Join NIRI in Opposing the SEC's Proposal to Gut 13F Transparency

On July 10, 2020, the U.S. Securities and Exchange Commission voted to propose amendments to its Form 13F disclosure rules, which would dramatically reduce the number of hedge funds and investment managers that have to report their holdings after each quarter. Under the proposal, the minimum threshold for 13F disclosure would increase by 35 times from $100 million in U.S. equities under management to $3.5 billion. As a result, 4,500 fund managers overseeing $2.3 trillion in assets (or 89 percent of current filers) would no longer have to provide disclosure.

Small and mid-cap issuers, which typically have more smaller fund managers owning their stock, would be more severely impacted by this rule change. According to Alexander Yokum of IHS Market, companies with less than $1 billion in market cap would on average lose visibility toward 23 percent of their top 100 list of investors. 

The SEC's proposal does not include of any of the much-needed reforms that NIRI, NYSE, Nasdaq, and other organizations have called for to improve transparency, such as reducing the 45-day reporting period, changing the reporting frequency to monthly, or requiring the disclosure of short positions.  

Commissioner Allison Herren Lee voted against the SEC's proposal, warning that the agency had not fully considered the impact on companies. "The proposal does not address this concern, discuss potentially reduced shareholder engagement, or balance the interests of issuers, and particularly small issuers, against the population of institutional investment managers affected by this proposal, i.e., those with discretion over between $100 million and $3.5 billion," she said, citing NIRI's arguments for reform.  

NIRI plans to submit a detailed comment letter that strenuously opposes this proposed rule change. NIRI urges chapters, issuers, and individual IR professionals to share their concerns by sending comment letters to the SEC, contacting federal lawmakers, or sharing concerns with the industry trade groups. NIRI welcomes assistance from anyone who shares our goal of improving ownership transparency.  

NIRI has prepared a joint issuer comment letter that public companies may sign on to. If your company would like to join this letter, please email Ted Allen, who oversees NIRI's advocacy efforts, by August 12. 

If your company plans to submit its own comment letter, it should include data on the number (or the percentage) of your investors that would no longer have to provide quarterly disclosure if the threshold was increased to $3.5 billion. 

NIRI is reaching out to other corporate organizations, the exchanges, and lawmakers to share the concerns of public companies and IR professionals.  

The SEC's 13F proposal is subject to a 60-day comment period, which means that comment letters should be submitted by mid-September. Comment letters to the SEC should reference "Reporting Threshold for Institutional Investment Managers, Release No. 34-89290; File No. S7-08-20" and may be submitted via the SEC's website at: https://www.sec.gov/cgi-bin/ruling-comments. 


Background on 13F Reporting

Public companies currently operate in an environment of great transparency governed by federal, state, and stock exchange rules and regulations, but the Form 13F ownership disclosure rules that apply to institutional investors have not been updated in decades. Current SEC rules generally require institutional investment managers to disclose their share ownership positions on a quarterly basis, with an exception made for those that petition the SEC to delay these disclosures on the basis of confidentiality. In 2013, NIRI, the NYSE Group, and the Society for Corporate Governance petitioned the SEC to shorten the 13F reporting deadline from 45 days to two business days after the end of the calendar quarter. 

NIRI also believes that the SEC should require 13F filers to provide public disclosure of their short positions. Section 929X of the Dodd-Frank Act of 2010 requires the SEC to promulgate rules obligating investment managers to publicly report short sale activity at a minimum of once every month. NIRI also believes that the benefits to investors and public companies of long-position reporting justify a similarly substantial increase of the frequency of Form 13F reporting.

NIRI has joined with the NYSE Group in filing a rulemaking petition that seeks a short-position disclosure rule. Nasdaq also has filed a rulemaking petition to require Form 13F filers to report their short positions.

The outdated 13F reporting rules are a significant impediment to corporate-investor engagement, because companies don’t have timely information on all of their investors’ long and short positions when trying to allocate scarce C-suite or director time among competing investor requests for one-on-one meetings or calls. NIRI believes that companies need to receive more timely and frequent ownership information (ideally on a monthly basis, with no more than a four-day delay), so they can treat investors fairly and effectively manage these engagement requests. 

NIRI encourages members and their companies to urge the SEC to modernize the 13F long-position reporting rules and to adopt a rule to provide improved transparency around short selling. More information on short selling, including comment letter templates, can be found on the Short Selling page of NIRI's website.  

 

13D Reform

Current SEC requirements require a Schedule 13D to be filed by any investor or group of investors that becomes a 5 percent holder within 10 days after crossing the 5 percent threshold. Based on technology improvements over the last several decades and the speed at which information now flows, NIRI sees no reason for such a delay in reporting this material shareholder ownership information. NIRI believes reporting rules should be amended to reduce the reporting requirement to four (or less) days from the current 10 days. This reporting requirement should be expanded to include long and short selling information, as well as share lending.

In 2017, Senator Tammy Baldwin (D-Wisconsin) introduced a bipartisan bill that sought a four-day filing period under 13D and tighter restrictions on the ability of activist hedge funds to hide their ownership stakes and collude as "wolf packs." NIRI encourages public companies and NIRI chapters to write letters to lawmakers in support of 13D reform. A letter template for public companies that wish to support 13D reform can be found here. In NIRI's 2018 Advocacy Issues Survey, 95 percent of respondents said they "agree" or "strongly agree" with these efforts to modernize the 13D rules. In July 2018, NIRI submitted a statement to the Senate Banking Committee that urges lawmakers to support 13D reform. The NIRI Houston chapter also has written letters in support of S. 1744 to Senators Ted Cruz and John Cornyn

Resources

NIRI Statement to the Senate Banking Committee (July 2018) on “Legislative Proposals to Examine Corporate Governance” (see pp. 7-10 for discussion of 13D reform) 

NIRI Houston Letter to Senator John Cornyn in Support of S. 1744 (August 2018).

NIRI Houston Letter to Senator Ted Cruz in Support of S. 1744 (August 2018).

Testimony of Darla Stuckey, President and CEO of the Society of Corporate Governance to the Senate Banking Committee (June 2018) 

Text of S. 1744 (also known as the "Brokaw Act")

Wachtell, Lipton, Rosen & Katz, "Commentary: Holding Activists and Proxy Advisory Firms Accountable?" New York Law Journal (May 2016)

Wachtell, Lipton, Rosen & Katz, Petition for Rulemaking on Schedule 13D of the Securities and Exchange Act of 1934 (March 2011)