On July 10, 2020, the Securities and Exchange Commission (SEC) announced that it has proposed to amend Form 13F and Rule 13f-1 to increase the reporting threshold for institutional investment managers (managers) and to require managers that are required to file Form 13F under the proposed amendments to provide additional information. These proposed amendments, if adopted, would enable the SEC to continue to monitor holdings of larger managers while providing meaningful regulatory relief for smaller managers.
Overview of Section 13(f) and Rule 13f-1
Section 13(f) of the Exchange Act of 1934, adopted in 1975, requires a manager to file a report with the SEC if the accounts over which the manager exercises investment discretion hold certain equity securities (13(f) securities) that have an aggregate fair market value on the last trading day of any month of at least $100 million. In 1978, the SEC implemented the reporting requirement of Section 13(f) by adopting Rule 13f-1 and Form 13F. Information reported on Form 13F, filed quarterly, becomes publicly available upon filing, unless the staff of the Division of Investment Management has granted a manager’s request for confidential treatment and allowed the filing of Form 13F CTR.
Section 13(f) reporting requirements were originally designed so that reporting would cover a significant proportion of managed assets in the public securities markets while minimizing the number of persons obligated to report. When it was adopted, the $100 million threshold limited the Form 13F filing requirements to the largest institutional investment managers of that time. However, the U.S. equities market has grown immensely since 1975 such that $100 million now represents a much smaller portion of the U.S. equities market. The overall size of the U.S. equities market has increased from $1.1 trillion to $35.7 trillion in the last four decades, and the number of managers required to file Form 13F has increased from less than a thousand to over five thousand in that time.
In light of these developments in the U.S. equities market, the SEC has proposed the following amendments to Rule 13f-1 and Form 13F:
- The reporting threshold for Form 13F and Rule 13f-1 would be increased from $100 million to $3.5 billion to reflect proportionally the same market value of U.S. equities that $100 million represented in 1975. The reporting threshold would be subject to a review every five years by the staff of the Division of Investment Management to determine whether it continues to be appropriate.
- The omission threshold for Form 13F that currently allows a manager to omit holdings of fewer than 10,000 shares or less than $200,000 in principal amount of convertible debt securities and less than $200,000 in aggregate fair market value would be eliminated, thereby requiring managers that meet the new reporting threshold to report all of the manager’s holdings.
- Managers that file Form 13F would be required to provide additional identifying information, specifically the number assigned to the manager by the Central Registration Depository system or the filing number assigned by the SEC, as applicable for each manager, as well as that of any other manager listed in the Form’s List of Other Managers Reporting for this Manager.
- The instructions on Form 13F for confidential treatment requests would require managers seeking confidential treatment of information contained in Form 13F to demonstrate that the information is both customarily and actually kept private by the manager and to show how the release of such information could harm the manager. This proposal reflects a recent U.S. Supreme Court decision, Food Marketing Institute v. Argus Leader Media, 139 S.Ct. 2356 (2019), that changed the standard for determining whether information is “confidential” under exemption 4 of the Freedom of Information Act.
- The proposed amendments would make certain non-substantive technical amendments to modernize the information reported on Form 13F.
The proposal includes an analysis of alternative approaches to adjusting the reporting threshold and requests comments from market participants. Any comments should be submitted within 60 days after the proposal is published in the Federal Register.
The proposed amendments, if adopted, would provide regulatory relief for smaller managers and reduce managers’ direct and indirect compliance costs associated with Form 13F. The proposal estimates that total annual direct compliance cost savings, which include information collection costs, would range from $68.1 million to $136 million. The proposal would also reduce indirect compliance costs that smaller managers face in the form of front-running and copycatting due to other market participants taking advantage of the disclosure of holdings information.