BCI Misreporting its SEC Filings?
One of Canada’s largest pension funds “inadvertently omitted” all of its Canadian holdings from a recent disclosure it made to the U.S. Securities and Exchange Commission, failing to include about US$2.46 billion in investments.Siedle is right, if BCI can't deliver on these easy, straightforward SEC filings, how can people trust the pension fund is on top of more complicated positions?
British Columbia Investment Management Corporation made the omission in February, when it submitted its disclosures for the three months ending on Dec. 31, 2018. The pension fund, which has $145.6 billion in assets under management, failed to disclose holdings in 98 companies, primarily across Canada’s energy, banking and mining sectors. The Canadian holdings accounted for more than 20 per cent of its total disclosed investments.
BCI, which manages the pensions of B.C.’s public sector workers, said it only discovered that it had omitted these investments following inquiries from the Financial Post about its disclosed holdings in Canadian energy companies, which appeared to decline to zero in the final quarter of 2018.
“As a result of your query, we have discovered that the holdings you listed were inadvertently omitted from the filing,” BCI Director of Corporate Communication Gwen-Ann Chittenden told the Post in an email.
A second look at the disclosure revealed that names BCI has consistently disclosed owning for years such as Toronto Dominion Bank, Canadian National Railway and Rogers Communications Inc. were also missing.
More than two weeks later, BCI corrected the errors in its Dec. 31 filing with an amendment. The errors, BCI told the Post, were a result of a “data filter” that “omitted Canadian-domiciled inter-listed securities.”
BCI also corrected errors in its filings for the quarters ended March 31, 2019 and June 30, 2019 after the Post inquired about the accuracy of the values listed for its Canadian holdings in both reports. The pension fund attributed these errors to “inconsistent conversion” of currency leading to both understated and overstated values. In some cases, values were inflated by more than 35 per cent. While BCI said the number of shares it listed for each stock in the initial reports was accurate, the Post found that it disclosed owning fewer shares of Enbridge Inc. in its amendment for the June 30 quarter than in the original file.
A Post analysis of BCI’s 13F filings over the past six years revealed the fund had previously restated its holdings to address similar inconsistencies. On Oct. 14, 2015, BCI filed 16 amendments to 13Fs dating back to 2010. In 10 straight quarters between March 31, 2013 June 30 2015, BCI appears to have failed to disclose its shares of dual-listed Canadian stocks bought on U.S. exchanges. In each of those quarters, shares of BCI staples TD, Suncor and Enbridge were all missing. Those errors, Chittenden said, were also the result of “inadvertent omissions.”
The SEC declined to comment about the omissions and whether the pension fund would be penalized for them, something a number of experts who spoke to the Post thought was unlikely.
BCI is required disclose its holdings as of the end of each quarter to the SEC because it routinely holds more than US$100 million in what the U.S. watchdog refers to as 13F securities — any equity, closed-end security or ETF that trades on a U.S. exchange. Certain convertible debt and equity options also fall under the SEC’s umbrella. Quarterly disclosures are not required in Canada, and BCI has in the past only revealed its total holdings once per year.
The SEC’s definition means that funds have to report the shares they hold of dual-listed Canadian companies such as TD and Suncor Energy Inc. — but only those that were purchased on U.S. exchanges.
Between March 31, 2018 and Sept. 30, 2018, BCI’s disclosures indicated that its holdings of U.S.-exchange purchased shares of Alberta-based energy companies declined by 43 to 46 per cent across the board. In that six-month span, BCI’s position in Suncor fell from 265,985 shares to 143,530 and Enbridge from 265,728 shares down to 149,734. None of these companies — or any other dual-listed company — appeared on its disclosure for the quarter ending Dec. 31.
Complicating matters, BCI said that it had changed its reporting methodology for the December 2018 quarter, and that it had intended to include its total holdings of dual-listed securities, not just those that were acquired on U.S. exchanges. That shift, which Chittenden said was done as part of a “move to increase transparency and reporting based on a higher standard,” wasn’t immediately noticeable due to the omissions.
The amended filing for the quarter ending on Dec. 31 2018 revealed its much larger overall holdings in the dual-listed companies. Those included 4,062,939 shares of Suncor valued at more than US$113 million, and 4,861,224 shares of Enbridge, valued at more than US$150 million.
By the end of the quarter ending June 30, 2019, those positions had both declined, to 3,292,517 and 3,877,882 shares respectively.
For comparison purposes, the Post asked BCI to provide its overall positions in a series of energy companies for the quarters ending in March, June and September 2018, but the pension fund did not address the request.
BCI’s decision to alter its filing style is uncommon, multiple securities lawyers with knowledge of SEC regulations and 13F filings told the Post.
“This is … kind of strange what they’re doing here,” said David Baum, a Washington-based lawyer at Alston & Bird LLP. “They’re effectively over-reporting.”
Altering their filing format may give investors a wider scope of BCI’s portfolio, but it could also lead to other issues, Baum said, and that’s why he would generally advise a client to remain consistent with their files.
As for the omissions themselves, Ze’-ev Eiger, a lawyer at the firm McDermott Will and Emery, believes they were not the result of any nefarious behaviour.
“It doesn’t jump out at me that they were trying to avoid reporting certain things,” Eiger said in an interview from New York City. “It seems to me it was a mistake.”
Mistakes in 13F filings are not unusual, Eiger said. But it certainly helps the case of a fund in question, Baum added, when the funds themselves admit their mistakes to the SEC instead of waiting for them to be discovered.
The SEC is unlikely to fine BCI or closely track their holdings, according to Edward Siedle, who used to work for the SEC’s Division of Investment Management before becoming a lawyer who forensically investigates pension funds. The last time the SEC appears to have fined a fund in relation to its 13Fs was in 2007, after Quattro Global Capital LLC failed to file its disclosures for more than three years.
But Siedle said repeated compliance oversights when it comes to 13Fs can be a warning sign.
“Is it the end of the world? No,” Siedle said. “But it’s a compliance oversight with respect to the most easy portion of the portfolio. How many other inadvertent omissions are there?”
Anyway, there's nothing nefarious going on here. It sounds like an operational screw-up or glitch that they discovered, reported and are addressing. It could be a new front or back office system or just a classic operational blunder which needs to be fixed once and for all.
And I agree with that lawyer who advises institutional investors not to over-report. What for? Just report what the law requires you to report, that's all.
By the way, while we are on the topic of 13-F filings, every quarter, I cover the activity of top funds and include Canada's large pension funds.
I noticed that Nasdaq redid its site so now I have to find all these links again on the new site or go somewhere else to cover the quarterly activity of funds I track, which is super annoying.
If anyone has any recommendations, feel free to shoot me an email at LKolivakis@gmail.com.
As for the SEC and BCI, I'm confident these reporting mishaps are being addressed as there's no reason why these errors should occur in the first place. This is bread and butter disclosure 101.
In general, I'm all for more transparency when it comes to reporting holdings so I do hope the Nasdaq site will reintroduce institutional holdings again.
Below, Stephen Schwarzman, Blackstone co-founder, tells "Squawk Box" that China knows it must change its trade and business practices but it's reluctant to do so because of the spoils it's reaped by protecting its economy.
Schwarzman also discussed his new book "What It Takes: Lessons in the Pursuit of Excellence," where he details his career from growing up in Philadelphia to building Blackstone into the world's largest private equity firm.
Along with the late Pete Peterson, Schwarzman built a global alternatives powerhouse and I'm sure Jon Gray will take this organization on to the next level when he retires.
Interestingly, Blackstone just raised $26 billion for its biggest private equity fund ever. This helps explain why Blackstone's shares (BX) have soared this year since bottoming back in Q4 of last year:
I wonder if BCI bought any Blackstone shares late last year but alas, it doesn’t really matter as I'm sure it's heavily invested in Blackstone's funds (that’s where the big money is made).
Lastly, while we are discussing reporting, Blackstone's Canadian nemesis, Brookfield, just released its 2018 ESG Report which you can read here.
Take the time to skim through this report, it’s truly excellent. Brookfield is a leader in ESG investing and I like this tidbit on diversity and inclusion: “We also believe that it is not enough to simply have a diverse employee base—we seek to leverage the benefits of diversity by upholding an inclusive environment that encourages contribution from all individuals and provides equal development and advancement opportunities.” Very well said.
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