The SEC’s proposal to raise the § 13(f) reporting threshold rests on a misinterpretation of the provision’s legislative history
Institutional investment managers like mutual funds and hedge funds are required to disclose their equity holdings every quarter under Securities Exchange Act § 13(f) and implementing regulations. On July 10, 2020, the Securities and Exchange Commission (SEC) proposed a rule that would eliminate this reporting requirement for all but the largest 10% of investment managers by raising the assets under management threshold that triggers the quarterly reporting requirement from $100 million to $3.5 billion.
The proposal has ignited a debate over the costs and benefits of the § 13(f) reporting regime. But its viability may be determined by a different question: Does the Commission have the legal authority to do this?
Exchange Act § 13(f) seems to establish $100 million as a hard ceiling on the reporting threshold. That provision requires the Commission to set a reporting threshold “of at least $100,000,000 or such lesser amount (but in no case less than $10,000,000)….” This language seems to mean that the Commission can lower the threshold below $100 million but may not raise it.
However, the Commission now argues, § 13(f) also grants the SEC authority to exempt any “class” of managers from these reporting requirements. Using this authority, the SEC seems to be arguing that it can “exempt” the “class” of managers with assets between $100 million and $3.5 billion from compliance with the reporting requirement without actually raising the reporting threshold.
Some have expressed skepticism that general exemptive authority can really be used to get around an express and specific statutory command. Commissioner Allison Herren Lee objected that “using exemptive authority in this way would vitiate the limit that Congress placed on our authority in the plain language of Section 13(f)(1)” and would “in effect . . . rewrite the statute to reflect the opposite meaning from its plain language.”
Perhaps anticipating these objections, the Commission offers one additional and critical piece of evidence in support of its interpretation: a key quotation from a 1975 Senate Banking Committee report stating that the provision gives the Commission “authority to raise or lower” the threshold.
The very big problem with this evidence is that the 1975 Senate Banking Committee was analyzing an earlier, materially different version of the provision than the one that Congress subsequently enacted. That earlier version required that the SEC set a threshold of “at least $100,000,000 or such other amount (but in no case less than $10,000,000)….” The Senate Banking Committee’s understanding that this provision would have allowed the SEC to raise or lower the threshold is unremarkable; indeed, it is hard to construe the operative language (“such other amount”) otherwise. Under this version of the provision, Congress would have merely suggested a $100M threshold while granting the Commission a license to move the threshold up or down as it saw fit.
But this language never became law. Shortly after the Senate passed this bill, the House passed a different version requiring the SEC set the reporting threshold at “at least $100,000,000 or such lesser amount (but in no case less than $10,000,000)….”
The House’s substitution of “lesser” for “other” makes all the difference. It converts the $100 million from a mere suggestion into a hard ceiling above which the Commission is not authorized to go. After the House passed this version, a Conference Committee was convened and stuck to the House version of this provision. As enacted – and to this day – the operative statutory threshold is “$100,000,000 or such lesser amount (but in no case less than $10,000,000)….”
In sum, the Commission’s legal theory for why its proposal is authorized under § 13(f) seems to rely on a misinterpretation of the statute’s legislative history. Not only does the cited Senate Banking Committee report fail to support the SEC’s proposal, it indicates that the 1975 Congress rejected language (“such other amount”) that would have authorized the SEC to raise the reporting threshold in favor of language (“such lesser amount”) that seems to preclude this.
Perhaps the SEC’s proposal will nevertheless manage to survive a legal challenge – based purely on its exemptive authority or on some other statutory argument that has yet to emerge. Regardless, the Commission can probably count on seeing the legislative history it relied on here thrown back in its face.
Alex Platt is an Associate Professor at the University of Kansas School of Law.