On Mar. 15, 2023, the Securities and Exchange Commission (SEC) proposed changes to Regulation S-P that would require certain funds to provide additional disclosures regarding their securities lending practices.
SEC Regulation S-P is a rule that requires financial institutions to protect customers’ nonpublic personal information from unauthorized access or disclosure. SEC Regulation S-P applies to “financial institutions,” which are defined as any company that is “significantly engaged” in providing financial products or services to consumers. This includes broker-dealers, investment advisers, mutual funds and other companies that provide financial services to customers.
Under the proposed rules, investment firms and exchange-traded funds that engage in securities lending would need to provide additional disclosures in their annual and semi-annual reports. The disclosures would include information on the nature and extent of the securities lending activities, as well as the risks associated with those activities.
The proposed rules are intended to provide investors with more information about the risks associated with securities lending activities, which involve lending securities to other parties in exchange for collateral. While securities lending can generate additional income for funds, it also exposes them to certain risks, such as the risk that the value of the collateral may decline, leaving the fund with insufficient collateral to cover the value of the loaned securities.
Some key points to note from the SEC’s announcement include:
- The proposed changes to regulation S-P would require funds that engage in securities lending to disclose certain information about their securities lending practices, including the nature and extent of the activities, the identity of the borrowers and the collateral provided.
- The disclosures would have to be included in annual and semi-annual reports filed with the SEC.
- The proposed changes to regulation S-P are intended to provide investors with more information about the risks associated with securities lending, as well as the benefits of the activity.
- The SEC is seeking comments on the proposed rules until May 15, 2023, after which it will review the feedback before making a final decision on whether to implement the rules.
The proposed rules are part of the SEC’s ongoing efforts to enhance transparency and improve investor protection in the financial markets. By providing investors with more information about the risks associated with securities lending, the SEC hopes to help them make more informed investment decisions and reduce the likelihood of unexpected losses.
While the rules are not yet final, they signal the SEC’s commitment to ensuring that investors have the information they need to make informed decisions and protect their investments. As such, funds that engage in securities lending should begin preparing for the additional disclosure requirements outlined in the proposal.