Movers and SHAKERS
SEC May Limit Individual Investors Knowing What Some Money Managers are Doing
In mid-July, the Securities & Exchange Commission proposed to amend Form 13F to update the reporting threshold for institutional money managers. Adopted in 1978, Form 13F requires money managers who manage in excess of $100 million to submit a list of their long equity holdings each quarter within 45 days of the end of the quarter. The purpose of the original rule was to provide the SEC with data from larger money managers about their investment activities and holdings so that their influence and impact could be considered in maintaining fair and orderly securities markets. The $100 million reporting threshold has not been adjusted in over 40 years.
Big Changes in SEC Proposal
The SEC proposal would lift the threshold to $3.5 billion, reflecting proportionately the same market value of U.S. equities that $100 million represented in 1978. The new threshold would retain disclosure of over 90% of the dollar value of the holdings data currently reported while eliminating the 13F filing requirement for nearly 90% of the filers that are smaller money managers, or some 4,500 investment managers, overseeing $2.3 trillion in assets, according to the National Investor Relations Institute. The SEC estimates the elimination of 13F filing requirements for smaller money managers could cut direct compliance costs some $15,000 to $30,000 annually per manager or $68.1 million to $136 million annually in aggregate.
Opposition Almost 100:1
What’s not to like about reducing “paperwork” while saving investors money? Sounds good, right? Well, in the first few days following the Proposal, 179 comment letters had been filed with the SEC in response to the Proposal – and 177 of those letters are opposed to it. Comments continue to trickle in, with the most recent from October 16th, and each of the last ten were opposed to the proposed rule changes, although some expressed interest in some type of change to the existing rules, just not the one’s the SEC has proposed. An article in the Harvard Law School Forum for Corporate Governance commented, “It is difficult to see how eliminating the limited transparency into ownership by activist and other hedge funds, and instead of increasing the percentage of 13(f) information provided by “price-taking” index funds rather than smaller active funds that set prices, will further” the goals of data gathering and increasing investor confidence in the integrity of the securities markets.
Why the seeming outpouring of opposition to the SEC proposal? According to the CFA Institute, “The resulting loss of holdings information would harm market participants such as, among others, investors, issuers, researchers, and the affected institutional investment managers themselves.” The CFA goes on to say, “We also believe the Proposal would run counter to other statutory objectives, such as the need to build investor confidence, enable issuers to identify their beneficial owners, afford an understanding of the effect of institutional investor activities on individual securities, and serve as a single centralized repository of certain holdings data. And finally, we believe the economic analysis falls short in establishing a baseline of current practices and assessing the costs and benefits of the proposed rulemaking in a thorough and impartial manner.”
Small Investors Have a Beef
An especially galling aspect to small and individual investors is the significant reduction in the ability to “follow the smart money.” A Forbes article noted that “Goldman Sachs estimates that the number of funds tracked, that would continue filing 13Fs, would plunge from 815 to just 65 if the filing threshold increased to $3.5 billion, which highlights only how much less transparency there would be if the proposal were implemented.” And in an article for Columbia Law School, Eduardo Gallardo pointed out that some of the most prolific activist funds would no longer have to file 13Fs, including Jana Partners, Starboard Value, Greenlight Capital, along with many others. In fact, of FactSet's SharkWatch 50 list of the top activist funds, just ten would still have to file 13Fs. While following the “smart money” isn’t a panacea, many investors track these investors to get additional insights not only into individual stocks but industries and the overall stock market.
Where There is Agreement
Despite the opposition to the SEC proposals, many stakeholders and market observers agree that the rules and regulations need modernizing. Such potential changes include shortening the reporting window so that shares held updates are available as soon as two business days following the quarter end, rather than 45 days, and to change the reporting period from quarterly to monthly to match the short?sale reporting period. A number of proposals also have commented on increasing the reporting threshold, though none as high as the SEC proposal.
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