The Securities and Exchange Commission (the “SEC”) has proposed amendments to Section 13(f) of the Securities Exchange Act of 1934 (“Form 13F”). The most significant amendment change would raise the current reporting threshold from $100 million, to $3.5 billion. This change is the first amendment to Form 13F in 45 years, and is intended to reflect the change in size and structure of the U .S. equities market since 1975, when Congress adopted the requirement for these managers to file holdings reports with the SEC.
The proposal issued by the SEC would amend Form 13F to increase the information provided by investment managers by eliminating the omission threshold for individual securities and requiring managers to provide additional identifying information. The proposal also makes certain technical amendments, including to modernize the structure of data reporting, and in light of a recent decision of the U.S. Supreme Court, amends the instructions on Form 13F for confidential treatment requests.
Form 13F filings were adopted in 1975 as part of the Securities Acts Amendments of 1975. Form 13F of the Securities Exchange Act of 1934 requires an investment manager to file a report with the SEC if the manager exercises investment discretion with respect to accounts holding certain equity securities (“13(f) securities”) having an aggregate fair market value on the last trading day of any month of any calendar year of at least $100 million. 13F must be filed quarterly, if the accounts over which they exercise investment discretion hold an aggregate of more than $100 million in 13(f) securities. The intent of section 13(f) was intended to provide transparency into a certain segment of the securities markets, specifically the equity holdings by larger institutional investment managers.
Today, over 5,000 managers exceed the $100 million reporting threshold for filing Form 13F holding reports. Based on SEC analysis, this is approximately 17 times the number of filers that the threshold covered in 1975. As a result of the growth in the number of advisers required to file, and the initial intent of the rule, the SEC has taken the position that the revision to the reporting threshold should be based on the growth of the U.S. equities market under management, rather than the returns generated by the stock market. Its preliminary decision to use market growth to adjust the reporting threshold is conceptually designed to require managers to file Form 13F when their holdings of section 13(f) securities approximate the same percentage of the U.S. equities market that was represented by the $100 million threshold in 1975. As a result, the increase in the reporting threshold reflects a correlation to the holdings of the larger institutional advisers in 1975, which results in a much smaller adviser pool that will be required to file under the proposed threshold. This has a positive impact on a number of investments advisers.
Positive Impact on Smaller Advisers
Based on the SEC’s analysis, and outreach to managers, the SEC estimates that the direct compliance costs for smaller managers that are currently required to file Form 13F reports, range from $15,000 to $30,000 annually per manager, depending on the complexity and volume of holdings, the type of third-party legal and compliance review undertaken prior to the filing, and a filer’s experience with filing Form 13F, among other factors. As the SEC believes that over 4,300 advisers would no longer be required to file the Form 13F reports, the cumulative reduction in compliance costs as a result of the proposal is estimated to range from $68.1 million to $136 million for those smaller advisers.
It is not often that rule proposals have a positive impact on compliance costs for investment advisers, but it appears that this might be one rule proposal with a silver lining for a large number of advisers.