Each quarter investors, management and investor relations teams eagerly await institutional investor “13F” reporting of securities held at quarter end. These reports are due within 45 days following the close of each calendar quarter.
Yet 13F reports, mandated by the Securities and Exchange Commission, 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, which Catalyst reviews below:
SEC Section 13(F) 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 million or more in “Section 13(F) securities.” Note that many fine and credible “smicrocap” investors can fail to meet this
reporting threshold, yet have the potential to own 5%, 10% or even more of a company’s equity.
- Form 13F filings are only required for designated Section 13(F) securities, which are identified by the SEC each quarter and published on their website (here). 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 13(F) securities.
- By definition, retail investors and smaller sub-13F level managers can account for a substantial portion of a smicrocap’s share base and are also not included in these reports.
Strangely enough – and contrary to many investors expectations – 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 U.S. 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 United States. 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 Company’s 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 – “object” to sharing their identity and contact information with the issuer. These shareholders are known as Objecting Beneficial Holders or “OBO’s” 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 (48 page) white paper submitted as a comment to the SEC by the Council of Institutional Investors:
The OBO/NOBO Distinction in Beneficial Ownership:
Implications for Shareowner Communications and Voting
Alan L. Beller and Janet L. Fisher, Partners,
with the assistance of Rebecca M. Tabb
Cleary Gottlieb Steen & Hamilton LLP – February 2010
This white paper asserts that “An estimated 70-80% of publicly-traded shares are held in street or nominee name…” Further, “over 75% of customers holding shares in street name are OBOs, and 52-60% of the shares of publicly-held companies in the United States 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!
Request 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, Broadridge Financial Solutions, 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, just as is done each proxy season. To reach OBOs, issuers can develop a written communication that they provide to Broadridge 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 is one avenue to engage with this enigmatic base of shareholders.
We hope this brief overview has proved helpful in explaining the complexity of shareholder ownership and the various third parties that assist with this process. Please contact Catalyst IR if you would like to learn more about these issues, to discuss ways to engage with your shareholder base, or to discuss other investor relations issues.
Chris Eddy & the Catalyst IR Team