Reporting Threshold for Institutional Investment Managers

[geov]

The SEC proposes amendments to Form 13F and rule 13f-1 under the Securities Exchange Act of 1934 which would raise the threshold for reporting specified equity securities on Form 13F from $100 million to $3.5 billion. This would save smaller funds the cost of preparing the filings.

https://www.sec.gov/news/press-release/2020-152#:~:text=Section%2013(f)%20requires%20a,of%20at%20least%20%24100%20million.

It’s a very significant change. For the most recent quarter, instead of 5,283 funds filing, there would be only 549.

I find the SEC’s concern about filing costs rather disingenuous. If government was so concerned about compliance costs they could change all sorts of reporting requirements, like the absurd tax code, for example.

So obviously the SEC is responding to intense lobbying here. Soon nothing will be disclosed anymore which is all detrimental to us smaller investors. P123 piggyback strategies of good funds would also become less profitable because the larger funds perform rather poorly, most of them under-perform the S&P500.

You can submit your comments to the SEC here:
https://www.sec.gov/comments/s7-08-20/s70820.htm

[InspectorSector]

Georg - thank you for bringing this to our attention. I assume this would mean that ETFs no longer have to disclose their holdings, or is there another regulation for that?

In any case, I don’t think it would be smart for ETF manufacturers to stop disclosing their holdings. I suspect it would be to their own detriment. Investors don’t want black boxes for the most part.

[yuvaltaylor]

Here’s Matt Levine’s take on this, from Bloomberg:

Every quarter, hedge funds and mutual funds have to report what stocks and bonds they own, using the U.S. Securities and Exchange Commission’s Form 13F. I forget why? Here’s the SEC’s current explanation for the requirement (which started in the late 1970s):

The section 13(f) disclosure program had three primary goals. First, to create a central repository of historical and current data about the investment activities of institutional investment managers. Second, to improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence. Third, to increase investor confidence in the integrity of the U.S. securities markets.

Those goals are all a little vague. When the SEC has a rule like “companies have to publish annual audited financial statements on Form 10-K,” the purpose and audience for the rule are obvious: Potential investors in the company will read its financial statements to inform their investment decisions, and it is good and only fair if they get accurate information. But when the SEC has a rule like “investors have to publish what they own,” the purpose and audience are less clear. I suppose investors in the funds—clients of hedge funds and mutual funds—have a right to know what their managers own, but that doesn’t require public disclosure; a hedge fund could tell its clients without telling the world. Competitors of the funds are interested in knowing what their competitors are up to, and might want to copy the most successful funds, though it’s not clear why that’s something the SEC should encourage. Also 13F requires reporting your holdings as of the end of the quarter, and the deadline is 45 days after quarter-end, meaning that if you did use 13Fs to inform trading decisions you’d often be wrong.

Corporate managers tend to like to know who their shareholders are, and 13Fs are one way to do that, and giving corporate managers tools to handle their shareholders does seem like a purpose of a lot of 1970s-era shareholder-disclosure rules. Still it’s not like chief executive officers are going to make corporate decisions based on 13Fs in the same way that investors are going to make investing decisions based on 10-Ks.

I’m left with the vague residual of “improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence.” I don’t know what those implications were in the 1970s, but we talk about them all the time now: the rise of index funds, the concentration of voting power in the biggest institutional asset managers, the “Problem of Twelve” in which a dozen managers will control almost all companies, the antitrust and governance implications, etc.

Now the SEC wants to scale back the 13F requirement: It currently applies to managers with at least $100 million of assets, and the SEC has proposed to raise that threshold to $3.5 billion. (The U.S. stock market has grown by about 35 times since 1975, from $1.1 trillion to $35.6 trillion, so this would be proportional.) It points out:

The new threshold would retain disclosure of 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.

That is, unsurprisingly, 90% of the shares own by 13F filers are owned by the biggest 10% of 13F filers, who would still have to file after this rule change. Also:

Under the proposed amendments, the aggregate value of section 13(f) securities reported by managers would represent approximately 75 percent of the U.S. equities market as a whole, as compared with 83 percent without the proposed amendments and 40 percent in 1981, the earliest year for which Form 13F data is available. The proposed amendments to the Form 13F reporting threshold thus also reflect the changes in the structure of the market that have occurred over time.

In 1981, 40% of shares were owned by institutions that owned at least 0.01% of the total U.S. equity market (that is, at least $100 million of assets in a $1 trillion market). In 2020, 75% are. If the purpose of 13F was to “facilitate consideration of the influence and impact of institutional investment managers on the securities markets,” it has certainly given us something to think about.

[geov]

Here are some of the reasons why hedge funds should continue to disclose their assets despite some piggyback strategies (which work well for investors) to which they object. One obvious reason is that the proposal, if implemented, is an open invitation for managers to run Ponzi schemes because there would be no check available to the public whether they are truthfully reporting their investment returns.

Also has anybody ever heard that the government is concerned about reporting costs. I find the SEC’s concern about filing costs rather disingenuous. The estimated filing costs of $30,000 per year for a hedge fund is like $0.30 for one of us. If government was so concerned about compliance costs they could change all sorts of reporting requirements, like the absurd tax code, for example. Just paid my accountant a few thousand dollars to fill the numbers I gave them into the correct forms. So obviously the SEC is responding to intense lobbying here. Soon nothing will be disclosed anymore which is all detrimental to investors.

This is from Daniel Collins
Owner, WhaleWisdom.com

If you use 13F filing data in your investing research then please take a few minutes to read this important message. I am asking for your help. You may have already seen the recent SEC proposal to dramatically raise the required reporting threshold for 13F filings.

This proposal would change the AUM threshold that investment managers must meet every quarter from $100 million to $3.5 billion! To put it in perspective, for the most recent quarter, that would reduce the number of funds that disclosed their holdings to the public from 5,283 to 549 or almost 90% of all filers. $2.3 trillion in investment holdings would no longer be disclosed to the public resulting in loss of transparency and valuable insight. When Congress first adopted Section 13(f) it did so to “stimulate a higher degree of confidence among all investors in the integrity of [the US] securities markets.” Taking this data away will have the opposite effect. Transparency is what gives investors confidence in US markets.

Given the SEC’s emphasis on a level fair playing field, this rule change makes no sense. The reasoning behind the proposed change is the “possible” reduction in costs and burdens to smaller managers. This justification is nonsense. I have asked several managers that file and they say it is a highly automated process that effectively costs nothing. The claimed cost savings are completely inaccurate.

One SEC commissioner, Allison Heren Lee, has already voiced her opposition to this proposal. https://www.sec.gov/news/public-statement/lee-13f-reporting-2020-07-10

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.

Comments are already pouring into the SEC. I am urging everyone to please post a comment on the proposal to the SEC site linked below. Why should we care? How are we impacted by this? Below are some issues to raise. Please mention them in your comments to the SEC and to your representative in Congress:
Raising the reporting threshold to such a high number will severely limit future academic research on markets, investing and securities.
Raising the reporting threshold to such a high number will reduce public companies’ opportunity to know more about who their shareholders are.
Many managers are known to talk among themselves, sharing ideas and information. They have access to company management that small investors don’t. Given the SEC’s emphasis on a level fair playing field, this rule change makes no sense.
The “justification” for the rule change is highly questionable.
When is less transparency and less data ever a good thing for the small investor?
Some investors may want to avoid over-owned stocks, believing they have a high level of risk. This rule change greatly reduces individual investors ability to reduce their risk.
In the event of a significant correction the number of reporting managers would be diminished even further. The S&P suffered a 56.4% decline during the 2007-2009 financial crisis. A similar event using the most recent quarter as an example, would have reduced the number of funds by another 31% at a time when such data is needed even more.
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