As the formal comment period for the SEC’s proposed changes to the 13F filing thresholds closed, the commission had received more than 1,800 comment letters from issuers, stock exchanges, institutional and retail investors and academics – with the majority of the letters in opposition to the proposal.
In July the SEC published its plan to increase the threshold for institutional investors required to file 13F filings from $100 mn in assets under management to $3.5 bn. The proposal instantly drew a dissenting opinion from SEC commissioner Allison Herren Lee, who argued that the proposal will reduce transparency into the markets.
NIRI quickly mobilized to educate its members about the proposal and the negative effect it would have on shareholder identification and, therefore, engagement. NIRI recently submitted a comment letter to the SEC that was co-signed by 237 public companies, 26 IR consulting firms and five other businesses. Ten NIRI chapters have also submitted letters in opposition.
Many of the letters cite a study by IHS Markit into the outsize effect the proposal would have on small-cap issuers. The proposal would exempt 89 percent of institutional investors from disclosing their positions on a quarterly basis, according to the SEC itself, and the study from IHS Markit suggests small-cap issuers would lose visibility into 14.6 percent of their shares outstanding. Micro-cap companies would lose visibility into 17.1 percent of shares outstanding, the study shows.
While it’s quite common for issuers to co-sign letters submitted to the SEC by industry bodies and trade associations, it’s less common for named executives to submit letters. But in this instance, executives from at least 33 public companies have submitted letters – including leading figures at Ford, Marriott International, Dell Technologies and Dow. Many of these letters express concerns about how the proposed rule change would make it harder to identify and engage with investors.
John Zecca, executive vice president, chief legal officer and chief regulatory officer at Nasdaq, also argues that the proposed rule change would make some public companies more vulnerable to activist investors, which could lead to short-term decision-making.
‘Smaller public companies would face an increased risk of activism, which, in turn, may lead to shorter-term decision-making that may be at odds with a more beneficial long-term company strategy,’ Zecca writes. ‘It may also result in cutting spending on necessary or important initiatives and prompt downsizing, as well as other actions not in the best interests of the company or long-term investors.’
He warns that, after an all-time high for activism activity in 2019, numerous corporate advisers are recommending that companies brace for a significant wave of activism that could resemble the uptick in campaigns following the 2008-2009 financial crisis.
While it’s not surprising that issuers would raise concerns about such a sharp decrease in the number of investors disclosing their holdings, this proposal is also notable for the volume of investor opposition.
The likes of CalPERS, the Council of Institutional Investors (CII), RockCreek Group, the Closed-End Fund Association and the University of Virginia Investment Management Company have all raised concerns.
In addition, the Consumer Federation of America (CFA) submitted its strong opposition to the proposal. ‘Our opposition may come as something of a surprise to the commission, which appears to have relied heavily on a few sentences in a letter we co-signed 17 years ago as evidence of support for its proposed approach,’ writes Barbara Roper, director of investor protection at CFA.
‘In the ensuing years, however, much has changed in the markets, including the rapid growth of private funds that operate with far less transparency than their registered counterparts and dramatic advances in information technology, which have simultaneously increased the speed with which such reports can be compiled and decreased the cost of doing so.
‘It is disappointingly consistent with the commission’s recent approach to its regulatory responsibilities that it has failed to seriously consider these developments in issuing its proposal, or indeed to have conducted any meaningful analysis of the proposal’s potential impact on users of the 13F data.’
According to a recent survey of the buy side by Corbin Advisors, 50 percent of asset managers that would be exempt under the proposal are against it, with respondents saying a threshold of $3.5 bn is too high; 38 percent of respondents agree with the proposal and 12 percent are unsure.
The proposed rule change also caught the attention of many retail investors. IR Magazine reported earlier this year that a significant number of the early comment letters originated from investing groups on Reddit and a newsletter sent by Whale Wisdom.
Similarly, Flavio Huraut, an Italian pilot and retail investor, started a Change.org petition in opposition to the proposal. The petition has received 175 signatures so far. Huraut tells IR Magazine that as an investor in the US markets, he is concerned with the lack of transparency the proposal would bring. He submitted a comment letter to the SEC but, due to a delay in its posting, he created the petition. He says he has promoted it in a number of Facebook investing groups.
Opposition on legal grounds
Beyond concerns about the effect the proposed rule would have on market transparency, CalPERS, the CII and CFA all believe the SEC doesn’t have the authority to propose such a change. As commissioner Lee writes in her initial opposition letter, when Congress signed the legislation to mandate 13F filings in 1975, it granted the SEC the authority to decrease the $100 mn threshold, but not to increase it.
Marcie Frost, chief executive officer of CalPERS, writes: ‘The unambiguous language of the statute does not give the SEC the discretion to increase the threshold… With the proposed rule, the commission would exceed statutory authority and contravene Congressional intent, which we expect would subject the proposed rule to unnecessary and costly legal challenges.’
Frost concludes that the loss of transparency in the US market and the potential illegality of the proposal itself would have a negative impact on investor sentiment on the US markets.
Questionable cost savings and popularity of 13Fs
The SEC’s proposal outlines the cost incurred by asset managers in filing 13Fs and says this rule change would save asset managers up to $30,000 per year in regulatory costs. But according to a letter from four business school professors from Stanford Business School, the Wharton School at the University of Pennsylvania, the University of North Carolina and Cornell University, the cost saving is a fraction of assets under management for most of the potentially exempt investors.
The professors estimate the median cost of filing 13Fs is $21,000 per filer each year. By not paying this, the median exempt filer would save 0.004 percent of its assets under management. The professors also look at the smallest exempt asset managers, and find the cost saving would be 0.02 percent of their assets under management.
Finally, the professors look at the popularity of 13F filings, relative to other regulatory filings, by examining downloads on the SEC’s Edgar system. They find that there were 289 mn downloads of 13F filings between January 2003 and June 2017, making 13Fs the sixth-most highly downloaded form from the SEC. The study finds that during this time period there was twice the demand for 13Fs as for all IPO prospectuses during the same time period.