By David Larrabee, CFA
When Warren Buffett recently disclosed a 5.4% position in International Business Machines (NYSE:IBM), it took almost everyone by surprise. How did the Oracle of Omaha manage to build a $10.7 billion position in the technology bellwether over the course of the year in such secrecy?
Buffett’s Berkshire Hathaway began accumulating IBM shares in March of 2011, and yet his stake was not revealed to the public until eight months later in its quarterly Form 13F filing with the Securities and Exchange Commission. But what about the requisite filings for the quarters ended in March and June? Turns out Buffett had simply taken advantage of a little-known waiver that is available to all investment managers required to report their holdings to the SEC. As a result, Berkshire managed to become IBM’s second largest shareholder (behind State Street Global Advisors) completely under the radar.
Congress passed Section 13(f) of the Securities Exchange Act in 1975 in order to increase the public availability of information regarding the securities holdings of institutional investors and to bolster investor confidence in the integrity of our financial markets. The rule requires institutional investment managers with investment discretion for US$100 million or more to disclose their equity holdings on a quarterly basis. Curiously, the rule only covers long positions and doesn’t address derivatives, including options, which could offset or enhance exposures. And, importantly, the rule also says that the SEC “may prevent or delay public disclosure of Form 13F information for public interest reasons or the protection of investors.”
A careful read of Berkshire’s earlier filings this year would have uncovered the following: “Confidential information has been omitted from Form 13F and filed separately with the Commission.”
In response to the disclosure of the “Buffett delay,” as CFA Institute CEO John Rogers termed it in a recent blog post, the SEC says that it issues about 60 so-called confidentiality waivers per quarter. In so doing, the commission tries to balance the interests of the public with those of investment managers, it contends.
Despite the fact that Buffett was availing himself of an exemption available to his peers, the news brought criticism from some circles of a lack of transparency or an uneven playing field. In response, large investors (including Buffett himself) argue that having to reveal positions while they are still being accumulated risks running the price up before they are finished buying, putting their investors at a disadvantage.
Rule 13(f) has withstood occasional challenges from investors in recent years. In 2006, CFA Magazine reported on hedge fund manager Philip Goldstein’s argument that the disclosure requirement made public his “trade secrets” at the expense of his investors, with no real benefit to anyone except those looking to copy his strategy. And earlier this year, the U.S. Court of Appeals rejected Full Value Advisors LLC’s separate challenge. Full Value Advisors had argued that 13(f) was effectively “compelled speech” in violation of the First Amendment of the U.S. Constitution and an uncompensated “taking” of intellectual property under the Fifth Amendment.
Buffett’s IBM purchase put the spotlight on Rule 13(f) and, for Buffett-watchers, underscored the importance of reading SEC filings carefully. However, little notice seemed to be paid to the fact that the legendary value investor strayed out of his self-described comfort zone in making such a large bet on a technology company, not to mention the fact that IBM’s stock was hitting all-time highs in recent months. IBM now stands as Berkshire’s second largest position behind longtime holding Coca-Cola (NYSE:KO). As for Buffett, a well-known bridge player, he appeared to play this hand like a master.