Tips on identifying your investors – even when they don't have to file a 13F
Each quarter investors, management and investor relations teams eagerly await institutional investor 13F reporting of securities held at the quarter end, due within 45 days following the close of each calendar quarter.
Yet 13F reports, mandated by the SEC, leave many C-suite executives wondering, Why is my list of reported investors so short? Where have all our investors gone?
These questions have several answers, particularly in the case of small and microcap stocks:
The SEC’s 13F filing requirements only pertain to institutional investment managers (investment advisers, banks, insurance companies, broker-dealers, pension funds and corporations) that exercise investment discretion over $100 mn or more in ‘section 13F securities’. This means that despite having the potential to own 5 percent, 10 percent or even more of a company’s equity, many fine and credible ‘smicrocap’ investors can fail to meet this reporting threshold.
Form 13F filings are only required for designated section 13F securities, which are identified by the SEC each quarter and published on their website. Common stocks listed on the NYSE, AMEX and Nasdaq are usually on the list, whereas most OTC Markets (OTCQB, OTCQX and OTC Pink ‘pink sheet’) stocks are not on the list.
Managers may omit the reporting of holdings if the manager holds fewer than 10,000 shares and less than $200,000 aggregate fair market value (including options to purchase such amounts) at the end of the quarter. Option holdings must be reported only if the options themselves are designated section 13F securities.
By definition, retail investors and smaller sub-13F level managers can account for a substantial portion of a smicrocap’s share base but are also not included in these reports.
Strangely enough – and contrary to many investors expectations – many public companies themselves do not keep track of their investors. That job is handled by an independent third party known as a transfer agent or registrar along with brokerage and investment firms who buy and sell securities for their clients. Because shares change hands each day, a record date (a specific day on which you are seeking to know who owns your shares) must be provided with any shareholder search request.
How can I identify shareholders not reported on form 13F?
To answer this question, we first need to consider the ways that securities are held:
Registered shares: shares that are tracked by a transfer agent or registrar and either held in certificate form by the shareholder or held by the transfer agent/registrar in certificate or electronic form are considered ‘registered shares’. A public company can request a list of registered shareholders from its transfer agent for a small fee. However, few shareholders in the US keep their share ownership in registered form.
Street name shares: This category covers shares that are held ‘in custody’ in brokerage or investment firm accounts. These shares are not registered in the individual owners’ names but instead are registered in the (Wall Street) investment firm’s name – where we get the term ‘street name’. The investment firms are responsible for keeping track of share ownership for each of their clients so at the close of each day they can tally the shares held by each of their clients in each security.
To keep track of all of the street name holdings, each firm or custodian holds their shares in accounts at the Depository Trust Company (DTC), or its nominee, Cede & Co, which serve as the central depository institution in the US. As a result, DTC is the holder of record for most public share holdings.
For purposes of shareholder identification, street name shares are divided into two categories. The difference has to do with a decision investors make about sharing their identity with the companies in which they invest. In opening a brokerage or investment account, investors specify whether they ‘object’ to sharing their name and contact information with the issuers in which they invest.
Shareholders who wish to keep their investment holdings anonymous – as far as the issuer is concerned – simply ‘object’ to sharing their identity and contact information with the issuer. These shareholders are known as Objecting Beneficial Holders (OBOs) and conversely, those who do not object to making their identity known are known as Non-Objecting Beneficial Owners or NOBOs.
A great overview of shareholder communications issues (which we have used as a source for this article) is found in a whitepaper submitted as a comment to the SEC by the Council of Institutional Investors and titled The OBO/NOBO distinction in beneficial ownership: Implications for shareowner communications and voting.
This white paper asserts that ‘an estimated 70 percent to 80 percent of publicly-traded shares are held in street or nominee name.’ Further, ‘over 75 percent of customers holding shares in street name are OBOs, and 52 percent to 60 percent of the shares of publicly-held companies in the US are therefore held by OBOs.’ Of course, these figures can vary with each company – but they demonstrate the challenge companies face in identifying their investors.
Requesting NOBO and registered shareholder lists
Public companies are able to request a list of their registered and NOBO shareholders as of a particular record date. Typically, shareholder list requests are made through an intermediary for a modest per account fee. The search is conducted across all the participating investment and brokerage firms to provide a listing of the accounts and share amounts held for a particular security on the record day.
However, the NOBO list will not indicate the broker or financial intermediary’s identity. The NOBO list, plus the registered shareholder list (provided by the transfer agent), represents the best window on share ownership; however, as we referenced, it typically addresses less than half of total shares.
How do I reach OBOs?
While OBO’s have requested to keep their identity unknown, it is possible to communicate with them through an intermediary such as Broadridge Financial Services, just as is done each proxy season. To reach OBOs, issuers can develop a written communication that they provide to the intermediary, which will then be forwarded to each OBO via mail or email, depending on their communication preference.
In that communication, you can ask the OBOs to respond with their contact information if they would like to be in direct contact with the company. Of course, this does not provide the issuer with any information as to the specific ownership size of any of its OBOs – but it is one avenue to engage with this enigmatic base of shareholders.
Christopher Eddy is senior vice president at Catalyst IR, where this article first appeared
