House Financial Services Chair Maxine Waters (D-Calif.) is pushing discussion draft legislation that would impose unnecessary new reporting requirements on institutional investors. This new regulatory burden would do little to solve the perceived problems being discussed by the Left. Instead, these requirements would impose duplicative, needless compliance burdens on investors that would undermine the free market and threaten retirement security for millions of Americans.
Rep. Waters wants to expand existing 13F reporting requirements that exist under the Securities Exchange Act of 1934 so that any short or long position in equities or in derivatives needs to be reported. This is part of a concerted effort from the Left to take aim at institutional investors. Securities and Exchange Commission Chair Gary Gensler has also said he wants to impose new disclosure requirements on short selling through regulatory authority.
The new reporting requirements are duplicative and unnecessary. The Dodd-Frank Act of 2010 requires SEC to adopt rules that increase transparency in the market. This process is already underway through the SEC Regulation Reporting and Dissemination of Security-Based Swap Information (SBSR), rules designed to enhance price discovery, create transparency, and lower transaction costs.
Given the existence of this regulatory framework, it makes little sense for Congress to impose additional requirements.
New reporting requirements would not solve the problems the Left claims it would. SEC staff have explained that increasing the disclosure of short and long positions would have little or no use to them.
A June 2014 study by the staff of the Division of Economic and Risk Analysis of the SEC concluded that, “… the Division believes that Real-Time Short Position Reporting would provide regulators with little additional information than would be available from CAT.”
Current reporting provides regulators access to short sale transaction information within a single day – so the problem is not a lack of data. Additional reporting requirements are a solution in search of a problem.
New reporting requirements will be devastating to tens of millions of Americans who depend on institutional investors for retirement and income. The costs of this new regulatory burden will not be absorbed by institutional investors, instead it will be passed along to the millions of Americans that rely on investments for their retirement savings. Pension funds, mutual funds, charities, and others rely on stock lending to earn millions of dollars for Americans across the country.
According to the Managed Funds Association, pensions, university endowments, and nonprofit foundations invest more than $1.4 trillion in hedge funds, a quarter of all U.S. pension assets. This investment vehicle provided strong returns for retirees — for instance, actively managed hedge funds outperformed the S&P 500 index by nearly 10% during the 2020 market crash.
At a time when retirement insecurity is a growing problem, these reporting requirements would contribute to the issue further.
In California alone, hedge funds deliver for pensions, colleges, and nonprofits through $164.5 billion in investments. California State Teachers’ Retirement System, which invests $15.1 billion in hedge funds, covers 1,209,590 teachers.
In New York, hedge funds deliver for pensions, colleges, and nonprofits through $121.5 billion in investments. New York State Common Retirement Fund and New York City Police Pension Fund invest $15.6 billion in hedge funds, covering 1,157,643 participants. In Texas, hedge funds deliver for pensions, colleges, and nonprofits through $115 billion in investments. The Teacher Retirement System of Texas invests $14.1 billion, covering 1,629,682 Texas teachers.
More public disclosure could also essentially force investors to reveal their trading strategies, compromising their ability to manage market risk exposure. It would also lead to others copying their strategies, reducing their return on the immense amount of research they do. This would reduce possible returns, which would harm the retirement security for millions of Americans.
New reporting requirements would play havoc with the free market. While there is little utility to expanding 13F reporting requirements, it would disrupt the natural functions of a free market.
For instance, these new reporting requirements could result in short-sellers facing public shaming and retaliation.
The fact is, there is nothing to fear from short selling, as it is a common function of the free market. An investor will short a stock when they believe it to be overvalued.
In-depth empirical research has found that short selling is not responsible for market crashes and economic downturns. Instead, it provides efficiency and information to markets, ultimately softening the blow of a downturn. The 2008 market crash could have been far more widespread if short-sellers hadn’t recognized the housing market was overvalued. Rather than solving market volatility, these reporting requirements could make the market more volatile and exacerbate the pain felt during future market crashes.
In extreme cases, short selling can help expose corruption. In the past, short-sellers have been instrumental in uncovering corporate fraud such as the Enron and Wirecard cases.
Rep. Waters’ bill to impose new regulatory requirements is completely unnecessary. This legislation would provide little or no useful information to regulators and would instead harm Americans’ retirement securit and remove important market signals that expose corruption and soften the blow of economic downturns.