What are the main drivers behind the SEC’s push for investor disclosure?
As with much of the regulatory environment post-2008, the main driver here is increased transparency into registered investment companies’ (mutual funds or funds) holdings and activities for the benefit of both the US Securities and Exchange Commission (SEC) and fund investors. Obviously, the thinking for fund investors, if the disclosures are properly designed, is that better insight into the mutual funds’ investments, expenses, credit exposures and so on will help investors with their investment decisions.
What is it hoping to achieve and what is the timeline?
In addition to providing investors with more detailed fund information, the SEC also made it clear at its 20 May open meeting (at which the proposals were announced) that this enhanced insight into increasingly complex mutual funds will help the SEC with its regulatory oversight and policy making.
As you know, funds today report their portfolio investments but offer little insight into their derivatives and securities lending activities, which are the subject of the SEC’s proposal.
As far as a timeline, as is the case with many proposed regulations or proposals, we can only guess. Assuming the SEC does not re-propose the new or amended rules and forms, we could see a final regulation in the middle of or late 2016 with an effective date perhaps 60 days after publication in the Federal Register, and a reporting compliance date a specified number of months thereafter.
The SEC’s guidelines will not be mandatory, but do you predict market pressure will make them hard to ignore?
Actually, the SEC has proposed specific amendments to both rules and forms under the Investment Company Act of 1940 (often referred to as the ’40 Act). Specifically, Regulation S-X under the ’40 Act is amended, along with a new Form N-PORT and new Form N-CEN (along with certain other amended rules and forms).
There is, however, a new Rule 30e-3 that would permit, but not require, funds to transmit periodic reports to investors via a website.
How does the SEC’s push for transparency tie in with the FSB’s proposals for greater data collection? Are they similar?
That’s a great question and one that has been posed to SEC officials. There is no specific tie, as the SEC’s proposal is limited to mutual funds (not the shadow banking community in general) on one hand and is broader than the Financial Stability Board’s (FSB) recommendations around securities lending and repo on the other.
That said, both go to data collection by regulators and we have urged consistency to both bodies. A related question is how does this SEC proposal relate to Dodd-Frank’s 984(b) mandate that the SEC “promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities”?
Interestingly enough, the SEC does acknowledge DFA 984(b) in footnote 73 of the proposal and simply states that this proposal accomplishes some of the requirements for such transparency.
What sort of new pressure will this put on those affected?
Another good question and one that was addressed, I would think, in most of the comment letters submitted to the SEC. There are a number of considerations here. First, most if not all of the information proposed to be reported or disclosed is in the hands of the agent lenders today, with much of it reported to the beneficial owners or lending funds.
The reporting onus is on the mutual funds themselves (ie, the fund complexes’ staff) and will require potentially significant resources in order to comply. To that end, in our Risk Management Association (RMA) securities lending committee comment letter, we urged the SEC to: (i) not require detailed loan information at the loan or Committee on Uniform Security Identification Procedures (CUSIP) level, which would effectively be voluminous and mostly useless data; (ii) narrow the definition of reportable borrower defaults (for example, don’t include delays in the return of borrowed securities, or technical defaults); and (iii) to limit aggregate loan information to the top five or 10 counterparties, which would comprise the majority of the funds’ exposure.
Do you feel that those affected fully appreciate the implications of the SEC and FSB’s guidelines?
We certainly are aware of the implication, though the ultimate impact on us won’t be known until both proposals are finalised. This is even more true with respect to the upcoming FSB’s reporting and disclosure recommendations that are still being sorted out by the FSB’s data expert group.
One of the biggest challenges in regards to the FSB proposals will be the consistency, or lack thereof, of the implementation by local regulators. Currently, the European regulators have proposed transactional data, whereas others such as the US seem to be leaning more to position level data.
As far as mutual funds go, the SEC’s proposal certainly made them focus on the implications, but it is probably fair to say that most beneficial owners in agency lending programmes aren’t at the same stage with regard to the FSB’s recommendations and perhaps don’t have to be if the reporting onus is placed on the agent lenders.
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