Study shows extent of 13F rule change proposal’s impact

Aug 13, 2020
Opposition to the SEC’s planned reform continues to mount

A proposed SEC rule change that would allow almost 90 percent of investors in US public companies not to make 13F filings will have an outsized effect on small and micro cap issuers’ ability to identify their shareholders, according to analysis of the Russell 3000 by IHS Markit.

The proposed rule change – which prompted NIRI, a significant number of retail investors and SEC member Allison Herren Lee to express concerns – would raise the threshold of estimated assets under management required for a 13F filing from $100 mn to $3.5 bn. That would relieve 89 percent of investors from reporting their positions on a quarterly basis, the SEC says.

According to the analysis from IHS Markit, the rule would also mean that 86 percent of activist investors would no longer need to file 13Fs. That includes the likes of Starboard Value, JANA Partners, Greenlight Capital, Engaged Capital, Land and Buildings and Marcato. More than two-thirds (69 percent) of hedge funds would also be exempt.

An analysis of investors at Russell 3000 companies highlights the extent to which this rule change would have an outsized impact on small and micro cap companies. IHS Markit looked at how market cap affects the percentage of total shares outstanding that issuers would lose insight into, and found that small and micro cap companies would be roughly three times worse off.

Small caps would lose visibility into 14.6 percent of their shares outstanding, while micro caps would lose visibility into 17.1 percent. Mega caps would lose visibility of 4.4 percent, large caps lose 5.5 percent and mid-caps lose 9.4 percent.

Percentage of shares outstanding lost by market cap
Mega cap 4.4%
Large cap 5.5%
Mid cap 9.4%
Small cap 14.6%
Micro cap 17.1%

Source: IHS Markit

Patrick Davidson, senior vice president of investor relations at Oshkosh Corporation and chair of NIRI’s advocacy committee, described the proposal as ‘ridiculous’ during a recent NIRI webinar. ‘We think the potential if this proposal were to become a rule would be terrible,’ Davidson told the audience. ‘It would make our jobs more difficult, it goes against transparency and would make it more difficult for us as issuing companies.’

NIRI is encouraging its members to take action by submitting comment letters to the SEC. More than 95 companies have already signed a joint letter that NIRI will be submitting on behalf of its members.

Speaking during NIRI’s recent webinar, Ted Allen, vice president of communications and member engagement at NIRI, voiced hope that comment letter could be particularly effective due to expected changes at the SEC.

Agency chair Jay Clayton has been nominated by the Trump administration to take over as the next US attorney for the Southern District of New York. If his nomination is approved, a new chair of the SEC may not share Clayton’s views on the proposed change regarding 13F filings, Allen said. NIRI is recommending that companies and individuals submit their comment letters before September 29.

NIRI president and CEO Gary LaBranche mentioned that he has been discussing the proposed rule change with other IR associations around the world. If a company is dual-listed with a US exchange as its secondary listing, this would affect them.

Laura Hayter, CEO of the IR Society, tells IR Magazine that this is a matter of concern for many of her members. ‘This SEC proposal means for UK listed companies with a significant proportion of US shareholders, visibility over the share register may well be reduced,’ she says. ‘The UK IR Society feels that this is backwards step in transparency at a time when many politicians and investment professionals have called for more openness in financial markets, and this SEC proposal would represent a significant change in disclosure practice.’

The timing of this proposed rule change coincides with the latest implementation date (September 2) of the European Commission’s Shareholder Rights Directive II. This regulatory change allows companies to request more detailed information from intermediaries about who their shareholders are.

Concern spreads to established financial institutions and advisers

Within one week of the proposed rule’s publication, 179 comment letters had been submitted with the SEC – with 177 of those being against the proposal. Many of those letters were from retail investors and academics, and a significant number originated from a series of posts on Reddit.

In the intervening weeks, opposition to the proposal has come from more established voices in the financial markets.

In a July 17 note to clients, Goldman Sachs strategist David Kostin wrote that the rule change would cut the number of hedge funds his team tracks from 822 to just 59. ‘The primary drawback of fewer hedge fund filings is lack of clarity around crowding risk,’ Kostin said, as reported by Financial Planning. ‘Reported hedge fund holdings allow investors to understand crowding risk, and to appropriately hedge portfolios.’

Lawyers from Wachtell, Lipton, Rosen & Katz also expressed their concerns in a recent article, calling for the SEC to reverse its proposal to take a look at how 13D and 13F filings could be reformed to create more transparency, not less.

In a statement shared with IR Magazine, Nasdaq joined the list of concerned parties. ‘Nasdaq appreciates the SEC’s efforts to mitigate administrative costs for funds and institutions concerning Form 13F,’ a Nasdaq spokesperson says. ‘However, as a longtime advocate for disclosure transparency, we have concerns that the negative consequences of this amendment would outweigh the intended benefits. Complete access to quarterly disclosure of ownership is critical information for public companies. We look forward to engaging on this initiative with the SEC for a resolution that benefits all market participants.’ 

The SEC did not respond to a request for comment.

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