Warren Buffett delights in masking his intentions. But unknown to most investors, he gets a little help from none other than the Securities & Exchange Commission. Under SEC rules developed in the mid-1970s, individuals or companies with investment portfolios of more than $100 million in equities must disclose securities positions quarterly in a 13F filing. But the Sage of Omaha can keep confidential for a year or more some of the holdings of Berkshire Hathaway Inc., his investment vehicle, thanks to an unusual exemption. Other well-heeled investors have obtained similar confidentiality privileges.
The rationale for secrecy? You have to show you have either a "proprietary investment strategy," which if disclosed could "cause substan- tial harm to [one's] competitive position," or a risk arbitrage position that may not be closed before the next quarter's end.
But doesn't everyone on Wall Street think their methods are "proprietary?" "We've definitely heard that," says SEC spokesperson Chris Ullman. "But simply looking for undervalued stocks is not unique to what money managers do."
"TIME ENOUGH." Last year, the SEC got more than 1,700 13F filings. About 50 individuals or companies got to keep all or part of their holdings secret for a year. A partial list from New York research firm Technimetrics includes such companies as: Greenway Partners, Capital Research & Management, Waterstreet Capital, T. Rowe Price, Allen Holdings, Fleet Financial Group, Deep Discount Advisors, Marcus Schloss, Ruane, Cunniff, Dillon Read, Lehman Brothers, and Alpine Associates.
Over two quarters in 1995 and '96, Alpine Associates, a private limited partnership in Cresskill, N.J., built a 1.9 million position in Revco--but didn't disclose it for another year, according to Bob Gabele, an insider-trading expert with Ft. Lauderdale-based CDA/Investnet. Alpine disclosed its position about the same time CVS said it was buying Revco. "I'm not speculating Alpine knew if the deal was coming," says Gabele. "But they took a fairly significant position in Revco, and possibly someone in the public would have liked to have seen that." Execs at Alpine would not comment.
Sometimes the secrecy backfires. On Aug. 21, when Buffett released his latest stock holdings, his previously disclosed 8% position in Wells Fargo & Co. was missing. Investors concluded he had dumped his stake, causing a sharp sell-off in Wells shares. Not true. Buffett just didn't have to disclose his position.
Technimetrics Vice-President Cary Krosinsky says it's ridiculous to allow confidential filings. "Its not clear who's getting confidential treatment at any point in time," he says. "Right now, for example, Warren Buffett has disclosed part of his holdings, but the other part remains confidential. The most recent information about his confidential holdings is from Mar. 31, 1996. That's 15 months late." Everyone without special treatment has 45 days after the end of the quarter to file. "That should be time enough for investors like Buffett as well," says Krosinsky.
All of this raises questions about whether confidential filings are necessary or even appropriate. Do these professional investors really have investing strategies so special that their positions should be protected for a year or more? Should any strategies be protected?
"People who run huge pools of capital don't have to follow the same rules that everyone else does," gripes L.A. merchant banker Marshall Geller. "If Buffett sells shares confidentially, he avoids possibly losing lots of money if the stock drops on the news. Whereas if I have to disclose I'm selling, I will lose lots of money if the stock drops. I should be harmed and he shouldn't?"
Clearly, the SEC has created an uneven playing field for investors. It's time for the SEC to reexamine its confidentiality policies and, ideally, abolish them. Secret filings give unfair advantages to a few and fuel the harmful whisper circuit on Wall Street. To keep the market truly open, the SEC's job is to prevent unnecessary speculation, not create it.
Says Larry Feinberg of Oracle Partners in New York, who heads a $500 million hedge fund: "I do not think confidential filings are fair. If I'm going to pull down my pants in public I want everyone to pull down their pants, too."