Hedge funds prey on communities. A new rule fights back.

The paper mill in Brokaw is long gone, but its demise triggered a campaign by Sen. Tammy Baldwin and others to tighten rules on hedge funds’ secret stock positions.

A years-long effort by Sen. Tammy Baldwin to tighten rules on secret stock positions has crossed the finish line, with the US Securities and Exchange Commission (SEC) finalizing a rule that puts new restrictions on how activist hedge funds can invade, infect, and incapacitate a hometown company, as was done to a paper mill in Brokaw in 2012. 

The Wausau Paper Co. mill in Marathon County had operated for more than a century, when a hedge fund started buying shares in Wausau Paper and was able to ultimately exert control on the board of directors, insisting on drastic cuts that included closing the Brokaw mill after more than 100 years of operation. The move put 450 people out of work and caused Brokaw to lose half its tax base. Ultimately, the village had  to be dissolved and incorporated into a neighboring village.

The new SEC rule sought by Baldwin imposes transparency standards on the way hedge funds secretly accumulate stock in a company, including the “wolf pack” approach, where multiple hedge funds coordinate their stock purchases as a single group, but buy shares individually in order to not trigger required disclosures. 

Under the old rules, hedge funds were able to withhold information about their stock purchases for 10 days once they reached a 5% stake in a company. The new rule cuts that window to five days, so that other shareholders aren’t left in the dark by potentially predatory behavior, often referred to as vulture capitalism. 

“Today’s adoption updates rules that first went into effect more than 50 years ago. Frankly, these deadlines from half a century ago feel antiquated,” said SEC Chair Gary Gensler in the statement announcing the finalization of the rule. “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company.” 

Baldwin first introduced the measure, nicknamed the Brokaw Act, in 2016, but opponents successfully prevented its passage for years. Baldwin started holding up nominations to the SEC until she received assurances they would consider the rule on their own, without legislation. 

“As communities like Brokaw know all too well, when activist investors buy up companies just to turn a quick profit, hard working Americans pay the price,” Baldwin said in a statement. “These short-term gains for super wealthy investors can lead to devastating impacts for working families, taxpayers, retirement savers, and local communities, and I am proud to have been fighting them at every turn.” 

The new requirements will go into effect 90 days after publication in the Federal Register, according to the SEC.