The Securities and Exchange Commission looks like it is abandoning a rule that would have raised the Form 13F threshold for lare investors. The proposed change, which we first highlighted months ago, would have been a major blow for hedge fund transparency and would have reduced the amount of holdings that fund managers would have to disclose to the public.
Now, some within the SEC have been informed that the proposed rule change "is dead", according to Bloomberg.
As the proposed change got closer, even the two largest lobbying groups for hedge funds questioned whether or not the amount saved by hedge funds in compliance costs due to the new rule was worth it. The SEC's decision was further swayed by an onslaught of public comments from hedge funds.
James Angel, a finance professor at Georgetown University, said: “This shows the value of the public comment process. More people should monitor what our regulators are proposing and submit comments. The SEC is a political agency, and they do pay attention to public opinion.”
The SEC responded: “It remains clear that the current threshold is outdated. The comments received illustrate that the form is being used in ways that were not originally anticipated when the form was adopted. We are focused on examining these important issues before we move forward with determining the appropriate threshold.”
All told, the SEC received 2,238 letters opposing the rule change and 24 letters in favor of it. Despite 90% of fund managers no longer having to file 13F's, more than 90% of U.S. stock holdings would still need to be publicly disclosed due to funds with $3.5 billion in equities owning a majority of stocks.
Recall, back in July of this summer, we first noted that the SEC was proposing the change when, in a press release they wrote that they were considering amending Form 13F to update a reporting threshold for institutional investors to a new standard that would all but eliminate the point of the filings to begin with.
Form 13F was put into place in 1978 to give transparency about larger institutions and their holdings. The threshold has not been changed for the last 40 years, which prompted Jay Clayon's SEC to attempt to raise the reporting threshold to $3.5 billion.
SEC Chairman Jay Clayton said at the time that the change was to reduce the burden on smaller managers while keeping the same oversight on large positions from the biggest institutional managers.
“Monitoring equity holdings of large institutional investment managers is an important part of our regulation and oversight of the securities markets. Today’s proposal will update, for the first time in over 40 years, the 13F reporting threshold to a level that furthers the statutory goal of enabling the SEC to monitor holdings of larger investment managers while reducing unnecessary burdens on smaller managers,” Clayton said over the summer.
Back then, the agency had estimated that $68 million to $136 million in compliance costs could be saved by smaller managers: "The proposal estimates that, for smaller managers that would no longer file reports on Form 13F under the proposed threshold, these direct compliance costs could range from $15,000 to $30,000 annually per manager, depending on certain factors, resulting in direct compliance cost savings for these managers per year ranging from $68.1 million to $136 million."
The SEC justifies the move by citing the growth in public equities since 1975. "In 1978, when Form 13F was adopted, the threshold for filing the form was set at $100 million, the amount in the underlying statute and representing a certain proportionate market value of U.S. equities," it said.
It continued: "Since then, the overall value of U.S. public corporate equities has grown over 30 times (from $1.1 trillion to $35.6 trillion), and the relative significance of managing $100 million has declined considerably. The Commission and staff have received recommendations to revisit the Form 13F reporting threshold from a variety of sources over the years, including from the Commission’s Office of the Inspector General."
The SEC also admitted at the time that the new rules would retain 90% of the dollar value that is currently being reported: "Today’s proposal would raise the reporting threshold to $3.5 billion, reflecting proportionally the same market value of U.S. equities that $100 million represented in 1975, the time of the statutory directive."