SEC Proposes Extensive Reporting and Disclosure of Securities Lending Information

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 to such information. The Reporting Agent would, in turn, be required to enter into a written agreement with the RNSA, provide the RNSA a list of each beneficial owner or Lending Agent on whose behalf the Reporting Agent is providing stock loan information, and provide any updates to such list by the end of the day.⁸ The SEC, in turn, would be able to obtain from the RNSA such information, to aid its oversight of the lenders that have entered into agreements with Reporting Agents.⁹
  • 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.¹⁰
  • If a beneficial owner does not employ a Lending Agent or a Reporting Agent, then the beneficial owner would remain responsible for reporting the stock loan information to the RNSA.¹¹
• Information to be Provided to the RNSA: 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 effected 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.
  • Information to be provided to the RNSA within 15 minutes after the securities loan is effected or modified: Some of the terms would be made public (as would any modifications to those terms), while others would not.
    • The terms that would 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;¹² (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).¹³
      • The terms that would be made public concerning 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.¹⁴
      • The RNSA receiving the securities lending transaction information would be required to assign to each loan a unique transaction identification identifier and and make it publicly available as soon as practicable.¹⁵
    • The terms that would not be made public include the legal names of the parties to the loan and, where applicable, their Central Registration Depository or Investment Adviser Registration Depository number, Market Participant Identification, and LEI, as well as whether such party is the lender, the borrower, or an intermediary; when the lender is a broker-dealer, whether a security loaned to its customer is loaned from the broker-dealer’s inventory; and whether the loan will be used to close out a fail to deliver pursuant to Rule 204 of Regulation SHO or whether the loan is being used to close out a fail to deliver outside of Regulation SHO.¹⁶
  • Additional information to be provided to the RNSA by the end of each business day that a person either was required to provide information to the RNSA concerning a stock loan transaction or had an open securities loan about which it was required to provide information: (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”);¹⁷ and (iv) the total amount of each security that has been contractually booked and settled (“security on loan”).¹⁸ With respect to the information that is required to be reported to the RNSA by the end of each business day, the RNSA would make publicly available, by no later than the next business day, only aggregated information for that security. All identifying information about Lending Agents, Reporting Agents, and other persons using Reporting Agents would not be made publicly available.¹⁹

SEC Objectives of the Proposed Stock Loan Reporting Requirements

The SEC views the information submission requirements in proposed Rule 10c-1 to serve a dual purpose by increasing transparency in the lending market — in that it would provide investors and other market participants with access to material information regarding securities lending transactions and market information in a timely manner — while also providing regulators with data that could be used to enhance in-depth monitoring of regulated entity activity and surveillance of securities markets. As the Release states, “the data elements are designed to provide regulators with information to understand: whether market participants are building up risk; the strategies that broker-dealers use to source securities that are lent to their customers; and the loans that broker-dealers provide to their customers with fail to deliver positions.”²⁰

In this regard, the SEC has described the different objectives of the separate requirements to report certain information within 15 minutes and certain additional information by the end of the business day:

• The SEC believes that the requirement to provide to an RNSA the loan-level data elements within 15 minutes after each loan is effected (or, for modifications, within 15 minutes after a loan term is modified) and the subsequent disclosure of certain of these data elements by the RNSA as soon as practicable “would increase the transparency of information available to market participants by allowing for the evaluation of the terms of recently effected loans and any signals that these terms provide [and] [a]lso, in a fast-moving market, market participants would benefit from visibility into recent transactions when considering whether to accept proposed terms for new loans or accept requests to modify existing loans.”²¹
• The SEC believes that the additional requirement to provide to an RNSA by the end of each day the data elements concerning the total amount of securities available to lend and the total amount of securities on loan “will provide market participants with an understanding of the available supply of securities and a simple, centralized daily snapshot of the number of securities on loan.”²²

What This Means to You

Suffice it to say, the proposed reporting and disclosure requirements would represent one of the most drastic adjustments in the history of the securities lending industry and are likely to raise significant operational and compliance challenges for a number of different market participants, including but not limited to:

• requiring taking information on securities lending transactions that has been maintained in the ordinary course of business and converting it into a format necessary to meet the reporting requirements of the RNSA
• reporting within 15 minutes information concerning new securities lending transactions as well as instances where there are modifications to existing loan terms (to include rate changes, which may occur quite frequently)
• extricating from broker-dealers’ bulk borrows of securities to meet delivery obligations information (i) concerning the customers with short positions to whom the security is “on-lent” and identifying “the legal name of each party” for purposes of providing such information to the RNSA within 15 minutes; (ii) concerning whether the security is loaned “from a broker’s or dealer’s securities inventory to a customer,” which could be challenging to the extent that borrows are arising from multiple sources (e.g., broker-dealer’s own inventor, borrows of margin securities eligible for hypothecation, borrows from third-party lenders); and (iii) identifying whether the loan is “being used to close out a fail to deliver pursuant to Rule 204 of Regulation SHO or to close out a fail to deliver outside of Regulation SHO,” which could be challenging to the extent that securities are being borrowed in bulk for multiple delivery obligations
• meeting the proposed requirement to provide to the RNSA, by the end of each business day and apparently in every security in which there is an open securities loan, (i) the total amount of each security available to be lent (including requiring broker-dealers to calculate the total amount of securities owned by customers who are part of a fully paid lending program and the total amount of securities in margin customers’ accounts); and (ii) the total amount of each security out on loan (including requiring broker-dealers to include as part of such calculation securities owned by the broker-dealer, securities owned by customers who are part of a fully paid lending program, and the total amount of securities in margin customers’ accounts)

The far-reaching scope of proposed Rule 10c-1 is also notable in that it would apply to several securities lending market participants that are not traditionally regulated by the SEC. The Release acknowledges this broad applicability, asserting that Section 10(c)(1) of the Exchange Act gives the SEC “broad authority to implement rules regarding securities lending transactions involving any person, including banks, insurance companies, and pension plans, so long as the rules involving the loan or borrowing of securities prescribed by the [SEC] are necessary or appropriate in the public interest or for the protection of investors.”²³

The following is a summary of considerations for securities lending market participants.

Beneficial Owners: Investment companies, central banks, sovereign wealth funds, pension funds, endowments, insurance companies, and other institutional lenders that currently engage in securities lending without the use of a Lending Agent would need to prepare to provide securities lending transaction terms and securities lending market information directly to an RNSA and to update those terms in the event of a modification or, alternatively, employ (and provide timely access to information to) a Reporting Agent.

Broker-Dealers: Broker-dealers that borrow securities to on-lend to hedge funds or other end users would need to prepare to provide securities lending transaction terms and securities lending market information to an RNSA and to update those terms in the event of a modification. This obligation would also apply to broker-dealers operating a fully paid lending program under which the broker-dealer lends retail or institutional customers’ securities that are fully paid on the customers’ behalf. Broker-dealers would also need to consider the various interpretive, operational, and compliance challenges noted above.

Agent Lenders: Broker-dealers, banks, and other entities offering agent lender services to clients would need to prepare to provide securities lending transaction terms and securities lending market information to an RNSA (likely FINRA) and to update those terms in the event of a modification. Agent Lenders would also need to consider the various interpretive, operational, and compliance challenges noted above.

Clearing Agencies: Clearing agencies that intermediate loans of securities between beneficial owners (e.g., by acting as the central counterparty between a lender and buyer) may qualify as Lending Agents under Rule 10c-1 and therefore may be responsible for collecting and submitting securities loan transaction data to an RNSA. Clearing agencies would also need to consider the various interpretive, operational, and compliance challenges noted above.

Private Data Lenders: Proposed Rule 10c-1 would also significantly affect private data lenders that currently offer subscriptions to consolidated securities lending market data. In particular, the SEC proposal would be that the RNSA would make publicly available certain information free of any charges.

Next Steps

The full text of the Release is available here. The SEC’s proposal stems from direct congressional authorization in the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it is therefore reasonably likely that the SEC will adopt some form of increased transparency. Thus, market participants may want to focus on the operational challenges created by potential requirements to report substantial amounts of granular information regarding every stock lending transaction in 15-minute intervals and the additional information by the end of the day, and whether the SEC’s stated goals — increasing transparency of pricing, signaling, and certain additional information regarding the application of Regulation SHO — can be accomplished through less burdensome means. The SEC is soliciting feedback on several key aspects of proposed Rule 10c-1, including, but not limited to the following:

• Should the persons required to provide securities lending transaction information to an RNSA be limited to persons registered with the SEC?
• What are the broader impacts of requiring that certain information be provided to an RNSA?
• Are there certain categories of lenders that should be excluded from proposed Rule 10c-1’s requirements to provide information to an RNSA?
• Should proposed Rule 10c-1 apply to all securities? Should certain securities be excepted or exempted?
• Should the SEC define what it means to “loan a security”?
• Is the description of the securities lending market in the Release accurate?
• Are there methods for the SEC to improve transparency in the securities lending market other than requiring lenders to provide the materials terms of a securities lending transaction to an RNSA?
• Should proposed Rule 10c-1 require that lenders provide material information to an entity other than an RNSA, such as to a clearing agency or directly to the SEC?
• Would FINRA be an appropriate organization to receive, store, and disseminate Rule 10c-1 information?
• Does the proposed approach of using an RNSA have implications for data quality compared to alternative approaches?
• Should one or more of the proposed data elements be removed or modified? Should other data elements be added?
• Should more of the data elements be made public? Should more of the data elements be made available only to regulators?²⁴

Notwithstanding all of the questions and issues that arise from the proposed reporting requirements, including the significant interpretive, operational, and compliance challenges that are likely to arise, the SEC announced a very short comment period of 30 days following the Release’s publication in the Federal Register, which should likely occur the week of November 22, 2021. As such, interested market participants must act very quickly to gather information and submit comments during the 30-day period, which arises during a period already involving end-of-year initiatives and deadlines as well as a season of multiple holidays.

¹ Proposing Release, Reporting of Securities Loans, Release No. 34-93613 (Nov. 18, 2021) (the Release).

² The Release defines a “lender” as “any persons [sic] that loans a security on behalf of itself or another person, including persons that own the securities being loaned (‘beneficial owners’), as well as third party intermediaries, including banks, clearing agencies, or broker-dealers that intermediate the loan of securities on behalf of beneficial owners (‘lending agent’).” The Release states that the term “does not extend to the borrower of securities in a securities lending transaction or any third party the [sic] intermediates the borrowing of securities on behalf of the borrower.” See Release at 8, n. 9.

³ Proposed Rule 10c-1 does not currently define what it means to “loan a security” (the SEC is soliciting comments on this point).

⁴ See Release at 24. Section 3(a)(10) of the Exchange Act (15 U.S.C. § 3(a)(10)) defines “security” to mean “any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”

⁵ The Release notes that according to the Office of Financial Research Pilot Survey, nearly half of the dollar value of assets on loan in 2015 were debt instruments. See Release at 24.

⁶ For purposes of the Exchange Act, “person” means “a natural person, company, government, or political subdivision, agency, or instrumentality of a government.” See 15 U.S.C. 78c(a)(9).

⁷ See proposed Rule 10c-1(a)(1)(i).

⁸ See proposed Rule 10c-1(a)(1)(ii).

⁹ See proposed Rule 10c-1(g)(2).

¹⁰ See Release at 38.

¹¹ See proposed Rule 10c-1(a)(1).

¹² Notably, while the reporting obligation would apply within 15 minutes after the securities loan is effected, collateral is not required to be transferred until the end of the business day under certain securities lending arrangements (e.g., fully paid lending programs).

¹³ See proposed Rule 10c-1(b).

¹⁴ See proposed Rule 10c-1(c).

¹⁵ See proposed Rule 10c-1(b).

¹⁶ See proposed Rule 10c-1(d).

¹⁷ If the Lending Agent is a broker-dealer, the total amount of each security available to lend by the broker-dealer would include (i) the securities owned by the broker-dealer; (ii) the securities owned by its customers who have agreed to participate in a fully paid lending program; and (iii) the securities in its margin customers’ accounts. If the Lending Agent is not a broker-dealer, the total amount of each security available to lend would include the total amount of each security available to the Lending Agent to lend, including any securities owned by the Lending Agent.

¹⁸ If the Lending Agent is a broker-dealer, the total amount of each security on loan would include (i) the securities owned by the broker-dealer; (ii) the securities owned by its customers who have agreed to participate in a fully paid lending program; and (iii) the securities in its margin customers’ accounts. If the Lending Agent is not a broker-dealer, the total amount of each security available to lend would include the total amount of each security on loan where the Lending Agent acted as an intermediary on behalf of a beneficial owner and securities owned by the Lending Agent.

¹⁹ See proposed Rule 10c-1(e).

²⁰ See Release at 10–11.

²¹ See Release at 4.

²² Id.

²³ See Release at 21–22 (emphasis added). Section 10(c)(1) of the Exchange Act provides that is unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or of the mails or of any facility of any national securities exchange “to effect, accept, or facilitate a transaction involving the loan or borrowing of securities in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(c)(1).

²⁴ See Release at 25–27, 29–30, 49–50, 56.