July 13, 2020

SEC Proposes to Increase Form 13F Reporting Thresholds

On Friday, the SEC proposed amendments to Form 13F for institutional investment managers.  If adopted, the primary proposed change would raise the Form 13F reporting threshold for investment managers – from the current $100 million to $3.5 billion – and as stated in the SEC’s press release, would thereby provide relief for smaller managers who are currently subject to Form 13F reporting.  Other proposed changes include:

The proposed changes also would direct the staff to review the Form 13F reporting threshold every five years and recommend an appropriate adjustment, if any, to the Commission. Additionally, the proposal would eliminate the ability of managers to omit certain small positions, thereby increasing the overall holdings information required from larger managers. The proposal also would require managers to report additional numerical identifiers to enhance the usability of the information provided on the form, and amend the instructions relating to requests for confidential treatment of Form 13F information.

The proposed reporting threshold change from $100 million to $3.5 billion is a big increase but as the announcement points out, the threshold hasn’t been updated since the Commission adopted the form over 40 years ago!  In the time since the form was adopted, the announcement says the overall value of U.S. public corporate equities has grown over 30 times (from $1.1 trillion to $35.6 trillion).

Even though the press release notes that the Commission has received recommendations to revisit the Form 13F reporting thresholds over the years, not all are in agreement with the proposed changes. Commissioner Allison Lee issued a dissenting statement saying the proposal decreases transparency and that it lacks sufficient analysis.  The National Investor Relations Institute (NIRI) tweeted its disagreement and said it “shared Commissioner’s Lee’s concerns about the ill-advised proposal.”  NIRI also referenced its position paper on 13F reforms, which is dated just last fall and among other things, advocates for shortening the 13F reporting deadline.

Market-Wide Crisis: Impact on Independent Chair Proposals?

A recent Georgeson blog assesses whether the Covid-19 pandemic had an impact on independent chair proposals voted on during the 2020 proxy season. In their analysis, Georgeson compared voting results during the five-year period leading up to, and including, the COVID-19 crisis with the five-year period surrounding the 2008 financial crisis. Georgeson found key similarities between the two crises’ impact on voting support for independent chair proposals – saying it appears preference for an independent chair gets stronger during the time of a market-wide crisis.

Independent chair proposals have been prolific since the mid-2000s and were the most common type of governance proposal voted last year. Despite their popularity, these proposals have experienced average support in the range of 29% to 32% since 2012, with only one proposal having received majority support in the last five calendar years. Accordingly, there has been a relative surge in shareholder support this proxy season, averaging approximately 35%, with two proposals receiving majority support and 15 receiving support in excess of 40%. The COVID-19 crisis seems likely to have fueled shareholders’ focus on improving board oversight effectiveness by requiring an independent chair.

In comparison, looking at the shareholder support trend for independent chair proposals during the most recent prior crisis, average support for independent chair proposals had similarly jumped from 29.6% to 34.2% in 2009, coinciding with the year when major stock market indices hit their lows in the wake of the 2008 financial crisis.

The blog also analyzes the impact of ISS’s voting recommendation on vote outcomes and says ISS’s favorable recommendation ‘did strongly influence voting outcomes in 2020.’  In 2020, although ISS recommended in favor of a significantly greater percentage of these proposals compared to 2019, ISS’s support was well below its level of support for such proposals during 2016 – 2018. The blog attributes increased average support during 2020 as being driven more by individual investors’ decision-making – demonstrating that investors made case-by-case decisions.

Although support for independent chair proposals rose this year, one key point mentioned in a ISS Governance Analytics report is that ‘momentum on this topic appears to be somewhat tepid as roughly half of the companies where independent chair resolutions appeared on ballots in both 2019 and 2020 witnessed year-over-year declines in voting support.’

Tomorrow’s Webcast: “Executive Compensation Planning in a Down Market”

Tune in tomorrow for the webcast – “Executive Compensation Planning in a Down Market” – to hear Tony Eppert of Hunton Andrews Kurth, Richard Harris of Aon and Jamin Koslowe of Simpson Thacher discuss emerging disclosure practices and how companies and compensation committees should approach executive compensation planning in a turbulent environment.

– Lynn Jokela