The SEC proposes amendments to update Form 13F

The SEC proposes amendments to update Form 13F

Authored by Jessica DeRosa

On July 10, 2020, the U.S. Securities and Exchange Commission (SEC) announced that it has proposed an amended Form 13F to update the reporting threshold for institutional investment manager, among other changes.

Overview of section 13(f) and Rule 13f-1

In an effort to provide the U.S. public with insight of the portfolios of the nation’s largest institutional investors, Congress passed section 13(f) of the Securities Exchange Act (the Exchange Act). The section 13(f) disclosure program had three primary goals:

  1. to create a central data repository for the investment activities of institutional investment managers;
  2. to better understand both the influence of the institutional investment managers on securities markets and the public policy implications of that influence; and
  3. to increase investor confidence in the integrity of the U.S. securities markets.

Section 13(d) securities are securities a person is deemed to beneficially own if the person has the right to acquire the securities within 60 days of the reporting date. Institutional investment managers who exercise investment discretion over certain equity securities described in Section 13(d) that have an aggregate fair market value of at least $100 million (the threshold), are subject to Rule 13f-1. Rule 13f-1 under the Exchange Act requires quarterly reports to be filled with the SEC on Form 13F with respect to the value of those securities which they have investment discretion.

The threshold was deemed to be representative of a certain proportionate market value of U.S. equities at the time of adoption in 1978. At the time of appropriation, there were approximately 300 institutional investment managers who held about 75% of the dollar value of all institutional equity security holdings and would be subject to the reporting requirements. Since the form was adopted, the overall value of U.S. public corporate equities has grown over 30 times, from $1.1 trillion to $35.6 trillion.

The growth in the market value of U.S. equities since 1978 has reduced the relative significance of a $100 million portfolio. As such, the SEC decided to reassess the threshold to ensure there was a proper balance between compliance burdens and the public benefit in the portfolios subject to the reporting requirements.

Proposal summary

The SEC’s proposal would raise the reporting requirement threshold to $3.5 billion, which is believed to represent proportionally the same market value of U.S equities today that the $100 million represented in 1975. The new threshold would retain 90% of the dollar value of the holding data currently reported, while eliminating the Form 13F filing requirement and cost for nearly 90% of filers that are smaller managers. The proposal would also direct SEC staff to review the Form 13F reporting threshold every five years and recommend an appropriate adjustment, if any, to the SEC.

The SEC included an analysis in its proposal where different approaches were used to adjust the reporting threshold. It included the use of consumer price inflation and stock market returns. The ratio of U.S. equities market value in 2018 to U.S equities market value in 1975 is 3,571.41%. Filers subject to reporting requirements has increased 17 times the number of filers since the initial adoption.

The increased threshold was determined using a “stock market growth” model, which utilizes the original $100 million threshold implemented in 1975 as a baseline, and adjusts that number based on the growth in value of U.S public equities through the end of 2018.

The proposal would eliminate the omission threshold for individual securities on Form 13F, which permits the exclusion of certain small holdings, namely holdings of fewer than 10,000 shares and less than $200,000 aggregate fair market value.

The proposal would require managers to report additional numerical identifiers to enhance the usability of the information provided on the form, and amend the instructions relating to requests for confidential treatment of Form 13F information.

The proposal is intended to alleviate the reporting burden on smaller managers. There are now approximately 5,000 investment institutional managers that are subject to the reporting requirements based on the $100 million threshold. Raising the threshold to $3.5 billion will still capture the largest institutional managers, but would reduce the total filers to approximately 500, which would be an 89% reduction.

Going forward

The proposal includes specific requests for comment on the proposed threshold, and whether an alternative method to adjust the threshold should be considered, as well as on the estimates of the burdens and costs to investment managers. There is a 60-day comment period following the publication in the Federal Register.

The goal of the SEC’s proposal is to streamline the reporting process. Evaluating the threshold every five years will help achieve the purpose of the reporting requirements, which is to provide the public useful data about the top institutional investment managers portfolios. The proposal will help avoid the burden for smaller managers who have met the requirement over the years as their portfolio value increased with the U.S. market value increase. The expectation is that the SEC’s proposal will streamline the reporting process and enhance the information available to the public.

The information above was obtained from the SEC website, in particular press release 2020-152 and 17 CFR Parts 240 and 249 [Release No. 34-89290; File No. S7-08-20] RIN 3235-AM65.

For more information or to learn how Baker Tilly’s Value Architects™ can assist your organization, contact our team.

Executive conference room overlooking the city
Next up

An agency’s journey to the cloud: success is in the details