SEC proposes updating Form 13F requirements

The Securities and Exchange Commission (SEC) recently published a Proposal to increase the reporting threshold for Form 13F reports by institutional investment managers (IIMs, as defined below).  The SEC is seeking to raise the reporting threshold from $100 million to $3.5 billion to reflect changes in the size and structure of the US equities market since 1975, when Congress first adopted the Form 13F requirement.  

The Proposal also would eliminate the de minimis threshold for omitting individual securities from Form 13F and require IIMs to provide additional identifying information. In addition, the Proposal includes technical amendments to modernize the structure of data reporting and amend the instructions for confidential treatment requests (CTRs).

Comments on the Proposal should be submitted within 60 days after the Proposal is published in the Federal Register, which is pending.

Background

In 1975, Congress added Section 13(f) to the Securities Exchange Act of 1934 (Exchange Act), requiring IIMs (any person, other than a natural person, investing in or buying and selling securities for its own account, and any person exercising investment discretion over the account of any other person), that use the US mail or other means of interstate commerce and that exercise "investment discretion" over $100 million or more of "Section 13(f) securities," to report their holdings of those securities within 45 days after the end of each calendar quarter.  In 1978, the SEC implemented Section 13(f) by adopting Rule 13f-1 and Form 13F.

An IIM exercises investment discretion with respect to an account if, directly or indirectly, it is authorized to determine what securities or other property will be purchased or sold by or for the account, or makes decisions as to what securities or other property will be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions.  An IIM is deemed to exercise investment discretion with respect to all accounts over which any person under its control exercises investment discretion.  Thus, for example, parent corporations and holding companies share investment discretion with their subsidiaries. 

"Section 13(f) securities" are generally equity securities traded on a US national securities exchange, including certain options and warrants, closed-end investment company shares, exchange traded funds and exchange-traded convertible debt securities.  To make the determination easier, each calendar quarter the SEC publishes a "List of Section 13(f) Securities" on its website.  Only securities on that list are counted in determining whether an IIM has reached the reporting threshold, and only those securities must be reported.  

Information disclosed on Form 13F for each security includes the name of the issuer; its class; the number and market value of each security; the nature of investment discretion (ie, sole, shared) and voting authority (ie, sole, shared, none); and whether one or more other IIMs also have investment discretion and/or voting authority over the securities and, if so, who they are.  Each Form 13F is publicly available on the SEC EDGAR website upon filing, unless the IIM has filed a CTR (which are granted only in very limited circumstances).

The Proposal

The SEC is proposing to increase the Form 13F reporting threshold from $100 million to $3.5 billion, based on the changes in the size and structure of the US equities market since adoption of Exchange Act Section 13(f) in 1975.  The SEC also is proposing to require an IIM that files Form 13F to provide certain identifying information, including its Central Registration Depository (CRD) number and/or SEC filing number if either has been assigned to it.

The Proposal also would eliminate the de minimis threshold for omitting individual securities on Form 13F.  In addition, the SEC is proposing certain technical amendments to modernize the information reported on Form 13F and to modify the standard applied to Form 13F CTRs to make it consistent with a recent US Supreme Court decision.

Increasing the reporting threshold

According to the Proposal, Section 13(f) gives the SEC broad authority to determine the size of the institutions required to file, the format and frequency of the reporting requirements, and the information to be disclosed.  However, by its terms Section 13(f)(1) authorizes the SEC to set the reporting threshold at "$100,000,000 or such lesser amount" as the SEC determines by rule, a point that Commissioner Allison Herren Lee raised in a separate statement in which she asserted that Section 13(f)(1) "withholds authority from the Commission to raise the threshold."  Commissioner Lee also expressed other reservations with the Proposal and declared her inability to support it. 

According to the Proposal, Section 13(f)(3) authorizes the SEC to exempt any IIM or class of IIMs from the 13F reporting requirements and asserts that the Senate Report accompanying the Exchange Act amendments that added Section 13(f) indicated that the SEC would "have authority to raise or lower" the threshold and that in setting it the SEC should consider, among other factors, burdens of reporting and the informational value of the disclosure.  The SEC states that Section 13(f)’s legislative history indicates that the $100 million reporting threshold was designed to cover a large proportion of managed assets, while minimizing the number of actual reporting persons, thus limiting the burdens of reporting to the largest IIMs.  At that time, approximately 300 persons, managing about 75 percent of the dollar value of all institutional equity security holdings, were subject to the reporting requirement.  The 1975 Senate Report explained that Congress was concerned with the increase in concentration of institutional ownership of securities and the potential effect of that increase on trade prices, the relevant issuers and the interests of individual investors.  However, in the 45 years since Section 13(f)’s adoption, the relative significance of $100 million in securities as compared with the overall size of the US equities market has declined significantly, leading many more IIMs to be subject to the reporting requirements while $100 million now represents a much smaller proportion of the US equities market.  According to the Proposal, today 5,089 IIMs exceed the $100 million threshold, nearly 17 times the 300 IIMs originally contemplated.  Accordingly, the SEC believes it is appropriate to increase the threshold to $3.5 billion to reflect proportionally the same market value of US equities that $100 million represented in 1975.  

The SEC believes that the change will provide meaningful relief for smaller IIMs that would no longer have to file, reducing their direct compliance costs and indirect costs.  While the SEC acknowledges that some costs associated with filing Form 13F have decreased since 1975 due to lower-cost information processing systems, it also believes that direct compliance costs are likely to be proportionately higher for smaller IIMs than for larger ones.  The SEC is also concerned that smaller IIMs’ Form 13F data is more likely to be used by other market participants to engage in behavior that harms the IIMs and the beneficial owners of their managed portfolios, such as front running and copycatting – things that may increase the costs of investing for smaller IIMs and hinder their investment performance.  The SEC noted that smaller IIMs account for a significant proportion of Form 13F CTRs as they seek to protect their information from these harmful behaviors and resulting costs.

According to the SEC, Congress adopted Section 13(f) because it was concerned with a material increase in the concentration of institutional ownership of securities with a small number of larger IIMs and the potential effect of that increase on the trade prices of those securities, the relevant issuers and well the interests of individual investors.  Congress was concerned that this, coupled with the lack of available trading data relating to the larger IIMs, hampered the SEC’s ability to maintain fair and orderly securities markets and impaired the stability of stock prices.  The Proposal explains that while Form 13F was originally designed to assist regulators and the public in understanding the effects of institutional equity ownership on the markets, use of the data has expanded greatly to include academics, market researchers, the media, attorneys pursuing private securities class actions, and market participants who use the data to enhance their ability to compete.  However, the SEC noted other sources of data, existing or under development, that may provide similar data to that included on Form 13F.

The goal of increasing the reporting threshold is to recalibrate it to reflect the objectives of Section 13(f), including providing the SEC, other regulators and the public with holdings information of larger IIMs that may impact the markets, while not saddling smaller IIMs with the costs of filing Form 13F or the risks of potentially harmful investment behaviors resulting from filing it.  The proposed $3.5 billion threshold is a level that the SEC believes does not impose undue burdens on smaller IIMs.  The SEC believes that for smaller IIMs the proposed threshold increase is likely not only to enhance competition by lowering the cost to participate in the market, but also to promote efficiency, which result can lower management fees and/or lead to enhanced services, both of which benefit investors.  

The SEC requests comment on the proposed increase of the 13F reporting threshold, including:

• Whether the threshold should be amended and, if so, whether the proposed $3.5 billion threshold is appropriate or a different threshold should be used
• Whether raising the threshold will negatively affect the utility of Form 13F data or investor confidence in the integrity of the US markets and, if so, how
• Any effects of raising the threshold that the SEC failed to consider
  
• The proposed methodologies for adjusting the reporting threshold
• Whether Form 13F filing obligations are actually burdensome to smaller IIMs and, if so, the nature and character of the burdens
• The benefits to investors and markets of the public having access to Form 13F data from smaller IIMs and whether and how those benefits justify the filing burdens
• Any burdens to larger IIMs, whether it is beneficial to continue having access to Form 13F data from larger IIMs, and whether those benefits justify the burdens
• Who uses Form 13F data and whether and how their uses benefit investors, market integrity, or capital formation
• Whether users of 13F data will be affected by the reporting increase and fewer filers reporting, and whether there are reasonably available alternative sources of data 
• Indirect costs such as the front-running and copycatting, whether and how they differ for larger and smaller IIMs, and whether and how they may be affected by the Proposal

Recognizing that the 13F threshold may again become misaligned with the size and structure of the market, the SEC considered proposing automatic future adjustments to the reporting threshold on an ongoing basis every five years.  However, the SEC instead decided that it will review the reporting threshold every five years to determine whether it remains appropriate or should be adjusted, in which case the SEC will again propose changes for notice and comment. 

Eliminating the Form 13F Omission Threshold 

Form 13F filers are permitted, but not required, to omit holdings of less than 10,000 shares (or $200,000 principal amount of convertible debt securities) and less than $200,000 aggregate fair market value (the Omission Threshold).  The SEC included the Omission Threshold when it first adopted Form 13F because it viewed aggregate holdings in these amounts as de minimis and therefore unlikely to have the potential to materially impact the market.  The goal was to further the objective of providing meaningful data while minimizing the form’s reporting burdens.

The SEC believes that if the reporting threshold is substantially increased, the Omission Threshold will not be necessary or appropriate, and seeks comments including whether it should be eliminated or instead whether it should be increased and, if so, to what level. 

Additional identifying information

The SEC also proposes to require Form 13F filers to provide additional information, including CRD and SEC filing numbers, if any.  The SEC believes this information will allow it and other users of Form 13F data to more easily identify a filer’s other regulatory filings and the interrelationships between IIMs who share investment discretion over Section 13(f) securities. 

The SEC seeks comment on whether it should require IIMs to provide CRD and/or SEC filing numbers, as well as those of other IIMs identified on their Forms 13F; whether this would be useful information and, if so, how; whether including this information would be unduly burdensome for filers; and whether there are any other amendments that should be made to the information provided on Form 13F, including eliminating information currently required that is not useful or beneficial to investors, such as CUSIP numbers for each security.

Technical amendments

The SEC also proposes non-substantive technical amendments to account for prior changes in the data format of Form 13F.  One of these is to simplify the Form 13F rounding convention by requiring dollar values to be rounded to the nearest dollar, rather than the current requirement of rounding to nearest thousand dollars, and for values to be stated in full rather than rounded to the nearest one thousand dollars and reported without the last three digits (ie, the "000").  The SEC believes this will reduce filer errors and data inaccuracies.  

Confidential treatment requests 

Finally, the SEC proposes to amend the instructions on the Form 13F for CTRs to require IIMs seeking confidential treatment for Form 13F information to demonstrate that the information is both customarily and actually kept private by the IIM, and to show how the release of this information could harm the IIM.  The SEC believes this is necessary in light of a 2019 Supreme Court decision that changed the standard for determining whether information is "confidential" under exemption 4 of the Freedom of Information Act (FOIA).  The SEC is also proposing technical amendments to Form 13F’s instructions for Form 13F CTRs to reflect amendments to the SEC’s FOIA regulations that were amended in 2018. 

Finally, in addition to its specific comment requests, the SEC requests general comment on all aspects of its analysis, including the potential benefits and costs of the proposed amendments, and whether the proposed amendments, if adopted, would promote efficiency, competition, and capital formation or have an impact on investor protection.  Commenters are requested to provide empirical data, estimation methodologies, and other factual support for their views, in particular, on the estimates of costs and benefits for the affected parties.

If you have any questions regarding the Proposal or Form 13F in general, please contact the author or a member of the DLA Piper financial services team.