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Disappearing Transparency: A Call to Action

Back in July, the SEC proposed new 13-F rules, including amending the reporting threshold for investment managers to “reflect today’s equities markets.” At first blush, the headline seems okay. When one digs deeper (actually, you don’t need to dig deep at all), the proposed rules represent a huge step backwards to a time when issuers and the investing public had very little information about stock ownership.

Source: Securities and Exchange Commision

A little bit more about the SEC’s rationale before diving into the heart of the matter. According to its July 10 press release, the proposal would increase the 13-F reporting threshold from $100 million to $3.5 billion, “reflecting proportionally the same market value of U.S. equities that $100 million represented in 1975, the time of the statutory directive.” From everything I’ve read on the subject, this rationale is misguided and imprudent.

According to IHS Markit, approximately 600 of the 5,200 investment managers that filed a Form 13-F last quarter manage over $3.5 billion in equities. Put another way, almost 90 percent of investment managers that are currently required to report their holdings, would no longer be required to do so. Further, more than 90 percent of the dollar value of the securities currently reported is held by these 600 firms. IHS Markit also noted that, on average, 55 percent of the investors on an issuer’s shareholder list would stop filing 13-F’s, 69 percent of the hedge funds on an issuer’s shareholder list would stop filing 13-F’s, and “IR Immune investors,” including index funds, quants and brokers would stop filing for 2 percent of their share value, while active investors would stop filing for 10 percent of their share value. Not good for an industry that requires more visibility, not less.

The National Investor Relations Institute (NIRI), has aggressively taken up the cause, rallying issuers, IR counselors and other prominent business associations. Last week, NIRI sent a letter to the SEC opposing the proposed rule. 237 issuers with a combined market cap of almost $3 trillion, five high-profile business associations and 26 IR counseling firms signed on in support. Additionally, NIRI reports widespread opposition from retail investors and small investment managers, who, in total, have submitted more than 1,000 comments to the SEC.

It’s not too late to take action, even if you’ve already signed on to NIRI’s letter. The deadline for submitting comments directly to the SEC is September 29. You can visit NIRI’s Advocacy Call to Action page for more information and suggestions on how you can help.

The SEC’s proposal would significantly hamper issuers’ ability to understand who owns their stock, who is selling their stock and who is buying their stock. Imagine a scenario in which an activist is slowly building a position, but you can’t see it happening and you are blindsided by a takeover attempt. Imagine how difficult it would be to keep current holders updated if you don’t know who they are. Imagine the inefficiency of having no way to prioritize incoming phone calls and meeting requests because you are in the dark about ownership status.

Perhaps Jim Cramer said it best. “If you believe Wall Street is important, if you believe business is important, if you believe the market is important, then the public deserves to know who owns what.” Use your voice to let the SEC know that you strongly oppose the proposed rule.

Laurie Berman, lberman@pondel.com

To Guide or Not to Guide

Should companies provide financial guidance to the investment community?  That is the age old question, at least in investor relations circles.  Ask 10 CFOs and you’ll probably get 10 different answers. Add 10 IROs to the mix and now you’ll likely have 20 different answers.  As usual, there is no one size fits all solution.
 
A Skadden, Arps alert debated the pros and cons.
 
Pros:
 

  • Gives analysts reliable data points from which to assess their own projections.
     

  • Reduces investor uncertainty.
     

  • Potentially averts trading volatility.

 
Cons:
 

  • Encourages short-term thinking.
     

  • Creates disclosure issues.
     

  • Distorts investors’ perceptions.

 
Chad Stone, CFO of Renewable Energy Group, told CFO Magazine that “Offering an indication of our expected performance creates an opportunity for investors and analysts trying to understand and model our business.”  He believes that the absence of quarterly guidance would make it difficult for the investment community to understand how his company will perform.
 
Stone is not alone.  A survey by the National Investor Relations Institute found that more than three quarters of those who responded continue to provide
financial guidance.  Of those, 37 percent give quarterly earnings guidance and 39 percent give quarterly revenue guidance.
 
On the other side of the debate, Diane Morefield, CFO of Strategic Hotels & Resorts, believes that quarterly guidance is too short-term focused.  “I would simply hate being boxed in by guidance every three months,” Morefield told CFO Magazine.
 
Many NIRI members agree.  The number of companies providing some type of financial guidance has fallen from 81 percent in 2010 and 85 percent the year before.
 
As a big proponent of transparency, and making it as easy as possible for the investment community to understand your business and financial expectations (especially true for micro-cap companies), I am firmly in the guidance camp.  Whether it’s a revenue range for the quarter or year, point guidance for EPS, or a qualitative discussion of the trends likely to impact future performance, some information is better than none in getting stakeholders on the same page and managing expectations.

 

Laurie Berman, lberman@pondel.com