Hedge Funds Take On SEC Over Disclosure Requirements

Hedge funds and other investment firms have been busily filing quarterly public reports to regulators in recent weeks, offering rivals a window into top manager holdings that sometimes moves shares.

But don't look for any information from Bulldog Investors or Wynnefield Capital -- their so-called 13-F filings are largely blank.

The two funds are leading a charge to overturn the rules that require them to file quarterly holdings information, maintaining that such disclosures are trade secrets. Both have applied to keep their holdings confidential, but expect regulators to turn them down, forcing a court battle.

"We filed but it was blank," said Phillip Goldstein, a veteran investor who heads the $300 million-plus hedge fund group Bulldog Investors and affiliate Full Value Advisors. "We haven't heard back from the SEC."

Goldstein is no stranger to tangling with regulators. Last year he successfully challenged SEC rules requiring hedge funds to register as investment advisers. The U.S. Court of Appeals in June agreed, forcing the SEC to abandon the rule.

"Frankly I think we will win," said Goldstein of his latest effort. But he said "I suspect it will take a long time." Last year Full Value Advisors also asked for an exemption, but got no response from the SEC, he said.

If Goldstein succeeds and funds stop filing quarterly 13-F reports, investors could be denied an important investment tool: a quarterly window into what the world's best investors are holding, at least as of a particular quarter's end. And evidence shows that information is closely followed.

Yesterday, for instance, railroad stocks rose after investors Warren Buffett and Carl Icahn disclosed that they held large stakes in major industry players. Icahn disclosed stakes in CSX, while Buffett revealed stakes in Union Pacificand Norfolk Southern.

Under SEC rules, institutional fund managers holding more than $100 million in assets must disclose their "long" holdings within 45 days of a quarter's end. Funds may apply to keep the information confidential if they can prove it reflects "trade secrets," and other criteria.

Bulldog and Wynnefield maintain that stock holding information is a trade secret akin to Coca-Cola's secret formula for Coke -- the product of much original research that must remain undisclosed. Fund holdings, he said, can also reflect trading strategies that is valuable to competitors.

Public disclosure of this "unique intellectual property" violates the Fifth Amendment of the U.S. Constitution that bars the taking of property without compensation or due process of law, the two funds maintain.

Ron Geffner, a high-profile hedge fund lawyer and former SEC prosecutor, gave Goldstein a reasonable chance of success.

"Had I not known him and his prior successful action with the SEC, I would have dismissed him as having a very limited likelihood of success," said Geffner. "However, this time I would chose not to underestimate his abilities and the strength of his claims."

Goldstein said he is now waiting to hear from the SEC on his application for confidential treatment. He said he expects his bid will be rejected, which will likely lead to a court challenge.

A spokesman for the SEC declined to comment.