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How 13Fs Detract From Competition and Help Companies Win Activist Campaigns
The Securities and Exchange Commission’s 2020 proposal to raise the bar for ownership disclosure sparked a deep dive into whether the transparency offered by 13F disclosures is worth it.
When the Securities and Exchange Commission floated reform of its 13F disclosure rule in 2020, there was a swift outcry from issuers, investors, and other stakeholders who were worried about the move’s effects on market transparency.
The July 2020 proposal would have reduced the number of institutions making 13F disclosures by about 90 percent.
“This caught people by surprise,” said Alexander Platt, an associate professor at the University of Kansas School of Law. “Everybody and their cousin and their brother said, ‘Don’t do this.’”
While that proposal never went through, a March 2021 regulatory filing from the SEC signaled that it is still considering changes to the 13F requirements — this time to increase the amount of disclosures.
Platt recently published research in the Stanford Law Review exploring how 13F disclosures impact market transparency, and he came to some unexpected conclusions.
The current rule requires certain institutional investors including public pension funds, mutual funds, broker-dealers, and banks, among many others, to disclose their securities holdings on a quarterly basis. These investors report their holdings to the Securities and Exchange Commission 45 days after the end of each quarter. These filings are then made available to the public.
Platt’s paper shows that companies use 13F disclosures to find out who their own shareholders are — and then use this information to make decisions about competing with other firms and with their activist investors.
“I don’t think it’s that complicated a point to say wait a second, transparency is not good in and of itself,” Platt said by phone. “You have to know who is using this information and to what ends in order to evaluate this disclosure program.”
Platt analyzed a series of 13F academic studies and the SEC proposal comment letters, as well as performing his own legal analysis in a paper released in August.
This research revealed that without 13F filings, companies could not easily find out who their shareholders are.
“People outside of the corporate governance intelligencia assume that at least the managers of the company, at least the CEO of Apple, for example, could punch a few buttons to come up with all the shareholders of Apple,” Platt said. But his analysis of the SEC comment letters revealed the opposite — to the tune of hundreds of letters claiming this is the case.
Platt found that there are multiple ways a company could use this information. Like their opposing hedge fund activists, firms can use 13F data to lobby their investors to vote in their favor on shareholder proposals. Platt pointed out that prior research has shown that companies are more likely to prevail in these votes.
“I think 13F is part of the story here,” Platt said. “It is subsidizing management’s ability to lobby shareholders ahead of these closely contested shareholder contests. Without 13Fs, management may not know as many shareholders, and that would inhibit their ability to lobby at the last minute.”
Platt said his research may also lend credence to concerns over universal ownership and how it affects competition among companies.
“A director or officer might learn from 13F that a substantial portion of her firm’s shareholders are also invested in the firm’s main competitors, and thus would not stand to gain from an aggressive competition against those firms,” he wrote in the paper.
For a while, there was only conjecture to back this claim up. But the letters submitted in 2020 during the SEC’s comment period on its 13F proposal show that this could be the case.
According to the research, the National Association of Manufacturers and the National Mining Association said in their letters to the SEC that issuers use the disclosures to understand their shareholder’s entire portfolios — not just which shareholders were holding their stock.
“I think if you’re an antitrust person, this is kind of a smoking gun,” Platt said. “They’re just saying that they just use this information for anticompetitive purposes.”