Blaming the Bearers of Bad Tidings

CNBC caught our libertarian attention by breathlessly raising the alarm: is government overly restricting activist hedge funds with the Brokaw Act? Could it be that the Feds are again short-circuiting the all important capitalist functions of creative destruction?

Meh. This is a nothing burger. The Brokaw Act seems to propose reasonable and common sense improvements to hedge fund disclosure requirements.

First, if you acquire more than 5% of the shares of a company, you must disclose that holding to the public within 2 business days, rather than the current 10. In today’s world of instant communication, where the public has a compelling interest in receiving all material information about public companies as soon as possible, this seems like a good common sense change.

Second, if you acquire such interest indirectly (say via a derivatives position or other agreement designed to obscure your position), you must also disclose it.

Last, if you acquire similar interests as shorts rather than longs (such that you are betting against the company shares), you must disclose that within 2 days as well.

Disclosure is good. Minimizing trading advantages of insiders is good. At the margin, if these rules make it harder for hedge funds to acquire shares to pressure poor management, the cost is minor, and in any case is offset by the benefits of disclosure to the broader market, which also may apply pressure on management.

It is interesting, however, that the legislation doesn’t really seem to have much relevance to the case that provided its name. The town of Brokaw went bankrupt when its mill closed and a hedge fund was blamed (though that guilt is not obvious from the facts presented). Often activist investors are the messengers of the market (more so than media companies like CNBC!), highlighting bad assets. But they usually did not make the assets (like the Brokaw Mill) bad in the first place. And this law simply improves the speed and quality of that messaging.

No cause for alarm. We think the Brokaw Act is a good asset for the financial community. Carry on.