LAWRENCE — For nearly 50 years, mutual funds, hedge funds and other institutional investors have been required to file quarterly reports identifying the companies they have invested in and how much stock they hold in each one. Last summer, when the Securities and Exchange Commission proposed dramatically curtailing this disclosure program, voices from across the financial spectrum decried the proposal as an assault on market transparency. A University of Kansas professor has written a new study that comprehensively tracks, for the first time, just what those reports actually do and finds that, in some cases, less transparency might be better.
Since 1975, when Congress directed the SEC to mandate these disclosures under Rule 13F, scant attention has been paid to exactly who actually uses the information and to what ends. A new study, forthcoming in the Stanford Law Review by Alexander Platt, associate professor of law at KU, shows how this information has significantly affected interactions among corporations, their shareholders and other corporate constituencies – both for better and for worse.
“Rule 13F was created in the mid-'70s. Since then, mutual funds and other institutional investors have been churning out these reports every few months,” Platt said. “Last summer, the SEC said, ‘Do we really need this?’ And everyone and their cousin said, ‘Bad idea, don’t get rid of these reports’ and pleaded to keep them. Groups that usually agree on nothing agreed that getting rid of this program was a mistake.”
The proposal was dropped, and the Biden administration and Congress are now considering whether to increase the scope and frequency of disclosure. But, Platt said, no policy reform in either direction can be responsibly undertaken without a better understanding as to who is actually using the information produced under 13F – and how. The article answers this call by tracking significant effects of the program across a broad array of corporate governance interactions.
In some domains, Platt said that the transparency fostered by 13F has had a positive effect. For instance, he shows how these institutional ownership disclosures mitigate the short-term bias of hedge fund activism and foster greater collaboration between shareholders and managers.
However, Platt also identifies some domains in which less transparency may be better. For instance, he shows that 13F operates to subsidize management victories in closely contested elections on shareholder proposals. At the annual corporate meeting, shareholders can offer proposals for policy changes, for example, to increase sustainability efforts or have more diversity on its board of directors. Empirical studies have shown that among the subset of votes on shareholder proposals that are close, management almost always wins. Platt said 13F is a key part of the reason why.
“13F, I think, is helping management defeat these proposals. Most fail by a wide margin, but if you only look at the ones that are closely contested, management disproportionately wins those,” Platt said. “The data gives them information on who to lobby in contested elections before the polls close. Otherwise they wouldn’t know who to call. And they have the resources to lobby, while shareholders and consumers usually don’t.”
Accordingly, Platt said, less transparency of who owns shares could potentially prevent management from snatching these victories away from proponents in closely contested elections.
Platt also said that 13F may harm consumers by facilitating the anticompetitive effects of common ownership. Antitrust policymakers and scholars have been hotly debating whether the rise of index funds and diversified investing more generally has undermined economic competition between firms. The concern is that, for instance, Delta Airlines may be less eager to steal sales away from American to the extent both firms are owned by the same, diversified investors. Platt offered new evidence that 13F may be facilitating this effect; he quoted from several comment letters to the SEC submitted by leading corporate interest groups asking not to drop 13F because companies use it not only to better understand who their shareholders are, but also the extent to which their shareholders are also invested in competitors.
“They’re essentially saying, ‘We’re not just using 13F to see who our shareholders are, but how much they overlap with our competitors,” Platt said. “If you’re an antitrust enforcer and you hear that, alarm bells have to be ringing.”
Such examples illustrate that the use of 13F data needs to be better understood. Platt urges law and finance scholars to take a closer look at the mechanics of the rule, its effects and examine what could happen if the bottom 90% of required reports were eliminated, as proposed.
“The key takeaway here is that transparency is not an end in itself,” Platt said. “We need to know who is actually using this information and what they are doing with it. It’s a simple point but one that is absolutely essential for policymakers to absorb before moving forward with any changes to this program.”
Photo: Alexander Platt, University of Kansas associate professor of law. Credit: KU School of Law.