Regulation
Challenge
Solution
Key Benefits
SEC 40 Act
Rule 12d3-1
Identify companies that derive 15%
of revenues in specific sectors
FactSet Revere Segment
Revenue (SegRev)
Access a broad and deep
dataset to ensure full
compliance
Smart Data for SEC 1940 Act Rule 12d3-1
The SEC 1940 Act Rule 12d3-1 prohibits a registered investment company (such as a mutual fund, ETF, or UIT) from
acquiring or investing in:
+ More than 5% of the outstanding equity security of an issuer
+ More than 10% of the outstanding principal amount of the debt securities of an issuer
+ More than 5% of the value of its total assets of an issuer
These requirements remain in place if the issuer derived more than 15% of its gross revenue from securitiesrelated activities in that issuer’s most recent fiscal year.
Challenge: Identify Securities that Meet the SEC’s 15% Sector Threshold
Because of the restrictions in place, mutual funds, ETFs, or UITs need to easily determine whether issuers derived
greater than 15% of its revenues in securities-related activities.
Industry classification systems such as GICS or ICB categorize companies into sectors based on their primary line of
business. However, companies that are mapped with these taxonomies recognize sectors from which only
significant proportions of revenue is sourced – often more than 50%. Because SEC’s threshold is a much lower
15%, fund companies must also be able to identify companies that have secondary lines of business in securitiesrelated industries as defined by the SEC.
To comply with this regulation, clients must define the following:
+
+
+
A list of “12d3-1” companies deriving revenues of more than 15% in securities-related activities.
A list of “12d3-1” companies that may be getting closer to the 15% mark.
Rules within trading and compliance systems to flag or alert a buy trade of any “12d3-1” companies that
may potentially cross the 5% acquisition threshold.
Solution: FactSet Revere Segment Revenue (SegRev)
FactSet is the first solution to be introduced to the market with a 12d3-1 eligible securities list that can support
compliance with the SEC’s sector threshold of 15%.
The FactSet Revere Segment Revenue (SegRev) is a normalized database that links company-disclosed business
segments and those segments’ associated revenues to the sectors defined in the FactSet Revere Hierarchy. Unlike
single-sector industry classifiers, the FactSet Revere Hierarchy maps not only primary lines of business, but also
their secondary lines of business which represent a much smaller (yet still meaningful) proportion of revenues.
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Going beyond a single-sector taxonomy solution is critical to ensure 40Act compliance. While a single-sector
taxonomy will include all the material 12d3-1 eligible companies, it does not result in full compliance – missing
approximately 10% of securities that are 12d3-1 eligible. It may also miss hundreds of companies that must be
monitored for future compliance.
For 40Act compliance, every 12d3-1 eligible company is critical and cannot be missed. As a 40Act firm, firms need
to have zero error tolerance on 40Act rules.
SegRev is a multi-sector map of companies that quantifies both primary and secondary sector exposures, and then
groups them by revenues. SegRev lets users screen publicly-traded companies operating in the 12d3-1 related
sectors, especially those that would have been missed by other industry classification systems. The following have
been identified as relevant sectors:
+
+
+
Finance > Investments > Asset Management and Financial Advisory
Finance > Investments > Securities Sales and Trading
Finance > Investments > Investment Banking/Corporate Finance
FactSet Revere SegRev covers 37,500 (48,000 by August 2015) companies globally.
FactSet Revere SegRev can be delivered via a data feed.
SegRev in Action
To highlight the solution in action, take for example Bank of America (BAC), primarily classified in the “Banking”
sector since more than 50% of its revenues are attributed to the Banking sector. However, SegRev is able to
identify BAC as having derived over 17% of its revenues from “Securities Sales and Trading.” Bank of America is
therefore flagged by a registered investment company as a 12d3-1 security, so fund managers can avoid holding
more than 5% of its assets in Bank of America.
While Bank of America is a fairly straightforward example for fund managers to determine 12d3-1 eligibility
because it resides in the financial sector, other companies are more complex in the way they attribute revenue and
run the risk of missing compliance with the 40Act rule.
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For example, Leucadia National Corporation (LUK) derives approximately 70% of revenues in the Consumer sector
because of its beef packaging and processing business. With SegRev, we are able to identify that over 24% of LUK’s
diversified business is derived from “Investment Banking/Corporate Finance.” Empowered with the complete
picture of where the security’s business is derived allows portfolio managers or traders to flag it as a 12d3-1
security and more easily maintain compliance.
To learn more about FactSet SegRev, contact your FactSet Representative or
complete the form at solutions.factset.com/smartdata.
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