After more than 40 years since Rule 13f-1 and Form 13F were adopted, the SEC is proposing new 13F requirements that, among other changes, will increase the 13F reporting threshold from $100 million to $3.5 billion. Form 13F reporting requires investment advisers that exercise discretion over more than $100 million in 13(f) securities to report their 13(f) securities holdings on a quarterly basis. The proposal would potentially eliminate the 13F reporting requirement for approximately 4,500 investment advisers.
The new SEC Release no. 34-89290 (July 20, 2020) proposes updates to Rule 13(f), including a major change in reporting threshold for 13F reports to “reflect the change in size and structure of the U.S. equities market.”
Originally intended as reporting for “institutional investment managers,” the number of investment advisers required to file Form 13F has increased since 1979, a year after Rule 13f-1 and Form 13F were adopted, from about 300 to more than 5,000. This is despite the Commission’s statement when it designed Form 13F, that its intent was to provide useful information, while minimizing reporting burdens. If the change in reporting threshold in the proposed rule is adopted, more than 4,000 investment advisers would no longer be required to file Form 13F. The SEC estimates that direct compliance costs per manager could range from $15,000 to $30,000 annually, and the proposal could result in savings of $68 million to $136 million, plus savings to managers in indirect costs related to 13F users front-running or copycatting advisers’ portfolios. The Commission also cites its own costs in responding to (smaller) managers’ inquiries and other requests related to 13F reporting.
The SEC seems to have re-discovered the initial goal to maximize the relevant information, while considering the administrative burden on smaller advisers. In addition, the SEC admits that the reporting threshold “may become significantly misaligned with the size and structure of the market, and as a result place unnecessary reporting burdens on certain managers,” and the proposed rule would have the Commission evaluate the 13F reporting threshold every five years, recommending adjustment as appropriate.
The SEC’s release looks back at the history of the reporting requirements of Form 13F, examining the goals and purpose of the form, which were:
Create a repository of data regarding the activities of institutional investment managers;
Improve the body of data regarding holdings of managers to evaluate their impact on the securities markets; and
Increase investor confidence in the integrity of US markets.
The Release evaluates different measures that could have been used to determine the new reporting threshold and explains why the SEC chose the value of the U.S. equity markets over other metrics. Using the size of the equity markets to increase the threshold results in a meaningful reduction in number of reporting firms, while still requiring reporting on a substantial portion of the equity markets. The release notes that about 75% of Forms 13F are filed by smaller managers, who in the aggregate manage less than 10% of the dollar value of all reported securities. The proposed amendment would result in reporting by managers of approximately 75% of the U.S. equities markets as a whole, compared to the current 83%.
The SEC acknowledges that the proposed changes would result in a reduction in data available to the SEC, other regulators, corporate issuers and other analysts and researchers. However, the Commission estimates that more than 95% of the portfolio companies currently reported would continue to be reported, and believes that the investing public would be less interested in holdings of smaller managers because those managers are “not likely to cause market effects of the type contemplated by sections 13(f).”
Additional amendments proposed in the release include deletion of the Omission Threshold, a requirement for 13F filers to include additional identifying information and other technical amendments.
The SEC is requesting comments relating to the substantive and technical amendments and their impact on advisers and their compliance programs within 30-60 days of the release’s publication in the Federal Register. Smaller advisers, and particularly advisers nearing the $100 million threshold will likely be in favor of the proposal, as it removes a quarterly project that requires resources of compliance, legal and IT/programming staff.
Note: On July 10, only minutes after the press release from the SEC, Commissioner Allison Herren Lee issued a public statement (a) challenging the Commission’s statutory authority to increase the reporting threshold, (b) stating that the proposal lacks a “sufficient analysis of the costs and benefits”, (c) questioning the reduction in transparency and (d) criticizing the methodology used to estimate savings.
Lauri B. London counsels investment advisers on legal and compliance matters including SEC regulations.