SEC Adopts Disclosure Requirements on Securities Loans

The SEC adopted a new rule ("Rule 10c-1") under the Securities Exchange Act which imposes reporting requirements on persons who lend "reportable securities," or the agents for such persons.

Key Provisions

Definitions. A "reportable security" is any security as to which trade reporting is required by any of CAT, TRACE or RTRS. CAT is the reporting system for equities, TRACE for debt securities other than munis, and RTRS for munis. To the extent that a type of security is not subject to trade reporting under one of these systems, it would not be subject to Rule 10c-1a. Lending information must be reported to a "registered national securities association" ("RNSA"). There is only one RNSA: FINRA. (FINRA will hereafter be used in place of RNSA.)

Persons Subject to the Reporting Requirement (referred to in the rule as a "covered person"). Any person who lends a reportable security is subject to the reporting obligation - if the loan of the security is agreed to on the principal's behalf by an intermediary, then the intermediary is responsible for reporting; if the loaned securities are borrowed by a broker-dealer under a fully paid lending arrangement, then the broker-dealer is responsible. A covered clearing agency that acts as in intermediary in a securities lending transaction is not subject to the reporting requirement.

Securities in the Margin Account. A broker-dealer that itself uses customer margin securities - for example, to make delivery into a short sale - would not be subject to a reporting requirement nor would the relevant customer. However, if the broker-dealer loaned that margin securities to a third party, that transaction would be subject to reporting.

Report Timing. The data described below must be reported to FINRA by the end of the day on which a reported loan is either effected or modified.

Public Data Elements Provided to FINRA.

• The issuer and its Legal Entity Identifier;
• The security and its CUSIP or other identifier;
• The date and time the loan was effected and the date of its planned termination;
• The size of the loan;
• Any venue on which the loan was effected;
• The type of collateral securing the loan and the value of the collateral to that of the loaned security;
• The fee for the loan, or, in the case of loans collateralized by cash, the rebate; and
• The type of counterparty to the loan.

Confidential Data Elements Provided to FINRA.

• If known, each party to the transaction, including an intermediary;
• If the loan is being made from a broker-dealer to its customer, whether the broker-dealer sourced the security from inventory or from a customer; and
• If known, whether the loan is being used to close out a fail to deliver.

Public Reporting by FINRA

• The business day after a securities loan is effected or modified and reported, FINRA should publish the public data elements other than the loan size; and
• Twenty business days after the loan is effected or modified and reported, FINRA should publish the loan size.

Use of Agents to Report. A "covered person" required to make reports to FINRA may use a third party agent. The covered person will remain liable, however, for the accuracy of the reports unless the third party agent is a broker-dealer or a central clearing agency that has agreed to assume liability. For this purpose, broker-dealers and central clearing agencies are referred to as "reporting agents."

Timing. The SEC stated in its accompanying Fact Sheet that the final rule will become effective 60 days after publication in the Federal Register. FINRA will propose reporting rules within four months of the SEC effective date and that those rules should be finalized within a year of the SEC's effective date. Covered persons must report required information to FINRA two years after the SEC's effective date. FINRA should begin public reporting within 90 days after that.

Commissioner Peirce and Commissioner Uyeda Dissents

In dissent, Commissioner Hester M. Peirce acknowledged that the SEC was obligated by statute to create a regulatory system for the reporting of securities loans. She argued that the actual rule was flawed both in the process (e.g., insufficient time to comment and then to implement) and in substance (e.g., failure to define basic terms). Commissioner Peirce raised questions which point out the practical difficulties that are likely to arise.

Commissioner Uyeda's dissent was largely focused on the rulemaking process. If the rulemaking is challenged on APA grounds, then his dissent and that of Uyeda will provide substantial support for the litigation.