FINRA Proposes Reporting Requirements for Securities Loans
Commentary by Steven Lofchie
FINRA proposed a new set of reporting rules (Rule 6500 Series: Securities Lending and Transparency Engine (SLATETM)) to implement SEA Rule 10c-1a ("Securities lending transparency"). The SEC Rule, adopted October 13, 2023, requires the reporting of securities lending transactions and provides for the public dissemination of loan information. (See related coverage.)
Under proposed FINRA Rule 6500, all covered persons (as defined in SEA Rule 10c-1a) would be required to report transaction data to FINRA, including non-confidential information such as the security issuer's legal name and identifier, the type of collateral used and the specifics of the securities loaned, which would then be made publicly available by FINRA. The proposing release emphasized the need for covered persons to report any modifications to the terms of securities loans to FINRA. (For a general description of SEA Rule 10c-1a, see "The SEC Rulemaking on Securities Loans.")
The rule would require the reporting of confidential information, including the identities of parties involved in the securities lending transaction. According to the proposal, the information will be kept confidential by FINRA and not disclosed publicly. However, the rule would enable FINRA to share reported information with law enforcement and other regulatory bodies.
FINRA said it intends to separately file a proposed rule change to establish covered securities loan reporting fees and securities loan data products and associated fees.
Comments on the proposed rule are due 60 days after publication in the Federal Register.
Commentary
The FINRA 6500 Series proposal seems to confirm the view that the use of rehypothecated securities by a broker-dealer, in order to make delivery into a customer short sale, would not be a reportable transaction. (See, Regulatory Intelligence commentary here.) This is because the FINRA Rules specifically do not require disclosure of the name of a customer from whom a broker-dealer borrows full-paid or excess margin securities, although the loan itself is reportable. It is therefore implicit that the rehypothecation of margin securities is not reportable at all as a securities loan, and, therefore, there was no need to provide a carve-out to hide the identity of the customer. Likewise, nothing in the reporting requirements suggest that making delivery of securities in respect of a short sale in a margin account would be recharacterized as a securities loan.
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