SEC Proposes Rule to Require Reporting of Securities Lending Transaction Terms | Practical Law

SEC Proposes Rule to Require Reporting of Securities Lending Transaction Terms | Practical Law

The SEC proposed new Rule 10c-1 under the Exchange Act, which would require persons lending securities to report material terms of the transaction to FINRA.

SEC Proposes Rule to Require Reporting of Securities Lending Transaction Terms

Practical Law Legal Update w-033-5118 (Approx. 4 pages)

SEC Proposes Rule to Require Reporting of Securities Lending Transaction Terms

by Practical Law Corporate and Securities
Published on 23 Nov 2021 • USA (National/Federal)
The SEC proposed new Rule 10c-1 under the Exchange Act, which would require persons lending securities to report material terms of the transaction to FINRA.
Update: On October 7, 2022, the SEC reopened the comment periods for several rulemaking releases due to a technical error that resulted in the SEC not receiving comments submitted through its online form between June 2021 and August 2022. The SEC's below proposed rule was one of the affected releases. The reopened comment period will remain open for 14 days after the reopening release is published in the Federal Register. For more information, see Legal Update, SEC Reopens Comment Periods for Several Proposed Rules.
Update: On February 25, 2022, the SEC reopened the comment period on its proposal to require reporting of securities lending. The comment period will remain open for 30 days after publication in the Federal Register. For more information, see Legal Update, SEC Reopens Comment Period on Proposal to Require Reporting of Securities Lending.
On November 18, 2021, the SEC proposed new Rule 10c-1 under the Exchange Act, which would require any person that loans a security on behalf of itself or another person (lenders) to report material terms of the securities lending transaction to FINRA, which would then publicly disseminate certain loan transaction data and aggregated information.
Proposed Rule 10c-1 specifies:
  • Who is responsible for reporting information under Rule 10c-1.
  • What information must be reported.
  • FINRA's obligations to collect and publicly disseminate Rule 10c-1 information.

Reporting Obligation Under Proposed Rule 10c-1

To avoid duplicative reporting and limit the burden on lenders, proposed Rule 10c-1 would specify who is responsible for reporting transaction information under certain circumstances:
  • If the lender uses an intermediary, such as a bank, clearing agency, or broker-dealer to loan securities, the intermediary acting as a lending agent would have the obligation to report the Rule 10c-1 information (such a scenario includes where a lending agent is loaning securities on behalf of a passive beneficial owner).
  • Lenders or lending agents are able to enter into written agreements with broker-dealers that agree to report Rule 10c-1 information on the lenders' behalf (reporting agent). Under such arrangements:
    • if the reporting agent is provided timely access to the required Rule 10c-1 information, the reporting agent would have the reporting obligation.
    • if the reporting agent lacks timely access to the necessary information, the person who entered into the written agreement would have the reporting obligation.
The SEC's proposing release also includes examples of who is responsible for reporting Rule 10c-1 information under certain circumstances to provide clarity to the proposal.
For purposes of the rule, "timely access" for reporting agents would mean sufficient time to provide the information to FINRA within the 15-minute reporting window (see below). In addition, reporting agents that enter into agreements with lenders or lending agents would also have to:
  • Enter into a written agreement with FINRA that explicitly permits the reporting agent to provide Rule 10c-1 information on behalf of the lenders.
  • Provide FINRA with a list of each beneficial owner or lending agent on whose behalf the reporting agent is reporting and update the list by the end of the day if any changes occur.
  • Establish, maintain, and enforce reasonably designed written policies and procedures to provide Rule 10c-1 information to FINRA in the manner, format, and time consistent with the rule.
  • Maintain certain information for a period of three years, for the first two years in an easily accessible place.

Information to be Provided Under Proposed Rule 10c-1

Under proposed Rule 10c-1, lenders must report the information required under Rule 10c-1(b) through (e) to FINRA. The timing requirement is dependent on the data elements to be reported:
  • The data elements required under Rule 10c-1(b) through (d), which cover transaction data elements, loan modification data elements, and confidential data elements, must be provided within 15 minutes after each loan is effected or modified.
  • Information required under Rule 10c-1(e) relating to the securities available to loan and securities on loan must be reported by the end of each business day.
Rule 10c-1 information that FINRA will make publicly available includes the:
  • Legal name of the issuer of the securities to be borrowed.
  • Ticker symbol of the securities.
  • Time and date of the loan.
  • Name of the platform or venue, if applicable.
  • Amount of securities loaned.
  • Rates, fees, charges, and rebates for the loan, as applicable.
  • Type of collateral provided for the loan and the percentage of the collateral provided to the value of the loaned securities.
  • Termination date of the loan, if applicable.
  • Borrower type.
Loan terms provided to FINRA that will not be publicly available include:
  • The legal names of the parties to the loan.
  • When the lender is a broker-dealer, whether the security loaned to its customer is loaned from the broker-dealer's inventory.
  • Whether the loan will be used to close out a fail-to-deliver, either under Rule 204 of Regulation SHO or outside of Regulation SHO.

FINRA Requirements Under Proposed Rule 10c-1

Proposed Rule 10c-1 also provides certain requirements for FINRA to administer the collection of information required under the rule. Specifically, FINRA will be required to:
  • Implement rules regarding the format and manner for lenders, lending agents, and reporting agents to report the Rule 10c-1 information.
  • Publicly disseminate the Rule 10c-1 information required to be made publicly available as soon as practicable, but not later than the next business day.
  • Retain the Rule 10c-1 information requested for five years.
  • Establish, maintain, and enforce reasonably designed written policies and procedures to maintain the security and confidentiality of confidential information required under Rule 10c-1.
The comment period for the proposed rule will be open for 30 days following publication in the Federal Register.