Skip to main content

The Short Squeeze: The Fund Disclosures to Review Right Now

what's next for fund compliance teams in the wild ride of flash mob investing
February 2, 2021

Ohhhh, the conversations fund providers must be having after the wild swings in stock prices for GameStop Corp. and others lately. 

If you're a large domestic equity fund or an index fund, you're watching the action like many of us as a spectator, said Anne Tucker, Professor of Law at the Georgia State College of Law. “If you are exposed to liability as a result of this strategy, then I think your conversation is very different,” she said when we called her up recently for her take on recent market volatility. “You're not the driver that's rolling past the accident. You are in the accident.”

Anne researches corporate law, and her current focus includes investment companies’ risk and investment strategy disclosures. As prices of a handful of stocks reached astounding heights, I naturally thought about funds that might have to rebalance portfolios, the disclosures and extra operational costs that could be triggered, and whether certain funds might close or take a cooling-off period—and the updates to the investing public that could stem from that. The Workiva team asked Anne for her perspective.

What this could mean for fund disclosures

“From a fund compliance standpoint, the type of disclosure you need to make really depends on what your asset class is,” Anne said. “If you are a fund that routinely shorts positions, that is something that should be clearly stated, not only in your investment strategy, but also in the ‘Principal Risks’ sections.”

Meanwhile, funds not engaged in short sales with a wide range of investments wouldn't have seen the same volatility as funds shorting GameStop and other stocks that were propped up recently. “The standard disclosures for these broad domestic equity index funds and their current statements about market volatility would likely cover this type of event,” Anne said.

Funds do have an obligation to report on current market conditions and to update registration statements if material information changes. If groups of organized investors continue to attempt to prop up stocks or work against a hedging or shorting strategy of funds across many more stocks as a longer-term trend, funds may want to consider volatility as a current market condition, Anne said.

3 keys to updating fund disclosures—ASAP

Speed and flexibility are essential to update disclosures quickly, so you can complete any urgent filings that are required due to material changes. Actually, Workiva was built for this sort of thing. This is what can help you move faster, without sacrificing accuracy:

  1. Make sure everyone involved in updating disclosures can work together in one cloud platform, whether they’re working from home or the office. It will make it easier for paralegals, compliance reviewers, executives, and auditors to see everyone else’s edits, questions, comments, responses, and approvals as you all work. Use permission settings to keep prying eyes out.
  2. Dynamically link shared disclosure language across documents. If you have a few funds that use shorting strategies and you want to use the same language to convey that across all of those funds, create a document that serves as your common content library, and link that language from your library to every place where it needs to appear. If you need to make a change, edit the wording in your library to update it everywhere it’s linked.
  3. Automate workflows for getting final approval of disclosure language. It will make that final step easier. Trust me.

(Send us a note if you want to see how any of the steps above work!)

Future regulation: The bigger picture

We know regulators are well aware of what’s happened in the markets. Anne sees a couple of takeaways we can all reflect on, as alternative investment funds, private equity firms, traditional funds, or armchair investors:

  • Social media platforms have given millions of retail investors the ability to talk with each other in real time, shifting the balance of investment power traditionally held by those with access to more money and information. 
  • Meanwhile, as certain stocks soared, customers of some brokerage houses were blocked from trading in those stocks while other investors could keep trading. “It created a disadvantage for individual investors, and it helped tip the scales back toward the larger funds,” Anne said. “In the event of volatility, what is the responsibility of brokerage houses? And are the rules set up so that both sets of investors have an equal playing field?”

It’s a conversation worth having.

Actually, they're already talking about it on the Off the Books podcast. I’ll also post updates on the blog. Subscribe so you don’t miss a thing. 

About the Author

Arthy Kumar is the Director of Product Marketing and Financial Services Industry Principal at Workiva. She drives the go-to-market strategy, execution, and success of reporting and compliance solutions for banking, investment, and insurance companies. Arthy’s previous roles at Workiva include Director of Program Management for Investments and Subject Matter Expert. Before joining Workiva in 2012, Arthy spent 14 years at Vanguard and MetLife. Her experience includes financial planning, portfolio analysis, relationship management of large institutional clients, and people management. She is a CFP® (Certified Financial PlannerTM) professional and a Chartered Financial Consultant (ChFC).

Online registration is currently unavailable.

Please email events@workiva to register for this event.

Our forms are currently down.

Please contact us at info@workiva.com

Our forms are currently down.

Please contact us at info@workiva.com

Thank you

A Workiva team member will follow up with you shortly.

Thank you for registering

You'll receive a confirmation email shortly.

Thank you

You are now subscribed to receive blog updates.

Thank you

Your preferences have been updated.