NRG fight puts spotlight on SEC's swaps debate

Catch up quick: Elliott, the world's largest activist hedge fund, has spent $1 billion for a more than 13% economic interest in NRG.

• Elliott says it wants a new CEO, new board directors, and cost cuts at the Houston-based company that supplies power to 7.3 million customers.
• The fund has petitioned FERC for the ability to hike its position to up to 20%, as required by Section 203 of the Federal Power Act.
• The rub: Elliott's actual ownership of NRG common equity is 1.1%, or around $100 million worth of shares, according to its latest filing.
• That means the majority of Elliott's holding is held via derivatives, namely, swaps. Swaps do not appear on shareholder registries, and do not grant voting rights, but they do allow investors a more cost-efficient way to build a position.

Zoom in: Executives and workers have complained for years about hedge fund usage of swaps. The argument: these types of derivatives give hedge funds an unfair advantage by staying below the public disclosure radar.

• The SEC has proposed a rule, known as 10B-1, that would require more disclosures and limits on the same kind of swaps Elliott is using for NRG.
• Public Citizen, the consumer advocate group founded by Ralph Nader, has launched a protest against Elliott's stake in NRG and filed complaints to FERC, calling for more details of the fund's ownership and plans.

The intrigue: Public Citizen also says Elliott's motives don't align with NRG's electricity customers, who stretch from Texas to New York.

• "Elliott's business model doesn't seem consistent with the interests of rate payers," says Tyson Slocum, energy program director at Public Citizen. "It's a short term play here. All Elliott cares about is moving a stock price to a target level and then getting out."
• In a response filed through FERC, Elliott called Public Citizen's claims baseless.

Of note: Gibson Dunn, Elliott's outside counsel, wrote in its response that "Public Citizen has attempted to commandeer the Commission's "protest" mechanism as a means of launching unsubstantiated and meritless attacks on the Elliott Applicants. These attacks are baseless and improper in this proceeding."

• Elliott has publicly said that its main issue with NRG is how the company spends its money, pointing to the December 2022 agreement to buy Vivint Smart Homes for $2.8 billion as one example of poor allocation.
• "Elliott's recommendations – that NRG should focus on its core business and improve its operations – are perfectly aligned with the interests of NRG's retail customers," the fund said in a statement to Axios.

By the numbers: NRG issued its spending plans in June and said in August that Vivint added 12% to Q2 revenues.

What's next: FERC is expected to rule on Elliott's 20% proposal by year-end though it has until early next year to make a final decision. Whether it will approve or deny the proposal remains unclear.

• FERC declined to comment on the case. NRG declined to comment.

What we're watching: If FERC denies Elliott's 20% request, it will be a victory for Public Citizen and advocates seeking to keep hedge funds in check.

• A ruling against Elliott would also embolden those in favor of the broader efforts to limit tools used by activist investors.

The SEC's swaps proposal

Meanwhile, the SEC is weighing its own effort on restricting how hedge funds like Elliott build public company stakes. Earlier this year, the Commission extended its 10B-1 comment period.

• "Transparency can be beneficial to market participants so that they can act in an informed manner to protect their own interests," the SEC says in its proposal.
• Elliott and other hedge funds have voiced strong opposition to the rule, saying it's an effort by companies to stifle shareholder activism.

What they're saying: "As currently framed, the Proposed Rule poses a direct threat to activism and risks undoing the progress activists have made in holding corporations more accountable and catalyzing healthy debate in all sectors of the market," Elliott's General Counsel Richard Zabel wrote in a March 2022 response letter to the SEC. Elliott's June 2023 letter took aim at the SEC's economic analysis.

• Retail investor Benjamin Peter, who listed himself as the president of the Peter Lumber Company, has a different take: "This regulation...appears to be a promising step towards enhancing transparency in our financial market. It gives everyone a clearer understanding of the securities landscape, allowing for better informed investment."

The bottom line: The financial industry's heavy lobbying efforts against 10B-1 make the chances of it passing about as small as Elliott's common equity stake in NRG.