In November 2021, the SEC proposed new Exchange Act Rule 10c-1, which would require lenders of securities to provide the material terms of securities lending transactions to a registered national securities association (RNSA), such as FINRA. FINRA would then make the information publicly available. The proposed rules are part of an initiative by the SEC and FINRA to increase public access to information on short positions and borrowing related to short positions.
Although the rule would definitely provide an improved level of transparency to market participants regarding short positions, it will also add a significant compliance burden to broker dealers and clearing agencies.
Consistent with recent SEC proposals, the comment period was only open for 30 days following publication in the federal registrar and as such comments closed January 7, 2022.
Background
Securities lending is the market practice by which securities are transferred temporarily from one party, a securities lender, to another, a securities borrower, for a fee. Most lenders are larger institutions, and most borrowers are broker-dealers borrowing on their own behalf or on behalf of their customers to cover short positions. Custodial banks and third-party agents (including prime brokers) generally facilitate the lending transactions.
Generally, when an end investor wishes to borrow securities, and its broker-dealer does not have those securities available in its own inventory or through customer margin accounts to loan, the broker-dealer will borrow the securities from a lending agent with whom it has a relationship. The broker-dealer will then re-lend the securities to its customer. Loans from lending programs to broker-dealers occur in what is referred to as the “Wholesale Market,” while loans from a broker-dealer to the end borrower occur in what is referred to as the “Retail Market.” There are other ancillary lending market participants, but the majority is through the general Wholesale and Retail Markets.
Lenders set terms such as guidelines regarding counterparties who can borrow, the types of collateral it accepts (usually cash), term of the loan, recall features, borrowing fees, volume features, etc..
Market participants have long complained about a lack of information related to securities borrowing (used to cover short positions, for example). Under current rules, parties to securities lending transactions are not required to report the material terms of those transactions. Section 984 of the Dodd-Frank Act provides the SEC with the authority to implement rules to increase transparency with respect to the loan or borrowing of securities. In that regard, the SEC is proposing new Exchange Act Rule 10c-1, which would require any person who loans a security on behalf of itself or another person (a “Lender”) to provide the specified material terms of their securities lending transactions to an RNSA.
In addition to providing market participants with important data to compare the terms of transactions and determine if they are market reasonable facilitating competition, market participants will also garner information on trends such as a change in supply and demand for a particular security and therefore increases in short positions.
Additional information will also assist regulators including the SEC and RNSAs to oversee transactions that are vital to fair, orderly, and efficient markets. The data elements in the proposed rule are designed to provide regulators with information on: (i) whether market participants are building up risk; (ii) the strategies that broker-dealers use to source securities that are lent to their customers; and (iii) the loans that broker-dealers provide to their customers with fail to deliver positions.
Proposed Rule 10c-1
New Exchange Act Rule 10c-1 which would require all lenders of securities to provide certain information to an RNSA (i.e., FINRA). The proposed rule is expansive covering any and all lenders of any and all securities (both debt and equity). I note that Regulation SHO is currently limited to equity securities.
To avoid double counting, 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. 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 to such information. While the reporting requirements apply to the lender of securities and not the borrower, where a borrower, in turn, “on-lends” the securities, that borrower would be responsible for providing stock loan information to the RNSA with respect to the subsequent on-lending transaction (i.e., as the lender in the on-lending transaction). Thus, for example, where a broker-dealer borrows securities from a lender or Lending Agent and on-lends to a hedge fund customer or another broker-dealer, the broker-dealer would be responsible for reporting to the RNSA information regarding the securities lending transaction between itself and the hedge fund or other broker-dealer.
The lender of the securities (or its Lending Agent or Reporting Agent) would be required to provide to the RNSA certain specified transaction terms and notify the RNSA of any modifications resulting in a change to those terms. The lender (or its Lending Agent or Reporting Agent) would be required to submit the required information to the RNSA within 15 minutes after the securities loan is affected or the terms of the loan are modified. Additionally, information on the amount of securities the lender has available to lend, as well as the amount of securities the lender has on loan, would need to be provided to the RNSA by the end of each business day. The material terms of securities lending transactions.
The following information must be provided within 15 minutes of a loan of securities:
- The terms required to be made public concerning the original loan include the (i) legal name and Legal Entity Identifier (LEI) of the issuer, as applicable; (ii) securities’ ticker symbol, CUSIP, ISIN, or other identifier; (iii) date the loan was effected; (iv) time the loan was effected; (v) name of the platform or venue where the loan was executed, if applicable; (vi) amount of securities loaned; (vii) rates, fees, charges, and rebates for the loan, as applicable; (vii) type of collateral used to secure the loan; (ix) percentage of collateral to value of loaned securities required to secure the loan; (x) termination date of the loan, if applicable; and (xi) borrower type (e.g., broker, dealer, bank, customer, clearing agency, custodian).
- The terms required to be made public related to loan modifications include: (i) the date and time of the modification; (ii) a description of the modification; and (iii) the unique transaction identifier assigned to the original loan.
Information that is not required to be made public includes personal identifiable information such as the legal names of the parties and there CRD or other registration numbers. Additionally, when the lender is a broker-dealer, whether a security loaned to its customer is loaned from the broker-dealer’s inventory is not required to be made public.
Information required to be made public by the end of a business day includes:
- (i) the legal name and LEI of the issuer, as applicable; (ii) the securities’ ticker symbol, CUSIP, ISIN, or other identifier; (iii) the total amount of each security that is not subject to legal or other restrictions that prevent it from being lent (“available to lend”); and (iv) the total amount of each security that has been contractually booked and settled (“security on loan”).
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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