NEW YORK (The Deal) -- With most of the media's focus of late on ex-Secretary of State and Democratic presidential front-runner Hillary Clinton's emails -- along with Donald Trump's rise in the Republican primary polls -- Clinton's attack on activist hedge funds last week received little coverage.
However, Clinton's comments, made at N.Y.U.'s Stern School of Business, are expected to bolster her support among the corporate community and at the same time help "get out the vote" in Iowa and other key primary battleground states.
"Running against hedge funds will get you votes, and the more Republicans look disorganized with Donald Trump out front, the more the business community will hedge their bets and put some money into Hillary's campaign," said Columbia Law School Professor John Coffee.
In her speech, Clinton proposed raising capital gains taxes for high-income investors who hold stock for only a short period of time. She would leave the current 20% capital gains tax rates for investments held for six years or more, but for investments held for up to two years, the rate would rise to the regular income-tax rate of 39.6%. After that it would drop in 4% increments for each additional year the investor owns the security until the shares have been held for six years.
The goal is to encourage corporations to focus on the long term and discourage short-term activists.
Most agree that the change would immediately interfere with activist hedge fund activities -- driving many out of the business altogether. Others would still stick around holding their positions longer. As a result, they would have less capital to recycle into new campaigns.
Bottom line: less activism at fewer targeted corporations.
All of which is music to the ears of Marty Lipton and like-minded individuals. Lipton, the founder of the anti-takeover poison pill mechanism and a leader among legal advisers to corporations targeted by activists, has been battling activist investors since their incarnation as the corporate raiders of the 1980s.
"Has Marty Lipton joined her campaign?" asked one activist investor.
Focusing on activist hedge funds also could help give Clinton a boost in the Iowa caucuses and other early primary election states among an electorate that isn't too supportive of hedge funds or anything emanating from Wall Street.
Activists make an easy target for Clinton. Most voters still associate them with the label slapped on Carl Icahn, T. Boone Pickens and others three decades ago for pushing a number of high-profile leveraged buyouts. Then they were criticized as raiders seeking to strip storied companies of assets -- and cashing out their pensions. That reputation, deserved or not, inspired the Hollywood character Gordon Gekko, of Wall Street.
Nevertheless, activists are small fry on Wall Street, and by attacking them she can pitch herself as someone willing to take on the greedy moneymen at the same time that she gives the corporate business community a reason to provide campaign donations.
One ex-adviser to a major activist fund described her speech as a "cynical attempt" to target a minority element in the market in an effort to "curry favor with incumbent CEOs and boards."
Clinton's campaign did not return requests for comment, but so far she has raised $47 million -- of which $39 million is from large individual contributors, as of June 30, according to the Center for Responsive Politics.
Her suggestion that some areas around insurgent investors "haven't been re-examined in decades, let alone modernized to reflect changing realities in our economy" also looks like it could have been written by Lipton. Such statements are likely to be greeted favorably by the corporate community.
Clinton didn't provide any specifics, but some observers familiar with the world of activism suggest that she likely is referring, in part, to concerns raised by corporations around a decades-old rule requiring activist fund managers to file a so-called Schedule 13D disclosing their positions within 10 days of owning a 5% stake.
Critics, including Lipton and law firm Wachtell Lipton Rosen & Katz, are petitioning the SEC to require that activists disclose their position one business day after crossing the 5% threshold, arguing that developments in technology and faster trading systems allow activist hedge funds to rapidly accumulate "control stakes" at companies in total secrecy. Activists argue that quicker disclosure would discourage them from improving companies because they couldn't accumulate shares in a cost-effective manner.
The provision may be wonky, but potential corporate donors would likely take a look at those comments and deduce that Clinton would bring in an SEC chair focused on swiftly cutting the reporting window, a major blow to activists.
(Clinton's capital gains legislation would be much more difficult to enact, even if she does become president. Her proposal would most likely be considered as part of a comprehensive overhaul of the U.S. corporate tax code, which is likely to be years away.)
Nevertheless, Clinton did acknowledge that some activist investors could have a positive influence on companies, noting that "it's a good thing" when they put pressure on managements to stay "nimble and accountable." She also focused on one issue that would likely be welcomed by activist funds -- executive compensation and the growing divergence between CEO and employee pay.
Three of the most prominent activists appeared to be targeted by her speech -- Icahn, Bill Ackman and Dan Loeb. Clinton noted that even "iconic" companies like Apple (AAPL) - Get Report and Procter & Gamble (PG) - Get Report and Dow Chemical (DOW) - Get Report have felt pressure from activists.
Icahn successfully urged Apple to hike its stock buyback. Under pressure from Loeb, Dow Chemical pledged to divest of more than $7 billion in assets by mid-2016. Following an Ackman campaign, Procter & Gamble in 2013 replaced its CEO with the consumer products company's former chief.
It's no surprise that those three activists aren't throwing money at Clinton -- so far only Loeb of Third Point has made any contributions to a 2016 presidential candidate, and it was $2,700 to Jeb Bush's Republican campaign, according to the CRP. In 2012, both Icahn and Ackman made $2,500 donations to Mitt Romney's campaign.
Clinton also urged pension funds and proxy advisory firms to focus on the long term, suggesting to one observer that she believes both groups have encouraged a myopic short-term focus at U.S. corporations.
"Some institutional investors already are beginning to push back," she said. "We need more pension funds and proxy advisory firms to do so as well," she said.
But there is a campaign financing element in her comments here as well. As Columbia's Coffee points out, pension funds and their officers generally do not make significant contributions to political candidates, but a larger swath of corporate executives do.
"Only hedge fund principals will make political contributions of any size or clout, and they are less numerous than corporate CEOs," Coffee said.
Finally, the focus on activist funds represents yet another Clinton attempt to convince left-leaning voters that she'll be tough on Wall Street. That audience, however, is likely to decide her promises fall far short of what her rivals are pledging. Earlier this month Clinton urged greater regulation of Wall Street and prosecutions of individuals for wrongdoing. However, she didn't go as far as ex-Maryland Gov. Martin O'Malley and Sen. Bernie Sanders, I-Vt., who both have come out in support of restoring the 1933 Depression-era Glass-Steagall Act that would break up the largest financial institutions.
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