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SEC Proposed Big Change To Hedge Fund Transparency, But Wall Street Said 'No'

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SEC Proposed Big Change To Hedge Fund Transparency, But Wall Street Said 'No'

In July, the SEC approved a proposed rule that would have serious implications for hedge funds and other large institutional investors. 

The rule in question, SEC Rule 13f-1, requires that all institutional investors with at least $100 million assets under management file quarterly statements with the SEC, disclosing their holdings in stocks, ETFs and some closed-end funds. 

The SEC’s proposed rule change has several aspects, but the main change would increase that reporting threshold from $100 million to $3.5 billion. The idea, according to the agency, was that the change would represent a proportionate increase from when the original threshold was established in 1978, and also free up smaller firms from having to file every quarter. 

But given the public feedback, it doesn’t look like it’ll happen. 

What Are 13Fs?

The Form 13F is one of the most anticipated regulatory filings, especially for those who actively track the biggest investors on Wall Street, like Warren Buffett and Bill Ackman. 

Qualifying investors are required to submit their 13F within 45 days after the end of a quarter. (For Q3 2020, that deadline was Friday, Nov. 13.) 

Why The Rule Change Won’t Happen

According to the SEC, the proposed rule change would mean about 90% of current 13F filers would no longer be required to do so. That reduced transparency has many concerned. 

These filings, though they are delayed and do not provide a complete picture of a given investor's holdings, can still offer valuable insight into how a large fund adjusted its positions from the previous quarter. There are even entire websites devoted to tracking these quarterly changes. 

“The response was overwhelmingly negative to this idea,” said Jason Paltrowitz, executive vice president of corporate services at OTC Markets.

An analysis from Goldman Sachs found that 2,238 comment letters were sent opposing the change, and only 24 expressed support. 

In addition to OTC Markets, other Wall Street entities like the New York Stock Exchange, Nasdaq, CBOE and Bloomberg, as well as public companies like FedEx Corporation (NYSE: FDX), La-Z-Boy Incorporated (NYSE: LZB), Alaska Air Group, Inc. (NASDAQ: ALK) and CVS Health Corp (NYSE: CVS) also dissented. 

The reason so many companies wrote in, Paltrowitz said, is because the 13F filing provides crucial insight for executives about who is investing in their company. Without it, they wouldn’t be able to tell if large investors are accumulating or unwinding positions. 

“Companies want to know who holds their stock; it’s something that gets talked about often,” he said. “This is a major issue for them.” 

After receiving the feedback, it doesn’t appear that the SEC will pursue its proposed change any further, according to Bloomberg.

This speaks to the effectiveness of the process, according to Paltrowitz. 

“The concept of how these things get done is actually really good for the capital markets. This is the way this should work. They had an idea trying to make markets better; the general population did not agree with them. Nothing ventured, nothing gained.”

Another Idea For 13F Reform

Though it doesn’t look like the SEC’s recent proposal will happen, there are still other ideas for 13F changes in the public domain. One of them calls for amending the rule to include more types of companies. 

Currently, international ADRs that trade in the U.S. but not on a major exchange — like Roche Holding AG (OTCQX: RHBBY), Adidas AG (OTCQX: ADDYY) and Heineken N.V. (OTCQX: HEINY) — do not have to be included in 13F reporting. 

“Rather than increase the reporting threshold for institutional investors, we think we should expand the definition or the number of securities that should be subject for reporting, namely OTC securities which are exempt from this whole thing altogether,” Paltrowitz said. “It is silly that you get these multi-national companies where the investment does not have to be disclosed.”

 

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