New SEC Rule Requires Extensive Reporting and Disclosure of Securities Lending Information

On October 13, 2023, the U.S. Securities and Exchange Commission (SEC or Commission), in a 3–2 vote along party lines, adopted new Rule 10c-1a¹ (Final Rule) under the Securities Exchange Act of 1934 (Exchange Act).² Rule 10c-1a will for the first time require persons entering  securities loans (or their intermediary or reporting agent, where applicable) to report specific terms of the loan to a registered national securities association (RNSA) by the end of the day on which the loan is either effected or modified. Currently, the Financial Industry Regulatory Authority (FINRA) is the only RNSA, so it is expected FINRA will play this role. The Final Rule will also require FINRA to make publicly available certain transaction-specific information by the morning of the business day after the loan is effected or modified, as applicable. The amount of the loan will be made publicly available on a delayed basis on the 20th business day after the loan is effected or modified, as applicable.

The Final Rule will impose significant operational and compliance burdens on a number of market participants, most notably broker-dealers, custodian banks acting as agent lenders, investment advisers and funds effecting securities loans, and certain clearing agencies. In addition, questions remain regarding the scope of the lending activity covered by the Final Rule. In this regard, Commissioner Hester Peirce, who did not support adoption of the Final Rule, noted her expectation that there would be a number of requests for guidance and stated her hope that the SEC staff would be amenable to working with the industry to provide important clarifications. 

Information to Be Reported

Consistent with the initial rule proposal published on November 18, 2021 (Proposed Rule), Rule 10c-1a requires a covered person, directly or indirectly through a reporting agent, to report 12 transaction data elements consisting of three types of data:

• Loan Data Elements: Specified material loan terms must be provided to FINRA by the end of the day on which the covered securities loan is effected. These terms include
  1. (1) identifying information concerning the issuer of the security that is the subject of the loan (e.g., issuer name and ticker symbol, International Securities Identification Number, or CUSIP) 
  2. (2) information related to the loan (e.g., date and time the loan was effected, amount of securities loaned, name of platform or venue where loan effected (if applicable), termination date (if applicable), borrower type)
  3. (3) information related to the collateral for the loan (e.g., type, percentage of collateral to value of securities loaned) 
  4. (4) loan rebate or fee information (e.g., rebate rate or other fee for loans collateralized by cash, lending rate or other fee for loans not collateralized by cash)
• Loan Modification Data Elements: Modifications to the specified material loan terms must be provided to FINRA by the end of the day on which the modification occurred if the modification occurs after other information about the loan has already been provided to FINRA.
• Confidential Data Elements: Certain confidential information in connection with a loan must be provided to FINRA by the end of the day on which a covered securities loan is effected. This includes
  1. (1) information concerning each party to the loan (e.g., the Central Registration Depository or Investment Advisor Registration Depository number, market participant identifier, and legal entity identifier of each party to the loan) and whether such person is the lender, borrower, or an intermediary
  2. (2) where a broker-dealer is lending to its customer, whether the loan is from the broker-dealer’s securities inventory
  3. (3) if known, whether the securities loan is being used to close out a fail to deliver that is subject to Rule 204 of Regulation SHO or outside Rule 204³
     
     FINRA must keep this category of information confidential, subject to applicable law, unlike the information covered by the Loan Data Elements and Loan Modification Data Elements categories. 

Key Changes from the Proposed Rule

Rule 10c-1a reflects a number of changes from the Proposed Rule.⁴ The following are some of the key changes.

• Changed and New Definitions: In response to public comments, the Final Rule provides several new definitions aimed at better defining its scope.
  • Covered Person: Final Rule 10c-1a replaces the Proposed Rule’s use of “person” as defined under Section 3(a)(9) of the Exchange Act⁵ with the new term “covered person,” which is defined to mean
    1. (1) any person that agrees to a covered securities loan on behalf of a lender (intermediary) other than a clearing agency when providing only the functions of a central counterparty pursuant to Rule 17Ad-22(a)(2)⁶ or a central securities depository pursuant to Rule 17Ad-22(a)(3)⁷;
    2. (2) any person that agrees to a covered securities loan as a lender when an intermediary is not used unless (3) applies; or
    3. (3) a broker or dealer when borrowing its customer’s fully paid or excess margin securities pursuant to Rule 15c3-3(b)(3)⁸ (i.e., the broker-dealer, rather than the customer loaning the securities, will bear the reporting obligations).
       
       In contrast to the Proposed Rule, the Final Rule excludes clearing agencies from the definition of “covered person” when engaged only in certain central counterparty or central securities depository activities. This implicates the centrally cleared securities lending programs that are operated by The Options Clearing Corporation and National Securities Clearing Corporation.
  • Reportable Security: The Final Rule replaces the Proposed Rule’s use of “security” as defined in Section 3(a)(10) of the Exchange Act⁹ with the narrower, new term “reportable security,” which is defined as any security or class of an issuer’s securities for which information is reported or required to be reported to the consolidated audit trail (CAT) as required by Rule 613¹⁰ and the CAT National Market System Plan, FINRA’s Trade Reporting and Compliance Engine (TRACE), the Municipal Securities Rulemaking Board Real-Time Transaction Reporting System, or any reporting system that replaces one of these systems. Thus, the reporting obligations will generally apply to loans of equity securities (both exchange-listed equities and equities traded over the counter), debt securities subject to TRACE reporting. This would include digital asset securities if they satisfy the “reportable security” definition.
  • Covered Securities Loan: The Final Rule also specifies what constitutes a loan.  This was conspicuously absent from the Proposed Rule. The Final Rule defines a “covered securities loan” as a transaction in which any person on behalf of itself or one or more other persons lends a “reportable security” to another person. This definition expressly excludes
    1. (1) a position at a clearing agency that results from certain central counterparty services or central securities depository services and
    2. (2) a broker-dealer’s use of margin securities, as defined in Rule 15c3-3(a)(4) (e.g., rehypothecation), unless the broker-dealer lends such margin securities to another person
• Removal of Daily Aggregated Reporting Requirements: In contrast to the Proposed Rule, the Final Rule removes the requirement to provide daily information regarding the total amount of securities that the person has “on loan” and “available to lend.” This is a key change, as many commenters had noted that providing such information would be extremely burdensome, confusing, and potentially misleading.
• End-of-Day Reporting Replaces 15-Minute Timeline: The Final Rule replaces the Proposed Rule’s requirements to report information to FINRA intraday within 15 minutes after the securities loan is effected or modified with requirements to report such transaction information by the end of the day on which a covered securities loan is effected or the terms of the loan are modified. This change responds to commenters’ concerns that intraday reporting of loan transaction information could result in potentially misleading information, as certain key terms may not be finalized until the end of the business day.
• Delayed Reporting of Loan Amount Information by FINRA: The Final Rule replaces the Proposed Rule’s requirement for FINRA to publish the loan amount (as well as any modifications to loan amount) as soon as practicable and instead requires the loan amount to be made public on the 20th business day after the covered security loan is effected (or modified). This too responds to commenters’ concerns about the potential negative effects on the market of publishing transaction-specific data in near-real time (e.g., the risk of revealing trading strategies).
• SEC Guidance on Cross-Border Application: The SEC also provided guidance in the adopting release in response to commenters’ requests for clarification on when non-U.S. persons would be subject to the Final Rule. The Commission stated its view that the Final Rule’s reporting requirements will generally be triggered whenever a covered person effects, accepts, or facilitates (in whole or in part) in the U.S. a lending or borrowing transaction.

Implementation Timeline

Final Rule 10c-1a will become effective 60 days after the date the adopting release is published in the Federal Register (Effective Date). Publication in the Federal Register will also trigger the first compliance date: FINRA must propose rules to implement Rule 10c-1a within four months of the Effective Date. FINRA’s proposed rules, which the Commission must approve, are required to go into effect no later than 12 months after the Effective Date (i.e., eight months after the deadline for FINRA to propose such rules). 

Covered persons must begin to report the information required by Rule 10c-1a to FINRA starting on the first business day that is 24 months after the Effective Date of Rule 10c-1a (Reporting Date). Finally, FINRA must begin to make information publicly available in accordance with Rule 10c-1a and its own rules within 90 calendar days of the Reporting Date.