Rule change complicates efforts by ESG investors seeking to identify major stakeholders and influence companies.
  • Investors are “disappointed” in a proposed rule change by the SEC that allows most hedge funds to keep some equity holdings secret, blocking efforts by ESG activists seeking to identify major stakeholders and influence companies.
  • Under the proposal, 90% of market participants would be exempt from disclosing their holdings and would reduce available data on portfolios with $2.3 trillion in assets.
  • An SEC Commissioner has criticized the proposed amendment for creating a lack of transparency in the market.

Investors expressed dismay about a proposed rule change by the Securities and Exchange Commission that allows hedge funds to keep their equity holdings secret, complicating the efforts of activist investors seeking to monitor major stakeholders and change company strategies.

Since 1978, investors including hedge funds that hold $100 million or more of a company’s shares have been required to disclose their stakes to the SEC through the quarterly filing of a form called 13F. In early July, the commission proposed raising the reporting threshold so that only investors with equity holdings over $3.5 billion would be required to disclose their stakes.

The move may exempt 90% of market participants from having to disclose their holdings. Investors who seek to influence corporate behavior about environmental, sustainability and governance matters say they oppose the change because it complicates their efforts to seek out major institutional investors.

“We are disappointed by the proposed changes to the 13F filing requirements, which will make it more difficult to identify the institutional shareholders of a company,” said a spokesperson for the Office of Comptroller of New York City, which represents the interests of the New York City Employees’ Retirement System’s over $205 billion pension fund. “We rely on this information to inform our investor outreach in support of our shareowner initiatives.”

In the announcement, SEC Chairman Jay Clayton said the proposed change is meant to reduce the regulatory compliance burden for institutional investors as the value of the U.S. public corporate equities market has ballooned to $35.6 trillion, up from $1.1 trillion over the last four decades.

The proposed amendment will be open for comment from the public for a 60-day period before the SEC makes a final determination about the issue.

Still, divisions have appeared within the SEC as Commissioner Allison Herren Lee criticized the relaxation of the reporting requirements saying that the cost-saving benefits for asset managers don’t make up for the loss of transparency into a large swath of the market.

“I am concerned that the projected cost savings in today’s proposal are greatly overstated and wholly inconsistent with the Commission’s past analysis — and, importantly, that the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets,” Commissioner Lee said in a written statement.

Some asset managers are also balking at the proposal, which they say would let activist investors sneak up on companies. 

Jim Rossman, head of shareholder advisory at Lazard, told the Financial Times the change would provide “another significant shield” around activists buying stock in a company to influence its business decisions.