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News September 11, 2006 Issue

Goldstein to Begin 13F Fight This Month

A few years ago, hedge fund manager Phillip Goldstein took a look at the pending SEC hedge fund manager rule. He didnít like what he saw, so he decided to do something about it.

And we all know how that turned out.

Now, once again, Goldstein is looking at a looming SEC requirement and doesnít like what he sees. His firm, Full Value Advisors, will be required to file its first Form 13F in February 2007. But Goldstein does not publicly disclose his fundís holdings. In his view, requiring the involuntary disclosure of portfolio holdings on the form is akin to the government taking protected trade secrets without compensation.

So heís decided to do something about it.

In the next week or two, Goldstein plans to file an application under Section 13(f)(2) asking the SEC to exempt him from the requirement to file a Form 13F. In it, he will argue that requiring his firm to publicly disclose its trade secrets would constitute a "taking" of his property without just compensation, in violation of the Fifth Amendment.

Moreover, he will argue that the 13F data collected by the SEC serves no legitimate purpose. "Simply keeping a repository of data is not a legitimate governmental purpose unless the SEC actually uses it," said Goldstein in an e-mail sent to the SEC staff over to the summer. "Collecting data for no purpose makes about as much sense as a guy that saves every catalog he gets in the mail . . . but never looks at them, let alone places an order. Even though some people are compulsive collectors, I donít think a judge would agree that that is a compelling government interest or even rational."

Filing an exemptive application is a necessary first step before pursuing a lawsuit, as courts have ruled that plaintiffs must exhaust all administrative remedies before challenging an agency in court. Assuming that the SEC does not grant his request for an exemptive application, Goldstein plans to file a lawsuit challenging the legality of Section 13(f).

In his view, Congress "made a mistake" when it created Section 13(f). "If the traffic department puts up a stop sign at the wrong intersection, shouldnít somebody say something? Like, ĎHey, letís move it to the right intersection.í"

Goldsteinís draft exemptive application makes some pretty good points. He noted that Congress intended that the Section 13(f) data would be used by the SEC for regulatory purposes as well as to enhance investor protection. In thirty years, however, the SEC has not used the data for regulatory purposes, he claimed. As evidence, Goldstein cited a 1983 SEC staff study in which the SEC stated that it "does not plan to make extensive use of information that could be gathered under Section 13(f) at the present time."

Of course, that was 1983. Now itís 2006. So, last week, IM Insight asked the SEC if it does anything with the 13F data it collects.

"The primary goal of Section 13(f) is to make available information to the markets and investors on portfolio holdings of institutional investors," replied SEC spokesperson John Heine. The SEC, he noted, disseminates this information through EDGAR. "Thatís the primary use to which the Commission puts this information."

So there you have it.

Goldstein argued that investor confidence has not been enhanced by the public availability of the data. His draft application contains a number of examples of how 13F filings are being data mined by newsletter writers, which are designed to "illustrate how 13F filings are actually used by investors in the real world."

Goldstein is not content to seek confidential treatment. That approach, he argues, "does not address the real problem, which is that 13F effects uncompensated takings of trade secrets." Moreover, the SECís standards for granting confidential treatment requests are cumbersome, unrealistic, and "constitutionally improper."

Despite such language, Goldstein claims that he is not eager to litigate. "Much as I enjoyed winning the hedge fund lawsuit, I would like to know if there is some other way than litigating to avoid filing," he said in an another e-mail to the staff. "Isnít there some other way than a public confrontation?"

In fact, Goldstein has suggested that the easiest way to address his concerns is for the SEC to initiate a rulemaking to raise the $100 million threshold in Section 13(f) to some higher amount. Last month, Goldstein told the SEC staff that he would be willing to hold off filing the exemptive application (which would start the ball rolling on his legal challenge) if the SEC initiated such a rulemaking. He noted that the $100 million threshold has not been adjusted since Section 13(f) was enacted in 1975. "The common sense updating of a statutory dollar amount seems to me just the sort of thing Congress intended when it gave the Commission authority to adopt exemptive rules," he said, referring to Section 13(f)(2), which authorizes the SEC "by rule or order" to "exempt, conditionally or unconditionally, any institutional investment manager or security or any class of institutional investment managers or securities from any or all of the provisions of this subsection or the rules thereunder."

But the SEC doesnít think it has the authority. "The threshold for 13(f) is set by statute at $100 million or less, down to $10 million," said Heine. "Raising that threshold would require legislation, rather than rulemaking."