SEC Stalls Proposal to Raise Form 13F Reporting Threshold

The Securities and Exchange Commission plans on scrapping a proposed rule that would reduce the number of investment managers required to file Forms 13F.  The proposal aimed to cut compliance costs for smaller asset managers but received a strong negative response and relied on shaky statutory authority.

Forms 13F are filed each quarter by institutional investment managers who hold more than $100 million in certain securities identified by the SEC.  The filings provide a rare glimpse into the usually secretive holdings of hedge funds and other asset managers.  The SEC’s proposal would have raised the reporting threshold from $100 million to $3.5 billion, which the Commission estimated would reduce the number of filers by almost 90%.  The SEC sought to reduce direct compliance costs and ancillary costs, such as front-running, for smaller asset managers while retaining disclosure by the largest managers.  Although the number of reporting managers would drop sharply, the SEC estimated that the proposal would retain disclosure of approximately 90% of the value of the securities currently reported.

During the comment period, the SEC received an overwhelmingly negative response.  An analysis of comment letters by Goldman Sachs revealed that of the 2,262 letters received, only 24 supported the proposed rule.  Notably, a current SEC Commissioner publicly voiced her opposition to the proposal, citing decreased transparency and overstated savings to reporting managers.

The negative response from many market participants revealed that 13F filings have become useful beyond their initial design.  Public companies review the filings to determine changes in their major shareholders and watch for activist investors.  Investment banks use 13F data to identify portfolio and market concentration risk.  Investors may check 13F filings to assess the portfolios of their investment managers.

Remarkably, the Commission may not have statutory authority to enact the proposed rule.  An article published by the Yale Journal of Regulation argued that §13(f) of the Securities Exchange Act only allows the SEC to lower––not raise––the current reporting threshold.  What’s more, the author states that the proposed rule relies on a misinterpretation of legislative history: the proposal cites a Senate Report stating that the bill gives the Commission the power to raise or lower the threshold.  This report, however, related to a materially different version of the bill, which was ultimately never enacted.

This interpretation may explain why the reporting threshold has not changed since its introduction in 1978.  Market observers may need to wait for an act of Congress or a different statutory argument to surface before the Commission tries again to raise the reporting threshold.