We Should Buy the Shares We Want, Free Of the SEC

Under current Securities and Exchange Commission (SEC) rules, investors who accumulate a five percent stake in a publicly traded company are required to disclose their stake within ten days. While some are calling for faster disclosure or disclosure of smaller stakes, I see no reason to have such a rule at all. There is no meaningful information to be had from the disclosed stakes. Disclosure simply provides an opportunity for others to piggyback on the ones filing the disclosures in hopes of capturing some easy profits.

The SEC justifies the disclosure rule by claiming that an investor building a significant stake in a company is information that needs to be made public so that other investors are on a level playing field. However, as long as the buyer made the decision to acquire a significant stake based on public information, why is that buying any different than any of the other stock purchases made every day?

A clear indication that the rule is unnecessary is that the SEC allows investors to request an exemption from the disclosure requirement. Investors, including Warren Buffett, have asked for and been granted exemptions on the basis that disclosure would cause the price of the stock to rise and make additional stock purchases more expensive. Since leveling the playing field is the justification for the rule, how can the SEC grant exemptions on the basis that disclosure would level the playing field?

Not only do the SEC's actions in granting exemptions eviscerate the rule's entire premise, but shorts do not face a symmetrical disclosure rule. Why are long positions of more public interest than short ones?

If I invest my money in a fund, I have a right to know how those fund managers are investing my money. To that end, SEC requires certain disclosures which basically amount to informing investors of the investment rules of the fund and disclosing the fund's investment positions once a quarter. For the SEC disclosure rules about a five percent stake to make sense, you have to believe that I have a right to know what other people are doing with their money.

The only reason I would care what other people are doing with their money is so I can copy them and make profits from their skill without paying them for that skill. This, in fact, is exactly why certain investors have requested disclosure exemptions from the SEC. While I would be happy to make some easy money, I see no reason why smarter investors should have to help out those who cannot make as good investments on their own.

The Wall Street Journal reported that some investors who acquire large stakes in companies tell other big investors what they are doing. The premise seems to be that they share some of the (expected) profits in hopes of reciprocal actions later by those they are helping now. Some people may find this unfair, but again, as long as the initial decision to buy is based on public information (no insider trading), then it is up to whoever was smart enough to see an opportunity to decide if they want to share some of the profits with others. Nobody owes me a piece of their deal.

In fact, as outlined by Dan McCrum, the main reason for the rule seems to be to benefit the companies whose stock is being acquired rather than for other investors. Thanks to the disclosure rule, the companies are given more time to plan and erect anti-takeover defenses in case those acquiring a large stake in the company are intent on a takeover. Why should the SEC be in the business of helping to defend companies against takeovers? While there is legitimate disagreement over whether or not takeover artists add value to companies and society, it is not the SEC's job to pick a side in that fight.

The SEC claims to be protecting investors but more likely they are helping companies defend themselves from potential takeovers. If investors are breaking no laws with their stock purchases, there is no reason for them to disclose those investments to the general public. What you do with your money is your business and the same should hold true for investors and investment funds.