What Is an Activist Investor?

An activist investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run.

The activist investor’s goals may be as modest as advising company management or as ambitious as forcing the sale of the company, divestitures or restructuring, or replacing the board of directors.

Unlike private equity firms that buy and restructure companies in order to profit when they are resold, activist investors seldom acquire full or majority stakes. Instead, they use public communications and private discussions to win over other shareholders and company insiders. When such efforts fail, an activist investor may pursue a proxy contest to elect new directors in order to force the company to meet their demands.

Understanding Activist Investors

Activist investors are sometimes called shareholder activists, a term also used to describe those lobbying companies to improve working conditions for the overseas employees of their contractors, or backers of a dissident board slate elected to fight climate change.

However, many activist investor campaigns seek only to maximize shareholder value, and most of those are the work of hedge funds specializing in the unique mix of public pressure, behind-the-scenes lobbying, and business expertise required.

Unlike the public pension funds and mutual funds that also engage in activism at times, activist hedge funds may hold highly concentrated stakes and supplement them with additional leverage from derivatives like stock options to offset the considerable cost of such campaigns. In contrast with institutional investors that sometimes turn to activism after owning a disappointing investment for years, activist hedge funds typically buy a stake in an underperforming company shortly before calling for change, and hope to profit from the resulting turnaround and price appreciation.

In contrast to institutional investors, activist hedge funds are also more willing to use confrontational tactics, from poison-pen letters to management and unflattering public reports to proxy fights seeking to oust incumbent directors.

How Activist Investors Make Their Case

Investor activists often announce their campaigns by filing a Schedule 13D form with the U.S. Securities and Exchange Commission (SEC), which must be filed within 10 calendar days of acquiring 5% or more of a company’s voting class shares.

Qualified institutional investors and passive investors, meaning those not trying to acquire or influence control of the company, may instead file a simplified Schedule 13G with less stringent disclosure requirements and thresholds. Schedule 13D filers must disclose, among other facts, their reasons for acquiring the stake and any plans they may have for the company in terms of mergers and acquisitions, asset disposals, capitalization or dividends, or other policies.

The initial 13D filing gives the activist investor a golden opportunity to publicize their case for change at the targeted company. At the same time, the filing curtails the activist’s ability to alter their stake in, and plans for, the company out of the public eye. Any changes to the facts disclosed on a Schedule 13D must be reported in an amended filing “promptly,” under current SEC rules.

Activist investors may use amended Schedule 13D filings to comment on a company’s response to their proposals. For example, when Netflix, Inc. (NFLX) adopted a poison pill after funds affiliated with Carl Icahn reported a stake of nearly 10% in the video streaming company, the funds filed an amended disclosure calling the poison pill “an example of poor corporate governance.” Activist investors may also write sharply worded letters to incumbent managers, issue press releases arguing their case to other shareholders, or privately lobby institutional investors to side with them.

The Future of Shareholder Activism

There has been a claim that “activism is dying,” lamented Carl Icahn in May 2022, contrasting the legendary investor’s few-holds-barred approach seen in the past. Some have feared the changes proposed to the Schedule 13D disclosure requirements in 2022 constitute a pressing threat, with Elliott Investment Management stating publicly that the proposed rules “will virtually shut down activism.”

In February 2022 the SEC had proposed shortening the initial Schedule 13 filing deadline from 10 calendar days to 5, with amendments due within a day of a material change rather than “promptly” as currently. The proposal, if passed, would effectively force 13D filers to specify holdings of derivatives (such as options) that confer an economic interest in the company without the shareholder rights associated with an outright stock position. Perhaps more controversially, the proposed rules would no longer require investors to agree to act in concert and be designated a single group by the SEC for Schedule 13D reporting purposes. Rules have also been proposed to make it harder for activist shareholders to squash a company’s environmental or other pro-ESG initiatives.

SEC Chair Gary Gensler argued the stepped up requirements proposed would address “an information asymmetry” between activist investors and other shareholders. Critics countered the proposed rules would make activism unprofitable by making it more difficult and costly for activist investors to accumulate significant stakes, while inhibiting communication among shareholders.

Despite these proposed rule changes, shareholder activism does not seem to be slowing down (at least, not yet). For example, activist investor Nelson Peltz reportedly made a profit of more than $150 million by acquiring shares of Disney (DIS) in November 2022, in a move that prompted a proxy fight against the returning CEO, Bob Iger; however, this brief fight was called off after Iger announced a restructuring plan that is expected to save the media giant $5.5 billion in costs and cut 7,000 employees. Peltz has expressed satisfaction with the company’s direction and decision to make changes, praising Iger and his management team. In early 2023, ValueAct Capital Management, a San Francisco-based activist hedge fund, took a stake in streaming media company Spotify Technology SA (SPOT), with the goal of cutting costs and streamlining management. ValueAct has also disclosed a major position and board seat in SalesForce (CRM), which now has no less than five large activist investor shareholders on board with long positions, resulting in early 2023 cost cutting measures that include layoffs of 10% of the company’s employees. In all three of the these examples, markets have reacted positively to the inclusion of activist shareholders, seeing their share prices afterwards outperform.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar or percentage-based contributions from the employer, the employee, or both. The sponsoring employer establishes eligibility and the vesting schedule. The employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.

Understanding a 401(a) Plan

There are a variety of retirement plans that employers can offer their employees. Each comes with different stipulations, restrictions, and some are better suited for certain types of employers.

A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit organizations. Eligible employees who participate in the plan include government employees, teachers, administrators, and support staff. A 401(a) plan’s features are similar to a 401(k) plan, which are more common in profit-based industries. 401(a) plans do not allow employees to contribute to 401(k) plans, however.

If an individual leaves an employer, they do have the option of transferring the funds in their 401(a) to a 401(k) plan or individual retirement account (IRA).

Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts, and vesting schedules. Employers use these plans to create incentive programs for employee retention. The employer controls the plan and determines the contribution limits.

To participate in a 401(a) plan, an individual must be 21 years of age and have been working in the job for a minimum of two years. These conditions are subject to vary.

Contributions for a 401(a) Plan

A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis. An employer contributes funds to the plan on an employee’s behalf. Employer contribution options include the employer paying a set amount into an employee’s plan, matching a fixed percentage of employee contributions, or matching employee contributions within a specific dollar range.

The majority of voluntary contributions to a 401(a) plan are capped at 25% of an employee’s annual pay.

Investments for a 401(a) Plan

The plan gives employers more control over their employees’ investment choices. Government employers with 401(a) plans often limit investment options to only the safest and most secure options to minimize risk. A 401(a) plan assures a certain level of retirement savings but requires due diligence by the employee to meet retirement goals.

Vesting and Withdrawals for a 401(a) Plan

Any 401(a) contributions an employee makes and any earnings on those contributions are immediately fully vested. Becoming fully vested in the employer contributions depends on the vesting schedule the employer sets up. Some employers, especially those who offer 401(k) plans, link vesting to years of service as an incentive for employees to stay with the company.

The Internal Revenue Service (IRS) subjects 401(a) withdrawals to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59½, dies, is disabled, or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer. 

Qualifying for Tax Credits

Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, the tax benefits for traditional IRA contributions may be phased out depending on the employee’s adjusted gross income.

401(a) vs. 401(k) Plans

A 401(a) plan is similar to a 401(k), another type of employer-sponsored plan that provides a tax advantage for retirement investments. The main difference is who participates: while 401(k) plans are intended for private sector employees, 401(a) plans are directed towards employees of government bodies, educational institutions, and charitable organizations. These plans also tend to offer fewer, more conservative investment options than those found in a 401(k) plan.

If you work in the private sector, you can contribute to a 401(k) plan after one year. But if your employer offers a 401(a) plan, it takes two years.

There are also important rule differences between the two types of plans. With a 401(k) plan, participation is voluntary, and the employee can decide how much money to contribute towards the plan so long as it is below the legal limit. Employers may match a portion of the employee’s contribution, but many do not.

But in a 401(a) plan, employers can make it mandatory for their employees to participate. But employers are also required to contribute to their employees’ accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.

Tips for a 401(a) Plan

As with other types of retirement plans, it is important to understand the rules and fees associated with a 401(a) before making a significant contribution. This caution can help reduce your costs and expenses further down the line.

Here are some ways to make the most out of a 401(a) or any other tax-advantaged retirement account:

• Understand the Rules. As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.
• Understand the fees. In addition to taxes, there are also fees associated with a 401(a) account that are used to offset the administrative costs of maintaining your investment account. High plan fees can easily eat into your portfolio gains, so it is important to talk to your employer and understand how much the plan will actually cost you.

The Bottom Line

A 401(a) plan is a type of tax-advantaged account that allows public-sector employees to save for retirement. These plans typically offer fewer investment options than other types of plans, and they are also relatively low-risk. Although employers can make participation mandatory, there are may also be a tax credit for those who contribute to a 401(a).

What Is an Alternative Trading System (ATS)?

An alternative trading system (ATS) is a trading venue that is more loosely regulated than an exchange. ATS platforms are often used to match large buy and sell orders among its subscribers. The most widely used type of ATS in the United States are electronic communication networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.

Understanding an Alternative Trading System (ATS)

ATS account for much of the liquidity found in publicly traded issues worldwide. They are known as multilateral trading facilities in Europe, ECNs, cross networks, and call networks. Most ATS are registered as broker-dealers rather than exchanges and focus on finding counterparties for transactions.

Unlike some national exchanges, ATS do not set rules governing the conduct of subscribers or discipline subscribers, other than by excluding them from trading. They are important in providing alternative means to access liquidity.

Institutional investors may use an ATS to find counterparties for transactions, instead of trading large blocks of shares on national stock exchanges. These actions may be designed to conceal trading from public view since ATS transactions do not appear on national exchange order books. The benefit of using an ATS to execute such orders is that it reduces the domino effect that large trades might have on the price of an equity.

Criticisms of Alternative Trading Systems (ATS)

These trading venues must be approved by the SEC. In recent years, regulators have stepped up enforcement actions against ATS for infractions such as trading against customer order flow or making use of confidential customer trading information. These violations may be more common in ATS than national exchanges because ATS face fewer regulations.

Dark Pools

A hedge fund interested in building a large position in an equity may use an ATS to prevent other investors from buying in advance. ATS used for these purposes may be referred to as dark pools.

Dark pools entail trading on ATS by institutional orders executed on private exchanges. Information about these transactions is mostly unavailable to the public, which is why they are called “dark.” The bulk of dark pool liquidity is created by block trades facilitated away from the central stock market exchanges and conducted by institutional investors (primarily investment banks).

Although they are legal, dark pools operate with little transparency. As a result, dark pools, along with high-frequency trading (HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market.

Regulation of Alternative Trading Systems (ATS)

SEC Regulation ATS established a regulatory framework for ATS. An ATS meets the definition of an exchange under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirements in Rules 300-303 of Regulation ATS.

To comply with Regulation ATS, an ATS must register as a broker-dealer and file an initial operation report with the Commission on Form ATS before beginning operations. An ATS must file amendments to Form ATS to provide notice of any changes to its operations, and must file a cessation of operation report on Form ATS if it closes. The requirements for filing reports using Form ATS is in Rule 301(b)(2) of Regulation ATS. These requirements include mandated reporting of books and records.

In recent times, there have been moves to make ATS more transparent. For example, the SEC amended Regulation ATS to enhance “operational transparency” for such systems in 2018. Among other things, this entails filing detailed public disclosures to inform the general public about potential conflicts of interest and risks of information leakage. ATS are also required to have written safeguards and procedures to protect subscribers’ trading information.

The SEC formally defines an alternative trading system as “any organization, association, person, group of persons, or systems (1) that constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Exchange Act; and (2) that does not (i) set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system, or (ii) discipline subscribers other than by exclusion from trading.”

What Is an After-Tax Contribution?

An after-tax contribution is money paid into a retirement or investment account after income taxes on those earnings have already been deducted. When opening a tax-advantaged retirement account, an individual may choose to defer the income taxes owed until after retiring, if it is a traditional retirement account, or pay the income taxes in the year in which the payment is made, if it is a Roth retirement account.

Some savers, mostly those with higher incomes, may contribute after-tax income to a traditional account in addition to the maximum allowable pre-tax amount. They don’t get any immediate tax benefit. This commingling of pre-tax and post-tax money takes some careful accounting for tax purposes.

Understanding After-Tax Contributions

In order to encourage Americans to save toward their retirement years, the government offers several tax-advantaged retirement plans such as the 401(k) plan, offered by many companies to their employees, and the IRA, which anyone with earned income can open through a bank or a brokerage.

Most, but not all, people who open a retirement account can choose either of two main options:

• The traditional retirement account allows its owner to put “pre-tax” money in an investment account. That is, the money is not subject to income tax in the year it is paid in. The saver’s gross taxable income for that year is reduced by the amount of the contribution. The IRS will get its due when the account holder withdraws the money, presumably after retiring.
• The Roth account is the “after-tax” option. It allows the saver to pay in money after it is taxed. That is more of a hit to the person’s immediate take-home income. But after retirement, no further taxes are owed on the entire balance in the account. The Roth 401(k) option (referred to as a designated Roth option) is newer, and not all companies offer them to their employees. Earners above a set limit are not eligible to contribute to a Roth IRA account.

Post-Tax or Pre-Tax?

The post-tax Roth option offers the attraction of a retirement nest egg that is not subject to further taxes. It makes the most sense for those who believe they may be paying a higher tax rate in the future, either because of their expected retirement income or because they think taxes will go up.

In addition, money contributed post-tax can be withdrawn at any time without a fat IRS penalty being imposed. (The profits in the account are untouchable until the account holder is 59½.)

On the downside, the post-tax option means a smaller paycheck with every contribution into the account. The pre-tax or traditional option reduces the saver’s taxes owed for the year the contributions are made, and it is a smaller hit to current income.

The downside is, withdrawals from this type of retirement fund will be taxable income, whether it’s money that was paid in or profits the money earned.

After-Tax Contributions and Roth IRAs

A Roth IRA, by definition, is a retirement account in which the earnings grow tax-free as long as the money is held in the Roth IRA for at least five years. Contributions to a Roth are made with after-tax dollars, and as a result, they are not tax-deductible. However, you can withdraw the contributions in retirement tax-free.

Both post-tax and pre-tax retirement accounts have limits on how much can be contributed each year:

• The annual contribution limit for both Roth and traditional IRAs is $6,000 for tax year 2022 (increasing to $6,500 in 2023). Those aged 50 and over can deposit an additional catch-up contribution of $1,000.
• The contribution limit for Roth and traditional 401(k) plans is $20,500 for 2022 (increasing to $22,500 in 2023), plus $6,500 for those age 50 and above.

Early Withdrawal Tax Penalty

As noted, the money deposited in a post-tax or Roth account, but not any profits it earns, can be withdrawn at any time without penalty. The taxes have already been paid, and the IRS doesn’t care.

But if it’s a pre-tax or traditional account, any money withdrawn before age 59½ is fully taxable and subject to a hefty early withdrawal penalty.

An account holder who changes jobs can roll over the money into a similar account available at the new job without paying any taxes. The term “roll over” is meaningful. It means that the money goes straight from account to account and never gets paid into your hands. Otherwise, it can count as taxable income for that year.

Special Considerations

As noted above, there are limits to the amount of money that a saver can contribute each year to a retirement account. (Actually, you can have more than one account, or a post-tax and a pre-tax account, but the total contribution limits are the same.)

Withdrawals of after-tax contributions to a traditional IRA should not be taxed. However, the only way to make sure this does not happen is to file IRS Form 8606. Form 8606 must be filed for every year you make after-tax (non-deductible) contributions to a traditional IRA and for every subsequent year until you have used up all of your after-tax balance.

Since the funds in the account are separated into taxable and non-taxable components, figuring the tax due on the required distributions is more complicated than if the account holder had made only pre-tax contributions.