When the facts change, I change my mind
– John Maynard Keynes
On July 10, 2020, the Securities and Exchange Commission (SEC) proposed to update the reporting threshold for Form 13F reports by institutional investment managers, raising the reporting threshold from the statutory threshold of $100 million in Section 13(f) of the Securities Exchange Act of 1934 (Exchange Act) to $3.5 billion.1 The increase is intended to reflect the change in size and structure of the U.S. equities market since 1975, when Congress adopted the requirement for institutional investment managers to file holdings reports with the SEC. The proposal also would amend Form 13F to increase the information provided by institutional investment managers by eliminating the carve-out that currently permits managers to exclude certain small positions from their Form 13F reports. The proposal contains a number of other modifications to the 13F reporting requirements.
Increase in Reporting Threshold
The SEC stated that raising the Form 13F reporting threshold to $3.5 billion would retain disclosure of 90.8% of the dollar value of the Form 13F holdings data currently reported while removing reporting requirements from approximately 4,500 Form 13F filers, or approximately 89.2 percent of all current filers. The SEC stated that its staff will conduct reviews of the Form 13F reporting threshold every five years to determine whether the reporting threshold continues to be appropriate.
Elimination of Reporting Carve-out
Form 13F currently gives a manager the option to omit holdings of fewer than 10,000 shares (or less than $200,000 principal amount of convertible debt securities) (share limit) and less than $200,000 aggregate fair market value (value limit) (together, with the share limit, omission threshold). The SEC stated that larger managers find reporting all of their holdings less burdensome than do smaller managers. Therefore, if Form 13F reporting obligations were limited to large managers, there is less of a likelihood that there would be a material increase in burdens for these filers.
Additional Identifying Information
The SEC also proposes to amend Form 13F to require each Form 13F filer to provide its CRD number and SEC filing number, if any. If a manager is making a Form 13F-NT filing, the manager must include the CRD number and SEC filing number, if any, of any other manager included in the “List of Other Managers Reporting for this Manager” table on the cover page.
The proposed amendment is intended to enable the SEC and other users of Form 13F data to identify a Form 13F filer’s other regulatory filings and the interrelationships between managers who share investment discretion over 13(f) securities more easily.
Confidential Treatment Requests
The SEC also proposed to amend the instructions on Form 13F for confidential treatment requests. The SEC asserted that the proposed amendment is necessary in light of a U.S. Supreme Court decision in June 2019 that changed the standard for determining whether information is “confidential” under exemption 4 of the Freedom of Information Act (FOIA). The SEC stated that the proposed amendments are necessary because a FOIA analysis is part of a confidential treatment request determination.
In March 2019, SEC Division of Investment Management Director Dalia Blass announced an initiative to reach out to small and mid-sized asset managers. The initiative was intended to solicit views from those groups about regulatory barriers and to consider how the SEC staff could address them. Because the initiative would eliminate the need of approximately three-quarters of investment managers to file Forms 13F, but would eliminate reporting with respect to less than 10 percent of the dollar value of all 13(f) securities, the proposed amendments to the Form 13F reporting threshold appear to be precisely the type of regulatory action contemplated by the initiative.
However, there may be legal impediments to the proposal ever being adopted. In particular, the current $100 million threshold is found in Section 13(f)(1). That Section gives the SEC express authority to reduce the reporting threshold to an amount not less than $10 million, but does not give the SEC the authority to raise the reporting threshold. The SEC correctly noted that Section 13(f)(3) of the Exchange Act gives the SEC the authority to exempt, by rule, or order, conditionally or unconditionally, any institutional investment manager or security or any class of institutional investment managers or securities from any or all of the provisions of Section 13(f). Even so, a court may decide that this grant of exemptive authority does not give the SEC the ability to override the express language of Section 13(f)(1), and, consequently, a future SEC may decide not to move forward with the proposed rulemaking.
1 Reporting Threshold for Institutional Investment Managers, Securities Exchange Act Rel. No. 89290 (July 10, 2020)