Securities Lending: SEC Proposes Sweeping Rule Requiring Reporting of Transactions to FINRA – JD Supra

Securities Lending: SEC Proposes Sweeping Rule Requiring Reporting of Transactions to FINRA – JD Supra

The US Securities and Exchange Commission’s proposed Rule 10c-1 would create a sweeping new reporting and disclosure regime for participants in the securities lending markets. Among other things, the proposal increases the Financial Industry Regulatory Authority’s ability to look into the activities of non-broker-dealers, including the potential for near-real-time access to a market participant’s entire portfolio holdings of securities.

Under proposed Rule 10c-1 (Proposed Rule), securities lenders would be required to almost instantly report detailed information about securities lending transactions to the Financial Industry Regulatory Authority (FINRA), and FINRA would in turn disseminate much of this information to the marketplace “as soon as practicable.”

If adopted without change, the Proposed Rule would create new operational reporting burdens and grant FINRA greater insights into the operations and holdings of persons over which it does not have direct statutory jurisdiction. Comments on the Proposed Rule are due by January 7, 2022.


“The securities lending market is opaque,” begins the 184-page regulatory proposal.[1] According to the Proposing Release, industry observers and market participants have requested that the Securities and Exchange Commission (SEC) consider rules addressing this opacity, noting that additional transparency is warranted. In addition, the SEC cites congressional hearings and various reports calling for transparency and a “consolidated tape” for securities lending transactions.

To this end, the Proposed Rule is intended to close data gaps in the market and minimize data asymmetries among market participants by establishing a mechanism of reporting not dissimilar to the TRACE reporting system for fixed-income securities. The Proposed Rule would require any person who lends a security on behalf of itself or another person to provide the specified material terms of the transaction to a registered national securities association (RNSA). Currently, FINRA is the only RNSA.[2]

The SEC believes that the Proposed Rule would provide investors and other market participants with access to pricing and other material information regarding securities lending transactions in a timely manner, increasing price transparency and reducing information asymmetry. The SEC also notes that the information FINRA collects will enable regulators to better surveil the securities markets and inform them of investor behavior in the securities lending market.


Persons Required to Report

The Proposed Rule would have a very broad application and apply to any person who loans any security as defined in Section 3(a)(10) of the Exchange Act on behalf of itself or another person (a Lender), including entities over which neither the SEC nor FINRA have had any direct oversight authority, such as banks, insurance companies, and pension plans. The Proposed Rule’s reporting requirements would apply to every Lender except where a Lender engages a lending agent.[3] In those instances, the lending agent would assume the reporting obligations on behalf of the Lender.

The Proposed Rule would permit Lenders and lending agents to engage a “reporting agent” (i.e., a registered broker-dealer) to transmit required information to FINRA if there is a written agreement requiring the reporting agent to provide the relevant information to FINRA within certain periods outlined in the Proposed Rule (i.e., 15 minutes, as discussed below). The Proposed Rule also sets forth the following specific requirements of broker-dealers …….


close-out dealers