On September 13, 2023, the SEC brought an enforcement action against a Registered Investment Adviser (RIA) with investment discretion over more than $100 million of reportable securities. The RIA, which has offices in New York, New York, and West Palm Beach, Florida, failed to file quarterly Forms 13F beginning in February, 2017. The firm did not begin to file Forms 13F until April, 2022.
The RIA was found to have willfully violated Section 13(f)(1) of the (Exchange Act) and Rule 13f-1 thereunder. The firm failed to file Forms 13F from the quarter ending December 31, 2016, to the quarter ending December 31, 2021.
The SEC censured the RIA and ordered the firm to pay a civil money penalty of $150,000. A penalty of that magnitude, along with the likely reputational damage to the RIA, should help investment advisers recognize how important it is for them to fulfill their Form 13F filing obligations.
What is Form 13F and why is it so important?
Form 13F is a report that must be filed with the SEC by institutional investment managers with discretion over specified securities that have an aggregate value of more than $100 million. This filing requirement was put in place by Section 13(f) of the Exchange Act. When Congress passed Section 13(f), its goal was to create a central depository of historical and current data about the investment activities of institutional investment managers for use by investors and government regulators. The SEC uses the information gathered to analyze the impact that institutional investment managers have on the securities markets. Depending upon its findings, the SEC may decide if changes in public policy are necessary.
Section 13(f)(1) of the Exchange Act and Rule 13f-1 thereunder require that institutional investment managers file Forms 13F with the SEC on a quarterly basis if they exercise investment discretion over at least $100 million in Section 13f securities that are traded on a national securities exchange or on the automated quotation system of a registered securities association. Pursuant to Rule 13f-1(b), an investment manager is deemed to exercise discretion over all accounts for which any person or entity under the control of the investment manager exercises investment discretion.
An institutional investment manager must file its first Form 13F for the December quarter of the calendar year during which the $100 million threshold is surpassed. The value of the 13(f) securities should be calculated as of the last trading day of each calendar month.
After the initial filing, an institutional investment manager must file Form 13F quarterly for at least three quarters. For example, if the aggregated market value of Section 13(f) securities falls below the $100 million level after the initial filing, the institutional investment manager must still file Form 13F for three more quarters. The deadline for filing is 45 days after the end of each quarter.
What are Section 13(f) securities?
If they are required to file Form 13F, institutional investment managers must disclose to the SEC the fair market value of their Section 13(f) securities under management. An institutional investment manager must report the publicly-traded equity and convertible securities that are described in Rule 13f-1(c) under the Exchange Act. The securities that institutional investment managers must report are found on the Official List of Section 13(f) Securities. The Official List is updated quarterly and can be reviewed HERE.
Generally, Section 13(f) securities include:
- equity securities traded on an exchange or quoted on the NASDAQ;
- some equity options and warrants;
- certain convertible debt securities; and
- shares of closed-end investment companies.
Shares of open-end investment companies, such as mutual funds, are not Section 13(f) securities and should not be reported. In contrast, shares of exchange-traded funds are on the Official List and must be reported.
Short positions should not be included on Form 13F. Furthermore, investment advisers should not subtract their short positions from their long positions in a particular security. Advisers should only report their long positions. If owned securities have been lent to a third party, they should be reported by the RIA on Form 13F. The third party that borrowed them is not required to report them.
An RIA that has neglected to fulfill its Form 13F requirements has a great deal of catching up to do. RIAs that are subject to Form 13F filing requirements must file for every quarter since their obligation was first triggered, no matter how long ago the first trigger was. In this enforcement action, the RIA was required to file twenty-one Forms 13F in February 2023, covering the period from the quarter ending December 31, 2016, to the quarter ending December 31, 2021.
The enforcement action can be found HERE.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.