September 17, 2020

Impact of Potential Amendment to SEC Form 13F to Equity Capital Markets

The quarterly report listing all equity assets under management provides position-level disclosure of all US-listed equity securities, including number of shares, issuer name and other details.

On July 10th the SEC proposed an amendment to Form 13F Reporting Threshold for Institutional Investment Managers by changing the minimum threshold for reporting from $100MM assets under management to $3.5bn AUM. When the rule was first enacted in 1975, the equities market was only $1.1trn and only 300 managers had over $100MM in AUM requiring them to file. Since then, the equities market has grown to $35.6trn with about 5,000 filers, so the rationale is that the threshold should be adjusted up to reflect the 35x growth.

Rationale Behind SEC Form 13F’s Amendment

In its amendment rationale, the SEC analysis indicates that the while the number of filers will drop from 5,089 to 550, those 550 filers will report on 90.8% of the aggregate assets[1]. In other words, the public will still see who holds 90% of the market from the 550 largest managers. The transparency of the remaining 10% is not worth the administrative cost burden put on the 4,539 managers.

As of September 4th there were almost 2,000 comments and an overwhelming majority opposed the amendment including SEC Commissioner Allison Herren Lee, who in her dissenting statement said, “The Commission proposes today to increase the reporting threshold by 35 times for institutional investment managers that must report equity holdings on Form 13F, thus eliminating visibility into portfolios controlling $2.3 trillion in assets[1].

This proposal joins a long list of recent actions that decrease transparency and reduce both the Commission’s and the public’s access to information about our markets.[2]… I’m unable to assess the wisdom of today’s proposal because it lacks a sufficient analysis of the costs and benefits.”[2]

Most of the comments came from individual investors protesting the reduction in transparency, a smattering of institutional investors echoing the same. There was not even much support from the 4,539 managers who would benefit from the lowering of the reporting burden.

Typically, the change to onerous reporting rules is driven by the industry which would have a concerted effort to write supporting comments, so perhaps they don’t care because it’s actually not much of a reporting burden.

Who Should Benefit From the Reduction of Transparency?

There was one comment from Miles Putnam, Portfolio Manager, Provident Investment Management: “This is a good idea. As an investment manager, my client portfolio is my primary work product. I believe the current requirement to publish that work product publicly harms my business by devaluing, and effectively stealing, my work product.” [3]

This is a fair point, but does it outweigh the desire for public companies to know who holds their stock? Not according to Richard Vincent, CFO, Oncternal Therapeutics, Inc who writes, “As a publicly traded company, we rely on 13F filings to aid in our shareholder engagement efforts – as it is the only accurate source of institutional holdings available. We believe that the proposed amendments would reduce transparency around holdings, significantly undermining issuer-investor engagement, particularly for small and mid-cap companies such as ours. Based on reporting data dated June 30, 2020, there were 10 institutional holders holding ~1.5 million outstanding shares of Oncternal Therapeutics, Inc. or ~8 percent of total shares outstanding. If the proposal were enacted, we would lose visibility on approximately virtually all our shareholders that are also 13F filers or 100 percent, a significant loss of market transparency.”[4] This highlights the reliance on this holding information from an investor relationship standpoint for public companies outside the S&P 500.

The Impact SEC Form 13F’s Amendment May Have on Equity Capital Markets
One of the biggest impacts will be to the capital markets and corporate investment banking departments, especially those that service the broader investment community below the top 500 institutional investors. The sell-side can currently rely on data providers who mine the 13F filings for holdings information, so they know who holds interest in stocks they cover for research and securities trading. Banks also facilitate corporate access for investors who value the face-to-face meetings with CEOs and CFOs of public companies. However, will they have a tough time knowing who holds the stock at all for the small cap companies like Oncternal Therapeutics? Will the larger investors ultimately have better access and influence with the lack of transparency across all funds?

Going forward, firms will need to spend more time gathering and vetting the information that today they are receiving automatically via a data provider. That is more time making calls to build relationships to simply gather and verify the holdings data on those remaining 4500+ managers. Not to mention then entering that data, normalizing it to match the automated data that will still be obtained via your data provider, and ultimately delivering the collected, actionable data for firm-wide consumption. Other operational technologies and automated workflows (sell-side CRM platforms among them) will become increasingly important to provide efficiencies and optimize the use of human capital.

Consider also, that lack of transparency can mean less liquidity. Banks and investors also use 13Fs for due diligence for hedge funds and fund of funds. Ultimately, they can be provided the due diligence information from the fund privately, but then the smaller fund is still bearing the reporting costs and the investor/lender must also do extra due diligence which is a cost. More cost and less transparency may steer banks away from the broader market which in turn can impact liquidity.

In Conclusion

Although the comments are overwhelmingly in opposition of the amendment, the current administration has tended to favor less regulation. The comment period ends on September 29th. As with all regulations, sell-side industry and public companies should comment and lobby to make sure their voice is heard before this critical information goes dark.

[1] Securities Exchange Commission 17 CFR Parts 240 and 249 [Release No. 34-89290; File No. S7-08-20]