Should US investors disclose short positions?
In July this year the US House Financial Services Committee passed a bill on to the main chamber that, if ratified, will drastically reform the information investors are required to report to the SEC.
The Short Sale Transparency and Market Fairness Act would require asset managers responsible for more than $100 mn in assets under management to file ownership reports with the SEC no later than 10 days after the end of each month. The current rules, which were enacted in 1934 and updated in 1979, require asset managers to file 13Fs with the SEC 45 days after the end of each quarter. The bill includes the disclosure of direct or indirect derivative positions or interest as well as equities in 13F filings. It also seeks to activate section 929X of the Dodd-Frank Act, which would require the disclosure of short positions.
The bill was introduced by Representative Maxine Waters, chair of the House Financial Services Committee. During her opening remarks at the hearing, she said: ‘In the late 1970s, Congress directed the SEC to require Wall Street fund managers to disclose their assets quarterly to the markets for several reasons: for companies to know who their shareholders are to better engage with them, for other investors to know where large investors are investing, and for Congress and the SEC to understand the economic power and influence of these funds.
‘Today, even though these large managed funds have become more dominant in the market and transactions occur at the speed of light, information in the 13F filing has not changed. In addition, many large investors now use derivatives as total return swaps or contracts for difference to quickly amass large levels of shares in a company.
'But these positions, which didn’t even exist in 1979, are not required to be disclosed. As a result, the information on a large fund’s 13F form is woefully incomplete.’
Waters’ comments were supported by NIRI, the Society for Corporate Governance, the North American Securities Administrators Association and others. For many, however, the language may sound familiar. Discussion around reform of 13F filings dates back many years: NIRI, the Society for Corporate Governance and NYSE Euronext filed a joint petition for reform in 2013. And, as already mentioned, provisions were made for disclosure of short positions in the Dodd-Frank Act, which was passed back in 2010.
The SEC – under both Democratic and Republican leadership – has decided, up to now, not to use that section of Dodd-Frank. So why did Waters decide to pick up these issues now? And do we really need disclosure of short positions in the US?
Timing is everything
There’s a line in Ernest Hemingway’s novel The Sun Also Rises where a character is asked how he went bankrupt. ‘Two ways,’ he responds. ‘Gradually, then suddenly.’ This is how lobbying in Washington, DC can feel, according to Gary LaBranche, NIRI’s president and CEO.
He tells IR Magazine that NIRI has been lobbying the SEC and members of Congress across both sides of the aisle on 13F reform for many years – long before he joined the association in 2017. But the last 12 months brought a confluence of events that made 13F reform and disclosure of short positions more attractive as a mainstream proposition.
It all started last summer, when former SEC chair Jay Clayton unveiled a proposed change to 13F filings, but not the one NIRI and others had been asking for. His change would have increased the threshold for 13F filers from $100 mn in assets under management to $3.5 bn – relieving 89 percent of asset managers from disclosing their positions in the US.
As much as the proposed rule change took IR and governance professionals by surprise, the surprise was outweighed by discontent. The SEC received more than 2,200 comment letters opposing the change and only 24 in favor. Clayton subsequently said that if 13Fs are the only way for US issuers to know who their shareholders are, ‘that’s something we [must] address’.
In short, last year’s attempt to reform 13F filings raised the broader issue of shareholder identification in the US, and amplified the voice of IR and governance teams that for years had been calling for greater visibility into who their shareholders are.
Clayton left the SEC on December 23, 2020, and just one month later the meme stock saga exploded into the US consciousness, as GameStop’s share price increased by more than 1,700 percent. The actions of WallStreetBets members and others raised a host of regulatory concerns, from payment for order flow and naked short-selling to clearinghouse rules and disclosure of short positions. Hundreds of Redditors even signed a petition asking the SEC to increase the frequency of 13F filings.
Then, in March 2021, Archegos Capital defaulted on margin calls from several large investment banks, having used total return swaps to hide its activity from the banks. The unwinding of Archegos Capital could ultimately cost lenders between $6 bn and $10 bn, depending on the analyst estimate – and it brought the practice of total return swaps into sharp focus.
‘One thing about being in the advocacy arena is that sometimes you have to dig the ground and plant the seeds for years,’ LaBranche says.
‘It’s a lot of education. Members of Congress and their staff change over time, so it’s important that you’re present and persistent. If you work hard enough at it and have enough people telling the story, the time will eventually be right.
‘We’re making great progress because of the Archegos scandal. These trading problems are showing the foibles in the market, and getting people to focus on a variety of issues. It’s hard to say that we’re lucky in this; we’re an overnight success after 13 years of effort.
'But with the rise of Reddit and WallStreetBets, it was an unusual set of circumstances. They say don’t let a crisis go to waste. Well, don’t let a meme stock go to waste either.’
This confluence of events may have paved the way for the Short Sale Transparency and Market Fairness Act, but a number of interviewees for this article say they’re not confident it will progress through the necessary steps to become a law before the US mid-term elections next year.
The vote in the House Financial Services Committee was along party lines – showing that the bill, and the others it was bundled with, do not have Republican support at this stage.
This is an extract of an article that was published in the Winter 2021 issue of IR Magazine. Click here to read the full article.