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Back in 1975, the SEC began requiring that all hedge funds submit a report of their long positions and other investments each quarter to “stimulate a higher degree of confidence among all investors in the integrity of securities markets.” Since then, all investment advisers, banks, insurance companies, broker-dealers, and pension funds with $100 million or more in assets under management (AUM) have been required to file Form 13F on a quarterly basis. The reports are required to be filed no more than 45 days after the end of the quarter. In addition to long positions, funds are required to report their put and call options, American Depositary Receipts (ADRs), and convertible notes in each quarter’s 13F form. Note that short positions are exempt.
The SECs Proposed Amendment
On July 10, 2020, the SEC announced a proposal to amend Form 13F that would raise the reporting threshold for institutional investment managers from $100 million to $3.5 billion, the first change to the threshold since 1975. The SEC’s rationale is two-fold:
First, the new AUM threshold reflects proportionally the same market value of U.S. equities that $100 million represented in 1975. Second, the SEC aims to reduce the cost burden and provide relief to smaller managers who are subject to 13F reporting. According to SEC estimates, the direct compliance costs per manager can range from $15,000 to $30,000 annually, and the proposal can result in savings of $68 million to $136 million in addition to “savings in indirect costs related to 13F users front-running or copying advisers’ portfolios.”
What Are the Implications to a Public Issuer?
By the SEC’s estimate, the change would eliminate nearly 90% of the investors currently required to file. That means public issuers would cease to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets. Only the most proactive shareholders and the largest institutional investors would be visible to executive teams, investor relations professionals, and corporate boards that rely on that data to inform their governance and proxy voting decisions, communications strategies, and corporate access. According to an IHS Markit analysis of the Russell 3000, an average company would lose visibility into 55 percent of its current 13F filers and 69 percent of the hedge funds on its 13F list.
Consider this: since institutional investors are required to disclose the stocks held in their portfolios 45 days after the end of a quarter and can be given permission to delay their 13F filings without penalty, if an investment is made early in a quarter, it is possible that the issuer may not be aware of a material new holder until more than 19 weeks from the initial investment. This makes the data—or at least acting on the data—outdated and arguably much less useful. Plus, shares can change hands during the 135-day period (from the first day of the quarter until 45 days after quarter end). As a result, public issuers are almost always in the dark about who actually owns their stock on any given day.
Unfortunately, companies cannot simply accept investors’ representations of ownership at face value. In a 2016 National Investor Relations Institute (NIRI) survey, 45 percent of its members indicated they definitely had experiences with investors who misrepresented their positions to obtain meetings with C-suite executives, while another 31 percent said they suspected that had happened. More info on 13F filings, can be found here and here.
In short, this action has the potential to:
- Eliminate access to information about discretionary accounts managed by institutional investment managers, resulting in a loss of transparency and valuable insights.
- Substantially reduce the ability of an issuer to identify high quality funds investing in them and/or their sector; these “lead steer” investors often at the top of 13F reports are the ones most likely identified as targets for the best use of management’s limited time.
- Minimize insights to be gained on holdings of Wall Street’s top stock pickers, leaving potential new investors dependent on third parties and unqualified sources to close that information gap.
- Mask activist activity, including funds that are amassing a position with the intention of a proxy contest, which will go under the radar until a 13D disclosure surfaces with a 5 percent (or more) position.
- Lead to significant cost increases for the data that is available, including surveillance services as well as companies seeking to obtain a list of their registered shareholders and Non-Objecting Beneficial Owners (NOBO) from stock transfer agents.
The comment period to the SEC’s proposed amendment officially ends on September 29, 2020. To date, more than a thousand publicly traded companies, investor relations consulting firms, NIRI, the NYSE, NASDAQ, more than 1,000 retail investors, and several other exchanges and industry associations have joined in opposing the Commission’s proposed amendments to the Form 13F reporting rules.
There was a proposal to the SEC underway to INCREASE transparency of institutional ownership, including short positions and more frequent reporting requirements. Expressing overwhelming support, 97% of public issuers surveyed requested a reduction in the 45-day filing period, with 86% indicating it should be 15 days or less, while 87% said they would support monthly reporting.
Clearly there is a need for 13F reform that includes more frequent reporting and an expansion of requirements to include short positions. Today, in the absence of an active (and relatively costly) daily stock surveillance service that can make educated guesses as to the source of large block trades on a daily basis, there is truly no way to know which funds own the majority of your stock on any given day.
Should this amendment pass, a program of best practices can mitigate some of the potential downside. Frequent but CONSISTENT corporate access will be critical, regardless of the outcome.
What Should You Do Now?
- Consider establishing an open dialogue with your current larger holders today, one that includes outreach at least once a quarter to the top ten holders and at least twice a year to the holders of meaningful positions (typically top 30), so that if patterns emerge that are different than historical patterns, it may signal a change.
- Put increased emphasis on consistent messaging. Without insight into ownership, it will no longer be possible to know if a fund manager’s questions are being driven by their interest in your shares or in a competitor.
- Finally, establish an internal protocol for taking investor meetings. It’s possible to gain the upper hand by further limiting access to long-only funds, funding managers with whom you have built a relationship based on credibility and transparency, and finally, preparing ahead for Q&A in a landscape where, like in poker, you may not know what cards the other players are holding.
The SEC’s proposed 13F reform has the potential to impact public issuers greatly. Don’t hesitate to reach out to the team at Gilmartin for more information and guidance during this time.
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Leigh Salvo, Managing Director