The push for speedier 13f filings has opened a broader debate on ownership visibility
‘Who owns my stock?’ That question is arguably one of the toughest IROs face, day in and day out. The current market is increasingly opaque. Dark pools have pulled a curtain over who’s buying and who’s selling. Algorithmic trades lacking any long-term investment horizon now make up a majority of average daily volume. The result? It’s harder than ever to answer that perennial question.
NIRI president and chief executive Jeff Morgan recently took the opportunity of a congressional hearing on another topic – the regulation of proxy advisory firms – to put that IR dilemma squarely in front of lawmakers and also open a broader conversation about the need for increasing the transparency of positions investors and traders can take in companies’ equities and derivatives.
Public companies have a ‘limited ability’ to know who their shareholders are, Morgan noted. ‘I think we would all agree that two-way communication is much less effective if each party doesn’t know who the other is,’ he added, describing the situation as ‘one of many challenges [facing] the capital markets today.’
Morgan, who has been pushing the SEC since last winter to tighten the requirement for institutional investors to report their portfolio holdings, reminded lawmakers that the Dodd-Frank Act requires disclosure of short-selling within 30 days. He then told lawmakers that a broader ‘evaluation of the entire equity ownership process makes sense.’
Current SEC regulations require institutional investors to disclose the stocks held in their portfolios 45 days after the end of a quarter. Investors can ask – and are typically granted – permission to delay their 13f filings so they can hide their investment strategies. As a result, IROs are often in the dark about who actually owns their company’s stock. And during proxy season, the lack of visibility into shareholder rolls can be particularly troublesome for corporate secretaries. When an investment is made early in a quarter, Morgan pointed out, the practical effect of the 45-day reporting requirement can push disclosure out 19 weeks from an initial investment. ‘That is hardly a productive way for issuers to get to know their shareholders,’ he observed.
The NIRI chief was one of several witnesses testifying before a financial services subcommittee on a hearing entitled ‘Examining the market power and impact of proxy advisory firms’. Much of the testimony at the hearing focused on the influence in the proxy process of proxy advisers ISS and Glass Lewis and the possible conflicts of interest posed by their market dominance. Witnesses, including Morgan in his written statement, recommended greater oversight of proxy advisers and increased transparency on possible conflicts, especially where these companies advise either corporate clients or activist investors.
Morgan, however, also took the opportunity of appearing before the lawmakers to raise the 13f reporting requirement and talk about the importance of improving shareholder communication.
Last winter, a coalition made up of NIRI, the Society of Corporate Secretaries and Governance Professionals and NYSE Euronext petitioned the SEC to shrink the reporting period down to two days after the end of the quarter.
The three organizations have been urging issuers to file comment letters with the SEC in support of the proposal, but only a couple of dozen letters appear on the SEC website. Predictably, issuers have lined up behind the petition with institutional investors arguing against it. The SEC has not acted on it. Speaking on the topic in recent weeks, Morgan has said a compromise between the two-day proposal on 13f filings and the current 45 days is the most likely positive outcome of the SEC petition.
Speaking at a NIRI chapter in Minneapolis shortly after the SEC petition was filed, Morgan said he would like to see the SEC examine the question of who is a beneficial owner, including looking at derivatives. ‘Dodd-Frank opened up the whole box,’ he said. ‘Let’s look at all these issues and see what makes sense.’
