A recent U.S. Supreme Court ruling in favor of California raisin growers Marvin and Laura Horne could dovetail with investment managers’ rights to property interest in portfolio information required by the SEC’s Form 13F.
In the ruling, Horne v. Department of Agriculture, the Court addressed a 1933 New Deal statute and related administrative rules designed to maintain an “orderly market.”
For decades, a federal government agency required raisin growers to surrender a portion of their crops, much of which the agency turned around and donated free to the public. The Hornes objected to the government’s appropriation of their property, relying on the Fifth Amendment, which requires just compensation for a “taking” of private property for public use.
After more than a decade of litigation and appeals (and with an 8-1 majority), the Supreme Court sided with the Hornes, finding among other things that “a governmental mandate to relinquish specific, identifiable property as a ‘condition’ on permission to engage in commerce effects a per se taking.”
Investment advisors are, of course, very familiar with another 1933 (and ’34 and ’40) statute and related administrative rules established to ensure an orderly market.
One such example includes the requirement of certain investment managers to file Forms 13F.
Ostensibly for the purpose of promoting competition and decreasing volatility in the markets, in 1975 Congress amended the Securities Exchange Act of 1934 to add a provision requiring certain institutional investment managers to disclose on Form 13F the names, shares and fair market value of the securities over which the institutional managers exercise control.
Could it be that an investment manager has a property interest in its portfolio information akin to the Hornes’ interest in their raisins?
The idea is not as far-fetched as it may seem. In 2011, Full Value Advisors raised the issue to the federal appeals court in Washington, DC. While the court did not rule out the possibility that portfolio information might be property, it ultimately ducked the issue of whether the SEC was impermissibly “taking” that property, finding it was not “ripe” for review.
Certainly no one can reasonably contest the value of such portfolio information. A cottage industry has sprung up around analyzing investments and investment strategies culled from Forms 13F. David Einhorn’s Greenlight Capital made news last year when it came to light that it had asked the SEC to keep one of its investments confidential because “mirror trading by ‘copycats’ could lead to unwarranted volatility and inflated prices in the security.”
Even if the SEC keeps the 13F portfolio information confidential, the Commission has made clear it will use such “big data” to identify trends and patterns in the securities markets.
The number of SEC initiatives, task forces and working groups that analyze large pools of data seems to grow every month: the Division of Economic and Risk Analysis, the Aberrational Performance Inquiry, the Office of Risk Assessment, the Accounting Quality Model (“Robo Cop), MIDAS. Most recently, the Consolidated Audit Trail, a response to the so-called Flash Crash, if implemented, “would create an estimated 58 billion records a day and maintain details on more than 100 million customer accounts.”
The SEC’s uses of private portfolio information may or may not further the stated purpose behind Forms 13F, promoting competition and decreasing volatility. But the Supreme Court’s robust support for the “takings” claims brought by raisin growers Marvin and Laura Horne may inspire investment managers to question the SEC’s ability to use such private property for public use without just compensation.