It's a bit of a stretch to think that the changes to Forms PF or 13-F might show a willingness to regulate in the cryptocurrency market such that might have exposed the weaknesses in FTX. Then again, SEC Chairman Gensler has repeatedly stated that he thinks cryptocurrency should be regulated like a security. Either way, discussing that trend of greater access into the books of companies may help nervous investors understand how FTX’s crash may not undermine their plans.
Often, we try not to cover investor trends or news topics in our newsletters and blogs. We prefer to leave that to the other sources of information flooding your inbox. But we couldn’t help noticing that the dings and pings rattling our phones over the first few weeks of November 2022 hit at an important topic. What’s on the minds of investors in the latest mess of investment woes around cryptocurrency trading is the same thing that was on their minds in 2008 with an investment shake up over real estate lending and was also on the minds of those in 2001 when the dot com bubble burst: Do investors have access to enough information about the management of publicly traded companies? That question has been a constant underpinning of the SEC’s proposed rulemakings since 2109 and more recently in its October 2022 effort.
Since information is such an important aspect of investor education and confidence, we thought digging into the FTX might be worthwhile, even if it might be yesterday’s news as soon as, well, we hit send on this newsletter. We think FTX’s troubles, and their subsequent urgent bankruptcy filing, may be a good teaching moment for most financial advisor’s clients. It’s like the theme song from the Facts of Life “you take the good, you take the bad, you take them both and there you have the facts of life” except here, the good is the long, careful planning towards making it easier for investors to get access to information. And the bad is, well, in case you missed it, there’s quite a lot of bad about FTX.
FTX is (was?) a cryptocurrency exchange, which misjudged a few things and found itself short about $8 billion. A white night appeared in the form of Binance, but after a less than a 24 hour’s glance at FTX’s books, they gracefully bowed out stating according to CNN, that FTX’s problems were too catastrophic. Like the banks in the 2008 market crash, FTX’s founder leveraged his risk against himself via other people’s money. FTX lent his investment firm, Alameda, by some reports $10 billion of funds traded on his exchange. Unlike the 2008 market crash, with banks being too big to fail, FTX’s structural problems were too big to fix.
There are a few key parts to this story that an investor may have missed. First, the management of Alameda was woefully unprepared for the challenge. According to her LinkedIn page, the CEO position was Caroline Ellison’s third job since graduating in 2016 from Stanford University. The first was an 18-month stint at Jane Street, the second as a trader for three years at Alameda and then on to the CEO position.[1] Second, there is some confusion about FTX’s relationship with federal regulators with some saying it was too cozy.[2] Yet other reports state that the SEC was investigating FTX.[3]
This topic dovetails perfectly into one old(er) and one we’ve discussed in various parts of our newsletters for the last three or four years. In 2019 we covered where investors might find company information important to making key decisions.[4] In 2020, we covered the announcement of Rule 30-e. There, we said: “Most investors think they want to review the annual reports and proxy statements of the funds they have invested in, but rarely do. Instead of digging into the thin paper and thick text, investors chuck the whole report in the bin, unopened…. In other words, the SEC is now undertaking efforts to determine how can investors avoid chucking the entire annual report instead of finding the key elements they are searching for.”[5]
But 30-E and any subsequent changes might not have helped those who had investments in FTX’s exchange. That’s because those detailed financial documents would have missed the woefully underprepared Alameda CEO Ellison involved in the FTX-explosion. Since the bankruptcy filing, Ellison admitted to employees that she knew that the funds transferred to Alameda from FTX were ones owned by customers.[6]
However, it’s hard to miss that the SEC’s rulemaking on investor information is beginning to show a clear trend, and it’s one of greater access to information for investors. As we said with our coverage of 30-E, the SEC wants to find out how to best present information for investors. Three rulemakings in 2022 continue this trend. In March of 2022, the SEC moved to encourage more reporting from private funds. “The proposed amendments [to Form PF] also would decrease the reporting threshold for large private equity advisers and require these advisers to provide additional information to the SEC about the private equity funds they advise.”[7] In June of 2022, the SEC extended its electronic filing requirements for investment advisors and investment managers. At that time, regarding changes to Form 13-F, they said “In a digital age, it is important for filers to have easy, online methods to submit information to the Commission, and where appropriate for investors to have easy, online access as well.”[8] More recently, in October of 2022, they changed their rules regarding how mutual and exchange traded funds present information about key aspects of their funds. They must now “transmit concise and visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisements.”[9]
It's a bit of a stretch to think that the changes to Forms PF or 13-F might show a willingness to regulate in the cryptocurrency market such that might have exposed the weaknesses in FTX. Then again, SEC Chairman Gensler has repeatedly stated that he thinks cryptocurrency should be regulated like a security.[10] Either way, discussing that trend of greater access into the books of companies may help nervous investors understand how FTX’s crash may not undermine their plans.
[1] https://www.linkedin.com/in/caroline-ellison-309216a7
[4] https://www.bcgbenefits.com/blog/best-financial-information
[5] https://www.bcgbenefits.com/blog/sec-rule-30e-3
[7] https://www.sec.gov/rules/proposed/2022/ia-5950.pdf
[8] https://www.sec.gov/news/press-release/2022-113
[9] https://www.sec.gov/news/press-release/2022-193
[10] https://www.forbes.com/advisor/investing/sec-crypto-regulation
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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