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Just when David Baskin thought he might have rid himself of having to disclose the contents of his portfolio to the U.S. Securities and Exchange Commission, Ontario came calling.
Baskin, like most Canadian fund managers, was happy to see a recent proposal from the SEC that would limit the public quarterly disclosure of holdings — through what are known as 13F forms — to funds with more than US$3.5 billion in U.S.-listed stocks.
The current bar of US$100 million was put in place in 1975 and was meant to force only the largest institutional players to disclose their portfolios to ensure they didn’t have undue influence in the market. Because the floor hasn’t been altered since, Baskin Wealth Management, which owns $677 million in U.S.-listed stocks — a relatively modest sum by 2020 standards — is still required to participate alongside massive U.S. hedge funds and pension plans.
The U.S. proposal is still subject to a 60-day comment period, and Baskin isn’t celebrating quite yet. That’s because while relief may be coming south of the border, a new filing requirement could be on the horizon here at home.
The Ontario government appointed a task force with the purpose of updating securities laws and, two weeks ago, it proposed introducing a Canadian equivalent of 13F disclosure.
“Easy come, easy go,” Baskin said. “But what’s the point? From a competitive point of view, it’s nice to know what your competitors are doing, but if you’re the Ontario Securities Commission and I report to you that last quarter I had 40,000 shares of Royal Bank of Canada and this quarter I had 60,000 shares … what are you going to do with that information?”
The Ontario task force proposal, in its current state, is still quite generic and does not currently include an assets-under-management floor that would trigger disclosure. But the group, which will present its final recommendations to the Ontario government later this year, said the SEC’s procedure will provide a “proven framework.”
“Because institutional investors are generally not required to disclose their holdings unless they cross the 10 per cent reporting threshold, issuers and other market participants may not have adequate transparency into institutional investors’ ownership positions,” the consultation report said. “The lack of transparency hinders shareholder engagement and the ability for issuers to respond to shareholder concerns.”
The task force is trying to strike a balance between granting more transparency for companies and more freedom for investors, according to Walied Soliman, the chair of the task force and the Canadian chair of law firm Norton Rose Fulbright.
“We think that that balance is quite fair, and we’re looking forward to comments from both the issuer and fund community on these recommendations,” Soliman said in an interview with the Financial Post.
The lack of transparency hinders shareholder engagement and the ability for issuers to respond to shareholder concerns
John Wilson, managing partner and co-CEO at Ninepoint Partners, said that if Ontario introduces its own form of 13F disclosures, there would have to be stark differences.
For one, the floor likely can’t be set at a number that compares to the SEC’s US$3.5 billion, given the disparity between AUM for Canadian and American funds.
“Our liquidity is different, the breadth of our market is different, the number of players here that are meaningful is very different,” said Wilson. “The TSX is a fraction of the S&P 500, so you don’t need to be nearly as large to have undue influence.”
More important for Wilson, this disclosure needs to have some sort of significance. One common complaint that multiple fund managers have about the SEC process is that many don’t feel that the regulator is actually analyzing the reports because of the sheer number of them — about 5,000 — that are submitted. They think the reports simply end up in a black hole of sorts.
Wilson has been filing 13Fs for 20 years and has never fielded a question about them. Last year, the Financial Post found that a major Canadian pension fund, British Columbia Investment Management Corp., had excluded significant chunks of its portfolio in 13Fs for 10 consecutive quarters and that the SEC was unaware. The last time a firm appears to have gotten the attention of the SEC was in 2007 when Quatro Global Capital LLC stopped filing 13Fs for three years.
The data is being used for other purposes than originally intended
“There was no clear evidence the SEC was even reviewing the files or using them for any purpose,” said Katie Walmsley, president of the Portfolio Management Association of Canada. “The data is being used for other purposes than originally intended.”
Some fund managers, Walmsley said, have always been concerned that their competition could see their holdings and copy the “secret sauce” of their portfolios. This is particularly true for small firms, she said. In comparison to what a pension fund might hold in investments that are not disclosed — short positions, options, alternative investments and more — a smaller firm is likely revealing of its overall strategy.
Opponents arguing against the changes purposed by the SEC, however, say the opposite is true. Because those other investments are not disclosed, the process doesn’t really lead to full transparency.
Former SEC lawyer and pension fund investigator Edward Siedle was critical of the SEC’s proposal. Siedle is particularly worried it will result in pension funds becoming less transparent. The money they’re using to invest belongs to pensioners, who should always be able to see how it’s being put to work, he said.
When the changes take place, some Canadian pension funds will no longer have to disclose their U.S.-listed stocks. Chief among them is OMERS, which as of its most recent quarter, owned slightly more than US$2 billion in U.S.-listed stocks.
The Financial Post asked OMERS about the proposal and whether it would still disclose its portfolio for transparency’s sake and the pension fund would not comment.
If some pensions are no longer required to reveal the contents of their portfolios, their decisions will no longer be open to scrutiny, Siedle said.
“The idea that withholding information from beneficiaries is helpful, that’s preposterous,” Siedle said. “This benefits Wall Street, but it clearly doesn’t benefit investors.”
As for the concerns of asset managers that participating in the 13F process reveals too much of their strategies, Siedle discarded them. “They own the same Amazons, the same Microsofts as everyone else,” he said.
With files from Geoff Zochodne
Copyright Postmedia Network Inc., 2020