A SEC 13F rule change would cut 13F filings by 90 percent. Isn’t the SEC supposed to promote market transparency?

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The Securities and Exchange Commission has proposed significantly raising the size threshold of funds required to file quarterly 13F disclosures. The SEC 13F rule change would end quarterly portfolio filings for nearly 90% of current filers.

The proposal would raise the AUM threshold that investment managers must meet every quarter from $100 million to $3.5 billion. For the most recent quarter, 5283 firms filed 13Fs. The rule change would have reduced that to 549 firms — almost 90% of filers.

The $100 million threshold has not changed since Congress adopted the requirements in 1975. The SEC adopted the rules in 1978. Congress established Section 13(f) to “stimulate a higher degree of confidence among all investors in the integrity of [the US] securities markets.”

It’s hard to understand how removing transparency into $2.3 trillion of investment holdings would promote investor confidence. Small and mid-cap stocks, which typically have more small and mid-size fund owners, would be disproportionately impacted by this rule change.

The proposed SEC 13F rule change would remove transparency into $2.3 trillion of investment holdings.

The SEC explained the proposed changes as a way to reduce administrative expenses for small managers, while still capturing nearly all the data the filings previously had. The commission also said the new $3.5 billion threshold would reflect “proportionally the same market value of U.S. equities that $100 million represented in 1975.”

However, objections to the SEC proposal have been widespread.

Count Daniel Collins, founder of 13F analytics firm WhaleWisdom, among the dissenters.

“The proposed rule change would be a loss for the main street investor.  The SEC should be pushing for more disclosure and transparency and not rolling back existing rules.  This can only hurt small investors and provides little to no benefit or savings,” Collins said in an email exchange.

Indeed, in 2019, the National Investor Relations Institute proposed changes to 13F reporting that would enhance — not decrease — transparency.

Here is a summary of NIRI’s recommendations.

• The threshold for institutional investment managers to file a Form 13F report would
be increased from $100 million to $450 million in 13(f) securities (which include
shares in U.S.-exchange traded stocks), to reflect a Consumer Price Index (CPI)
adjustment from 1976 to 2019.
• The new threshold of $450 million would be adjusted every 5 years to reflect changes
in the CPI for All Urban Consumers, as calculated by the Bureau of Labor Statistics.
• Form 13F filings would be made within 15 days after the end of each calendar month.
Current law requires Form 13F filings to be made within 45 days after the end of each
calendar quarter.
• All filers would be required to disclose long, short, and derivative positions in a Form
13F report. All positions would be aggregated together (not netted) to determine if
the threshold is met.

The proposed rule change would be a loss for the main street investor.  The SEC should be pushing for more disclosure and transparency and not rolling back existing rules, Daniel Collins, WhaleWisdom.

SEC Commissioner Allison Heren Lee was quick to voice her opposition to the proposed 13F rule changes, saying that “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.”

“I am concerned that the projected cost savings in today’s proposal are greatly overstated and wholly inconsistent with the Commission’s past analysis…the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets.”

Comissioner Lee notes that smaller public companies use 13F filings to monitor activist firms that may be accumulating their shares. She expresses concern that these small companies cannot afford to pay for stock surveillance firms that analyze trading patterns and try to determine which investors are buying or selling shares.

“In addition, there is a recognition that new uses of the data have developed among academics, market researchers, and others, but (the proposal) has no discussion or estimates of the costs to them or the public.”

She also express doubt as to whether the SEC actually has the authority to pursue the proposed changes. She states that Congress set the statutory reporting threshold at $100 million and the Commission has the authority to lower it, but not increase it.

In summary, the SEC proposal that would increase the 13F filing threshold by 35X seems ill-conceived, and contrary to the SEC’s mission of promoting fairness in the U.S Securities Markets.

Comments from the public may be submitted within 60 days of the proposal’s publication in the Federal Register.

I urge everyone to post a comment on the SEC 13F rule change proposal on one of the SEC sites linked below.

SEC Comment Page:  https://www.sec.gov/rules/proposed.shtml.  Click on “Submit comments on S7-08-20”.  

Or you can send an email to rule-comments@sec.gov.  Include the file number S7-08-20 in the subject. Instructions are at https://www.sec.gov/rules/submitcomments.htm.  

Full SEC Proposed Rule Change:  https://www.sec.gov/rules/proposed/2020/34-89290.pdf

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