SEC Proposes New Securities Lending Disclosure Rule

Pursuant to Section 984 of the Dodd-Frank Act, the Securities and Exchange Commission (SEC) published for comment proposed Rule 10c-1 (Rule), which is meant to “increase transparency and efficiency” in the securities lending market. The Rule would require all securities lenders to disclose identifying data and material lending terms to a registered national securities association (RNSA) within 15 minutes for every securities loan effected or modified. Upon receipt, the RNSA would bifurcate the information between public and nonpublic, with the former disseminated to the general public and the latter shared only with regulators. 

Terms to be publicized would include: (1) the legal name of the issuer of the securities to be borrowed; (2) the ticker symbol of those securities; (3) the date of loan; (4) the time of the loan; (5) the name of the platform or venue if used; (6) the amount of securities loaned; (7) the rates, fees, charges and rebates for the loan, as applicable; (8) the type of collateral provided for the loan; (9) the rebate rate or any other fee or charges for a loan collateralized by cash; (10) the percentage of the collateral provided to the value of the loaned securities; (11) the termination date of the loan, if applicable; and (12) the borrower type, e.g. broker, dealer, bank, customer, clearing agency or custodian. Nonpublic terms shared only with regulators would include: (1) the legal names of the parties to the loan; (2) when the lender is a broker-dealer, whether the security loaned to its customer is loaned from their inventory; and (3) 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. Additionally, securities lenders would be required by the end of each business day to disclose information concerning securities on loan or available to loan to the RNSA for aggregation and publication.

The Rule defines a lender as “any person that loans a security on behalf of itself or another person.” Such an expansive definition means that most lending participants, including insurance companies, would be brought into the Rule’s regulatory scope. The Rule would present operational challenges to covered parties. If the Rule is adopted as proposed, insurance companies engaging in direct securities lending would need to develop and implement disclosure systems that comply with the 15-minute disclosure window. While the use of intermediaries, such as lending or reporting agents, would shift the reporting obligation to them, insurance companies would need to be prepared to communicate with the intermediaries regarding terms and modifications that trigger mandatory disclosure. 

The comment period for the Rule ends January 7, 2022.