SEC 13F Proposal
As you are aware, on July 10, the SEC proposed amendments to update Form 13F for institutional investment managers “to reflect today’s equities markets”, which would significantly reduce the number of investment managers that would have to report their holdings. This change would raise the threshold from $100 million to $3.5 billion, and aims to reduce the financial burden on smaller investment firms.
According to NIRI’s Fight for Market Transparency, which has been joined by 237 companies to date, 4,500 fund managers overseeing $2.3 trillion in assets, or 89% of current filers, would no longer be required to disclose their portfolio holdings. Furthermore, an average Russell 3000 company would lose visibility into 55% of its current 13F filers and 69% of current shareholders that are registered hedge funds.
In addition, 86% of activist investors would no longer be required to file 13F holdings. For additional insights, please click here.
Those that oppose this proposed amendment cite:
- Reduced transparency
- Increased exposure to activism
- Increased burden on executive time
- Negative impact on capital formation
- Outsized impact on small-cap companies
- Reduced exposure to management for smaller investment firms
The IR community has been swift to condemn and “strenuously oppose this proposed rule change” and has urged IR professionals to share concerns by sending comment letters to the SEC. While these views are clear, we wanted to better understand investor sentiment, particularly those that would be impacted by the proposed threshold.
Key Insights
Our Survey Finds More Investors that Would Be Impacted Are Against the Proposal Than For
We surveyed 30 institutional investors and analysts from August 14 to September 3, with emphasis on investment firms that would no longer have to report filings. More than half of participants, 53%, have between $100 million and $3.5 billion in EAUM (current and proposed threshold, respectively), while 37% are below $100 million and 10% are above $3.5 billion.
According to our research, the investment community is divided on whether they agree with the proposal: 47% agree with the amendment, 43% are against it and 10% are unsure. However, when we look at the group that would be impacted by the change – those between $100 million and $3.5 billion in EAUM – 50% are against the proposal.
While overall results are divided, for the firms that would be affected, many are against the proposal because:
- They believe the level of transparency lost by key stakeholders more than offsets the financial benefits of not having to file
- The $3.5 billion threshold is too high and should be lowered
Agree
Disagree
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“Corporate management rarely interacts with smaller investment managers, so even though I marked ‘Agree’, the impact will be minimal.” ~$750M EAUM
“Long overdue. We sued the SEC over 13F. Our investments are proprietary.” ~$275M EAUM (Activist)
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“We are one of the managers that wouldn’t have to report. However, it takes a few minutes and the transparency that would be lost to stakeholders is much more important.” ~$3.0B EAUM
“I understand the desire for smaller AUM shops but I do think the lower visibility would be detrimental to the investing public.” ~$2.0B EAUM
“The states are not uniform. Better transparency through ADV for $100M or more.” ~$1.5B EAUM
“Mine is a high-turnover firm generally, so it is not always useful to look at our 13Fs to know what our positioning is. There are a lot more sophisticated funds that do things to hide the true nature of their holdings. I know some large hedge funds that will ‘box’ a position instead of selling it, so they will show up as a holder for the sake of interacting with management but they actually have no economic exposure. They do that with an option overlay. I have heard that there are tax strategies involved. We do not do that. I have never done that. I do not feel that the data in a 13F is very relevant for a lot of hedge funds, so moving the threshold up is not that meaningful.” ~$1.2B EAUM
“I agree with increasing the threshold but think this goes too high.” ~$575M EAUM
“SEC should require reporting of short positions, not just long positions.” ~$550M EAUM
“It feels politically motivated with no real purpose that serves the overall market. It feels like a lobbyist has done a good job to have such a ridiculous proposal to even be considered.” ~$350M EAUM
“The $ level definitely needs to increase, although the $ threshold should probably be based on lower levels of where the market has been in the last couple of years. Instead of about 35x increase in the limit, it should probably be in the neighborhood of 20x to 25x.” ~$125M EAUM
“The threshold absolutely should be increased. However, there should be arguments made available to the public about whether it should be increased to the level it is, or something lower.” ~$100M EAUM
Investors Believe the Greatest Impact will be to Stakeholder Transparency
We asked investors about whether they agreed with several measures regarding the impact / consequences of the proposal. Overwhelmingly, two-thirds noted they believe transparency will be reduced for stakeholders, which is slightly above the percentage that noted the financial burden for smaller asset managers will be reduced.
Moreover, 40% expect buy side access for smaller firms to be impacted and nearly the same number believe IR will become less efficient, though they are likely unaware of the increased IR effort that would come as an unintended consequence).
Investors Aren’t Being Held to the Same Standard as Issuers
For over 13 years, we have and continue to be proponents of increased transparency and have encouraged our clients to provide a deeper level of insights into their corporate strategy, key initiatives and execution. Combine that with the step change in transparency we have seen from companies amid the COVID-19 pandemic, issuers are putting their best foot forward to give investment firms an honest and in-depth view of their organizations and performance.
We believe (and so do 67% of investors) that the SEC’s proposal will reduce transparency for key stakeholders, resulting in companies dedicating outsized time and resources in offsetting this lost transparency. This comes at a cost: executive time will be taken away from focusing on the key areas of stakeholder value creation – strategy, operations and execution – and spent on identifying the appropriate investors. For more information as we approach the end of the 60-day comment period, including comment letter templates, please visit NIRI’s Advocacy Call to Action page.