Andrew Ross Sorkin of the New York Times beat me by about two hours last night in getting to the point about the SEC-granted waivers from public disclosure that allowed Warren Buffett to accumulate $10.7 billion worth of IBM stock for Berkshire Hathaway in secret. Mr. Sorkin even, to his credit, asked Mr. Buffett about the issue. From the Sorkin column:
Mr. Buffett, in an interview, asked me, "How would you feel if you had to announce every story idea you had?"
He said that he did not believe that public investors should always be allowed to piggyback on investment ideas made by professional investors, especially before they are finished buying.
Mr. Sorkin could have answered Mr. Buffett back that the SEC's disclosure rule isn't the same as requiring a journalist to announce every story idea. Mr. Buffett, after all, isn't required to announce every investment idea he has. He isn't even required to disclose immediately every investment he makes. He just has to disclose, at the end of every three months, what publicly traded stocks he owns. An appropriate journalistic response might have been, "Mr. Buffett, the readers find out about all the story ideas I act on anyway, because by the time three months pass, they're articles printed in the newspaper."
Or Mr. Sorkin might have answered, "how would you feel if every professional journalist were required to announce every story idea, but a government agency issued a few waivers each year to journalists working for large news organizations."
Or Mr. Sorkin might have answered, "Gee, Mr. Buffett, if you don't think public investors should be allowed to piggyback on ideas of professional investors, why don't you launch a public policy campaign to repeal section 13(f) of the Securities Exchange Act of 1934? And why don't you make it as aggressive and high-profile a campaign as your effort to get taxes raised on the "super-rich"?
There's a discrepancy between Mr. Sorkin's dispatch, which has an SEC spokesman saying "the agency received about 60 requests a year to keep investments confidential" and the Wall Street Journal dispatch I linked last night, which reports, "The SEC issues about 60 confidentiality waivers per quarter to investors."
A September 2010 report by the SEC's inspector general found "approximately 446" confidential treatment requests made between January 2008 and December 2009.
A deeper question is why should investment managers have to disclose to the public in the first place what they are buying. The rationale when the 13(f) requirement was enacted in 1975 was that the SEC would somehow use the data to protect the public interest. But the SEC inspector general report in 2010 found that in fact, "no regular or systematic review of analysis of this information is conducted." If the point is for the SEC to use the information, some might say it should be available to them only, rather than to the public as well — like, say, the information on a tax return. That would eliminate the need for confidential treatment requests, because the information would be confidential by default. Unfortunately, it could also open the door to potential trading on that information by current or former SEC employees or by their friends and family. If you think there's a lucrative revolving door for former SEC employees now, just wait until they have exclusive confidential access to the holdings of large hedge funds.
For funds that trade frequently, the quarterly snapshot may not be particularly revealing. Requiring funds to disclose on November 14 what they owned on September 30 may actually be misleading, because the firms could have dumped their September 30 holdings during October. The disclosure winds up being not what a fund actually holds but what it used to hold. What it all seems to amount to is a lot of compliance burden on fund managers and a lot of regulatory expense in return for not much by way of public benefit. Entrenched managements probably like it because it gives them some advance warning of large shareholders who might want change.
The inspector general report on the issue is worth a read. My favorite finding — a classic, really — is that some applicants are de facto granted confidential treatment, because it takes the SEC so long to decide on whether to approve or reject the confidential treatment request that by the time the question is resolved several reporting periods have passed and by then whatever stock-buying the firm is doing has been completed.