Jul. 16, 2020
Ms. Countryman, We’re offering our blog post dated Jul 15, 2020, regarding the startling and unexpected proposal by the Commission to exempt nearly 90% of institutional investors from statutory ownership disclosures. Issuers had asked at a September 2019 summit with the SEC if 13F changes were in the plans as our community has long advocated for modernized data and shorter timeframes (Dodd-Frank directs the Commission to institute monthly short-reporting, a directive that remains tabled, even as the Commission now in surreal fashion moves to worsen transparency). We were told no, that our initiatives were not on the current administration’s set of objectives. And then we see this. We will offer a separate, formal comment letter, but the discussion here is both germane to central concerns about the proposal and comes with humor highlighting what to us is absurdity. The blog follows in entirety: Jul 15, 2020: Big Blanket The US stock market trades about $500 billion of stock daily, the great majority of it driven by machines turning it into trading aerosol, a fine mist sprayed everywhere. So tracking ownership-changes is hard. And unless we speak up it’s about to get a lot harder. In 1975 when the government was reeling like a balloon in the wind after cutting the dollar loose from its anchoring gold, Congress decided to grant itself a bunch of authority over the free stock market, turning into the system that it now is. How? Congress added Section 11A to the Securities Act, which in 2005 became Regulation National Market System governing stock-trading today – the reason why Market Structure Analytics, which we offer to both public companies and investors, are accurately predictive about short-term price-changes. And Congress decided to create a disclosure standard for investors, amending the Securities Act with section 13F. That’s what gave rise to the quarterly reports, 13Fs, that both investors and public companies rely on to know who owns shares. I use the phrase “rely on” loosely as the reports are filed 45 days after the end of each quarter, which means the positions could be totally different by the time data is released. It’s a standard fit for the post office. Mail was the means of mass communication in 1975. Currently, the standard applies to funds with $100 million or more in assets. Many managers divide assets into sub-funds to stay below that threshold. So most companies have shareholders that show up in no reports. But at least they have some idea. Well, out of the blue the Securities and Exchange Commission (SEC) has decided to lift the threshold to $3.5 billion to reflect, I guess, the collapse of dollar purchasing power. But nothing else changes! What would possess a regulatory body ostensibly responsible for promoting fairness and transparency to blanket the market in opacity while keeping in place time periods for reporting that have existed since 1975? I’m reminded of a great line from the most quotable movie in modern history, Thank You For Smoking: I cannot imagine a way in which you could have $#!!@ up more. Public companies have been asking the SEC for decades to modernize 13F reporting. Dodd Frank legislation passed in 2010 included a mandate for monthly short-position reporting. It’s not happened because the law put no timeframe on implementation. But how stupid would it be to require monthly short-position reporting while letting long positions remain undisclosed till 45 days after the end of each quarter? Much of the world has stricter standards of shareholder disclosure. Australian markets empower companies and stock exchanges to require of investors full disclosure of their economic interest, on demand. Our regulators appear to be going the opposite direction. Australia offers an idea, SEC. If you’re going darken the capital markets with a new (non) disclosure standard, then how about empowering companies to demand from holders at any time a full picture of what they own and how they own it? Investors, I get it. You don’t want anyone knowing what you have. Well, it seems to work just fine in Australia, home to a vibrant capital market. And let’s bring it around to market structure. There is a woefully tilted playing field around ETFs. A big investor, let’s say Vanguard, could give a billion-dollar basket of stocks to an Authorized Participant like Morgan Stanley off-market with no trading commissions and no taxes, in exchange for a billion dollars of ETF shares. None of that counts as fund-turnover. It could happen by 4p ET and be done the next day. No trading volume. And then Vanguard could come right back with the ETF shares – again, off-market, doesn’t count as fund-turnover – and receive the stocks back. Why would investors do that? To wash out capital gains. To profit on the changing prices of stocks and ETFs. This is a massive market – over $500 billion every month in US stocks alone. It’s already over $3 TRILLION in total this year. What’s wrong with it? All other investors have to actually buy and sell securities, and compete with other forces, and with volatility, and pay commissions, pay taxes, alter outcomes by tromping through supply and demand. Oh, and every single trade is handled by an intermediary (even if it’s a direct-access machine). So how is that fair? Well, couldn’t all investors do what Vanguard did? No. Retail investors cannot. Yes, big investors could take their stock-holdings to Morgan Stanley and do the same thing. But trading stocks and ETF shares back and forth to profit on price-changes while avoiding taxes and commissions isn’t long-term investment. That the ETF market enjoys such a radical advantage over everything else is a massive disservice to public companies and stock-pickers. And after approving the ETF market, you now, SEC, want to yank a blanket over shareholdings to boot? Really? Leave us in 1975 but 35 times worse? Market Structure Analytics will show you what’s happening anyway. And nearly in real time. But that’s not the point. The point is fairness and transparency. Every one of us should comment on this rule. # # # Yours Sincerely, Tim Quast President ModernNetworks IR LLC