On July 10, 2020, the Securities and Exchange Commission (SEC) proposed to raise the Form 13F reporting threshold for institutional investment managers from $100 million to $3.5 billion (the Proposal). Currently, investment managers must file quarterly reports if they have investment discretion over public equity securities with an aggregate fair market value of at least $100 million. This reporting threshold has not been adjusted since the adoption of Form 13F in 1975.
According to the SEC, the intent of Section 13(f) and Form 13F is to ensure that the SEC can adequately monitor larger institutional managers’ influence and impact on the U.S. equity market using data collected from the filed Form 13Fs. However, the value of the market has grown from $1.1 trillion in 1978 to $35.6 trillion today, with no corresponding increase in the reporting threshold. The SEC believes that raising the reporting threshold from $100 million to $3.5 billion will preserve the original intent of Section 13(f), which was to monitor larger institutional managers, while alleviating the reporting burden and attendant compliance costs on smaller managers. “The new threshold would retain disclosure of over 90% of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90% of filers that are smaller managers,” the SEC stated in its press release.
In addition to raising the reporting threshold, the SEC proposes to (a) direct its staff to review the reporting threshold every five years and recommend an appropriate adjustment, if necessary; and (b) eliminate the omission threshold (which permits an investment manager to omit holdings worth less than 10,000 shares (or less than $200,000 principal amount of convertible debt securities) and less than $200,000 aggregate fair market value). The Proposal also seeks to amend the process for requesting confidential treatment of information contained in Form 13F disclosures. Currently, managers can request to temporarily withhold disclosure on the basis that such disclosure would be premature and likely result in substantial harm to the manager’s competitive position. The Proposal would require managers seeking confidential treatment to demonstrate that the information is both customarily and actually kept private by the manager, and to show how the release of the information could cause harm to the manager.
If the Proposal is ultimately adopted by the SEC, institutional investment managers with investment discretion covering less than $3.5 billion in public equity securities will no longer be required to file Form 13Fs. Larger investment managers who meet or exceed the reporting threshold will continue to file and will have to provide further information in return for confidential treatment.
The Proposal anticipates that the increased reporting threshold may save smaller investment managers compliance costs and indirect costs associated with “front-running” and “copycatting” arising from public access to Form 13F. The SEC estimates that the nonreporting smaller investment managers may save $68.1 million to $136 million per year, in the aggregate.
The Proposal does not come without its detractors. In a separate statement published on the same day as the Proposal, Commissioner Allison Herren Lee expressed concern for the potential loss of market transparency as a result of the Proposal, as the data for $2.3 trillion worth of assets managed by 4,500 investment managers would no longer be accessible to investors, at a time when the market is demanding increased disclosure.
Please contact one of the listed authors of this Client Alert or another Lowenstein Sandler contact if you have any questions with respect to the Proposal regarding Form 13F, or if you would like assistance reviewing and updating your documents.
For additional information regarding the Form 13F amendment, please see the following links: