The requirement that American public companies file a quarterly report listing all equity assets under management (AUM) provides position-level disclosure of all US-listed equity securities, including number of shares, issuer name and other details.
On 10 July this year, the US Securities and Exchange Commission (SEC) proposed an amendment to Form 13F Reporting Threshold for Institutional Investment Managers by changing the minimum threshold for reporting from $100m (AUM) to $3.5bn AUM.
When the rule was first enacted in 1975, the equities market was only $1.1tr. and just 300 managers had more than $100m AUM and were required to file. Since then, the equities market has grown to $35.6tr. with about 5,000 filers, driving the rationale that the threshold should be adjusted up to reflect the 35x growth.
In its amendment rationale, the SEC analysis indicates that while the number of filers will drop from 5,089 to 550, those 550 filers will report on 90.8% of the aggregate assets. In other words, the public will still see who holds 90% of the market from the 550 largest managers. The transparency of the remaining 10% is not worth the administrative cost burden put on the 4,539 managers.
As of 4 Sept, there were almost 2,000 comments and an overwhelming majority opposed the amendment, including SEC Commissioner Allison Herren Lee who in her dissenting statement said: “The Commission proposes today to increase the reporting threshold by 35 times for institutional investment managers that must report equity holdings on Form 13F, thus eliminating visibility into portfolios controlling $2.3 tr in assets. 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’m unable to assess the wisdom of today’s proposal because it lacks a sufficient analysis of the costs and benefits.”
Most of the comments came from individual investors protesting the reduction in transparency, a smattering of institutional investors echoing the same. But the biggest impact to transparency will be to those public companies that are not actively traded.
Richard Vincent, CFO, Oncternal Therapeutics, wrote: “As a publicly traded company we rely on 13F filings to aid in our shareholder engagement efforts – as it is the only accurate source of institutional holdings available. We believe that the proposed amendments would reduce transparency around holdings, significantly undermining issuer-investor engagement, particularly for small and mid-cap companies such as ours. Based on reporting data dated June 30, 2020, there were 10 institutional holders holding ~1.5 million outstanding shares of Oncternal Therapeutics, Inc. or ~8% of total shares outstanding. If the proposal were enacted, we would lose visibility on approximately virtually all of our shareholders that are also 13F filers or 100%, a significant loss of market transparency.” This highlights the reliance on this holding information from an investor relationship standpoint for public companies outside the S&P 500.
Lack of transparency can also mean less liquidity. Banks and investors also use 13Fs for due diligence for hedge funds and fund of funds. Ultimately, they can be provided the due diligence information from the fund privately, but then the smaller fund is still bearing the reporting costs and the investor/lender must also carry out extra due diligence, which is a cost. More cost and less transparency may steer banks away from the broader market, which in turn can impact liquidity.
Although the comments are overwhelmingly in opposition of the amendment, the current administration has tended to favour less regulation. The comment period ends on 29 September. As with all regulations, public companies should comment and lobby to make sure their voices are heard before this critical information goes dark.