July 2020
SEC’s 13F Proposal Blindfolds Public Companies
By Patricia Figueroa and Danielle Belopotosky
The U.S. Securities and Exchange Commission’s recent proposal to raise the threshold for asset managers to disclose their holdings in public companies has been met with opposition from public companies, retail investors and Wall Street watchers. The move, they say, would be detrimental to the public markets.
Under the proposal, the threshold would increase more than 35 times to $3.5 billion assets under management, up from $100 million AUM. As a result, approximately 4,500 fund managers overseeing $2.3 trillion in assets (or nearly 90 percent of current filers) would no longer have to provide disclosure.
This reporting system, which has been in place since 1975, “is the only accurate source of institutional holdings available,” said the National Investor Relations Institute (NIRI), which argues the rule would reduce transparency in the public markets and jeopardize issuer-investor engagement.
Form 13F disclosures provide critical shareholder information for companies. These forms offer transparency and clarity on a broad range of investors and their trading patterns in the prior quarter. Limiting these disclosures to a small fraction of the investor community would blindfold companies and remove an important piece of investor relations data, which is often the primary means by which companies learn about activist investors accumulating a position in their stock.
In addition, the proposal would help activist hedge funds fly under the radar, giving activists more freedom to build a position and sneak up on a company without its knowledge. Some of the most aggressive activists, including Starboard Value, would not need to disclose its holdings.
The SEC purports the proposal will save between $15,000 and $30,000 a year for those asset managers who would be exempt by removing the filing requirement. However, the proposal fails to assess the incremental costs to issuers of adding surveillance services in order to have some sense of who is in their stock. Not to mention the paltry sum of that savings range for investors, whose nine- to ten-figure funds can afford filing costs and steak dinner tabs.
At a time when investors and issuers are calling for greater transparency and engagement, the SEC’s proposal would reduce market transparency and negatively impact shareholder engagement.
In order to support efforts by stakeholders interested in advancing a more transparent and efficient securities market, Gladstone Place Partners is providing a template to facilitate the submission of comment letters to the SEC [Download template letter here].
Companies need federal regulators to help them turn the lights on when it comes to monitoring and communicating with their investor base. The SEC’s 13F proposal is, unfortunately, an off switch.
Patricia Figueroa and Danielle Belopotosky are Senior Vice Presidents at Gladstone Place Partners.