Subject: File No. S7-08-20
From: Vinesh Jha
Affiliation: CEO, ExtractAlpha

July 19, 2020

Dear SEC,

Thank you for the opportunity to comment on the proposed rule change for holdings disclosures regarding form 13F.

By way of background, I am the founder and CEO of a financial technology firm called ExtractAlpha, whose clients, including the largest and most sophisticated investment management firms, rely on our data and research for their data-driven decision making and I have been at the forefront of data-related issues in trading, investment management, and finance research for over twenty years. I was formerly head of research for StarMine, a company which provided accountability in equity research in the wake of the equity research scandals of the early 2000s. StarMine was acquired by Reuters in 2009. I have also spend considerable time as a trader and portfolio manager within banks and hedge funds. My current firm focuses on helping investors use data and disclosures to make better decisions, thereby making market prices more efficient and fair. We strongly believe that the availability of high quality, abundant data is an unqualified good for the markets, and we believe that our decades of investment research proves this to be the case.

We believe that there are two competing views which many of us in the capital markets space hold dear, and which should not be particularly controversial:

1. Unnecessary regulatory disclosure burdens are bad for business from a cost perspective
2. More disclosure is good for market efficiency

There is a third view which might be more controversial, and where market participants probably have more varied views:

3. Regulatory disclosure burdens are bad for the investment management business from a proprietary information perspective

These three are not always easy to reconcile, and the new 13F rules put them at direct odds with one another. Therefore, we must look at the particulars of the newly proposed rule changes and determine how the costs and benefits related to each view offset one another.

First, to what degree are the current regulatory burdens bad for business?

Second, to what degree are the existing disclosures good for the market, and how much would the newly proposed disclosures be worse?

And third, to what degree does the current level of required disclosure affect business for asset managers?
Of the three, the first question is actually the easiest to answer empirically, in the sense that the costs are quantifiable. We have spoken to multiple contacts in the industry to determine the magnitude of these costs. Typical responses:

Its not a time-consuming task to prepare and file the report via EDGAR. Our 13F table is generated automatically. I spend less than 2 hours a quarter reviewing, editing, record keeping etc.

We use a service to file. The fee is only $125 per quarter. They modify our report to comply with the EDGAR filing requirements and file it with the SEC. Its very efficient.

We have not seen any estimates which are even close in magnitude to the PRA estimates listed in Table 2 of the text of the rule change, which seem orders of magnitude too large.

Given the important role that reporting plays in investor protections, investment managers have built robust compliance organizations into their practice. Leveraging the capabilities of these fixed costs with an additional 2 hours of work per quarter, at a minimal cost, is an extremely efficient way to bring transparency to all market participants, and is in the best interest of everyone, including the managers own clients. There are many onerous regulatory burdens in the asset management industry, many of which have emerged post-Madoff. 13F filings are not one of them and its unclear why today, in an era in which the general public understands the value of data and disclosure, a reduction in the availability of such information is on the table.

As for the second question, are the disclosures good for the market? The data in 13F filings is highly valuable for financial researchers who analyze EDGAR data in order to gain insight into holdings, sentiment, and trends in the investment management industry. Investors can use the data to understand whether their managers have drifted from the style which they claim in their documents, or have recklessly invested in positions which are more speculative than their mandate would imply, or have become more or less concentrated in their holdings than an investor would have been led to believe. Although the data only tells a part of the story – for example, it shows only the long side of the managers holdings and not the short side – it is still immensely valuable.

From an institutional investors perspective, the following quote sums up the viewpoint nicely:

I am a lot more concerned about losing transparency from a research point of view than I am about filing

As for the third question, are the disclosures bad for business for investment managers? Do they harm the ability of investment managers to do their job competitively? We would argue that the original framing of the disclosure rules was actually forward-thinking in this regard. Trading today happens more and more rapidly, and investors holding periods has measurably shrunk over time. The disclosures are required only quarterly, and with a 45 day lag. By the time the holdings are disclosed, the fund has likely entered into its position, and anyone wishing to mimic the funds position can do so without adversely impacting the funds ability to enter that position at a favorable price without moving the market against it. The disclosures allow individual investors to examine an investment managers track record, without impacting that managers ability to do their job.

It is rare, and commendable, that the Commission seeks to help reducing the regulatory burdens which have had a significantly negative impact on American capital markets since 2008. However, we believe on balance that the proposed amendments to 13F filings are a poor place to start, and wonder whether there is any single important interest group, including individual investors, for whom the proposed changes represent a truly significant improvement. On the whole, the balance of the arguments seems to clearly tilt in the favor of keeping the regulations as they are today. Adjusting the minimum AUM of filers would not benefit the investment managers, their clients, or the general public, would cause more harm than good, and should most certainly be considered a major rule change, with significant adverse effects on competition, investment and innovation, per the Small Business Regulatory Enforcement Fairness Act of 1996.

Thank you for your consideration.