Market players push back on SEC proposals

New regulatory proposals (including the trade reporting regime, Exchange Act Rule 10c-1, the proposal for Form SR and the private fund advisors rule) are causing friction between industry players and the SEC.

The latest proposals from the US Securities and Exchange Commission (SEC) under chairman Gary Gensler’s campaign to improve transparency and increase investor protection in the markets are seeing pushback from industry players concerned over their impact.

Bringing lending into the light

In November last year, the SEC proposed a new US trade reporting regime, Exchange Act Rule 10c-1, which would require lenders of securities to provide registered national securities associations (RNSA), such as the Financial Industry Regulatory Authority (FINRA), with the material terms of securities lending transactions.

Following this, the registered national securities associations would then provide the public with the same information on these transactions.

The proposal (which would additionally require details of securities both on loan and available for loan to be reported) was developed to help bring greater transparency for the securities lending industry.

“Securities lending and borrowing is an important part of our market structure. Currently, though, the securities lending market is opaque,” said Gensler in a statement released alongside the original proposal.

“In today’s fast-moving financial markets, it’s important that market participants have access to fair, accurate, and timely information. I believe this proposal would bring securities lending out of the dark. We have put out this proposal for comment, and I look forward to hearing feedback from the public.”

Consultation raises concerns

Following the announcement of the proposal last November and its subsequent publication in the Federal Register, a public comment period was opened for 30 days. However, last month, following this initial public comment period, the SEC voted to reopen public consultation, offering additional time for respondents to share their recommendations on the design of the proposed rule.

The second round of consultation was extended until 1 April 2022 and reflected the strong amount of feedback originally received during the first public comment period as well as the significant amount of uncertainty that the initial Exchange Act Rule 10c-1 design caused.

Responses to the SEC’s public consultation raised concerns around clarity with respect to the scope of the Exchange Act Rule 10c-1, as well as clarity surrounding which transactions should be reported.

Further issues brought to light included the need for such regulatory requirements to be adapted on a worldwide scale in order to achieve the goal of improved transparency. Without national supervisors having an agreed framework surrounding the regulation, a lack of consistency could occur which could result in arbitrage opportunities and a disruption in the development of worldwide standards.

Equity buyback update

In December, the SEC also proposed amendments to its rules regarding disclosure about an issuer’s repurchases of its equity securities, which are commonly referred to as buybacks.

Speaking on the proposed changes, Gensler said: “Share buybacks have become a significant component of how public issuers return capital to shareholders. I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.”

The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. The form would require detailed information including disclosure of the class of securities purchased, total amount, average price paid, and the aggregate total amount purchased on the open market.

Archegos impact

A driving force behind the latest SEC amendments has been linked to the March 2021 collapse of Archegos Capital Management – which has been cited as evidence of the need for enhanced transparency in swaps markets. In early 2021, the family office collapsed following the use of total return swaps to build significantly concentrated bets on share price moves which eventually backfired.

New SEC rules, proposed in December, would require investors to disclose their swaps positions publicly, preventing them from building out holdings in public companies secretly (a practice that has been blamed for the Archegos collapse). In January the SEC also voted in favour of amendments to hedge fund disclosure rules that would require hedge funds to report within one business day if they suffered any large losses or withdrawals.

Private fund advisors rule

In February this year, the regulator introduced further proposals to regulate private fund advisors, in response to concerns around the opacity of the amassed $18trn in gross assets held by private funds including hedge funds, private equity firms and venture capital groups.

“Private fund advisers, through the funds they manage, touch so much of our economy. Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field,” said SEC Chair Gary Gensler. “I support this proposal because, if adopted, it would help investors in private funds on the one hand, and companies raising capital from these funds on the other.”

The proposed changes would require the disclosure of quarterly performance, fees and expenses, along with annual audits of private funds, the banning of preferential terms for some investors. The SEC also voted in favour of slashing the settlement process of stock, bond, mutual fund and ETF trading from two days to just one by March 2024 – a move that investor lobby groups have been calling for since the GameStop saga kickstarted the meme stock chaos of 2021.

In addition, the SEC proposed amendments to the Advisers Act compliance rule that would require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

Industry pushback

The new proposals have been met with frustration from many market participants, including hedge funds and brokers, which have publicly voiced out their concerns about the changes in regulation.

In March, 12 trade associations (including the Securities Industry and Financial Markets Association, the American Investment Council, the Structured Finance Association and the Managed Funds Association, among others) submitted a request to the SEC to extend the comment period for the private fund advisers proposal (known as the Private Fund notice of proposed rulemaking, or NPRM).

“The proposal is nearly 350 pages, seeking responses to over 900 questions throughout but only offered a 30-day window for comments,” commented the SFA. “Complex and sweeping changes are included in the proposal and would impact a broad range of stakeholders.”

The SEC has been accused in some quarters of breaking its own rules and to some extent, the law itself, with suggestions that the regulator has not assessed the costs and benefits of the new proposals thoroughly enough. Lobbyists have also threatened legal action against the SEC if it goes ahead with the planned amendments.

Activist investors and their brokers have also expressed concerns about the new proposals, noting that the rules could stifle the industry by giving other investors the opportunity to front-run their strategies while also giving firms increased time to defend themselves against shareholders plotting for change.