SEC Proposes 13F Disclosure Relief for Smaller Investment Managers
On July 10, 2020, the Securities and Exchange Commission (the “SEC”) announced that it had proposed an amendment to Form 13F and Rule 13f-1 to, among other items, substantially increase the reporting threshold for institutional investment managers (the “Proposal”).1 If the Proposal is adopted, it would be the first amendment to Form 13F since its adoption in 1978 and would significantly relieve the administrative burden of 13F disclosures on many investment managers.
Form 13F and Rule 13f-1
Currently, Section 13(f) of the Exchange Act of 1934 requires institutional investment managers to file a report on Form 13F with the SEC if the accounts over which the manager exercises investment discretion hold certain equity securities (known as 13(f) securities, which are identified by the SEC quarterly) that have an aggregate fair market value on the last trading day of any month of at least $100 million. Pursuant to Rule 13f-1, investment managers must file a Form 13F quarterly. Typically, Form 13Fs are publicly filed, unless the staff of the Division of Investment Management grants a manager’s request for confidential treatment of a Form 13F.
The Proposal recently announced by the SEC would raise the Form 13F reporting threshold from $100 million to $3.5 billion – a thirty-fivefold increase. The underlying aim of the disclosure requirements of Section 13(f) is to provide insight into the holdings and distribution of a significant proportion of managed assets in the public securities market, while the reporting threshold seeks to minimize the actual number of persons obligated to report. The SEC notes that the increase under the Proposal is in line with the overall value increase of equity securities market since the original implementation of Form 13F in the mid-1970’s:
“[s]ince then, the overall value of U.S. public corporate equities has grown over 30 times (from $1.1 trillion to $35.6 trillion), and the relative significance of managing $100 million has declined considerably.” 2
In the press release announcing the Proposal, the SEC states that the Proposal would retain disclosure for “over 90% of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90% of filers that are smaller managers.” 3 Thus the Proposal intends to achieve the original aims of Section 13(f), while recalibrating the threshold for the modern markets.
Effect on Managers
If adopted, many investment managers will no longer be required to make quarterly Form 13F disclosures and the Section’s requirements will be refocused on the largest institutional investment managers, who are more likely to move markets. In particular, most activist investors would be spared the administrative burden and compliance costs of preparing these quarterly filings, as activist investors typically hold less than the new threshold amount.
While investment managers falling below the new threshold will reap the benefits of the Proposal, the largest institutional investors would see increased disclosure requirements. For example, the Proposal includes the elimination of certain exemptions to the Form 13F reporting requirements, including the ability to omit holdings of fewer than 10,000 shares and less than $200,000 in aggregate fair market value from a manager’s Form 13F. These changes mean that managers subject to the new reporting requirements would need to disclose all such manager’s holdings. The Proposal would also require managers to disclose certain additional identifying information, specifically the number assigned to the manager by the Central Registration Depository system of FINRA and the filing number assigned by the SEC. Finally, the Proposal would increase the requirements for a Form 13F to be given confidential treatment, requiring that the manager (i) demonstrate that the information is customarily and actually kept private by the manager and (ii) show how the release of this information could cause harm to the manager.
The Proposal will be published on the SEC website and in the Federal Register shortly. Once published, it will be subject to a 60 day comment period.
1 SEC Proposes Amendments to Update Form 13F for Institutional Investment Managers; Amend Reporting Threshold to Reflect Today’s Equities Markets, Securities and Exchange Commission, July 10, 2020, Release 2020-152 (https://www.sec.gov/news/press-release/2020-152).