Issuers and investors criticize SEC’s proposed 13F rule change

The SEC’s proposal to significantly change the thresholds for investors required to submit 13F filings has drawn the ire of issuers and investors.

The SEC unveiled its proposed rule change on July 10. It would change the minimum reporting threshold from $100 million in US equities under management to $3.5 billion. Under the current rules – which haven’t been updated since their adoption in 1978 – investment managers must file quarterly ownership reports, known as 13F filings.

The proposal aims to update reporting standards so that they apply to the same proportion of the market as they did when the rule was first written in 1975. At that time, the $100 million threshold accounted for 75 percent of the dollar value of all institutional equity security holdings. The SEC estimates that the $3.5 billion threshold would mean the rule is applied to the same share of the market.

But the proposal also means that 89 percent of the investment managers currently required to file 13Fs would be exempt. That accounts for 4,500 investment managers, overseeing $2.3 trillion in assets, according to an executive alert sent out by NIRI this week.

The SEC says the proposed rule will help smaller asset managers in a number of ways, including reducing compliance costs, regulatory burdens and the risk of copycat investing that could have a disproportionately large effect on small managers.

The rule change would also reduce the burden on the SEC itself. Investment managers can file a request to keep their 13F filings confidential. Investors with less than $3.5 billion in assets under management make less than 10 percent of all 13F filings, but are responsible for approximately three quarters of all confidentiality requests, the SEC says in its proposal.

‘A STEP BACKWARDS FOR TRANSPARENCY’

NIRI was quick to respond to the commission’s proposal, issuing an executive alert and encouraging members and chapter leaders to work together on opposition comment letters.

‘This proposal is a step backwards for transparency and investor engagement,’ NIRI president and CEO Gary LaBranche says in the alert. ‘NIRI plans to oppose this ill-advised proposal, and we encourage issuers, NIRI chapters and other corporate groups to share their concerns with the SEC.’

There is particular frustration from NIRI’s leadership about this proposal because the association has been lobbying the SEC to modernize 13F filings since 2013. As part of that lobbying effort, NIRI has asked for a reduction in the time periods investment managers are required to report on, arguing that the existing rules were written when shareholder certificates were being issued in hard copy and should be updated.

Ted Allen, vice president of communications and member engagement at NIRI, tells Corporate Secretary sister publication IR Magazine that the proposal would make shareholder ID and engagement much more challenging for investor relations teams.

‘Unlike in Europe where there’s a share registry, you don’t know who owns your shares until you see the 13F filings,’ he explains. ‘[The proposal] inhibits the ability of IROs to advise management teams on who is buying their shares. Companies get lots of requests for meetings from investment managers, and the volume of requests has gone up during the pandemic, but the C-suite has to manage its time. We see this as a step backwards by the SEC.’

SEC commissioner Allison Herren Lee released a statement in opposition to the proposal. She draws attention to the lobbying efforts of NIRI and expresses disappointment that the organization’s recommendation for more timely access to 13F filings wasn’t included in the proposed update.

‘The proposal does not address this concern, discuss potentially reduced shareholder engagement or balance the interests of issuers, and particularly small issuers, against the population of institutional investment managers affected by this proposal: those with discretion over between $100 million and $3.5 billion,’ she writes.

Allen says NIRI would support an increase to the threshold if it was in line with inflation but adds that such an increase would raise the threshold to $450 million in US equities – significantly less than the $3.5 billion threshold in the proposal.  

The SEC says it considered consumer price inflation, stock market growth and stock market returns as potential benchmarks for the threshold change.

SMALL-CAP IR EFFECT

It is anticipated that the proposed rule change would have a more pronounced effect on small and micro-cap issuers. Small asset managers are more likely to invest in small-cap companies, and the reduction of transparency would make shareholder engagement and proxy solicitation even more challenging than it currently is in the post-Mifid II environment.

One way to offset the potential challenges this poses for issuers is to invest in stock surveillance, but several interviewees have noted that this service could be too expensive for many small-cap IR teams.

Alexander Yokum, senior associate at IHS Markit, published an analysis of the proposed rule on LinkedIn that underscores just how much this could affect small-cap issuers. In the analysis, he looks at the top 100 shareholders of 70 consumer services companies to see how many would fall below the $3.5 billion threshold. On average, 15 percent of the top 100 shareholder lists would no longer be required to file 13Fs under the proposal. Almost a quarter (23 percent) of investors at consumer services companies with a market cap of less than $1 billion would not be required to file 13Fs.

Although the vast majority of the top 100 investors in companies of all market cap sizes are above the threshold and would be required to file 13Fs, Yokum’s analysis shows the outsize impact that this rule could have on small cap issuers.

Jim Toes, CEO of the Security Traders Association, says the proposed rule shifts costs away from investors and onto issuers. ‘Issuers are going to have to get information that was previously publicly available, and that will be a new cost,’ he says.

CONCERNS ABOUT TRANSPARENCY FOR SMALLER INVESTORS

As of July 16, 179 comment letters had been filed with the SEC in response to the proposal – and 177 of those letters are opposed to it. Many of these letters are written by retail investors and small asset managers.

The recurring concerns relate to a lack of market transparency, the effect the proposal would have on future academic research and concern that it prioritizes the interests of institutional investors at the expense of retail investors.

Many of the comment letters also suggest the proposal will make it harder for small asset managers to do their jobs. Often, commenters write, these asset managers cross-check the investing patterns of larger investors as part of their due diligence, and this proposal would reduce the pool of information available.

Toes says he isn’t clear about where the pressure for this proposed rule change came from. ‘When it comes to asset managers, I’m not aware of there being an industry-wide upheaval or concern to have this changed,’ he tells IR Magazine. ‘I’m not aware of this being a top-five issue that is burdensome – which doesn’t mean that it isn’t, but I’m not aware of it.’

The SEC did not respond to a request for comment for this article.