day for many American companies, which need to replace incompetent CEOs rather than entrench them,” said Icahn, one of the industry’s most successful activist investors with a net worth of more than $16 billion. of dollars.

Icahn, 86, has fought corporate behemoths from Apple to Occidental Petroleum and recently clashed with McDonald’s over how it sources pork and treats pork. Since 2011, he has been investing his personal fortune.

Although Icahn said the rule won’t hurt him much because he doesn’t need outside money, its potential to dampen returns will be painful for activists who have to woo outside investors.

The rule is subject to comment and could go into effect later this year if finalized by SEC commissioners.

“This is a step backwards for shareholder governance with no discernible benefit to the market,” said a prominent activist hedge fund manager.

SEC Chairman Gary Gensler, however, said activists currently have too much time to benefit from material, nonpublic information.

Other investors should know sooner when an activist has targeted a company, especially since the evidence on whether activists create long-term value is inconclusive, critics said.

Ty Gellasch, head of the Washington-based group Healthy Markets, said activists were playing a “critical” role in pushing for change, but he was skeptical the rule would seriously harm them.

Similarly, Jim Rossman, who defends companies against activists as co-head of capital markets advisory at Lazard, said the 5% hurdle was not “magical”. “Good ideas are valuable on their own, even if an activist has a smaller stake,” he said.

INCORRECT MESSAGE?

Still, other investors said the proposal sent the wrong message. As passive index tracking has allowed most investors to disengage from corporate boards, the market needs more investors willing to spend time and money unearthing information and identifying companies. undervalued.

With just $195 billion in assets, according to research firm Insightia, activists already make up only a tiny fraction of the market.

“Fewer investors than ever are doing the job of analyzing companies and holding underperforming boards and CEOs to account,” said Rob Collins, executive director of the Council for Investor Rights and Corporate Accountability.

“The SEC should encourage engaged shareholders to use their rights and their voice to push for value-creating change, without making their job harder.”

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Reporting by Katanga Johnson in Washington and Svea Herbst-Bayliss in Boston; Editing by Michelle Price and Cynthia Osterman

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