The SEC has adopted a final rule intended to increase transparency in the reporting of securities loans. Those covered by new rule 10c-1a will be required to provide information about securities loans to FINRA by the end of the day the loan is made; the information will then be made publicly available on the next business day. This rulemaking fulfills a Dodd-Frank Act mandate to increase the transparency of information available to brokers, dealers, and investors. The vote was 3-2, with Commissioners Peirce and Uyeda declining to support the rule (Reporting of Securities Loans, Release No. 34-98737, October 13, 2023).
Proposed rule. The proposed rule was advanced by unanimous vote in late November 2021. Proposed rule 10c-1 would have required lenders of securities to provide certain terms ("loan-level information") of lending transactions to a registered national securities association (FINRA is the only currently existing RNSA) within 15 minutes after a loan is effected or modified. The RNSA would then make certain of these data elements publicly available as soon as practicable. Data elements concerning securities available to loan and securities on loan would be provided to FINRA by the end of each business day, and FINRA would make this information public no later then the next business day.
The initial thirty-day comment period ended on January 7, 2022, and comments were then reopened for another thirty-days until April 1, 2022. At the time, the Commission said that it was reopening the comment period so that commenters may consider whether there would be any effects of proposed Rule 13f-2 that the Commission should consider in connection with proposed Rule 10c-1. Comments continued to be received in late 2022 (and much later) after the comment period was briefly reopened due to a technological error causing comments submitted on certain matters between June 2021 and August 2022 to not be received.
Rule adopted. As adopted, Rule 10c-1a requires a "covered person" agreeing to a "covered securities loan" to provide specified information to an RNSA. The information must be provided within specified time periods in the format the RNSA requires. The RNSA is then required to keep confidential certain information and to make other information publicly available on the next trading day. The modification of the rule designation to "10c-1a" was made to conform to Federal Register requirements.
Under the rule, "covered person" means: (1) any person that agrees to a covered securities loan on behalf of an intermediary (i.e., the lender); (2) any person agreeing to a covered securities loan as a lender when an intermediary is not used; or (3) a broker or dealer borrowing fully paid or excess margin securities. In a change from the proposal, "covered person" excludes a clearing agency providing only the functions of a central counterparty or central securities depository.
A "covered securities loan" is a transaction in which a person lends, on their behalf or the behalf of others, a "reportable security" to another person. The definition excludes positions at a registered clearing agency that result from central counterparty services or central depository services, and the use of margin securities by a broker or dealer unless they are lent to another person. "Reportable securities" are defined as a security for which information is already reported or required to be reported to existing reporting regimes (e.g., the CAT NMS Plan, TRACE, or the MSRB real time reporting system).
Information required. The rule requires covered persons to provide certain information to an RNSA by the end of the day on which a loan is made, including, as set out in subsection (c) of the rule:
- Legal name of the issuer of the securities to be borrowed;
- Ticker symbol of those securities;
- Time and date of the loan;
- Name of the platform or venue, if one is used;
- Amount of securities loaned;
- Rates, fees, charges and rebates for the loan as applicable;
- Type of collateral provided for the loan and the percentage of the collateral provided to the value of the loaned securities;
- Termination date of the loan if applicable; and
- Borrower type, e.g., broker, dealer, bank, customer, clearing agency, custodian.
The RNSA will then make certain information publicly available no later than the morning of the next business day. This includes a unique identifier, the above data elements, the aggregate transaction activity, and the distribution of rates among loans and lenders for each reportable security. On the twentieth day after the loan is effected, the RNSA must also make publicly available the loan amount.
Effective dates. The rule will be effective 60 days after publication in the Federal Register. Four months after the effective date, the RNSA must propose rules implementing Rule 10c-1a that will then be effective within 12 months of the rule's effective date. Covered persons will begin reporting 24 months after Rule 10c-1a's effective date, and the RNSA must make specified information publicly available within 90 calendar days of the reporting date.
Commissioner reactions. "Securities lending played a role in the 2008 financial crisis, and, currently, the securities lending market is opaque,” said SEC Chair Gary Gensler. In a separate statement, Gensler said that the rule will help address current information asymmetries between subscribers who have access to data and the rest of the investing public. "The final rule will help regulators and market participants access timely and comprehensive information about securities lending," he said.
Commissioners Peirce and Uyeda dissented. Peirce said that she agreed with the objective of increasing transparency but said that the final rule's approach was not the right way to do so. Her concerns were mainly practical: timing should have been contemplated at every step of the process, and a phased process would have afforded time for a smoother transition for FINRA and market participants. "I fear we have set up both to fail," she said.
Commissioner Uyeda took issue with the short comment period, which spanned the late 2021 holiday season, and which also should have taken into account the intertwined short sale reporting rule proposed at the time. Given the changes from the proposal to the final rule, plus the changes in the new short selling rule, there is a compelling argument for a re-proposal, he said. The reporting regime is so different from that which was proposed, "one could argue that this final rule is arbitrary and capricious," he said.
The release is No. 34-98737.