13F – a poor substitute for a 793 – is under threat

It is a constant misapprehension that we live in an era of a global financial services market. The media is constantly telling us that when the US catches cold, Europe sneezes, and that the markets are intimately linked.

Well, this is certainly NOT true when it comes to identifying who owns which listed company. Whilst in the UK – and several other markets – issuers have the right to demand the details of the beneficial ownership of their equity issues (see "From 212 to 793 – the world in two parts"), the world’s largest market (the US) has to rely on quarterly filings known as 13-F’s.

And yet evidence is emerging that even these modest disclosures are under attack from the hedge fund industry.

Congress passed Section 13(f) of the 1934 Securities Act in 1975 in order to increase the information available to the public regarding the securities holdings of institutional investors. Generally, Section 13(f) requires that institutional investment managers, that use “instrumentalities of interstate commerce” and manage over $100 million or more of specified securities, must file Form 13F.

If the manager is required to file Form 13F, the form must be filed no later than 45 days after the end of each calendar quarter. Form 13F must include the issuer name of all Section 13(f) securities, a description of the class of security listed, the number of shares owned, and the fair market value of the securities listed at the end of the calendar quarter. Small positions consisting of fewer than 10,000 shares of a given issuer are not required to be listed where the value of all of the fund’s holdings of that issuer is less than $200,000.

What does this mean in practice? Essentially, if you are an IRO seeking to find out who owns your shares, the newest information you can possibly get is a month and half out of date – and potentially nearly four months old.

In the days of fast position building, shorting of stocks and the leveraged fund, this is an absurdly long time.

Contrast that with the 793, where the issuer has the unrestricted right to demand the identity of an issuer, at any time.

So with this distinction, who is arguing that even a 13F filing is too much information, and why? Inevitably it is a hedge fund. Enter Mr Philip Goldstein, of Bulldog Investors hedge fund complex, which now runs $240 million in four hedge funds, and another $90 million as a sub-advisor to other managers. They crossed the 13F reporting threshold earlier this year and are due to make its first filing any time soon (February 2007).

Mr Goldstein says that putting the portfolio information in the public domain amounts to the appropriation of valuable trade secrets without compensation: “There is no rational relationship between the disclosure scheme of 13F and any legitimate government interest”. And the other argument goes: Filing a Form 13F runs counter to hedge funds’ desire to keep their positions confidential. Moreover, by examining a series of Form 13F filings, it may be possible to work out hedge funds trading strategies. As a result, hedge fund managers seek to avoid Section 13(f) requirements.

And they are pitching the SEC to win an exemption.

This would be very bad news for companies and their IR professionals seeking to manage an outreach programme to institutions. As we argue elsewhere in this blog, knowledge of the underlying owners of the business is the heart of good IR, and we believe that an orderly market as a whole has a right to know whether a company is the target of an activist strategy, and the extent of that ownership.

To do otherwise would run counter to the SEC’s own rules of disclosing material information – rule 10b-5.

The SEC should consider very carefully the consequences of any exemption before deciding.