Form 13f (Mis) Filings
Anne M. Anderson
Carlson Capital's Black Diamond Arbitrage Partners fund added 1.3% net fees in the first quarter of 2021, according to a copy of the firm's March 2021 investor update, which ValueWalk has been able to review. Q1 2021 hedge fund letters, conferences and more At the end of the quarter, merger arbitrage investments represented 89% of Read More
Oct 23, 2015
We examine the reliability of Form 13F filings and document the widespread presence of significant reporting errors. Even among a select group of high-profile bank holding companies, we find that filing firms frequently (1) report their holdings of securities that do not appear on the SEC’s Official List, (2) report inaccurate market prices for securities that do appear on the SEC’s Official List, and (3) file amended 13F reports that can be less accurate than the original filings. Overall, our evidence shows that the widespread reliance on 13F filings for institutional ownership figures is unwarranted.
Form 13f (Mis) Filings – Introduction
The roles and influence of institutional investors have changed dramatically over the past several decades. In contrast to individuals, institutional investors have expanded their economic influence from a relatively modest level in 1950 to occupying the commanding heights of US capital markets in 2014. Securities and Exchange (SEC) Commissioner Luis Aguilar notes in a 2013 speech that institutional ownership increased from 7 to 8% of total US market capitalization in 1950 to roughly 67% in 2010. This influence is stronger among leading US companies since institutional ownership is even more concentrated in large, liquid firms. For example, institutions control roughly 73% of the shares of the largest 1,000 publicly-traded companies.1 At the conclusion of his speech, Commissioner Aguilar sums up the impact of institutional investors by stating that, “Clearly, institutional investors have a great deal of power in our capital markets.” This power has attracted considerable attention among academic researchers, investors (both individuals and institutions), and government regulators. While academic researchers are interested in understanding the causes and consequences of institutional ownership, investors are interested in tracking and replicating the trading strategies of successful institutional investors. The focus of government regulators like Commissioner Aguilar is to monitor and provide oversight of institutional investors. The effectiveness of these three actors, among others, depends crucially on their ability to access timely and accurate information about institutional investor holdings. The primary purpose of this study is to evaluate the quality of such information.
Form 13F is the most fundamental and comprehensive source of institutional investor information. As described in Section 13(f) of the Securities Act Amendments of 1975 (pertaining to the Securities Exchange Act of 1934), institutional investors who exercise investment discretion on portfolios of over $100 million of Section 13(f) securities must disclose such holdings within 45 days of the end of each calendar quarter. The SEC updates and publishes a list of Section 13(f) securities (i.e., the Official List) on a quarterly basis. Section 13(f) securities consist of mostly publicly-traded equities, along with specific equity options, warrants, and convertible bonds. The 13F disclosure requirements appear to be both straightforward to interpret and simple to implement; first, institutional investors match their holdings against the SEC’s Official List;2 second, institutional investors disclose the CUSIP number, number of shares, and the total market value of their holdings for matched securities as of the last business day of the quarter.3 These CUSIPs, shares, and market values provide the raw material for researchers, investors, and regulators to construct databases from which to analyze institutional investor behavior. We examine the accuracy of this raw material.
One indication that 13F filings might have serious flaws comes from investors who have attempted to track changes in institutional holdings. Disclosure accuracy is particularly important for such investors as they attempt to replicate successful trading strategies. There is anecdotal evidence from various investor blogs complaining that inaccuracies are sufficiently serious to render 13F filings useless for tracking (and therefore replicating) purposes. One such investor blog entitled “Rant time” is fairly typical. In his March 13, 2014 blog Dave Manuel (www.davemanual.com) asks “How does the SEC not have a program in place to adequately deal with Form 13F filings?” and then continues as follows:
As it stands right now, the Form 13F filings are just a non-standardized mishmash of jumbled (and often inaccurate) information. Seriously – have fun going through these filings if you are doing any type of serious research. I guarantee you that you will have a migraine headache when you are done. In addition, you will very likely notice glaring errors staring back at you from the pages of the reports.
Are these assertions the rants of a disgruntled investor unable to earn trading profits by monitoring quarterly changes in institutional holdings, or are 13F filings filled with “glaring errors” and seriously “inaccurate information?”
In addition to investor complaints, a second (and perhaps more credible) indication that 13F filings could have serious flaws comes directly from within the SEC itself. In 2010, the SEC’s Office of Inspector General (OIG) issued a 46-page report entitled Review of the SEC’s Section 13(f) Reporting Requirements. The OIG investigation uncovered multiple problems that cast serious doubts on the reliability of 13F filings. Among the relevant findings, the OIG review concluded that: (1) “no SEC division or office has been delegated authority to review and analyze the 13F reports, and no division or office considers this task as falling under its official responsibility;” (2) “no SEC division or office monitors the Form 13F filings for accuracy and completeness,” and (3) “there are no checks built into the EDGAR system, through which the Forms 13F are filed …” The OIG report concludes that “despite Congressional intent that the SEC would be expected to make extensive use of the Section 13(f) information for regulatory and oversight purposes, no SEC division or office conducts regular or systematic review of the data filed on Form 13F.”4
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