SEC Grants Too Many Confidential Treatment Requests, Critics Say

Warren Buffett’s Berkshire Hathaway and other institutional investors have used the CTR loophole to avoid disclosing holdings.


When Berkshire Hathaway CEO Warren Buffett revealed in a late-August filing to the Securities and Exchange Commission that his conglomerate held a 10.8 percent stake in Phillips 66 Co., worth some $4.5 billion, the development was somewhat surprising on two fronts.

First, it was only in February 2014 that Buffett had swapped a big chunk of Phillips 66 stock for the Houston-based oil refiner’s specialty products division, which he folded into Berkshire Hathaway’s Lubrizol Corp. chemical subsidiary. So that was a quick about-face.

Second, despite the fact that Omaha, Nebraska–based Berkshire Hathaway had built its stake well past the 5 percent threshold that requires an investor to notify the SEC of its position, that information was not publicly disclosed until well after the fact. Careful Buffett followers may have noticed that less than two weeks earlier, Berkshire had filed a statement listing its portfolio holdings that read: “Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission.”

This perfectly legal move to hide the Phillips 66 stock purchases shines a light on a relatively obscure but increasingly popular loophole in SEC disclosure requirements. Large institutional investors like Berkshire, as well as hedge funds and broker-dealers, which are normally obliged to divulge their stock holdings, can keep them shielded from public scrutiny by simply filing a confidential treatment request, or CTR. Valid reasons for the SEC’s granting such requests range from the possibility of increasing market volatility to the risk of facilitating copycat trading or front-running.

Some advocacy groups and experts say that granting CTRs for holdings is unfair — and unhealthy for markets because it decreases transparency. “It’s important information that investors have a right to receive,” says Heather Slavkin Corzo, Washington-based director of the AFL-CIO’s office of investment. “It’s feeding into the sentiment of retail investors that there are two sets of rules.”

Still, requests for confidential treatment appear to be on the rise lately. Institutional Investor filed a Freedom of Information Act request with the SEC, asking for the number of such requests it received from institutional investment managers filing on Form 13F, which lists stock holdings and must be submitted within 45 days of the end of the quarter. In 2011 the SEC received 116 requests and granted 99 of them. In 2012 it received 127 and granted 110. For 2013 the agency granted 119 of 138 requests; last year it received 172, of which 143 were granted.

So although these CTRs have been climbing, the percentage approved by the SEC has remained fairly constant, at about 85 percent. That strikes some as wrong. “As the number of requests increases, the percentage of those granted should decline,” says Mercer Bullard, a professor at the University of Mississippi School of Law and a former assistant chief counsel at the SEC who has served on the agency’s Investor Advisory Committee. “It is the larger managers who benefit.”

The penchant of institutional investors to seek confidential treatment for portfolio holdings may reflect the likelihood that the SEC will grant their requests. Also, until the agency makes its decision, the holding in question remains nonpublic, which leads to the same result.

In any case, Scott Hodes, a Washington-based lawyer active in Freedom of Information Act issues, says the SEC takes a relatively benign stance toward confidentiality requests. “They are somewhat sympathetic to them,” he notes, adding that investors have recourse if the commission turns them down. “Even if they don’t grant the CTR, the requestors still have the ability to file lawsuits.”

Hodes argues that the notion of absolute transparency is quixotic and perhaps unwarranted. “There’s not supposed to be 100 percent transparency; there are exemptions,” he says. “There are winners and losers. Stockholders in Berkshire Hathaway probably think it’s a good thing.”

Berkshire Hathaway did not respond to a request for comment. In a 2011 interview with the New York Times, the Oracle of Omaha defended confidential treatment of his investments, after he purchased a big wad of International Business Machines Corp. stock. “There are only about three people I’d like to know what they are doing,” he said. “But I don’t feel entitled to know.” Buffett added: “In fact, I think it would be unfair.”

Still, if one accepts the idea that more transparency leads to more efficient markets, confidential treatment must decrease efficiency. “The SEC is an agency whose purpose is the protection of market investors,” says the AFL-CIO’s Slavkin Corzo. “One of the foremost ways it achieves those goals is through disclosures. When you see waivers being given to certain investors, it raises concerns.”

For some observers, the confidential treatment issue shows a lack of vigilance on the part of the SEC, which also had no comment but sent a link to its website detailing its policy on the matter. “In recent years, the SEC has been deferring more to the industry — except in cases where symbolic settlements are negotiated against major banks,” Columbia Law School professor John Coffee says via e-mail. “This is a case where a cost-constrained SEC is letting sleeping dogs lie, while going after the low-hanging fruit (such as insider trading cases). They should be embarrassed but they are not.” Don’t expect Buffett to make a fuss about it either.