The U.S. Securities and Exchange Commission (SEC) has announced a proposed amendment to the filing requirements for Form 13F, which is expected to decrease the number of institutional investment managers required to report quarterly investment holdings by almost 90%. Form 13F is a quarterly report filed by institutional investment managers listing equity assets under management of the type identified by the form (including most publicly traded equity). Currently the threshold for reporting is set at $100 million under management by any one investment manager. The proposed amendment, made on July 10, 2020, would increase that threshold by 35 times, to $3.5 billion under management.
For public companies and their investors, adoption of this proposal will result in a significant reduction in the transparency and visibility regarding makeup of their stockholder base and changes over time. If adopted, the rule change will impede engagement by companies with their stockholders, and hinder decision‑making by smaller and retail investors.
The proposed amendment ignores prior petitions by coalitions including the Harvard Corporate Governance Center, NYSE, the National Investor Relations Institute (NIRI) and the Society of Corporate Secretaries and Governance Professionals that proposed other ways of modernizing Form 13F. A number of commenters have voiced opposition to the proposal (with others being organized within the business community), and one of the commissioners has questioned the SEC’s legal authority to make the change. Public comments on the proposal are due September 29, 2020, after which the SEC will engage in further consideration before any final rulemaking.
Lack of Transparency
Although the reduced disclosure requirements will have some cost savings to “smaller” investment managers, the resulting loss of visibility into trading and ownership will have an impact on these same managers. For example, as pointed out in a joint letter drafted by NIRI, executives and investor relations professionals at public companies often have many more investor meetings or calls than they can take. Similarly, when public companies conduct “shareholder engagement” meetings to address governance, compensation and other ESG matters with investors, for efficiency reasons they focus those efforts on their larger, longer‑term investors. Since investors hold their equity in “street name,” the company has no way of knowing who holds stock, except as required to be reported under SEC rules and regulations. When deciding how to allocate their time and efforts, public company executives and IR professionals rely on having accurate information about the holdings of their investor base compiled from Form 13F reports. Decreased insight into the allocation of holdings may result in management focusing on investors that don’t even hold long shares of the company, rather than engaging with actual stockholders on substantive matters such as corporate governance, compensation, long‑term strategy and other major decisions.
It is also notable that the investment funds that will benefit from these cost and time savings include many hedge funds and activists who are likely to trade more aggressively and are therefore more likely to be involved in setting the stock price. The large indexes that tend to have more stable positions and are less price sensitive will continue to report, but the information provided by these companies provides less insight into the market sentiment around an issuer.
In addition, the Form 13F information provides useful information to a public company about activist investors who are growing a position in the stock. This information is used to consider engagement strategy by both sides as they consider the likely views and dispositions of other significant stockholders while considering settling or contesting issues.
This information is beneficial to third‑parties outside of the issuer and direct market participants. Academic institutions and other research organizations often use this public data in their papers and research, and the loss to them has yet to be quantified but could be meaningful.
Commissioner Allison Herren Lee in a posting on The Harvard Law School Forum on Corporate Governance also has called attention to the fact that Section 13(f)(1) of the Securities Exchange Act of 1934, as amended, specifically states that “Every institutional investment manager … having an aggregate fair market value on the last trading day in any of the preceding twelve months of at least $100,000,000 or such lesser amount (but in no case less than $10,000,000 million) as the commission, by rule, may determine, shall file reports with the Commission in such form, for such periods, and at such times after the end of such periods as the Commission, by rule, may prescribe ... .” [emphasis added] Since the threshold is set in the statute rather than the rule, there is a presumption that this is fixed by Congress, and the SEC was only granted the authority to revise it to a lesser amount—but not a greater amount—under the plain statutory language.
As mentioned above, many stakeholders and market observers agree that the rules and regulations need modernizing. We anticipate that many of the suggestions from prior petitions will be reiterated and amplified in the form of comment letters from their sponsors and like‑minded stakeholders. Suggested changes include shortening the reporting window, so that shareholding updates are available as soon as two business days following the quarter end, rather than 45 days. When the rule was first enacted, processing time and preparation of paper documents created a time burden in preparing these reports. Modern systems no longer require such a long preparation period. Another suggestion was to change the reporting period from quarterly to monthly, to match the short‑sale reporting period, though the petition tacitly acknowledges that may require an act of Congress, rather than action by the SEC.
Given the strong reaction by the business community to the proposed rule change, it will be interesting to see if there is a significant evolution in its provisions when and if the final rule is adopted. As proposed, it will change the dynamics between investors and issuer management as well as require investor relations professionals to find alternative sources of credible investor information. Concerned parties should consider submitting a comment to the commission or joining one of the collective comment efforts.