Is Too Much Transparency a Good Thing?
Transparency is an oft-repeated word these days. I can remember back to the good old days of Eliot Spitzer as New York AG crusading against equity analysts and tossing that word around. Sarbanes-Oxley made it stylish and the recession made it mandatory for corporate communicators, and in particular, Investor Relations Officers (IROs). An unscientific study found that “transparency” was used in 98% of 2010 annual shareholder letters. Jokes aside, transparency in many areas of communications is of course a good thing, in fact a necessity, and now even a requirement on many levels. But does the value of transparency hold true for all areas of communications? Well, that depends on who you ask.
From an institutional investor standpoint, let’s look at reporting and disclosure for portfolio holdings, focusing on Section 13 of the SEC reporting process, including F, G and D filings. As many of us are already aware, institutions managing over $100M in assets are required to disclose their equity holdings to the SEC on a quarterly basis. You see this in the form of 13-F Filings. It’s always lagging data, and when coupled with the myriad legal ways in which institutions can report their true positions by spreading them out, the information never proves all that useful. This is especially true in activist situations when real-time disclosure is of the most pressing need, and therefore waiting 45 days after the current quarter has expired limits or eliminates the value of the data. One work-around for IROs is the ability to engage in the art of shareholder ID; a service provided by several vendors who try to develop a profile of how existing shareholders may adjust their positions. For institutions, one of the drawbacks is that the reporting process can be onerous, especially to smaller funds with limited back-office infrastructure. (In a future post I will address potential changes to the classifications of passive and non-passive investors.)
On the other side of the institutional investor reporting/disclosure spectrum is the expectation that within the next two years institutions will be required to report their total portfolio of holdings, including equity (long/short), derivatives, swaps and other financial instruments. As you may imagine, the buy-side is not very happy about this, with shareholder activists in particular calling it anti-free market. Some institutions are arguing that this will hamper investment, if for tactical purposes, they do not want to disclose their investments until it is absolutely necessary, e.g. 13-D Filing. And those with an agenda against Wall Street will dismiss this unease with traditional buy-side dissatisfaction and pushback with anything that requires more reporting/disclosure and insight into a firm’s investment approach and execution. However, in this instance the buy-side might have legitimate concerns for two reasons:
- Will these more expansive reporting requirements limit the competitiveness of US-based buy-side institutions over their global counterparts, who are not held to the same level of disclosure (at least not yet and with any degree of consistency)?
- Is the real value in expanded reporting the timeframe in which the information is disclosed, or the specific information itself? I would argue that the timing, especially in activist situations, is far more valuable to an IRO than necessarily an institution’s derivatives or other holdings in financial instruments, irrespective of how they can convert into equity.
Regardless of these two concerns, clearly the existing reporting requirements and expected reporting changes are neither ideal for any constituency. But barring a hybrid approach, and in contending with an “open is better” atmosphere, institutional investors may want to start beefing up their back offices in advance of what’s ahead.