Reporting Threshold Would Increase to $3.5B from $100M
On July 10, 2020, the Securities and Exchange Commission (the “SEC”) put forth a proposal to amend the Form 13F reporting threshold from $100 million to $3.5 billion in market value of 13(f) securities. The public will now have 60 days to provide comments prior to any SEC approval.1
The SEC has stated that a $3.5 billion threshold would still apply to “over 90% of the dollar value of the securities currently reported” while eliminating filing requirements for nearly 90% of current Form 13F filers.2 This is in no small part due to the growth of index funds and the increase in the number of smaller bespoke funds.
Closed-end Funds, BDC’s and MLP’s Would Have Less Insight on Ownership
Issuers are largely upset by the proposed changes.3 Amid record levels of shareholder engagement by short-term activist investors, issuers would now, if the proposal is approved, have less insight into who owns shares in their fund. While the 13F process is imperfect, it provides a quarterly snapshot of an issuer’s shareholder base, which among other things, allows issuers to engage with their shareholders throughout the year, hear their concerns and participate in best governance practices.
From a solicitor’s standpoint, if the 13F threshold is amended as proposed, even if an issuer obtains a costly (and incomplete) list of non-objecting beneficial owners (NOBOs), a notable number of issuers will be unable to identify and target their shareholders in a solicitation beyond blind mailings. This fundamentally alters the ability of issuers to solicit votes from their shareholders, affecting not only director elections, but also any corporate transformation.
Closed-end Funds, BDC’s and MLP’s Hit the Hardest
The largest impact will be felt by CEF’s, BDC’s and MLP’s, which will feel the burden of the increased mailing costs and lack of transparency the most, with lower quorums and much more challenging solicitations. Additionally and most importantly, this proposal would leave these issuers vulnerable to “sneak attacks” by the short-term activist investors so long as the activists keep themselves under the Form 13D threshold of 5% of a company’s shares outstanding, allowing them to slowly build positions.
A Two-Edged Sword for Activists
While some activist investors will cheer this move – as most if not all of the CEF’s, BDC’s and MLP’s activists and followers would fall under the new reporting threshold and enable them to advance more “sneak attacks” on issuers – this will likely increase the transaction costs of any activist campaign, making contested solicitations more expensive and outcomes more difficult to predict.
Under the current Form 13F requirements, in most instances activist investors are able to scout potential targets by understanding a fund’s shareholder base and looking for likeminded shareholders (aka “followers”). Once a campaign begins, dissidents are often able to reach out to a super-majority of their target’s shareholders simply by aggregating Form 13F’s and engaging specific contacts at each institution.
If the proposed changes are implemented, prior to campaigns and investments, activist investors will have less insight into issuers’ shareholder bases, increasing the transaction costs to deploy capital and resources. For campaigns themselves, again, especially at CEF’s, BDC’s and MLP’s, the costs for dissidents to run campaigns will often increase exponentially, as the only way to make contact with most of their targets’ shareholders may be through blind mailings.
Next Steps: Submitting Comment Letters to the SEC
The initial pushback from the issuer community following the SEC’s announcement has been swift and vocal against the proposed changes, making it all the more likely that following the 60-day comment period, the SEC, if they agree to adopt the change at all, will settle on a lower threshold than the proposed $3.5 billion.
If you have any questions concerning these proposed changes, please email or call us (details below), as we would happy to explain how we can assist companies in identifying and engaging with their shareholders.