The Potential Impact on Investor Relations Practice of Proposed SEC Rules Changes on Form 13F
By Jeff Tryka, CFA, Senior Director
Seldom do we take active positions on proposed changes to securities regulations, but a recent development has the potential to significantly impact public companies’ ability to understand and engage with shareholders. On July 10, the Securities and Exchange Commission (SEC) proposed the first significant changes to its form 13F institutional shareholder disclosure rules in nearly five decades.
Under the current disclosure rules, institutions holding more than $100 million in assets are required to disclose their equity holdings on a quarterly basis, 45 days after the end of the calendar quarter. Lambert has supported cross-industry calls in recent years by the National Investor Relations Institute and other organizations to modernize those archaic rules, require more frequent disclosures of long positions and begin disclosing short positions.
Instead, the SEC last week proposed reduced transparency, raising the $100 million threshold to $3.5 billion, purportedly in an effort to reduce compliance costs for an expanded group of fund managers. The potential impact of the proposal to such a change to the investor relations function cannot be understated:
- Approximately 4,500 of the current estimated 5,000 13F filers would no longer be required to disclose holdings on Form 13F, leaving only 500 of the largest fund managers to provide this important information to the market.
- The reduction in the number of filers will likely have a disproportionate impact on smaller public companies as lower float and trading liquidity of small caps makes them less attractive to larger institutional managers.
- A reduction in an issuer’s knowledge regarding the shareholder base will make allocating management time and scarce investor relations resources more difficult.
- Lack of transparency regarding public companies’ shareholder bases will make proxy issues more difficult to address and place companies at a disadvantage when it comes to shareholder activism.
- Less knowledge of who an issuer’s shareholders are may create a reduction in accountability for corporate performance.
This proposed change seems incongruous with the SEC’s mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” We also fail to see how eliminating 90% of the public disclosure of holding by institutions furthers the SEC’s vision to “To promote capital markets that inspire public confidence and provide a diverse array of financial opportunities to retail and institutional investors, entrepreneurs, public companies, and other market participants.” (as stated in the SEC’s FY2018-22 Strategic Plan). The significant decrease in oversight and disclosure of the proposed rule change seems antithetical to the mission vision of the SEC in that less information and transparency damages public confidence in the markets.
At Lambert, we believe in transparency and accountability in investor relations, but the SEC’s proposed change will reduce transparency and likely lead to lower management accountability to shareholders. The National Investor Relations Institute has provided some detailed information on the SEC proposal as well as their position regarding the rule change.
The SEC has a 60-day public comment period before finalizing the new disclosure rules, during which time we encourage public companies to join Lambert in submitting a comment letter to the SEC outlining the concerns surrounding this proposed change.