On July 29 the US House Financial Services Committee voted to advance a new bill that would shorten the 13F filing window and require short-seller disclosures to the floor of the House of Representatives.
Bill HR 4618 – also known as the Short Sale Transparency and Market Fairness Act – would require asset managers responsible for more than $100 mn in assets under management to file ownership reports with the SEC no later than 10 days after the end of each month. The current rules, which were enacted in 1934 and updated in 1979, require asset managers to file 13Fs with the SEC 45 days after the end of each quarter, a situation that ‘renders the information useless,’ committee chair and bill author Representative Maxine Waters said during a markup hearing for the bill on July 28.
The proposed bill would require asset managers to include direct or indirect derivative positions or interest, in addition to equities, in their 13F filings. Further, it would mandate short-seller disclosure within 180 days of passing, activating a part of the Dodd-Frank Act that hasn’t yet been enforced. Finally, it would ask the SEC to conduct a review of the terms under which asset managers can apply to file their 13Fs confidentially.
Waters said: ‘In the late 1970s, Congress directed the SEC to require Wall Street fund managers to disclose their assets quarterly to the markets for several reasons: for companies to know who their shareholders are to better engage with them, for other investors to know where large investors are investing, and for Congress and the SEC to understand the economic power and influence of these funds.
‘Today, even though these large managed funds have become more dominant in the market and transactions occur at the speed of light, information in the 13F filing has not changed. In addition, many large investors now use derivatives as total return swaps or contracts for difference to quickly amass large levels of shares of a company. But these positions, which didn’t even exist in 1979, are not required to be disclosed. As a result, the information on a large fund’s 13F form is woefully incomplete.’
As she introduced the bill for discussion, Waters noted letters of support from NIRI, the Society for Corporate Governance, the North American Securities Administrators Association and several other organizations.
Despite passing in the committee, the bill faced opposition from several Republican members. Waters introduced the bill as part of a solution to concerns raised in the aftermath of the GameStop short squeeze and Archegos Capital Management issues that occurred earlier this year. But Representative Anthony Gonzalez pointed out that the provisions in the bill would do nothing to address capital requirements for broker-dealers, reduce settlement clearing times or affect total return swaps – the concerns at the heart of the GameStop and Archegos Capital Management incidents.
Representative Ann Wagner questioned whether short-seller disclosure is needed, noting that in 11 years since the passage of the Dodd-Frank Act, the SEC has not enforced the part of the bill that would require short-seller disclosure. The SEC has been Democrat-controlled for six of those 11 years.
‘Completing this Dodd-Frank rulemaking was not – I underscore – not a priority,’ Wagner said. ‘Could it be that those Democrat SEC chairs believe the benefits of these disclosures were outweighed by the potential cost? After all, shorting a stock plays an important role in price discovery. It often roots out fraudulent companies like Enron and Luckin Coffee well before government regulators.’
Other Republican concerns focused on the shortened window for 13F filings: that it would place asset managers at risk of copycat investing and that it could disincentivize investment research.
The bill passed on a party-line vote, with 27 votes in favor and 22 votes against.
What difference a year makes
The Short Sale Transparency and Market Fairness Act was debated just over a year after the SEC introduced its own short-lived suggestions for reforming 13F disclosures. Under then-chair Jay Clayton’s suggestion, the threshold for filing would have risen from $100 mn in assets under to management to $3.5 bn – which would have relieved 89 percent of all asset managers from filing 13Fs.
The SEC received more than 2,238 comments opposing the change, and only 24 in support of it, according to analysis from Goldman Sachs. Even SEC commissioner Allison Herren Lee released a statement in opposition.
In the aftermath of the proposed rule change, Clayton expressed surprise about the backlash and concern about shareholder identification. During an interview with CNBC’s Bob Pisani, he said that if 13F filings are ‘the only way we have to effectively identify who our shareholders are, that’s a problem. If we’re using 45-day trailing filings of a select group of people to help companies figure out who their shareholders are in the day of electronic communication, that’s something we’ve got to address.’
His comments aggravated a number of IR and governance professionals who have lobbied the SEC to refresh the rules governing 13F filings for more than a decade. The bill proposed by Waters closely resembles the suggestions put forward by NIRI and the Society for Corporate Governance in the past. The bill will now be scheduled for debate in the full chamber of the House of Representatives and, if passed, referred to the Senate.
In a statement, NIRI president and CEO Gary LaBranche, said: ‘NIRI thanks the U.S. House of Representatives Financial Services Committee for passing H.R. 4618 to modernize Section 13F to advance transparency and shareholder engagement by a vote of 27-22. All Democrats voted in favor and all Republicans voted against. NIRI will continue to advocate for these first changes to 13F in 45 years.’