US activist investors must disclose clients in filings, SEC says

NEW YORK - Activist investors in the U.S. must disclose the identities of their clients in regulatory filings, the Securities and Exchange Commission said, a move that may rattle hedge funds by requesting information they long fought to keep secret.

The updated interpretations on 13D filings and proxy statements, issued by the main U.S. securities regulator last week, was not expected and not widely reported, according to lawyers who work on investor activism who spoke on condition of anonymity to discuss the matter openly.

The SEC's new guidance on its Corporate Finance Interpretations clarifies how the agency views its rules on critical filings after a busy six months of activist campaigns.

The regulator did not respond to a request for comment on the changes or say what prompted it to issue the interpretation now.

The changes signal increased interest in transparency about what investors pushing for boardroom changes or other matters must say about their clients, the legal advisers said. The changes come as special purpose vehicles called "sidecars" are increasingly used to finance activist campaigns.

"The identities of the investors in an entity formed for the purpose of acquiring securities of a specific issuer and engaging in an activism campaign at that issuer must be disclosed," the SEC wrote in answer to Question 110.09.

The answer to Question 155.02, which asks whether clients are considered "participants" in a limited partnership that aims to solicit votes to change board directors, is "yes" if these clients invested more than $500.

This year, investors including Elliott Investment Management, Ancora Alternatives and TOMS Capital Investment Management pushed companies ranging from media giant Warner Bros Discovery to Devon Energy to perform better.

In a particularly competitive part of financial markets, hedge funds long prized secrecy around the identity of their investors. They argue that identifying anything about their business, including who is funding them, could embolden copycats and limit their ability to make money.

As hedge funds race to gather assets, more rely on special purpose vehicles where potential investors are often told about the firm's strategy and the target company's name. It allows clients to make investments in specific companies, rather than be in a hedge fund's bigger pool of investments.

But companies targeted by corporate activists say greater transparency, including knowing who is invested, is necessary information to defend themselves.

The SEC's interpretation will remind companies and hedge funds of 2022, when medical device company Masimo Corp, facing a fight with Politan Capital, amended its bylaws to force any activist planning to nominate directors to disclose the identities of the fund's limited partners and reveal future plans to nominate candidates elsewhere.

The Masimo bylaws sparked outrage among seasoned activist investors. While few companies followed Masimo's lead, hundreds of corporations contacted their lawyers to ask whether they, too, should adopt such bylaws, attorneys said.

In early 2023 Masimo reversed course and stopped requiring hedge funds to detail this information. This year, it was purchased by Danaher.