The opacity of hedge funds challenged by American companies

Posted on Oct 28, 2020 at 1:58 p.m.

A regulator at war with transparency. The much criticized plan to modify the disclosure thresholds for shareholdings gave this impression to many listed companies. In the United States, management companies, hedge funds and in particular activists, managing more than 100 million dollars, must make public their holdings in listed companies and certain derivatives (options, warrants, convertible bonds) no later than 45 days after the end of the quarter.

They fill out the famous 13F forms which list their investments. Any stock market investment of more than 10,000 shares or a value of $ 200,000 is thus communicated to the regulator and made public to the markets and investors. Their short selling positions (downside bets) may be kept confidential.

This rule of transparency of participations which has been imposed on them since 1978, the regulator, the Securities and Exchange Commission (SEC) wanted to shatter it by raising the threshold to $ 3.5 billion of managed capital. In 42 years, the US market capitalization has multiplied by 30, and the threshold must therefore also change and increase by a comparable amount.

According to the project, all managers or hedge funds with a stock market portfolio of less than $ 3.5 billion would not have had to make their investments public. More than 90% of hedge funds currently subject to the 13F rule would have escaped it with the new threshold. This would have been the case for the family investment firms of George Soros, John Paulson and activist David Einhorn.


But the project has met with unanimous opposition from US listed companies, some investors like Warren Buffett and even, rather rare, one of the four “commissioners” of the SEC, Allison Herren Lee. This new regulation should be abandoned or greatly amended (moderate increase in the threshold or choice of a new criterion). According to Goldman Sachs on the 2,262 letters received by the SEC in consultation with its project, 99% expressed their opposition. Companies fear in particular that activist hedge funds will take the opportunity to increase their capital in the greatest opacity. The funds can already try to derogate from the 13F rule by justifying their decision to the regulator. They can obtain, if necessary, a few additional days (6 maximum) to make their participations public.

Flexible regulation

Appointed by Donald Trump, Jay Clayton, the president of the SEC is on the same line as the Republican when it comes to the lowest regulatory bid. He sought to reduce “unnecessary burdens” and compliance costs for investors who must scrupulously complete their 13F forms. This would save between $ 68 million and $ 136 million per year for the management and fund industry.

A tradition, the president of the regulator of the American markets resigns after a presidential election even if the tenant of the White house is re-elected. It is the successor to Jay Clayton who is eyeing a post of attorney general or in the private sector, who should inherit this controversial project. Under his tenure, the SEC opted for a flexible, low-pressure approach to Wall Street.

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