SEC Considering Tougher Fund Disclosure Rules After Archegos FIasco

With the SEC having long ago become the butt of all financial jokes, its reputation tarnished and memorably steamrolled by none other than the Elon Musk who not long ago mused once whether SEC stands for “Suck Elon’s Cock“, the US capital markets regulator finally appears to be waking from its peaceful slumber frozen in carbonite and in the aftermath of the GameStop short squeeze and Archegos fiasco – which ended up costing various prime brokers billions in losses – it is reportedly considering “tougher disclosure requirements” for investment firms.

Confirming what we discussed last month, according to Bloomberg, Securities and Exchange Commission officials are “exploring how to increase transparency for the types of derivative bets that sank Archegos,” while also facing pressure from Capitol Hill “to shed more light on who’s shorting public companies after the GameStop frenzy.”

A key focus of the review will be whether there needs to be changes to forms 13F and 13D which reveal big stock holdings of hedge funds, mutual funds and family offices… except when they don’t.

Normally, investment firms that own shares worth at least $100 million must file a 13F detailing their long holdings (but not their shorts) every quarter, while funds issue a 13D once their stake in a single corporation exceeds a 5% “activist” threshold, an alert to other investors that they may be pursuing a hostile takeover or the breakup of the company. However, when funds use derivatives such as TRS or Certificates For Differences, they can legally mask their activities and hide their investment strategy from the entire market.

Enter Archegos, which never filed a 13F or a 13D because it used swaps – lots of swaps – rather than common stock to stealthily amass huge positions, including an estimated $10 billion wager on ViacomCBS. 

Like derivatives, short-sales are also largely excluded from disclosure forms in the US (but not in Europe), an issue that became a flashpoint this year when lawmakers questioned how hedge funds made bearish bets that were seemingly bigger than GameStop’s market value without anyone knowing who was behind the trades.

According to Bloomberg, the SEC is evaluating “whether filings should include derivatives and short positions, and if firms should submit 13Fs more frequently than every three months.” An overhaul might help regulators and Wall Street spot risks that are building up in the financial system. The billions of dollars in losses that Archegos triggered for Credit Suisse Group AG and other firms show the consequences of having such blind spots.

Hilariously, it was less than a year ago, in July 2020, that the Securities and Exchange Commission tried to reduce fund filing requirements, when it announced it had proposed an amendment to Form 13F and Rule 13f-1 to increase the reporting threshold for institutional investment managers to $3.5BN. Had the Proposal been adopted, it would have significantly relieved the administrative burden of 13F disclosures on all those investment managers who managed less than $3.5BN which is roughly 98% of all.

Luckily, the proposal did not pass, and so now the SEC is trying to do the opposite: get funds to file even more information about their holdings.

However, it won’t be easy: according to Bloomberg, one “thorny issue” the SEC is examining is how much legal flexibility it has to revamp rules as “current disclosure requirements are based on equity stakes that give investors the right to vote shares in corporate elections, not complex financial instruments like derivatives or options.”

Democrats on the House Financial Services Committee are also evaluating whether regulations should be tightened, including by making family offices like Archegos file confidential forms to the SEC that are meant to help identify threats to market stability, a congressional aide said. Even when family offices file 13Fs, they often avoid reporting their investments publicly because the SEC permits them to submit parts of the documents covertly.

To be sure, it is likely that nothing will actually happen since the review is in its early stages and Gary Gensler, who took over as SEC chairman last week, will decide how to proceed. He may well decide to do nothing if his Wall Street buddies decide that’s in their best interest.  And with former Goldmanite Gensler being new to the job, “there hasn’t yet been a push to pass legislation because lawmakers would like to give Gensler time to get up to speed in his new job.”

In other words, don’t expect anything to change for a long time.