Don't Mess with 13Fs
The SEC's proposal to raise the reporting threshold is troublesome. The cost-benefit rationale is faulty, and it hurts the manager-allocator relationship.
On July 10, 2020, the Securities and Exchange Commission proposed to significantly raise the AUM threshold for funds required to file quarterly 13F disclosures. The new AUM threshold would be $3.5 billion, up from $100 million, effectively excluding 90% of current filers.
Commissioner Allison Herren Lee published a dissenting opinion regarding her agency’s proposal, where she wrote, “I am concerned that the projected cost savings in today’s proposal are greatly overstated…and, importantly, that the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets.”
Novus shares the commissioner’s concerns.
The proposal ignores other changes in our industry.
The logic offered by the SEC is that they are realigning the regulation with its original intent, which was to provide transparency into the movements of the largest players in the industry. To that end, the proposal states that $3.5bn is the proportionate increase needed to account for the growth of the US equities market since 1975.
We can all agree that a $100m fund back then feels very different to a $100m fund today. However, the proposal fails to consider the complexities that have accompanied this growth in our industry. More complexity means more risk for everyone involved.
Given the undisputable ballooning of the monetary base in US capital markets, we’ve seen not only a proliferation of asset managers, but also a valuation bubble across all financial assets. Let’s remember that congress’ stated goal for the 13F filings was to “increase investor confidence in the integrity of the United States securities markets.” Capturing meaningful flows today, and the essence of the transparency which the 13F regulation seeks to provide, requires a much wider angle than a simple growth-adjusted reporting threshold.
Transparency benefits capital markets.
Data and transparency make for healthier, stronger markets. 13Fs are playing an important role in our investment ecosystem right now, as they are currently the only method to monitor behavior across US equity movements and trends.
In some cases, 13F filings are the only form of oversight which pension funds and other institutional investors can exercise over less transparent asset classes; e.g., hedge funds.
Small- and mid-sized corporations, which may have more active ownership, in many cases rely on 13Fs for visibility into their shareholder base. Equally, active managers often benefit from coordination with other shareholders to improve corporate governance.
At the time of writing this, 538 out of 541 publicly filed comments on the SEC’s website expressed concerns about the proposal. The measurable public sentiment so far is that if any change were to be made, more transparency would be preferred.
Transparency is the currency of the investor-manager relationship.
One of the public comments on the SEC’s site is from a hedge fund due diligence analyst who uses 13Fs to detect manager fraud.
Examples like this demonstrate how 13Fs have become a key part of the analysis process for many allocators when sourcing new investment ideas and monitoring their investments. Especially when coupled with an analytics tool like Novus, these filings are an essential method for allocators to find investments, for managers to be found, and for investments to be monitored over time.
True harm would come from eliminating this form of relationship genesis, especially for smaller firms (whom the proposal claims to benefit). A senior analyst for a firm specializing in alternative investments points out that, “By raising the AUM threshold to $3.5bn, you are effectively putting these smaller managers at a significant disadvantage by making it more difficult for investment groups to do their diligence and get comfortable moving forward with an investment.”
And after an allocation is made, 13Fs remain an important tool for oversight and monitoring investments. Depending on the level of transparency a manager is willing to provide, SEC filings are sometimes the only source an allocator may possess to understand what names are actually in their portfolio.
13Fs require minimal effort to file.
If allocators have been up-in-arms over the proposal, are managers breathing a collective sigh of relief? Not really. Some have actually expressed to us that they value knowing how crowded certain names are before making an investment (a sentiment recently highlighted by Goldman Sachs as well).
The managers we serve at Novus assure us that filing a 13F is not actually that burdensome. With the technologies of 2020, much of the process is automated anyway. One commenter on the SEC’s site, an individual who had filed 13Fs themselves, defined the cost burden as “completely inconsequential.”
If you’d like to quantify this more specifically, a client of ours shared that preparing 13Fs takes their firm a total of 2-3 hours per quarter.
Managers could actually end up with more work.
If 13Fs suddenly vanish, allocators will still demand transparency into what names are in their portfolios (via their underlying managers). Instead of going to a centralized location for this information, allocators will start asking for the information directly. Without universal formats and procedures, we can reasonably expect that managers would spend more time preparing documentation, as they adhere to a more diverse set of requirements from their various investors.
Novus stands to benefit either way…
Novus is the largest industry aggregator and analytical platform for both public and private data. On the public data side, we aggregate holdings disclosures from over 100 regulatory sources globally. On the private data side, we facilitate manager portfolio exchanges with allocators under strict confidentiality and permissioning. In this context, Novus acts as a fulcrum in the manager-allocator relationship.
If the proposal gets rejected, it will remain business-and-usual for us, and we shall continue our public regulatory filing offering (of which 13Fs are a major component). If the proposal is passed, we would expect more allocators to ask more information of managers directly, thus benefitting our private data and analytics exchange.
…but ultimately we stand against this proposal.
Despite how we may stand to profit, that outcome does not justify the negative consequences that this proposal places on allocators, managers, and the larger investment community.
We’ll also acknowledge our other self-interests in this direction. First, this proposal threatens our ability to deliver the high caliber research that we provide for free to the investment community. Furthermore, our own 13F research powers an index we’ve co-created with Barclays.
Should this proposal pass, Novus will continue to empower investors with best-in-class portfolio intelligence solutions (and perhaps even become more essential to the marketplace). Our allocator clients will no doubt continue to labor in the best interest of their fiduciaries, and do what they can to secure manager transparency in other ways where possible. But the industry as a whole will wake to a gloomier day, further shrouded by the secrecy for which it is already criticized.
Add your voice.
The SEC is inviting the public (i.e., YOU) to provide feedback on their proposal. The submission window was created on Jul 10 and will remain open for 60 days. See the link below for more details.
Ultimately, whether you are speaking as an institutional or a private investor, a concerned citizen or an opinionated practitioner, you need to form your own opinion. We have provided our arguments for your consideration. Regardless of how you feel about the proposal, it’s important for the SEC to hear your voice, especially if you stand to benefit or suffer from the proposed changes.
Freedom of speech is a wonderful privilege in a democratic society. Make use of it!
Here are a few ways to do so—
Online Comment Submission:
- On the SEC's site, Navigate to “File No: S7-08-20” (Reporting Threshold for Institutional Investment Managers)
- email@example.com with subject line: “File Number S7-08-20”
- Zeena Abdul-Rahman, Senior Counsel / Mark T. Uyeda, Senior Special Counsel, at +1 (202) 551-6792
- Brian McLaughlin Johnson, Assistant Director, at +1 (202) 551-6792