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Why the SEC May Have Scrapped Its Controversial 13F Proposal
The proposed rule change drew sharp criticism — but it also rested on shaky legal grounds.
Concerns about a regulatory proposal to allow many hedge funds to keep their stock investments secret may have been overblown.
The Securities and Exchange Commission’s July proposal to increase the reporting threshold for hedge fund managers from $100 million to $3.5 billion quickly drew criticism, as it would have reduced the number of reporting firms by nearly 90 percent.
Bloomberg reported Tuesday that the regulator had scrapped the program, citing anonymous sources within the SEC. A spokesperson for the SEC did not return an email seeking confirmation.
According to Alexander Platt, an associate professor at the University of Kansas School of Law, the negative reaction toward the rule may have been overblown. But, he added, there was still reason to toss out the proposal: The grounds the SEC based it on included a “glaring legal error.”
When the SEC originally proposed the rule in July, public companies said the rule could make it harder to figure out which activist investors owned their shares, effectively making them “go dark.” Shareholders would then be able “ambush” companies with activist campaigns, the reasoning went.
But according to Platt, the current system already allows for ambushes. As it stands, Rule 13F requires a hedge fund to disclose its position within 45 days after the quarter has ended. This effectively allows a hedge fund firm to avoid reporting a January stake in a company until mid-May, Platt wrote.
“Activists often move much faster than this,” he added. What’s more, about a quarter of activist investors announce themselves to a target before making any regulatory filings, Platt said.
“I think that these going-dark critics are exaggerating how much hedge funds would benefit from this ability to not file 13Fs,” Platt said by phone Friday.
In his paper, Platt noted that the proposal could have actually reduced activism, as so-called “wolf pack” activists, who try to win the support of their fellow shareholders, would no longer have visibility into who else was investing.
“Reducing transparency regarding institutional investor holdings might make things more difficult for hedge fund activists in some ways,” Platt said by phone. “Those activists benefit from that transparency just like issuers do.”
[II Deep Dive: The SEC Is Proposing a Big Change. These Firms Are Not Happy About It.]
Platt highlighted another reason that the SEC may have scrapped the plan in a separate paper that was published by the Yale Journal of Regulation in July. In this paper, Platt noted that the SEC’s proposal relied on a quote from a 1975 Senate Banking Committee report that said the regulator had the “authority to raise or lower” the reporting threshold.
The only problem was that this never became law. Instead, the final legislation allowed the SEC to lower — but not raise — the regulatory threshold.
“The whole proposal rested on the legality of being able to raise the reporting threshold, and the linchpin of their argument turned out to be completely inaccurate,” Platt said by phone. “I am puzzled as to how that error would have made it into a proposal like this.”
Reporting from Bloomberg and Reuters shows that there was a high level of opposition to the rule, which surprised regulators. Platt said he had no reason to doubt that this was the reason the rule was jettisoned, but there was a possibility that the SEC could have also seen the legal incentive to throw it out.
“No one at the agency benefits from admitting that kind of error because it’s a little bit embarrassing,” Platt said. “I think that they would much rather tell the world that they have listened to all of these policy-based concerns and that the comment process works.”