Morningstar backs SEC’s call for fee-split transparency
26 August 2015 Chicago
Image: Shutterstock
The securities lending aspects of the US Securities and Exchange Commission’s (SEC) investment company reporting modernisation programme are necessary because fund investors are entitled to know the revenue split between the manager, agent lender, and the fund itself, according to Morningstar.
The mutual fund data and analytics provider submitted a comment letter to the SEC on 21 August, following publication of a new set of disclosure requirements aimed at taking advantage of the benefits of advanced technology, and to modernise the fund reporting regime in the US.
Under the reforms, which the SEC published for public comment in May, Rule 6-03 of Regulation S-X will be amended to include a new subsection mandating certain disclosures of a fund’s securities lending activities.
These could include a fund’s gross and net income from securities lending, and all fees and compensation it pays out, including borrower rebates. Fund would also have to reveal the revenue sharing splits that they have in place with their agent lenders.
Explaining the requirements, the SEC said: “We believe that these proposed disclosures would allow investors to better understand the income generated from, as well as the expenses associated with, securities lending activities.”
Morningstar backed the move in its comment letter, saying: “Securities lending is … an area in which frequent, comprehensive disclosure would allow market participants to assist the SEC in identifying risky practices and exposures.”
“We further support the SEC’s proposal to provide more-granular information about funds’ fee income from securities lending. We believe that investors are entitled to know the revenue split between the fund manager, the lending agent, and the fund itself."
"Collecting and publishing this additional information will allow investors to learn whether they are being adequately compensated for securities lending, at least in comparison with other funds.”
Forms N-Q and N-CSR will also be replaced with a new portfolio holdings reporting form, dubbed N-PORT.
The previous forms made investment management companies report on a quarterly basis, but Form N-PORT will have to be filed with the SEC every month, and securities lending and repo information will need to be included.
Each monthly report will need to include borrower information, such as the aggregate value of all securities on loan, although the SEC is assessing whether a loan-by-loan basis would be more appropriate.
Morningstar added in its letter: “By collecting and making available additional information about counterparty risk and other important factors, the SEC will make it easier for investors and financial advisors to monitor portfolio risks. We also believe the enhancements to securities lending disclosure will assist the SEC in monitoring potential systemic financial risks.”
The mutual fund data and analytics provider submitted a comment letter to the SEC on 21 August, following publication of a new set of disclosure requirements aimed at taking advantage of the benefits of advanced technology, and to modernise the fund reporting regime in the US.
Under the reforms, which the SEC published for public comment in May, Rule 6-03 of Regulation S-X will be amended to include a new subsection mandating certain disclosures of a fund’s securities lending activities.
These could include a fund’s gross and net income from securities lending, and all fees and compensation it pays out, including borrower rebates. Fund would also have to reveal the revenue sharing splits that they have in place with their agent lenders.
Explaining the requirements, the SEC said: “We believe that these proposed disclosures would allow investors to better understand the income generated from, as well as the expenses associated with, securities lending activities.”
Morningstar backed the move in its comment letter, saying: “Securities lending is … an area in which frequent, comprehensive disclosure would allow market participants to assist the SEC in identifying risky practices and exposures.”
“We further support the SEC’s proposal to provide more-granular information about funds’ fee income from securities lending. We believe that investors are entitled to know the revenue split between the fund manager, the lending agent, and the fund itself."
"Collecting and publishing this additional information will allow investors to learn whether they are being adequately compensated for securities lending, at least in comparison with other funds.”
Forms N-Q and N-CSR will also be replaced with a new portfolio holdings reporting form, dubbed N-PORT.
The previous forms made investment management companies report on a quarterly basis, but Form N-PORT will have to be filed with the SEC every month, and securities lending and repo information will need to be included.
Each monthly report will need to include borrower information, such as the aggregate value of all securities on loan, although the SEC is assessing whether a loan-by-loan basis would be more appropriate.
Morningstar added in its letter: “By collecting and making available additional information about counterparty risk and other important factors, the SEC will make it easier for investors and financial advisors to monitor portfolio risks. We also believe the enhancements to securities lending disclosure will assist the SEC in monitoring potential systemic financial risks.”
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