The Mormon Church v. the SEC
But before we dig into the story, it’s worth laying some groundwork:
The Players:
The Mormon church is organized as a Utah corporation sole and, unsurprisingly, is exempt from tax under section 501(c)(3). (In fact, I’m putting the finishing touches on a book about the Mormon church and taxes, which will probably be published at the end of this year or sometime in 2024.) The church has a strong preference for centralization and hierarchy; in the U.S., the Utah corporation owns basically all of its property (unlike other denominations, which often incorporate different regions or congregations separately). The Mormon church is tremendously wealthy; just before the pandemic, a whistleblower alleged that it had $100 billion of invested assets (an amount that presumably didn’t include, for instance, land it uses for church buildings).
Ensign Peak Advisors is the Mormon church’s investment manager. Once upon a time the church managed its investments in-house, but in 1997, it spun its investments off to a separate entity. That entity–Ensign Peak–is a nonprofit organization and exempt from federal income taxes as an integrated auxiliary of the church. (As an integrated auxiliary, it shares the church’s exemption from filing a Form 990. And why is it name “Ensign Peak”? Presumably after the relatively pretty peak a little north of Salt Lake’s Capitol building.)
The Law
Section 13(f) of the Securities and Exchange Act of 1934 requires institutional investment managers who exercise investment discretion over investment accounts with $100 million or more of certain equity securities (basically publicly-traded securities) to file periodic reports of those securities with the SEC. Rule 13f-1 clarifies that the filing be done quarterly (45 days after the end of the quarter) on Form 13F, listing the securities and value of securities it owns. Congress enacted this disclosure requirement so that the SEC could create a centralized database of current and historic data about the activities of investment managers, with the goal of increasing investor confidence in U.S. securities markets.
So who is an “institutional investment manager”? Basically, any entity that invests, buys, or sells securities on its own behalf, and any person (natural or legal) who manages another’s securities investments. Critically, as the SEC was drafting its regulations, several people requested that nonprofits be exempt from this particular disclosure rule, in light of the many other reports they had to file and the limited utility of such reports. The SEC declined, however, pointing out that any nonprofit with enough assets to fall within the disclosure requirement “would have the same potential to impact upon the market as other large institutional investors.” Besides, the SEC said, the disclosure rules under 13(f) aren’t terribly onerous.
But it’s not enough to be an institutional investment manager; the filing requirement only applies to IIMs that “exercise investment discretion” over securities. To exercise investment discretion, a IIM must either be authorized to determine what property to buy and sell for the account, make decisions about what to buy and sell, even if somebody else executes the trades, or otherwise exercise influence over the purchase and sale of securities and other property.
So What Did the Mormon Church Do?
With all of that background out of the way, on to the story. I’m going to summarize, but the details come from the SEC’s order.
Remember how the Mormon church spun off Ensign Peak Advisors in 1997? It seeded Ensign Peak with about $7 billion in assets, a significant portion of which were securities subject to Rule 13f-1. And in 1998, Ensign Peak informed top (as in, very top) Mormon leaders about its obligation to file Form 13F. Top Mormon leadership balked–people knew that Ensign Peak was associated with the church and church leaders worried about “negative consequences” if people knew the size of its portfolio. With their approval, in 2001 Ensign Peak formed an LLC to file the form. It went so far as creating a California address for the LLC, though nothing happened at the address. The LLC filed its first Form 13F for the quarter ending Dec. 31, 2002 and continued to file through the third quarter of 2006.
Around 2005, the church realized that the person signing the Forms 13F was listed in a public directory as a church employee. So it formed a new LLC, this time in Delaware. And in 2011 Ensign Peak became concerned that the portfolio had grown so large that it would attract unwanted attention. It reached out to church leaders with a plan to form additional LLCs so that it could split the portfolio up in its public filings. Church leaders approved, and Ensign Peak formed five new LLCs, all of them also organized in Delaware. Four years later, Ensign Peak learned that somebody had connected the LLCs to Ensign Peak; it went to church leaders, who approved the formation of another 6 clone LLCs.
But there was one significant problem with this plan, a problem that continued throughout: Ensign Peak never actually transferred investment discretion to the LLC. Ensign Peak continued to manage the portfolio, meaning that Ensign Peak continued to have the legal responsibility to file the form (a thing it did not do). While Ensign Peak designated business managers (often chosen because they had common names and limited social media presence) for each LLC, but the business managers’ sole role seems to have been signing Form 13F (and, on occasion, forwarding voicemails from regulators to Ensign Peak while deleting all other voicemails).
In 2018, a website made the structure public, tying the LLCs to Ensign Peak. Two of the business managers resigned when they learned what they had been doing. Instead of changing, though, Ensign Peak just assigned new business managers.
Finally, in 2020, Ensign Peak filed its first Form 13F for the quarter ending December 2019; at that point, it had $37.8 billion of securities under management.
Conclusion
From what I can tell, the Mormon church was probably required to file Form 13F before it spun Ensign Peak Advisors off. If it seeded its investment advisor with $7 billion of assets, many of which were securities, it almost certainly had more than $100 million in securities prior to 1998. It may, however, have been unaware of the filing requirement prior to Ensign Peak informing it.
That said, it took extensive steps to avoid the filing requirement, preferring to maintain the financial opacity it had begun cultivating in the late 1950s. However, the its desire to maintain financial privacy ran up against its desire to maintain tight control–had it devolved management authority to the various clone LLCs, they would have been the correct parties to file the Forms 13F.
It did not, though, and ended up both in hot water both legally and in the public eye.
Samuel D. Brunson
Photo by Joshua Hoehne on Unsplash