Late last year, the Federal Trade Commission (FTC), with the concurrence of the Antitrust Division of the U.S. Department of Justice published a misguided proposal that would update the Hart-Scott-Rodino (HSR) Antitrust regulations.  The proposal essentially has two parts: the first part relates to the so-called “Aggregation Rule,” which would increase the number of costly HSR filings asset managers must make, and also subject asset managers to a 30-day waiting period in certain circumstances.  The second proposed rule change would adopt a debunked academic theory called “common-ownership,” which asserts that the ownership of competitor companies by an asset manager could lead to anticompetitive behavior; essentially, the pricing could increase for those competitor companies, because they have the same ownership.

Both proposals are problematic – not only because they are inherently wrong and therefore bad policy, but also because they will ultimately harm investors who look to asset managers to help them invest and save.

The Nuts and Bolts: What Changes Does the FTC Intend to Actually Make to the Current HSR Framework, and What does that Mean in Practice?

While the proposal is a bit in the weeds, the biggest and most important changes to understand include the following.

First, the FTC proposed to amend the definition of “person” within the HSR to include (or aggregate) all “associated” funds and the ultimate parent entity when determining whether a filing threshold has been breached – this is the Aggregation Rule mentioned above.  This means that all funds under common management by the same investment manager would effectively be aggregated when determining whether HSR thresholds are met.  For many of SIFMA AMG’s members, this requirement is not only onerous and unnecessary, it would simply be impossible to meet.  And, as far as we can tell, the FTC has not been able to offer a tangible competitive concern.  They also seem to lack a proper understanding of fund structures and are seriously discounting the harm this would cause to investors.

Second, the FTC is proposing to institute a de minimis exemption that would allow both active and passive investors to purchase securities without an HSR notification if, as a result of the purchase, the investor would hold no more than 10% of the outstanding voting securities of a publicly listed company, subject to certain conditions. However, in order to restrict asset managers from owning competitors, the proposed de minimis exemption would be limited by the condition that the asset manager have no “competitively significant” relationship with the issuer. In other words, the exemption would be rendered useless in most situations for large asset managers, as those managers – who manage funds which include most large companies – would clearly have an interest in a competitor of the issuer.

Third, every HSR filing requires a 30-day waiting period for clearance after a filing is made. So, even if asset managers follow the process and do the additional filings – this doesn’t just mean paperwork (at a steep outside counsel cost).  It means the asset manager, and the underlying investors, will have to wait 30 days to make the investment, resulting in distorted investment returns at best, negatively impacted returns at worst.

Why Does this Rulemaking Matter? 

If this rulemaking is adopted, asset managers will be forced to either limit certain investments across all of their funds – thereby limiting investor access to opportunity – or will be subjected to the HSR filing and waiting period requirements, which creates artificial and unnecessary investment barriers.

To state the obvious, markets move quickly, and asset managers need to be able to purchase and sell securities in immediate response to economic developments.  An impediment to a purchase or sale is an impediment to maximizing an investor’s return.  This means that asset managers will likely opt, where they can, to limit their exposure of certain securities to avoid crossing HSR thresholds, harming certain issuers as well as the underlying investors in situations where they are no longer able to purchase the securities they would otherwise purchase.

This sure seems like a tragic result, especially when considering that the FTC has not been able to articulate clearly the harms they are seeking to address.  Perhaps the FTC should instead coordinate with the SEC and do a bit more groundwork before charging full speed ahead with major regulatory changes.

By Lindsey Keljo, Managing Director for the Asset Management Group (AMG) and Associate General Counsel of SIFMA and Andrew Ruggerio, Assistant Vice President & Assistant General Counsel of SIFMA.

For more information on the FTC’s Proposal and SIFMA AMG’s thoughts, please see our Comment Letter to the FTC on the HSR Proposal, as well as our Letter to the FTC’s Hearing on Common Ownership.