Warren Buffett disclosed on Monday that his company, Berkshire Hathaway (NYSE:BRKA), had bought a 5.5% stake in International Business Machines (NYSE:IBM), his first big investment in a technology company. However, Buffett has been building his $10 billion-plus stake in IBM over the last eight months, a fact that the Securities and Exchange Commission allowed him to keep secret.
Berkshire Hathaway made no mention of its purchases, which began back in March, in either of its quarterly SEC filings in April and August. Rather, the filings each contained a footnote that said: “Confidential information has been omitted from the form 13F and filed separately with the commission.”
Buffett was able to keep his investment in IBM a secret thanks to an obscure rule that says the SEC “may prevent or delay public disclosure of form 13F information for public interest reasons or the protection of investors.” Billionaire investors like Carl Icahn, Bill Ackman, and Nelson Peltz have all taken advantage of the rule, arguing that the simple disclosure of an investment would cause the price to rise so much as to torpedo their strategy.
John Nestor, a spokesman for the SEC, said the agency tried “to balance the benefits of transparency of how large managers invest with the need to temporarily protect the legitimate confidentiality interests of managers in limited circumstances.”
Buffett says that public investors shouldn’t always be allowed to piggyback on investment ideas made by professional investors, especially before those professionals are finished buying. And despite the Securities and Exchange Act of 1934, which requires that all big institutional investors — those managing over $100 million — have to disclose their holdings every quarter, many big investors are successfully keeping their investments secret, at least for a while. Investors who buy more than 5% of a public company must file a separate 13D filing.
The rules are meant to prevent an investor from mounting a cover takeover effort, and also to keep average investors informed as to where their money is being moved, but each quarter, the SEC receives about 60 requests to keep investments confidential. Furthermore, questions have been raised as to how well the SEC polices filings.
“Over 90 percent of confidential treatment requests submitted were not subject to a thorough review and examination for compliance with all aspects of the confidential treatment request rules,” according to the Office of the Inspector General, which found there to be “an increased risk that material information to investors may not be disclosed,” after looking into the way the SEC broadly treated confidentiality requests in 2010.
The SEC’s review of the requests also ignores the the fact that investors may use options and derivatives to mask their publicly disclosed positions. As investors are only required to disclose long positions, they file only at the end of a fiscal quarter, so the public doesn’t necessarily know if a position is hedged or perhaps being magnified through another instrument. Furthermore, the disclosures themselves only represent a snapshot in time; an investor could very well sell shares a day before disclosing a position, only to buy them back the next day.