I interview Amy Lynch, who is an SEC expert and founder of Frontline Compliance. With only weeks left until the election, SEC Chairman Jay Clayton has limited time left to push through changes. There are several potentially impactful pieces of upcoming or just adopted legislation that she takes me through like the mandatory filing of 13f documents for U.S. funds, a potential change to the definition of what constitutes an accredited investor, that RobinHood got itself into a lot of trouble with the regulator, how insider trading very importantly may become illegal, and finally what a blue sweep could foreshadow.
The SEC proposed a rule change where U.S. funds don’t have to file a 13-f as soon as they hit $150 million in AUM but when they hit $3.5 billion. That would be a major change. 13-f documents by big investors are closely followed by peers as well as by individual investors who ride the coattails of smart money. Active management has been struggling to beat the market and potentially being able to keep key positions a secret for years would help active funds to recoup some of the lost ground. Amy believes the rule is not likely to go through as is and explains why.
The SEC changed the accredited investor definition. This could have a profound effect on small funds and emerging managers’ ability to raise funds. In my personal opinion, it would be a step forward to broaden the definition although I believe the entire rule is sort of archaic. Amy doesn’t think it will greatly help firms like Apollo (APO), KKR (KKR), Blackstone (BX) and Carlyle Group (CG)
Not directly related to pending regulation I asked her about the SEC interest in Robinhood (RH). Robinhood does a lot of great things and makes trading easier and it is much more user friendly. The other side of that coin is that you could argue it gamifies trading to the point people may be more prone to nonchalantly gamble it up with their savings.
Could Robinhood traders impact the markets? I think so and former trader Ranjan Roy wrote a good explanation of how here. Hint -options:
In July Goldman reported an historic inversion in the stock market: For the first time ever, the average daily value of options traded exceeded shares, with July single stock options volumes hitting 114% of shares volumes.
Amy believes the company already is receiving a lot of attention given it has only been in the market for a few years. I personally wouldn’t mind if options trading would go back to within historical norms.
We talk about the effect of a potential Democratic victory in the elections or even a so-called blue sweep. Checking the latest bookmaker’s lines and converting these into probabilities I roughly get to a 60% chance of a Biden victory and about 40% for Trump. It’s a bit less on both sides probably. The odds of a blue sweep look like they’re only about 55% as multiple things have to go in their favor for that to happen.
One of the most interesting pieces of legislation that could be established in the near future is rules against insider trading. Amazingly, there’s no clear rules against this. Cases are brought under the general anti-fraud statute and rely on case precedents.
This could potentially be a great thing. For one it’s not cool if some people get ahead in an unfair way and a more trustworthy market commands a higher multiple. At the moment the U.S. markets are clearly in the lead regarding multiples with the S&P 500 (SPY) at a Shiller CAPE ratio in excess of 30 (only exceeded in 99′). Here are some examples of international multiples collected by Star Capital:
But the U.S. markets have generally commanded a slightly higher multiple in a historical context. I think, at least in part, due to a somewhat stricter regulator that really goes after offenders from time to time and keeps the markets from some abuse. I’m not sure if the potential uplift will be enough to offset the gravity that should be pulling on a 30 Shiller CAPE but it’s a positive nonetheless.
You can find Amy’s work and her firm here.
You can find her on Twitter here.
Bram de Haas writes the Special Situation Report. He looks at special situations like spin-offs, share repurchases, rights offerings and a lot of M&A events. If you are in a good mood follow him on Twitter here or reach out through email at email@example.com.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.