July 20, 2022

13D & Swaps Reform: Controversial Academic Group Backs Activist Hedge Funds

It’s no surprise that activist hedge funds have squealed like stuck pigs when it comes to the SEC’s reform proposals for Section 13(d) and swaps reporting. Shortening the time period in which they have to disclose a 5% stake in a public company, expanding the definition of what constitutes a 13D “group” and limiting the ability to use undisclosed swaps to mask equity stakes would all hit these folks right in the wallet. But a recent Institutional Investor article says activist hedge funds have another group on their side that’s causing quite a stir:

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. That effort is the brainchild of Frank Partnoy, a law and finance professor at the UC Berkeley School of Law, who decided the SEC’s new aggressiveness was a good reason to create a nonpartisan, nonprofit institute — he named it the International Institute of Law and Finance — that could influence policy by convincing other professors to sign on to comment letters that he, and his colleague Robert Bishop, would draft.

“There’s a gap in terms of academics connecting with policymakers,” says Partnoy, a highly regarded academic and prolific writer, whose work includes several nonacademic books, including F.I.A.S.C.O., his first-person takedown of the derivatives business in which he once toiled as a salesperson at Morgan Stanley. In part, that gap exists because there is no incentive for academics to get involved.

Wonky academic comments on proposed SEC rule changes typically fly under the radar. But Partnoy made them his mission. Now his work — in comment letters signed by himself, 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 article says that the effort has been successful in recruiting other academics, with 85 adding their signatures to a comment letter opposing the swaps disclosure rules and 65 signing-on to one criticizing the proposed 13D amendments. But it’s also attracted controversy, with one former supporter alleging that the Institute “must be either a front for or supporter of hedge funds.” That’s a charge that Partnoy denies, noting that his financial backing is provided by a diverse group of individuals and institutions. The Institutional Investor article says that that group includes at least one very prominent hedge fund maven – Pershing Square CEO Bill Ackman.

John Jenkins