Hedge funds are going all out to stop the SEC from implementing new disclosure rules. Now they have some help from an academic group whose finances are shrouded in secrecy.
From a report that broke yesterday in Institutional Investor:
…hedge funds aren’t fighting the SEC alone: A new organization, which Institutional Investor has learned has at least one hedge fund backer, has enlisted dozens of academics to argue against the proposals, creating something of a firestorm of criticism.
Wonky academic comments on proposed SEC rule changes typically fly under the radar. But [UC Berkeley law and finance professor Frank] Partnoy made them his mission. Now his work — in comment letters signed by himself, [Robert] Bishop, and other academics — is taking some heat. In part, that’s because the financing of his institute, which pays Partnoy and Bishop for their letter writing, has been shrouded in secrecy.
The International Institute of Law and Finance refuses to disclose its backers. But at least one major hedge fund manager, Bill Ackman of Pershing Square Capital Management, is bankrolling the effort per Institutional Investor.
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Even the group’s chairman is a hedge fund employee:
The chairman of the institute’s board is Stephen Fraidin, a corporate attorney and partner at Cadwalader who has also long worked for Pershing Square.
Given the institute’s lack of financial disclosures, we can only guess who else may be backing its efforts. But we do know that numerous hedge funds, including Citadel, have met with the SEC to oppose new regulations.
So what exactly are these regulations that hedge funds and their friends in academia so passionately oppose?
One requires investors who buy over 5% of a company’s stock to disclose the position sooner. Another requires similar disclosure if the 5% position is in swaps.
Swaps can be used to hide both long and short positions in a stock. They can also lead to sudden, massive losses, as was the case with Archegos Capital Management last year.
Other shareholders should know when the stock they hold is being accumulated by a major investor. Employees too need to know about ownership changes that can affect their livelihood.
Better disclosures could even prevent another financial crisis. If banks know about a fund’s huge swaps positions, they may be unwilling to extend it more credit, which could prevent a huge hedge fund or bank failure.
But just because regulations are good for society as a whole doesn’t mean hedge funds won’t fight them with everything they’ve got. And since the message isn’t that persuasive coming from them, why not pay a few academics to deliver it for them?
Hedge funds are also finding some unlikely allies in Washington, including a Congressman with ties to hedge fund Elliott Management:
Rep. Ritchie Torres, a Democrat from New York’s South Bronx — one of the poorest districts in the nation — whose top donors include Elliott, has been circulating the letter [opposing regulation], according to an individual familiar with the effort. (Torres, whom OpenSecrets says is a top recipient of hedge fund cash in the current election cycle, did not return multiple requests for comment, nor did Elliott.)
Is hedge fund regulation really a top priority of Torres’ constituents in the South Bronx?
Big money has long since poisoned politics and now is doing the same with academia. We, as citizens and investors, need to stop fooling ourselves about who these institutions really represent.
Who else do you think is behind the fight against hedge fund regulations? Leave a comment at the bottom and let me know!
More on markets:
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