FINRA Proposes Rules to Implement New Securities Lending and Transparency Engine (SLATE™)

On May 1, 2024, the Financial Industry Regulatory Authority (FINRA) proposed a new Rule 6500 Series to implement its Securities Lending and Transparency Engine (SLATE™).¹ The new rule series is mandated by Rule 10c-1a under the Securities Exchange Act of 1934 (Exchange Act),²which was adopted by the U.S. Securities and Exchange Commission (SEC or Commission) on October 13, 2023,³ and which, for the first time, requires persons entering into securities loans (or their intermediary or reporting agent, where applicable) to report specific terms of the loan to FINRA by the end of the day on which the loan is either effected or modified. Despite an ongoing legal challenge to the SEC rule in the U.S. Court of Appeals for the Fifth Circuit, FINRA published its proposed Rule 6500 Series within the four-month deadline initially set by the Commission in the adopting release for SEC Rule 10c-1a.⁴

Under the proposed rules, participation in SLATE would be mandatory for purposes of reporting Covered Securities Loans.⁵ Any SLATE Participant⁶ would be required to comply with certain initial and continuing compliance requirements, including (1) obtaining a Market Participant Identifier (MPID), if it does not already have one; (2) executing and complying with the SLATE Participant application agreement and all applicable rules and operating procedures of FINRA and the SEC; (3) maintaining the physical security of the equipment located on the premises of the SLATE Participant to prevent unauthorized entry of information into SLATE; and (4) informing FINRA of any non-compliance with, or changes to, any of the aforementioned participation requirements.

Information Proposed to Be Reported

Consistent with SEC Rule 10c-1a, FINRA’s proposed SLATE rules would require a Covered Person, directly or indirectly through a Reporting Agent,⁷ to report loan transaction data elements consisting of three types of data: non-confidential data elements (Data Elements), confidential data elements (Confidential Data Elements) and — in the event a reported data element is modified (Loan Modification) — information on the modified data element. FINRA proposes to collect additional data elements and information, which it states will help it to better understand the Covered Securities Loan.

• Non-Confidential Data Elements: In addition to the data expressly specified in SEC Rule 10c-1a,⁸ FINRA has proposed certain additional Data Elements, including (1) the expected settlement date of the Covered Securities Loan, and (2) apart from the rebate rate or securities lending fee, the dollar cost of any other fees or charges.⁹
• Confidential Data Elements: In addition to the data expressly specified in SEC Rule 10c-1a,¹⁰ the proposed SLATE rules would require the reporting of additional Confidential Data Elements, including (1) whether the Covered Person is the lender, borrower, or intermediary; (2) the unique internal identifier assigned to the Covered Securities Loan by the Covered Person responsible for reporting the loan to SLATE; and (3) if the Covered Securities Loan is an allocation of an omnibus loan effected pursuant to an agency lending agreement, the unique internal identifier for the associated omnibus loan assigned by the Covered Person responsible for reporting the Covered Securities Loan to SLATE.¹¹
• New Modifiers and Indicators: The proposed SLATE rules also would require six new “modifiers and indicators” to be appended to any SLATE report for Covered Securities Loans with the following characteristics: (1) loans associated with exclusive arrangements; (2) loans with affiliates; (3) unsettled loans; (4) terminated loans; (5) loans with rate or fee adjustments (including if the rate or fee accounts for the value of a distribution or other economic benefit associated with the Reportable Security — e.g., a corporate action); and (6) basket loans.¹² FINRA stated that these modifiers and indicators would help it to better identify loans for which the pricing may not indicate the current market rates available in the securities lending market. FINRA also proposes to reserve discretion for itself to not publish any modifier or indicator that it determines should not be made publicly available.
• Loan Modifications: In addition to the data expressly specified in SEC Rule 10c-1a (which includes the unique identifier assigned by FINRA to the Initial Covered Securities Loan),¹³ FINRA is proposing additional information to be reported in connection with a Loan Modification, including (1) if the Covered Securities Loan is an allocation of an omnibus loan effected pursuant to an agency lending agreement, the unique internal identifier for the associated omnibus loan assigned by the Covered Person responsible for reporting the Covered Securities Loan to SLATE; (2) the expected settlement date for modifications to the loan amount (if the expected settlement date is a date other than the date of the Loan Modification) or the effective date for all other Loan Modifications (if effective date is a date other than the date of the Loan Modification); (3) whether the Covered Person is the lender, borrower, or intermediary; and (4) such modifiers and indicators as may be required by FINRA.¹⁴ Notably, FINRA has proposed that any modifications to an Initial Covered Securities Loan after it has been effected — but before it has been reported to FINRA — would also have to be reported, as would multiple modifications on the same day to a previously reported Covered Securities Loan. Furthermore, FINRA has proposed that a change to any party to a Covered Securities Loan would constitute both the termination of the prior Covered Securities Loan (which must be reported as a Loan Modification and tagged with a termination identifier) as well as the initiation of a new loan (which must be reported as an Initial Covered Securities Loan).

Information Proposed to Be Published by FINRA

SEC Rule 10c-1a requires FINRA to make two categories of information publicly available: (1) the non-confidential Data Elements for each Initial Covered Securities Loan or Loan Modification to a Covered Securities Loan reported to SLATE on the prior business day (except the loan amount) and (2) daily statistical information on the aggregate loan transaction activity and distribution of loan rates, by Reportable Security, as reported to SLATE on the prior business day.¹⁵

For each Initial Covered Securities Loan, FINRA would make publicly available all of the non-confidential Data Elements (except the loan amount). For each Loan Modification to a previously reported Covered Securities Loan, FINRA would make publicly available the modified Data Elements reported to SLATE (except the loan amount, if modified).¹⁶ As provided in SEC Rule 10c-1a, the loan amount would be made publicly available 20 business days after the date on which the Initial Covered Securities Loan was effected or the loan amount was modified.¹⁷

With respect to the daily statistical information, the SEC afforded FINRA broad deference in how to compile and present the information for public use.¹⁸ FINRA is proposing to compile and present the information as follows:

• Aggregate Loan Transaction Activity: (1) Aggregate volume of securities (both in total and by collateral type) subject to an Initial Covered Securities Loan or modification to the amount of Reportable Securities loaned, reported on the prior business day; (2) aggregate volume of securities (both in total and by collateral type) subject to a rebate rate or fee modification, reported on the prior business day; (3) aggregate volume of securities subject to an Initial Covered Securities Loan or modification to the amount of Reportable Securities loaned with a specified term, and subject to an Initial Covered Securities Loan or modification to the amount of Reportable Securities loaned without a specified term, reported on the prior business day; (4) aggregate volume of securities subject to an Initial Covered Securities Loan or modification to the amount of Reportable Securities loaned to one or more borrower types reported on the prior business day; and (5) the total number of Initial Covered Securities Loans and terminated Covered Security Loans (both in total and by collateral type) reported on the prior business day.
• Loan Rate Distribution Data: (1) The highest rebate rate, lowest rebate rate, and volume weighted average of the rebate rates reported for Initial Covered Securities Loans collateralized by cash and for Loan Modifications collateralized by cash (where the Loan Modification involved a change to the rebate rate) and (2) the highest lending fee, lowest lending fee, and volume weighted average of the lending fees reported for Initial Covered Securities Loans not collateralized by cash and for Loan Modifications not collateralized by cash (where the Loan Modification involved a change to the lending fee).

Other Key Proposals

The proposed SLATE rules include a number of other terms and requirements. The following are some of the other key items proposed by FINRA.

• Duty to Report and Notification of Failure to Report: The proposed rules include a general requirement that where a Covered Person makes a good faith determination that it has a reporting obligation under SEC Rule 10c-1a and the SLATE rules, the Covered Person or its Reporting Agent, as applicable, must report the Covered Securities Loan. Additionally, if the Reportable Security is not entered into the SLATE system, the Covered Person or Reporting Agent, as applicable, must promptly notify and provide FINRA Operations the information necessary to enter the Reportable Security for reporting through SLATE.¹⁹
• Daily Reporting Deadlines: Both Initial Covered Securities Loans and Loan Modifications would be required to be reported by the following deadlines:
  • For Initial Covered Securities Loans or Loan Modifications effected on a business day at or after 12:00:00 a.m. ET through 7:45:00 p.m. ET, the required information must be reported the same day before 8:00:00 p.m. ET.
  • For Initial Covered Securities Loans or Loan Modifications effected on a business day after 7:45:00 p.m. ET, the required information must be reported no later than the next business day (T+1) before 8:00:00 p.m. ET.
  • For Initial Covered Securities Loans or Loan Modifications effected on a Saturday, a Sunday, a federal or religious holiday, or other day on which SLATE is not open at any time during that day (determined using ET), the required information must be reported the next business day (T+1) before 8:00:00 p.m. ET.²⁰
• Fees for Data: In its adopting release, the SEC authorized FINRA to charge a fee in connection with data that it publishes pursuant to Rule 10c-1a.²¹ FINRA is proposing to make the data available on its website free of charge for personal, non-commercial purposes only. For other uses, FINRA would publish or distribute SLATE data for certain fees, which are pending approval by the Commission.
• Security Measures: In connection with the proposal and adoption of SEC Rule 10c-1a, several industry commenters raised concerns over the security of the sensitive data required to be reported under the new SEC and FINRA rules, including the potential significant consequences of a cybersecurity incident (such as a data breach) affecting FINRA’s or the SEC’s databases holding such information. While not directly addressing these concerns, as a condition of participation in SLATE, a SLATE Participant would be required to maintain the physical security of the equipment located on its premises to prevent unauthorized entry of information into SLATE.²²
• Rules Specific to FINRA Members: While Covered Persons that are required to report Covered Securities Loan information to SLATE include both FINRA members and non-FINRA members, FINRA is proposing certain rules specific to FINRA members, including (1) an obligation of the member under FINRA Rule 3110 to take reasonable steps to ensure that the Reporting Agent is complying with SEC Rule 10c-1a and the applicable FINRA SLATE rules on the member’s behalf and (2) that FINRA may consider a member’s pattern or practice of late reporting without exceptional circumstances to be conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, in violation of FINRA Rule 2010.²³
• De Minimis Activity: The industry has voiced concerns about the potential for inadvertent proprietary data leakage when there is only one — or very few — open Covered Securities Loans in a particular Reportable Security. FINRA is proposing (possibly in response to these concerns) that it may elect to omit from the aggregate loan activity volume information for Reportable Securities for which there were three or fewer types of Initial Covered Securities Loan and Loan Modification events reported to SLATE in total on the prior business day.²⁴ However, it appears the Data Elements for the loans themselves would still be published.

Implementation Timeline

If approved by the SEC, FINRA’s proposed Rule 6500 Series would go into effect 45 days after the May 7, 2024, publication of FINRA’s Notice of Proposed Rulemaking in the Federal Register — or on June 21, 2024. The Federal Register publication also triggered the start of the 21-day comment period, which will expire on May 28, 2024. Accordingly, firms wishing to comment on the proposal should act quickly to engage with FINRA.

FINRA’s proposed rules are required to go into effect no later than 12 months after the January 2, 2024, effective date for SEC Rule 10c-1a — that is, by January 2, 2025. Covered persons must begin to report the information required by SEC Rule 10c-1a and the SLATE rules to FINRA starting on the first business day that is 24 months after the effective date of SEC Rule 10c-1a, which is January 2, 2026 (Reporting Date). Finally, FINRA must begin to make information publicly available in accordance with SEC Rule 10c-1a and its SLATE rules within 90 calendar days of the Reporting Date, which is April 2, 2026.

While the legal challenge of SEC Rule 10c-1a in the Fifth Circuit is ongoing, there has been no indication that the implementation of SEC Rule 10c-1a will be stayed during the course of the litigation. Therefore, firms should review the proposed FINRA SLATE rules and consider the operational builds that would be necessary to begin complying with the rules’ requirements beginning in January 2026.