Jul. 16, 2020
Dear Chair Clayton, the SEC Commissioners Several, and Those Considering the Rule, I comment today in support of the proposed Rule (the “Proposal”) described in Release 34-89290 (the “Document”). The periodic reporting requirements envisioned by Section 13(f) (the “Provision”) were drafted during the Ford administration as Wright Patman (D-TX) wrapped up his tenure as Chair of the pertinent House Committee (now the House Committee on Financial Services, then the House Committee on Banking and Currency). The vast majority of provisions drafted at that time and codified at 15 U.S.C. 78m(f)(1) and in nearby U.S. Code sections remain as they were in 1975. The Proposal changes the Provision to reflect the realities of today’s market where investment managers with $100M under management are commonplace. The SEC estimates roughly 4,500 of the 5,000 filers would be affected by the Proposal and would have their reporting burden under the original Provision meaningfully reduced. This is not only good for the reporting investment managers, it is good for the SEC, which can concentrate its limited audit and investigative resources at the right (no pun intended) end of the tail. The SEC stated earlier this month the new $3.5B threshold discussed in the Proposal is “proportionally the same market value of U.S. equities that $100 million represented in 1975.” While I agree with the gist of this, I believe it lacks some of the context needed. The number of 13F filers has increased dramatically since the Provision’s implementation. Figure 1 on p. 10 of the Document shows the number’s growth from approximately 600 filers to roughly 5,089 today, a 17x increase. Given the performance of equities markets over this period and the portion of high AUM managers who are equities-heavy relative to other asset classes, using an equities appreciation multiple seems reasonable; as the SEC notes in the Document, this results in a $3.57B threshold (compared with the $3.5B proposed threshold in the Proposal). It is also important to note $100M is simply not very relevant in the scheme of the U.S. economy. In 1975, US GDP (2020 dollars) was slightly less than $1.7T. Today, US GDP is nearly $22T (+1,294%). Turning to equities markets, the measure to which the SEC alludes on pp.15-16 of the Document, and no doubt the measure used matters, but in any event the amount of money referenced in the Provision (and implemented in nominal dollars, no less) in 1975 or 1979 is materially different today. Since the Provision took effect, the NASDAQ is up 10,311% and the DJIA is up 2,957%. Though $3.5B is an arbitrary cutoff, it has the intended and necessary effect of returning the number of filers burdened with this higher level of reporting to a number below 600 firms. While an increase of 3,000% or more in the minimum reporting threshold may seem like a large number, in this context it is not–in fact, only numbers this large are in the right order of magnitude. And implementing the Proposal continues a positive trend toward concentrating scrutiny and resources where they matter most (see also Release Nos. 33-10588; 34-84842) rather than attempting to monitor and police the market through an overbroad, dragnet approach. This Proposal also brings the US in line with other OECD countries reducing reporting requirements and improving compliance efficiency (see, e.g., the UK’s reconsideration of quarterly reporting in 2014). I write fully in support of the Proposal. While many have raised legitimate and thoughtful questions as to the implications of the Proposal, including SEC Commissioner Herren Lee, I do not believe these objections provide an alternate path forward; I have not seen objections that substantively challenge the appropriateness or effectiveness of a new reporting threshold or do more than merely citing that reporting will be reduced. I agree that reporting will be reduced, but suggest this is a virtue for the reasons stated above rather than a change that materially disadvantages investors or meaningfully reduces the information available to the markets the SEC oversees. These are my opinions and do not represent the views of my employer(s), client(s), or other institutions. Respectfully submitted, /s/ Karl T. Muth, J.D., M.B.A., M.Phil., Ph.D. Lecturer in Economics, Organizational Behavior, Public Policy, and Statistics, Northwestern University Lecturer in Law, Pritzker School of Law, Northwestern University @karlmuth on Twitter