July 15, 2020
Convergence is a research firm that studies the regulatory filings of SEC registered advisers. Our founders were senior leaders in the asset management industry and our research provides our clients with insights into various business risk that registered advisers face in carrying out their advisory services. We study the businesses of the 18,000 exempt and non-exempt filing advisers by examining the Form ADV, Form D and Schedule 13f.
Our asset management clients use our data-driven insights to improve the efficiency and effectiveness of their control environments and our retail and institutional investor clients use or insights to identify and manage operational risk. We are fortunate to serve many of the largest and most prominent firms in the industry.
We continue to support the SECs mission to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation. In fact, we applaud the significant enhancements to Form ADV in October 2017. The additional disclosures that were added and the many enhancements and clarifications to form question provided additional transparency that helped small and large investors make more informed Adviser selection decisions.
We do not believe that the current proposal to raise the 13f reporting threshold to $3.5bn is consistent with the SECs mission. In fact, it represents a significant step-backward. Less transparency and less data are never good for small and large investors. And 13f data is important.
We cite the following reasons and strongly recommend materially reducing the proposed threshold.
1.Raising the reporting threshold to such a high number will severely limit future academic research on markets, investing and securities. Specifically, academic research around pricing, valuation, operating risk and adviser behaviors in bull and bear markets will be eliminated which will eliminate the type of transparency that is needed to study markets, behavior and eliminate the ability to find signals suggesting the potential for adviser wrongdoing.
2.Raising the reporting threshold to such a high number will reduce public companies' opportunity to know more about their shareholders.
3.Raising the reporting threshold to such a high number will eliminate an investors ability to reconcile the positions reported to them in the quarterly performance reports and investment summaries given to them by their Advisers to positions reported in their 13F filings.
4.Many advisers work together informally to buy shares in companies they seek to influence. Investors need the ability to analyze positions across 13f filers of all sizes to identifying this form of investment "smurfing." These advisers have access to company management that small investors do not. This proposed rule change contradicts the SECs mission to protect investors. Less transparency and less data are never good for the small investor.
5.The cost justification for the rule change is highly questionable and actually encourages Advisers to spend even less on the internal processes, controls and technology they need to run their business in an orderly and well controlled manner. Advisers who invest properly in infrastructure have little to no problem producing and delivering 13f data and filings. In fact, in our studies of 13f filing accuracy, we clearly see differences between those Advisers who do and do not invest in the appropriate infrastructure. There is no size bias, meaning the regulatory filing requirements of small and large Advisers who invest in basic infrastructure is better than those that do not. Therefore, the 13f burdens cited are somewhat exaggerated. The cost of producing 13f data and related filings is only burdensome to Advisers who fail to invest enough to automate processes and who fail to work with Fund Administrators and other service providers who can help them reduce the cost of these processes. While the SEC's intent to relieve Advisers of unneeded cost burdens, 13f data is fundamental to its mission.
6.Raising the reporting threshold to such a high number will rob individual investors of their ability to avoid over-owned stocks, what is referred to as crowded trades. Many contrarian investors use 13f data to manage investment risk. This rule change greatly reduces individual investors ability to reduce this risk.
7.In the event of a significant correction the number of reporting advisers would decline. Market volatility should not influence the number of filers.
Thank you for your continued good work.