'Literally no one was asking for this, zero': How a controversial SEC proposal could shroud big-money managers in secrecy and leave individual investors in the dark

  • The Securities and Exchange Commission has proposed changing a rule in a way that would eliminate most investment managers' quarterly filings, called 13-Fs, which show equity holdings at quarter's end. 
  • The SEC said the change will allay expense-and regulatory-related burdens for small funds and protect investment strategies.
  • It's been widely challenged by the public and industry executives, as well as an SEC commissioner who said the proposal "joins a long list of recent actions that decrease transparency and reduce both the Commission's and the public's access to information about our markets."
  • Business Insider spoke with executives, academics, and other industry insiders about how the proposal could change the institutional investment industry and how it's being received.
  • Visit Business Insider's homepage for more stories.

In a controversial move bewildering investors and executives, the Securities and Exchange Commission is considering a rule change that would let billionaire fund managers like David Einhorn and Stanley Druckenmiller release four fewer filings a year to the public and effectively keep their public equity holdings a secret. 

It's a proposal currently up for debate that comes at the expense of market participants like individual investors, academics, and small businesses, critics of the proposal say.

There's general confusion around why the commission — in an election year — is pursuing the largely unpopular change that even the hedge-fund managers it purportedly helps haven't publicly supported. 

The SEC is proposing an amendment to the Form 13-F, which shows institutional investment managers' public equity holdings at quarters' end. Currently, firms overseeing at least $100 million in equities are required to file them quarterly within 45 days of the quarter's end.

The proposed change would bump that up to $3.5 billion, eliminating 90% of current US filers, like Einhorn's Greenlight Capital's $922 million in equity holdings or Druckenmiller's family office's $2.4 billion of stock holdings. 

Read more: The hedge fund industry has a problem with managers cherry-picking performance. 1 group wants to stop that.

This would spare smaller firms the cost of filing the documents, and would also protect proprietary investment strategies, the SEC said, pointing out the form has not been modernized since it was implemented in 1978. 

"Literally no one was asking for this, zero," said Maz Jadallah, CEO of AlphaClone, which uses the filings to create ETFs out of the best-performing stocks.

Companies like Jadallah's have sprung and been tapping these filings for years in order to gain insight into the top-performing managers' ways, and then replicate them. The filings have also been a favorite of journalists, giving a small window into the largely unregulated world of hedge funds. 

A number of market participants have railed against the proposal announced on a Friday afternoon in July. Of the 968 public comments posted to the SEC's website as of August 20, all but seven were in opposition, a team of Goldman Sachs strategists led by Ben Snider wrote in a report. More comments have been posted since the note was published.

A spokesperson for the SEC declined to comment for this story beyond the proposing release.

'I don't know if that passes the sniff test'

People who have weighed in range from professional investors to small-time traders. They identify themselves as executives, analysts, academics, retirees, chief investment officers, and individual investors including a Walmart associate, a retired orthodontist with the US military, and a research engineer with the American Welding Society.

One poster was Philip Howard, an assistant professor of finance at Wake Forest University's School of Business and a senior research associate at the Kenan Institute of Private Enterprise, a business policy think tank affiliated with the University of North Carolina.

Howard, who has researched crowded trades among hedge funds, posted that the proposed rule would hinder economists' work examining systemic risk with the use of 13-F data. 

"The research produced using this data has informed policy debates and regulators. Increasing the threshold would severely hamper the ability to continue conducting academic research in this area," he wrote.

The SEC's view that raising the threshold would alleviate a regulatory burden for funds? "I don't know if that passes the sniff test," he said in a recent phone interview, suggesting the burden on firms to fill out 13-Fs is not significant. 

Read more: Hedge funds are using these 10 alt-data sources to gain an investing edge and keep track of the coronavirus' impact

Other industry participants have puzzled over the SEC's statement that eliminating some funds' 13-F requirement would reduce costs and other burdens for small investment managers. The agency estimated that firms would save between $68.1 million and $136 million in annual compliance-related cost-savings if the proposal passes — roughly $15,000 to $30,000 per manager. 

"Most hedge funds characterize the cost of 13-F filings as inconsequential rather than burdensome," the team of strategists of Goldman Sachs wrote in the August 20 report to clients, adding clients have expressed to them that they are generally opposed to the proposal in its current form. 

"Clients believe transparency aids in price discovery. More information is better than less," Snider's team wrote, citing uses like asset allocators relying on 13-F data to aid in manager selection, and risk managers identifying crowded positions. 

The industry sounds off 

Financial services heavyweights, including an SEC official, have expressed alarm over the proposal. Most have cited a sweeping loss of transparency into what money managers own. 

Moments after the agency released its announcement on July 10, Commissioner Allison Herren Lee said in a statement that the proposal "joins a long list of recent actions that decrease transparency and reduce both the Commission's and the public's access to information about our markets."

"I am concerned that the projected cost savings in today's proposal are greatly overstated and wholly inconsistent with the Commission's past analysis — and, importantly, that the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets," she said. 

Three weeks later, Nelson Griggs, the president of the Nasdaq Stock Exchange and executive vice president of its corporate services business, said in a post on the company's website that the reduced transparency resulting from the proposal "could be harmful to public companies and investors." 

"It seemed to us like a fairly significant step backward," Griggs said in a recent phone interview with Business Insider, adding he was surprised by the agency's announcement. 

"We've heard from all sizes of companies, all sectors, and I will tell you, there is a belief that this is a pretty big step backward," he said. 

On the other side of the coin, hedge-fund investors — oftentimes individuals running billions in state employees' retirement funds or college endowments — are losing a key due-diligence tool, industry observers say. 

"They check managers to see that they're doing what they say they're doing from a style perspective," said Bill Murphy, who runs 13-F-focused site 13Hedgies, which tracks the performance of stocks held by the filers.

Hedge funds desperate for performance during the pre-pandemic bull run often strayed from their original strategies in search for performance, particularly value managers who ended up buying growth-focused tech names. 

Murphy plans to reorient his site around large funds with long holding periods, like Tiger Cubs such as Coatue, Lone Pine, and Tiger Global, and add additional analytics if the proposal passes.

Read more: THE TRUE TIGER KING: Inside the sprawling web of billionaire Julian Robertson, whose legendary Tiger Management has helped spawn hundreds of new hedge funds

"That's all we can do right now, adjust the business model and try to get as much out of the filings as possible," he said. 

The SEC said it chose $3.5 billion as the new proposed threshold because that level reflects the same market value of US equities that $100 million represented in 1975, when the agency adopted section 13(f) of the Exchange Act (the document in its current form was officially implemented three years later). 

Rocking companies' relationships with investors

The proposal to raise the reporting threshold so significantly would take away companies' insight into who owns their shares, especially small companies whose shareholders also tend to be relatively small, according to experts in investor relations and others in the field. It could also be more difficult to track activist investors' activity.  

Those were among the most prominent concerns from the finance chiefs and investor relations professionals at 110 US-listed public companies that data and analytics provider IHS Markit recently polled. Respondents spanned sectors and size, from $35 million to $400 billion in market capitalization. The survey found 98% were opposed. 

"I've never seen anything that lopsided," Robin Auten, executive director of perception research, whose team conducted the study, said in an interview. 

She said some respondents expected negotiations between the SEC and market participants that could yield compromises, like an increase to the threshold that is below $3.5 billion.

"They are asking for more and more transparency from us. There is a huge irony in that," Deborah Pawlowski, the founder and chief executive of Kei Advisors, a Buffalo, New York-based firm that helps micro- and small-cap companies navigate investor relations and corporate governance issues.

Pawlowski laughed when Business Insider asked what she thought about the SEC alleviating small funds' cost burdens in filing quarterly 13-Fs, suggesting the estimated savings have been overstated. 

But cost-savings for billionaires and millionaires is not the only reason the proposal has been floated. 

In a July 23 appearance on Squawk Box, the CNBC morning show, Chairman Clayton said "a lot of what we're hearing" related to the proposal is the way investors like to follow investment managers' holdings. 

"Well, that was not the purpose of 13-F," he said. "We have other requirements for when people have to disclose their holdings to the rest of the marketplace. So there's some question: should people really be able to track these small managers and follow their strategies? That's one of the questions we've asked." 

The commission's release on the proposal asked, "Who uses Form 13F data? Are these uses beneficial to investors, market integrity, or capital formation?"

Ken Heinz, the CEO of Hedge Fund Research, said hedge funds would be able to "manage their strategies with less non-investor access to proprietary holding data, allowing the funds to invest with greater focus on generation of performance for their investor clients."

Managers, constantly under pressure to outperform and justify their fees, have complained that their best ideas are quickly arbitraged away thanks to so many investors fishing in an increasingly small pond: The number of active US hedge funds now outnumber public US companies, not to mention the thousands of mutual funds and ETFs trading in the stock market.

Still, small investors who track big money managers' moves religiously from quarter to quarter are bracing themselves for the proposal in the case that it passes. The public comment period ends on September 29. 

"Rule S7-08-2 is bad," a person commenting under the name Tyler Dooskin wrote to the SEC. "Thank you." 

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