13F rulemaking petition

The Society for Corporate Governance (“Society”), the National Investor Relations Institute (“NIRI”), and NYSE Group, Inc. (“NYSE”) jointly petition the U.S. Securities and Exchange Commission (“SEC”) to request that the SEC initiate a rulemaking to modernize its Section 13(f) disclosure rules by reducing the outdated 45-day filing period to no more than five business days to improve the utility of 13F filings for market participants and increase investor confidence in the integrity of the U.S. securities markets.

This Petition follows our earlier Petition for Rulemaking on the same topic, which was submitted 2 in 2013. [1] The Society, [2] NIRI, [3] and the NYSE [4] together represent the interests of more than 2,400 public companies.

Since our 2013 Petition, there has been growing support among market participants for modernizing the SEC’s Section 13(f) disclosure rules and improving the timeliness of these disclosures. In 2020, retail shareholders, institutional investors, research firms, issuers, and industry groups submitted hundreds of comment letters [5] that conclusively documented the value of 13F transparency; many of those letters called for reducing the 13F filing period. [6] We urge the SEC to respond to this broad base of support and move forward with a modernization initiative within the scope of its authority under Section 13(f).

I. The Commission Has Long Recognized the Value of 13F Transparency

For decades, the Commission has documented the benefits that Section 13(f) reporting has for both investors and public companies. Congress [7] enacted Section 13(f) of the Securities Exchange Act of 1934 to increase the public availability of information regarding the securities ownership of institutional investors and to increase investor confidence in U.S. securities markets. When the final rules relating to the filing and reporting requirements of institutional investment managers were announced in 1979, the SEC made clear that “[t]he reporting system required by Section 13(f) is intended to create in the Commission a central repository of historical and current data about the investment activities of institutional investment managers, in order to improve the body of factual data available and to facilitate the consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence.” [8]

In 1999, when adopting rules requiring Form 13F filings via EDGAR, the Commission noted that “investors would find the information contained in Form 13F filings useful in tracking institutional investor holdings in their investments and . . . issuers . . . would find detail as to institutional investor holdings useful because much of their shareholder list may reflect holdings in ‘street name’ rather than beneficial ownership.” [9]

In 2010, the Commission’s Office of the Inspector General (“OIG”) reviewed the 13(f) filing requirements and cited several statements by the Commission in enforcement cases about the widespread usage of 13F data by SEC staff, investors, and other market participants. That report observed:

The information collected on Forms 13F has been and continues to be used by U.S. regulators, academics, the media and financial information distributors, and investors, and other U.S. equity markets participants, as intended by Congress. The Commission’s staff use Form 13F information for a variety of research, oversight, and enforcement purposes. The Commission’s staff also use Form 13F-based academic research, for example, to analyze the Commission’s rulemaking initiatives under the federal securities laws. [10]

The OIG review flagged various flaws with the 13F process, including the lack of a regular monitoring process by the SEC to ensure the accuracy and completeness of filings. This report included recommendations for addressing reporting gaps and improving the utility of 13F data for the investing public, such as increasing the types of securities covered by 13F disclosure to include derivatives and other hedging instruments, [11] improving the confidential treatment request process, [12]  and requiring investment managers to report average holdings each quarter. [13]

Notwithstanding the significant value of 13F data to U.S. markets, the Commission surprised many investors and issuers in July 2020 by proposing rules (“2020 Proposal”) that would have exempted more than 4,500 filers (almost 90 percent of the total) from disclosure. [14] In its rulemaking release, the Commission acknowledged that Form 13F data “is used for a wide variety of purposes” including different uses that developed after 13F filings became publicly available. “While Form 13F was originally designed to assist regulators and the public in understanding the effects of institutional equity ownership on the markets, the pool of users of the data has expanded to include academics, market researchers, the media, attorneys pursuing private securities class-action matters, and market participants (including institutional investors themselves) who use the data to enhance their ability to compete,” the release explained. “The data can also assist individuals in making investment decisions, investment managers in managing assets, and corporate issuers of 13(f) securities interested in determining the beneficial holders of their publicly traded stock.”

Following overwhelming opposition from retail investors, institutional shareholders, mutual funds, public companies, trade associations, the national exchanges, and other market participants, the Commission never finalized its 13F proposal. [15] A number of commenters, including NIRI and the Society, pointed out the various gaps in 13F reporting and suggested various reforms to improve the utility and timeliness of 13F data.

Over the past decade, the importance of 13F data has further increased as retail investing has soared, [16] while public companies have ramped up their engagement with investors in response to—among other things—Dodd-Frank Act mandates (most notably to date, the required “say on pay” advisory votes), the rapid adoption of proxy access bylaws during the 2010s, the Commission’s 2021 universal proxy rule, and growing expectations from institutional shareholders. In response to these technological advances and governance trends, the Commission has recently moved to modernize several of its ownership reporting rules, adopting new rules to improve the timeliness and address disclosure gaps in Schedule 13D/13G filings, [17] and to require monthly disclosure of short position data to the SEC. [18] The Commission also proposed new rules to mandate the prompt disclosure of securities-based swap transactions. [19]

The one prominent ownership transparency rule that has not yet been modernized is Form 13F, notwithstanding the widespread usage of 13F data by investors, issuers, and other market participants. While the SEC has accelerated many of the disclosure deadlines that apply to public companies [20] and shortened the standard settlement cycle, [21] investment managers are still allowed 45 days after the end of a quarter to report their ownership in 13F securities (or seek confidential treatment from the SEC staff). While a 45-day period might have made sense in the bygone days of paper filings when investors did not have email systems or computers and trades could take all week to settle, that delay makes no sense today. As many Society and NIRI members and listed companies will state, much of the data in 13F filings will be out of date after a 45-day delay, yet many companies still use it because they have few reasonably priced alternatives. [22] [23]

Given the evidence that investors, issuers, and other market participants are increasingly relying on 13F filings, it is imperative that the Commission revisit 13F and modernize the outdated 45- day reporting period. This will ensure that 13F disclosures meet critical market informational needs that have evolved in tandem with the rapid pace of the technological advancements and governance developments that have occurred since the late 1970s.

II. Investor Comment Letters Demonstrate Many Increased Uses for 13F Data

In response to the Commission’s Proposed 2020 Rule, hundreds of retail and institutional investors submitted comment letters that discussed how they use Form 13F filings to make investment decisions, refine their investing strategies, review the performance of investment professionals, and assess portfolio risks.

Data firms that analyze financial markets also shared their insights on 13F. In its comment letter, S&P Global outlined the many ways that investors, research analysts, and others use 13F data and the firm urged the Commission to consider the impact of the Proposed 2020 Rule on those market participants, including:

• the general public, for whom 13F data helps create an environment of confidence in the markets; 
• for investors and fund managers to be able to compare their monthly reports with the 13F data; 
• for investors and fund managers to better evaluate their existing advisory relationship and/or identify other investment advisers that are more suited to their investment strategies or needs; 
• for the sell-side to evaluate buy-side targets; 
• to identify all owners of a given company and seek investor engagements; 
• to evaluate potential investor activism; 
• to evaluate who to partner with to start a campaign; 
• to identify opportunities for individual investors; and 
• to help legal departments to expedite their claims for affected parties. [24]

This widespread usage of 13F also is illustrated by EDGAR download data. A group of academics analyzed historical data over 14 years and found that Form 13F is the Commission’s sixth most highly downloaded form. They found that there were 289 million downloads of Form 13F between 2003 and June 2017. [25]

A. 13F Filings Are a Critical Resource for Retail Investors

Form 13F data is particularly useful to retail investors, [26] who do not have access to multiple sell-side analyst reports and other resources available to investment professionals, when deciding which companies to invest in. While many retail investors will consider an issuer’s performance and SEC filings, they also will look to 13F data to see the buying (or selling) by well-known investment managers and companies to confirm their investment ideas. In their letters opposing the 2020 Proposal, many individual investors instead called for lowering the threshold and increasing 13F transparency.

Morningstar, a provider of research to retail shareholders, observed in its comment letter that 13F filings “are the only accurate source of ownership information freely available to individual investors.” [27] Morningstar further explained that 13F filings also are used by individual investors to help inform their decisions about which investment managers to hire.

James Angel, a finance professor at Georgetown University, made a similar observation about how 13F filings help individual investors evaluate the performance of smaller institutional managers. “By examining 13F filings, potential investors can see whether the actual investment history of a manager is consistent with its marketing material,” Angel wrote in his comment letter. [28] “Eliminating 13F transparency for 4,500 investment managers will also make it harder for potential investors to detect fraud by investment managers.”

B. Institutions Report that the Benefits of 13F Data Outweigh the Costs

13F data also is widely used by investment advisers, fund managers, and other institutions in their efforts to manage risk, monitor activism, and achieve better returns for their clients. As the Investment Adviser Association (“IAA”) observed in its comment letter, “The benefits provided by Form 13F data have evolved over time and are many. Today, Form 13F information is extremely valuable to a wide array of investment advisers and others.” [29]

The Investment Company Institute (“ICI”) also noted “the many benefits of 13F data, which market participants and the public have come to rely on over the years.” [30] In its 2020 letter, the ICI explained that 13F data is a “critical source” of data for closed-end funds and their boards to monitor the ownership of their shares, including the activity of activist investors. These closed-end funds also use this data when communicating with their shareholders, soliciting proxies, and trying to meet quorum requirements. ICI further pointed out that exchange traded funds use 13F data to meet their regulatory requirements, to engage with its investors on proxy proposals, and to inform their marketing and educational materials.

Most notably, a number of investment managers, including those who would have been exempted from 13F filings under the Commission’s 2020 Proposal, specifically argued that the benefits of transparency outweighed the costs of reporting. [31] For instance, Julia Mord of the Tulane University Investment Management Office, who helped oversee an $1.5 billion endowment, shared what she had learned about the costs and benefits of Form 13F from the investment managers who manage her university’s money.

We speak with our managers regularly, and even those firms with small teams and limited assets have managed very successfully to comply with this SEC requirement as part of their regular‐way business. Investment managers already have the information in the 13F at their fingertips and not once in my 15 years as an allocator have I heard a manager complain that the 13F requirement created undue burden or expense. . . . As an institutional investor who pays these costs regularly, we welcome the burden of these costs in exchange for the transparency this filing provides us. [32]

Similarly, John Cheshire, a trustee with the Kentucky Retirement Systems, observed in his comments on the Commission’s 2020 Proposal: “It is our belief that the potential harm in reducing market transparency far outweighs any potential savings, in a magnitude that makes this proposed change disastrous to confidence in market structure and fair access to information for all investors.” [33]

III. 13F Filings Foster Greater Public Company Engagement and Capital Formation

As NIRI, the Society, the NYSE, and numerous other organizations noted in their comment letters in 2020, 13F data is critically important to public companies, helping them to engage with existing investors, monitor activism, and raise capital from new investors.

As the Society explained in its 2020 letter, 13F data is essential to help U.S. public companies to track their “street name” shareholders, [34] which make up the vast majority of their investors. “In significant part because of public companies’ limited visibility to their shareholders’ identities, Form 13F filings today make up the primary data input for their ‘shareholder lists.’ These disclosures provide the only reliable means for market participants to understand the ownership profile of an issuer’s securities and, in the view of the Society’s membership, are essential to the functioning, growth, and clarity of the U.S. securities markets,” the Society noted. [35]

A. 13F Filings Help Companies Plan Their Engagement Activities

Other commenters stressed the importance of 13F data in informing issuers’ engagement with their investors and helping companies to allocate scarce executive time for shareholder meetings. In its comment letter, which was joined by 381 listed companies, NYSE explained how issuers use 13F data to prioritize engagement:

As corporate issuers work to engage with shareholders, investor relations officers, CFOs, and CEOs constantly manage interest from the investment community asking for their time in phone calls or in-person meetings with senior management. The large volume of these requests makes it impossible for a company to accept all invitations and still have time to effectively run its business. As a practical matter, decisions regarding shareholder engagement meetings are made based on the overall nature of the investment manager, typically as determined by the investor relations officer, and almost always based on 13F data. [36]

These engagement activities have become increasingly important over the past decade as institutions (including “passive” fund managers) have taken a more active role in communicating their views on corporate strategy, capital allocation, and corporate governance issues. As a result of Section 951 of the Dodd-Frank Act, a majority of U.S. companies hold annual proxy votes on executive compensation and need to allocate board time to investment managers who have questions about the company’s pay versus performance alignment. Many institutions also have increased their engagement over climate risk, other environmental concerns, human capital, board diversity, and other matters. While a particular company’s large index investors may not change appreciably, many companies see significant turnover in their other institutional shareowners (particularly by more actively managed funds) each year and thus need timely 13F data to be able to engage effectively with these investors.

B. Issuers Rely on 13F Data to Monitor and Engage With Activists

In addition to ongoing engagement, 13F data also is critical to help issuers identify activist fund managers before they cross the 5 percent threshold that would trigger a Schedule 13D filing. [37] As the National Association of Manufacturers (“NAM”) observed in its 2020 comment letter:

Quarterly Form 13F reports grant businesses insights into activist investors that take a position in their stock and give them valuable time to consider how best to respond to potential activist activity. Though 13F filings are published well after the end of the quarter (up to 135 days after an activist first buys stock if they purchase on the first day of the quarter), they are still often the first signal a business receives that an activist has built a position in the company’s stock. The infrequent and delayed nature of 13F filings already limits issuers’ ability to respond to activists, and eliminating their disclosure obligations entirely would leave companies flying blind in the event of activist activity. [38]

While the Commission has modernized the 13D/13G rules (which the Society and NIRI strongly supported), public companies still have limited (and delayed) visibility into activists that are building positions that have not reached 5 percent. [39] Notwithstanding the new 13D/G rules, an investment manager can still buy a 4.99 percent stake on Jan. 2 and not have to report that position until May 15 (assuming the investment manager does not obtain confidential treatment to further postpone disclosure).

The most effective ways to close this disclosure gap would be to increase the frequency of 13F filings and to reduce the 45-day filing period. Although Congressional authorization would be needed to mandate monthly filings, the Commission already has authority under Section 13(f) to reduce the 45-day period. [40] Such a reform would provide more timely notice to companies about activists that are building significant stakes, which is increasingly important given the robust levels of hedge fund activism and the Commission’s 2021 universal proxy rules, which make it easier for activists to obtain board representation.

C. 13F Disclosures Help Smaller Companies Attract Capital

13F data also is essential to help mid-size, small, and micro-cap companies attract capital by identifying prospective institutional investors. Investor relations officers at these companies routinely review 13F data to see which fund managers are investing in peer companies and thus may be inclined to hear their company’s investment thesis.

The Biotechnology Innovation Organization (“BIO”), which represents many small biotech companies, explained the role of 13F data in supporting this outreach process in its 2020 comment letter:

Innovation is a capital intensive process, and the idiosyncrasies of investor mandates and risk limit the opportunity set, requiring a great degree of effort in understanding the landscape and pursuing the right investors at the right time who can understand the scientific pursuit, appreciate the goals, and have the necessary risk tolerance for each stage of growth. Ultimately, every company wants long-term investors, such as financial institutions that package shares into mutual funds and exchange-traded funds. But these investors are earned over time with consistent execution and proper diligence. This entire process begins and ends with 13(f) filing data. [41]

Given that capital formation is a component of the SEC’s tripartite mission, the Commission should consider the potential impact on smaller companies’ capital-raising activities when it evaluates how to modernize 13F. [42] Instead of reducing transparency, the Commission should consider policy changes that would improve the utility, completeness, [43] and timeliness of 13F filings. A reduction in the 13F filing period from 45 calendar days to five business days would certainly help these smaller companies grow by providing them with more current data about these potential investors.

Finally, other commenters noted that 13F data can be helpful for other business purposes, such as evaluating partnerships and M&A opportunities. [44]

IV. The 2020 Comment Letters Demonstrate Broad Investor and Issuer Support for Increasing 13F Transparency

While the vast majority of the 2020 comment letters focused on the reduction in market transparency that would have resulted from the proposed 35-times increase in the statutory filing threshold, a number of investor advocates, business groups, and other commenters highlighted the well-known disclosure gaps under the current 13F rules and urged the Commission to take steps to expand transparency by requiring more timely filings and expanding disclosure to include OTC securities, as well as the disclosure of short positions, a reform that NIRI and NYSE supported in a 2015 rulemaking petition. [45]

In its 2020 comment letter, the Consumer Federation of America concluded: “In short, there is a strong case to be made that Section 13(f) reporting requirements are in need of an update to close substantial gaps in information about the investment activities of institutional investment managers and their impacts on both securities markets and corporate issuers.” [46] The consumer organization cited the reforms suggested by OIG in 2010 and NIRI’s rulemaking petitions.

Likewise, Americans for Financial Reform (“AFR”), which represents 200 consumer, civic, labor, and faith-based groups, cited the 2013 rulemaking petition by NIRI, Society, and NYSE, as well as several OIG recommendations and asked the SEC to expand 13F reporting to capture more information. [47]

In a joint letter, the Communication Workers of America and the American Federation of Teachers referred favorably to the 13F reforms requested in the 2013 and 2015 rulemaking petitions. “These proposals quite plainly went in the opposite direction of [the Commission’s 2020] proposal, and sought to enhance market efficiency by improving market transparency. They would have shortened the reporting deadline and expanded the types of investment activities subject to disclosure. Each of these requests would enhance market efficiency by providing investors with more timely and pertinent information about the actual size and structure of investment activities,” the labor groups wrote. [48]

Asset manager Rock Creek Group was among the commenters that noted the delay before 13F filings are made public and called for expanding 13F disclosure to include all positions, including short transactions. [49]

In its 2020 comment letter, FCLTGlobal, an organization of more than 50 asset owners, asset managers, and corporations that promotes long-term investment and business decision-making, urged the Commission to shorten the 45-day disclosure period, noting that “such reporting delay is no longer needed in our electronically advanced capital markets.” [50]

Investment research firm Morningstar specifically endorsed the 13F reforms proposed by NIRI, the Society, NYSE, and Nasdaq, noting in its comment letter that “[m]arket transparency increases market efficiency, which ultimately lowers costs for all investors. These include transparency-boosting elements, such as the reduction of an outdated 45-day reporting period, as well as the inclusion of short positions and other types of securities like derivatives.” [51]

In addition, a number of industry and corporate groups voiced support on behalf of their members for increasing 13F transparency. In a joint letter, the Edison Electric Institute and the American Gas Association endorsed the following reforms: “increasing the frequency of the Rule 13f-1 filings to monthly, reducing the filing period from 45 days to 5 days, and requiring full disclosure of derivative positions.” The groups also noted that Section 16 corporate officers, “a significantly larger group of less sophisticated reporting persons,” are able to make Form 4 filings within two business days and that filing 13Fs within that same period would be achievable. [52]

Likewise, the National Mining Association, observed in 2020 that the SEC “failed to heed the calls of investors and companies to truly modernize this reporting program by reducing the reporting period from 45 days to 15 days, changing the reporting frequency to monthly, or requiring the disclosure of short positions, and other reforms that would provide real benefits to publicly traded companies and other stakeholders.” [53]

In its 2020 letter, NYSE noted that “it and others had long advocated for modernization of the length of the 45-day delay period under Rule 13f-1 for submission of data by institutional investor holdings,” and lamented the SEC’s failure “to address the long overdue deficiencies in the timeframe for reporting Form 13F data.” [54]

In light of this extensive record of support from both investors and issuers for greater 13F transparency, we urge the Commission to undertake a new rulemaking that would improve the timeliness and usefulness of Form 13F filings.

V. The 45-Day Reporting Period Remains an Outlier Given the SEC’s Efforts to Accelerate Other Disclosure Deadlines

Finally, we ask the Commission to consider that the archaic 45-day filing period for Form 13F managers has remained unchanged since 1979. Over the past 45 years, the Commission has acted repeatedly to accelerate disclosure deadlines for corporate issuers and officers with the intent to provide more timely information to investors and increase public confidence in the U.S. financial markets. In response to the Sarbanes-Oxley Act, the Commission moved quickly in 2002 to shorten the Form 4 deadline for executive stock trades to two business days; the disclosure period had been 10 days after the end of each month. [55] In discussing the rulemaking’s costs and benefits, the SEC acknowledged that “[c]osts may arise because reporting persons will be required to file Form 4 significantly more quickly after a transaction, and potentially more frequently because Form 4 no longer will be a monthly form.” However, the SEC concluded that “[m]aking this information available to all investors on a more timely basis should increase market transparency, which will likely enhance market efficiency and liquidity.” In 2004, the SEC adopted “real-time issuer disclosure” amendments to Form 8-K that reduced the filing period to four business days, added eight new items that would trigger a filing, and transferred two items from quarterly filings to 8-K. [56] In discussing the benefits of more timely and complete disclosure, the Commission observed that “[m]odern computer and communications systems enable current disclosure to be analyzed and incorporated into the price of a security quickly. By moving our rules towards a system emphasizing current reporting, our markets may become more effective as price discovery mechanisms during periods between periodic reports.” The Commission further opined: “In addition, these amendments should enhance investor confidence in the financial markets. The requirement of enhanced, timely disclosure should raise investors’ expectations regarding the amount and timing of information that reporting companies must make available to the public.”

In 2009, the Commission adopted proxy disclosure enhancements that directed public companies to disclose preliminary vote results from their annual meetings in Item 5.07 of Form 8K within four business days instead of waiting until their next quarterly filing. [57] In discussing this change, the SEC emphasized how more timely disclosure would benefit investors and that technological advances had made it easier for companies to comply. As the final rulemaking release explained:

Under our prior disclosure requirements, it could be a few months before voting results are disclosed in a Form 10–Q or 10–K. Often, matters submitted for a shareholder vote at an annual or special meeting involve issues that directly impact shareholder interests, such as the election of directors, changes in shareholder rights, investments or divestments, and capital changes. The delay between the end of an annual or special meeting of shareholders and when the voting results of the meeting are disclosed in a Form 10–Q or 10–K can make the information less useful to investors and the markets. We also understand that technological advances in shareholder communications and the growing use of third-party proxy services have increased the ability of companies to tabulate vote results and disseminate this information on a more expedited basis. [58]

In these prior rulemakings, the SEC opted to accelerate deadlines to improve the timeliness of disclosure for the benefit of investors; the Commission also cited increased efficiency and the importance of enhancing investor confidence in the financial markets. As the SEC observed with Item 5.07, delay in disclosure can make information less useful to investors. In response to concerns about the potential burdens on filers, the Commission pointed to technological advances that allowed both companies and investors to process information more quickly.

While these accelerated disclosure rules for issuers were updated more than a decade ago, the same underlying rationale – the need to provide more timely information to foster greater confidence in the market – also applies to Form 13F filings. [59] Unlike in 1979, investment managers today have the technological tools [60] (along with faster trade settlements) to quickly gather the data they need for these filings.

Given the undeniable importance of 13F data to investors, issuers, and other market participants, it is time for the Commission to start the process of modernizing its 13F disclosure regime. A modest initial step would be to propose a rulemaking to address the pre-digital-age reporting period. [61] In light of the more than 2,200 comments provided in 2020, the 2010 OIG Review, and the three earlier 13F-related rulemaking petitions, the Commission already has sufficient information to start this process.

VI. Conclusion

In conclusion, the Society, NIRI and the NYSE ask the Commission to initiate a new 13F rulemaking process that would reduce the quarterly disclosure period from 45 calendar days to five business days. We also encourage the Commission to seek public comment on other potential reforms, such as those detailed in the Office of the Inspector General’s 2010 Review, [62] that would increase the utility and completeness of 13F filings.

To foster more timely engagement between companies and activist investors, we also ask the SEC to consider modifying the 13F confidential treatment process as follows: If the SEC Investment Management Division staff grants a confidential treatment request to a 13F filer to delay disclosure of a significant position (such as greater than 1% of a company’s shares outstanding) in a company’s securities, the SEC staff should privately inform the company’s designated contact person (i.e., the investor relations officer, corporate secretary, or general counsel) that such a request had been granted to a filer. [63] The company would be required to treat that notification as confidential and material non-public information (“MNPI”) and could only use that information for engagement purposes.

Link to full petition can be found here.