On November 18, 2021, the U.S. Securities and Exchange Commission (SEC) published and requested comment on proposed Rule 10c-1 (the Rule) under the Securities Exchange Act of 1934 (Exchange Act)1, which would for the first time require all lenders2 of securities to provide identifying data and material negotiated terms of securities lending transactions to a registered national securities association (RNSA) — which would likely be the Financial Industry Regulatory Authority (FINRA) — for public dissemination. If adopted, the proposed Rule would require any person that loans a security on behalf of itself or another person to report to an RNSA certain material terms of those loans, information regarding the securities the person has on loan, and information regarding the securities the person has available to lend. The proposed Rule would also require the RNSA to make available to the public securities lending transaction data and aggregated information in respect of securities on loan and available to lend.
The proposed Rule raises many questions concerning the scope of certain information required to be reported and would impose significant operational and compliance burdens on a number of market participants, most notably broker-dealers and certain clearing agencies. The proposed Rule is the latest in a series of initiatives by the SEC and FINRA to increase public access to information on short positions and borrows related to short positions.
Once published in the Federal Register, the Release will be open for a very short comment period of only 30 days. Accordingly, securities lending market participants wishing to provide comments should take prompt action to prepare their submissions.
Summary of the Proposed Rule
- Securities Covered: The requirements contained in proposed Rule 10c-1 would apply to loans3 of any “security,” as defined in Section 3(a)(10) of the Exchange Act.4 Thus, unlike Regulation SHO, the proposed Rule would apply to both equity and debt securities.5 The SEC has requested comment on whether there should be exceptions for certain categories of securities, such as U.S. Treasuries.
- Parties Covered and Responsible to Report: Proposed Rule 10c-1 would technically apply to any person6 that loans a security; however, the SEC has provided the following clarifications:
- Where beneficial owners of securities (including banks, insurance companies, and pension plans) lend securities through an intermediary such as a bank, broker-dealer, or clearing agency, then such “Lending Agent” would generally have the obligation to report the stock loan information to the RNSA. Thus, for example, (i) stock loans by insurance companies and pension plans would be reported by their agent lenders; (ii) customers of broker-dealers that participate in fully paid lending programs would have their loans reported by their broker-dealers; and (iii) clearing agencies (such as The Options Clearing Corporation) that have established programs to intermediate loans of securities on behalf of beneficial owners would be responsible for providing the stock loan information to the RNSA.7
- Lenders and Lending Agents would, however, be able to enter into a written agreement with a broker-dealer acting as a “Reporting Agent” to report the stock loan information to the RNSA for the Lender or Lending Agent, provided the Reporting Agent is also given timely access …….