Statement on the Proposal to Substantially Reduce 13F Reporting

[1] See Reporting Threshold for Institutional Asset Managers, Exchange Act Release No. [Forthcoming] (July 10, 2020) (“13F Proposal”). Section 13(f) of the Securities Exchange Act of 1934 (“Exchange Act”) requires certain institutional investment managers to report to the Commission and the public information regarding the securities over which they exercise investment discretion. See 15 U.S.C. § 78m(f). The current threshold generally requires that any manager that exercises investment discretion with respect to securities with an aggregate fair market value of at least $100 million report certain information about those securities on Form 13F. Id. Congress codified that threshold in Section 13(f) of the Exchange Act as part of the Securities Acts Amendments of 1975. See Pub. L. No. 94-29, § 10 (1975) (“1975 Amendments”).

[2] See, e.g., Amendments to Financial Disclosures about Acquired and Disposed Businesses, Securities Act Release No. 10786 (May 21, 2020) (reducing the time period for which companies must provide financial statements for acquired and disposed businesses and increasing the circumstances in which companies may provide abbreviated financial information or omit financial statements); Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, Securities Act Release No. 10762 (Mar. 2, 2020) (expanding the circumstances in which issuers of registered debt securities offerings that are guaranteed or collateralized by affiliates may skip the requirement to provide audited financial statements for those affiliates and reducing the amount of alternative disclosure that companies must provide in lieu of financial statements); Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Securities Act Release No. 10750 (Jan. 30, 2020) (proposing to eliminate disclosure items 301(Selected Financial Data), 302 (Supplementary Financial Information), 303(a)(4) (Off-balance sheet arrangements), and 303(a)(5) (Tabular disclosure of contractual obligations)); Disclosure of Payments by Resource Extraction Issuers, Exchange Act Release No. 87783 (Dec. 18, 2019) (proposing to dramatically reduce the disclosure required by resource extraction issuers, compared the requirements of the Commission’s 2016 rule and compared to international standards, by eliminating the requirement for contract-level disclosure, raising the de minimis threshold below which reporting is not required, and expanding other exemptions from compliance, including fully exempting smaller reporting companies and emerging growth companies from the rule); Investment Company Liquidity Disclosure, Investment Company Act Release No. 33142 (June 28, 2018) (rescinding before implementation the requirement in Form N-PORT that funds publicly disclose aggregate liquidity classification information about their portfolios).

[3] See National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, § 106(b) (Oct. 11, 1996) (adding a requirement to the Exchange Act for the Commission to consider, when the Commission is engaged in rulemaking, whether an action will promote efficiency, competition, and capital formation). In this regard, I note that the proposal, at a total of 53 pages, does not even contain a separate section for economic analysis. Rather, it contains a number of (mostly narrative) assertions scattered throughout the descriptive portions of the release. This does not comprise a sufficient economic foundation for the proposed rulemaking or a sufficient basis for public comment regarding the Commission’s view of the costs and benefits.

[4] See 13F Proposal, supra note 1, at 16-17.

[5] See National Investor Relations Institute, The Case for 13F Reform at 1 (Sept. 25, 2019), https://www.niri.org/NIRI/media/NIRI/Advocacy/NIRI-Case-for-13F-Reform-2019-final.pdf (“NIRI Letter”). See also See Petition for Rulemaking Under Section 13(f) of the Securities Exchange Act of 1934 (Feb. 1, 2013), https://www.sec.gov/rules/petitions/2013/petn4-659.pdf (requesting that the Commission shorten the reporting delay for Form 13F to ensure that investors receive sufficiently timely access to holdings information to objectives underlying Section 13(f)).

[6] Id. at 2 (emphasis added). The only position from this letter mentioned in the release is NIRI’s support for legislation that would increase the reporting threshold to $450 million to account for the effects of inflation. See 13 Proposal, supra note 1, at 13, fn. 31. Importantly, however, the legislation would also make other changes to increase both the timeliness and frequency of 13F reporting to facilitate greater transparency. See NIRI Letter, supra note 5, at 2-3. The context of the letter makes clear that NIRI’s acquiescence to an increased reporting threshold is primarily because of the other changes that would simultaneously increase transparency for issuers and other market participants. Those changes to increase transparency, however, are absent from today’s proposal, and the proposed increase to the reporting threshold far exceeds the level anticipated by NIRI’s letter.

[7] 13F Proposal, supra note 1, at 21. As to the public use of 13F data, the release states simply that the effects “would depend on their particular use of this data.” Id. at 24.  I also note that there is insufficient discussion of countervailing considerations or solicitation of input from users of the data. The release suggests that other tools, such as N-PORT filings and the still non-existent consolidated audit trail (“CAT”), could mitigate the effects of the proposed changes, but provides no analysis as to the actual utility of those alternatives or the extent of overlap in the relevant data. And of course, information that might one day be available to the Commission from the CAT will not be available to the public.

[8] The Commission should consider, for example, reversing course on the guidance and proposed rulemaking regarding proxy advisors. See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. 5325 (Aug. 21, 2019); Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Exchange Act Release No. 87457 (Nov. 5, 2019). While the Commission has failed to demonstrate the existence of any concrete problem that we are attempting to fix, we nonetheless propose to impose substantial new costs on advisers of all sizes both directly through our guidance and indirectly through increasing costs for proxy advisors.

[9] In light of the size of the managers subject to the requirement, the potential savings of today’s proposal are relatively small regardless of whether one uses the existing PRA estimate or the proposed increase to it.

[10] See Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Form 13F, OMB Control No. 3235-0006 (Oct. 5, 2018), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201804-3235-001.

[11] See Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Form 13F, OMB Control No. 3235-0006 (June 9, 2015), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201412-3235-004 (estimating the burden at approximately $26.1 million); Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Form 13F, OMB Control No. 3235-0006 (Apr. 23, 2012), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201203-3235-007 (estimating the burden at approximately $28.4 million); Notice of OMB Action, Form 13F, Extension Without Change of a Currently Approved Collection, OMB Control No. 3235-0006 (Aug. 19, 2009), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=200904-3235-003 (revising the 2006 estimate only with respect to total estimated burden hours—401,178 instead of 335,090—due to an increase in the number of filers); Supporting Statement: Form 13F, OMB Control No. 3235-0006 (Sept. 18, 2006), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=200609-3235-002 (estimating the burden at approximately $17.97 million).

[12] See 13F Proposal, supra note 1, at 42-44 (stating that “[t]he current burden estimates for Form 13F assume that all of the functions are carried out by a compliance clerk, whereas we understand that additional professionals are typically involved,” but providing no basis for the assumption that time is split equally between an attorney, senior programmer, and compliance clerk). While I recognize that the PRA analysis typically reflects an estimate of the compliance costs and that precision cannot be expected, the heavy reliance on this new estimate as a basis for the proposed changes warrants greater scrutiny.

[13] Previous estimates have attributed the work to a compliance clerk, which, according to our most recent estimate, entails an hourly burden of $71. By changing the assumption to assume equal time spent by a compliance attorney ($368/hour) and a senior programmer ($334/hour), the estimate has increased from $71 per hour to $257 per hour. See id.

[14] See generally Form 13F, https://www.sec.gov/pdf/form13f.pdf.

[15] See Official List of Section 13(f) Securities, https://www.sec.gov/divisions/investment/13flists.htm.

[16] The Commission estimated an average annual per-fund burden associated with Form N-PORT at $46,704. See Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Rule 30b1-9 and Form N-PORT, OMB Control No. 3235-0730 (Jan. 24, 2017), https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201611-3235-028. While that estimate exceeds the new annual burden associated with Form 13F, which, according to today’s new estimate is approximately $22,333 per filer, it nonetheless results in a greater per-filing burden. Investment companies must submit Form N-PORT for each month of the year, while Form 13F is filed only quarterly. This results in a per-filing burden for Form N-PORT of $3,892, and a per-filing burden for Form 13F of $5,583. Given the heightened complexity of certain information required to be filed on Form N-PORT and the investment professionals involved in producing that information, this outcome seems unlikely.

[17] See generally Form N-PORT, https://www.sec.gov/files/formn-port.pdf. See also Investment Company Reporting Modernization, Investment Company Act Rel. No. 32314 at 433-441 (Oct. 13, 2016) (discussing comments received on the proposed PRA analysis relating to N-PORT and how relevant changes in the final requirements affect the estimate).

[18] See 13F Proposal, supra note 1, at 42.

[19] The release states that there are currently 5,089 managers required to report, with an existing total burden estimate of $31,186,425.60. See 13F Proposal, supra note 1, at 42-44. This results in an average per-manager burden of approximately $6,130. However, the release also acknowledges that the largest managers incur higher compliance costs on a per manager basis. Id. at 19. While the 550 managers captured by the proposed new threshold comprise only 10.8% of the existing managers required to report, they cover approximately 90.8% of the currently-reported assets. Id. at 16-17. If we assume that such managers account in the aggregate for 25-40% of the existing compliance costs—a reasonable assumption given the relative size of such managers—then the savings that will accrue to newly excluded managers will range from $4,122 to $5153. The following formulas reflect assumptions that the largest/remaining managers account for 40% and 25% of the existing burden estimate, respectively: ($31,186,425.60 x .60 / (5089 existing filers – 550 remaining filers)) and ($31,186,425.60 x .75 / (5089 existing filers – 550 remaining filers)).

[20] See Section 13(f)(1). For readability purposes, I have omitted certain language from the statute that does not bear directly on today’s proposal.

[21] This view is bolstered by the legislative history and an analysis of the rest of Section 13(f). S.249, the bill that was eventually adopted as the 1975 Amendments, proposed to implement Section 13(f) with language that would have allowed the Commission to adjust the $100 million threshold to “such other amount” by rule. See S.249 (1975). The companion bill in the House of Representatives—H.R. 4111—contained the more limiting phrase “such lesser amount” with respect to the Commission’s authority to set the reporting threshold. After each chamber passed its own bill, the conference committee adopted the House’s language, limiting the Commission to lowering the statutory threshold.

Likewise, other parts of Section 13(f) demonstrate that Congress knew how to provide broader authority when it intended to do so. Congress’ use of “lesser amount” in Section 13(f)(1) is in contrast to its use of “other amount” in Section 13(f)(1)(E), which was adopted as part of the same legislation. In Section 13(f)(1)(E), Congress empowered the Commission to require disclosure by institutional investment managers regarding certain large transactions “having a market value of at least $500,000 or such other amount as the Commission, by rule, may determine . . . .” (emphasis added). See 15 U.S.C. 78m(f)(1)(E). Here, the import of the phrase “such other amount” is to provide Commission with broad authority to either increase or decrease the threshold set by Congress. The Commission’s interpretation of Section 13(f)(1) appears to conclude that “lesser amount” means the same as “other amount”—a conclusion at odds with the plain meaning of the words. The presumption of consistent usage in statutory construction provides that “where [a] document has used one term in one place, and a materially different term in another, the presumption is that the different term denotes a different idea.” See Antonin Scalia & Bryan A. Garner, Reading Law 170 (2012).

[22] The release presents only a portion of the relevant text, asserting: “Section 13(f)(1) authorizes the Commission to set the reporting threshold in an amount ‘of at least $100,000,000 or such lesser amount’ by rule.” See 13F Proposal, supra note 1, at 7. This suggests that the Commission’s rulemaking authority with respect to the threshold is subject to a lower bound of $100 million, i.e., that Congress required a threshold of at least $100 million. In fact, however, the context makes clear that the reference to “at least $100 million” is a description of the statutory threshold: any manager exercising discretion over securities with an aggregate fair market value greater than or equal to $100 million must file reports with the Commission, unless the Commission designates by rule a lower threshold.

[23] Section 13(f)(3) provides: “The Commission, by rule, or order, may exempt, conditionally or unconditionally, any institutional investment manager or security or any class of institutional investment managers or securities from any or all of the provisions of this subsection or the rules thereunder.” Given Section 13(f)(1)’s omission of any reference to authority for the Commission to increase the reporting threshold—and, in fact, substantial reason to believe that authority was withheld—it stands to reason that the Commission can only resort to this admittedly broad exemptive authority to support today’s proposal. In short, the Commission appears to take the position that we have authority to exempt from the reporting requirement in Section 13(f)(1) the “class of institutional investment managers” that exercise discretion over securities with an aggregate value of less than $3.5 billion.

[24] This interpretation would result in Congress’ choice of the words “lesser amount” having essentially no effect. But see Lowe v. SEC, 427 U.S. 181 at n.53 (1985) (“[W]e must give effect to every word that Congress used in the statute.”). See also Scalia and Garner, supra note 21, at 174 (“If possible, every word and every provision is to be given effect . . . None should be ignored. None should be needlessly given an interpretation that causes it to duplicate another provision or to have no consequence.”).

[25] The release also provides a passing citation to Section 36 of the Exchange Act as a source of authority for today’s proposal. See 13F Proposal, supra note 1, at 48. Section 36 provides the Commission with overarching exemptive authority relating to the requirements in the Exchange Act. See 15 U.S.C. 78mm. Reliance on Section 36, however, would raise many of the same questions about the Commission’s ability to use exemptive authority in a way that evades statutory restrictions on our rulemaking authority.