Rule2023-23052
Reporting of Securities Loans
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 3, 2023
Effective
January 2, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("SEC" or "Commission") is adopting a new rule under the Securities Exchange Act of 1934 ("Exchange Act") to increase the transparency and efficiency of the securities lending market by requiring certain persons to report information about securities loans to a registered national securities association ("RNSA"). The new rule also requires certain confidential information to be reported to an RNSA to enhance an RNSA's oversight and enforcement functions. Further, the new rule requires that an RNSA make certain information it receives, along with daily information pertaining to the aggregate transaction activity and distribution of loan rates for each reportable security, available to the public.
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 212 (Friday, November 3, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 212 (Friday, November 3, 2023)]
[Rules and Regulations]
[Pages 75644-75742]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23052]
[[Page 75643]]
Vol. 88
Friday,
No. 212
November 3, 2023
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Part 240
Reporting of Securities Loans; Final Rule
Federal Register / Vol. 88 , No. 212 / Friday, November 3, 2023 /
Rules and Regulations
[[Page 75644]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-98737; File No. S7-18-21]
RIN 3235-AN01
Reporting of Securities Loans
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting a new rule under the Securities Exchange
Act of 1934 (``Exchange Act'') to increase the transparency and
efficiency of the securities lending market by requiring certain
persons to report information about securities loans to a registered
national securities association (``RNSA''). The new rule also requires
certain confidential information to be reported to an RNSA to enhance
an RNSA's oversight and enforcement functions. Further, the new rule
requires that an RNSA make certain information it receives, along with
daily information pertaining to the aggregate transaction activity and
distribution of loan rates for each reportable security, available to
the public.
DATES:
Effective date: January 2, 2024.
Compliance date: The applicable compliance dates are discussed in
Part VIII of this release.
FOR FURTHER INFORMATION CONTACT: Elizabeth Sandoe, Senior Special
Counsel, James Curley, Special Counsel, Elisabeth Van Derslice,
Attorney-Advisor, Theresa Hajost, Special Counsel, Brendan McLeod,
Attorney-Advisor, Roland Lindmayer, Attorney-Advisor, Josephine J. Tao,
Assistant Director, Office of Trading Practices, or Carol McGee,
Associate Director, Office of Derivatives Policy and Trading Practices,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-7010, at (202) 551-5777.
SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 240.10c-1a
(``final Rule 10c-1a'' or ``final rule'') under the Exchange Act, which
requires covered persons to provide to an RNSA information concerning
certain securities loans, in the format and manner required by an RNSA,
and within specified time periods. The final rule requires an RNSA to
make publicly available certain information it receives, within
specified time periods, and to keep confidential certain information it
receives. The final rule contains requirements regarding an RNSA's data
retention and availability and permits an RNSA to establish and collect
reasonable fees.
Table of Contents
I. Introduction
II. Background
III. Statutory Mandate
IV. Proposed Rule 10c-1
V. Overview of Final Rule
VI. Overview of Changes From Proposed Rule
VII. Discussion of the Final Rule
A. Scope of Persons With Reporting Obligations--10c-1a(j)(1)
B. Reporting Agent Overview
1. Use of a Reporting Agent--Rule 10c-1a(a)(2)
2. Reporting Agent Definition--Rule 10c-1a(j)(4)
C. Reporting Agent Requirements--Rule 10c-1a(b)
1. Reporting Agent Reporting Requirements--Rule 10c-1a(b)
2. Recordkeeping Requirements of a Reporting Agent--Rule 10c-
1a(b)(5)
D. Scope of Securities Required To Be Reported--Rule 10c-
1a(j)(3)
E. Scope of Transactions Required To Be Reported--Rule 10c-
1a(j)(2)
F. Information To Be Provided to an RNSA
1. Loan Data Elements--Rule 10c-1a(c)
2. Loan Modification Data Elements--Rule 10c-1a(d)
3. Confidential Data Elements--Rule 10c-1a(e)
4. Removal of Securities Available to Loan Data Element
5. Removal of Securities on Loan Data Element
G. Timing of Required Reporting to an RNSA
1. Timing of Reporting of Loans
2. Timing of Reporting of Loan Modification
3. Timing of Reporting of Confidential Data Elements
H. Definition of Registered National Securities Association--
10c-1a(j)(5)
I. RNSA Rules To Administer the Collection of Information--Rule
10c-1a(f)
J. RNSA Publication of Data--10c-1a(g)
K. RNSA Data Retention, Availability, Fees, and Security
1. Data Retention--Rule 10c-1a(h)(1)
2. Data Availability to the Public--Rule 10c-1a(h)(3)
3. RNSA Fees--Rule 10c-1a(i)
4. Data Security--Rule 10c-1a(h)(4)
L. Data Availability to the Commission and Other Persons--Rule
10c-1a(h)(2)
M. Cross-Border Application of Rule 10c-1a
N. Additional Comments
VIII. Compliance Date
IX. Economic Analysis
A. Introduction and Market Failure
1. Introduction
2. Market Failures
B. Economic Baseline
1. Securities Lending
2. Current State of Transparency in Securities Lending
3. Characteristics of the Securities Lending Market
4. Structure of the Securities Lending Market
5. Structure of the Market for Securities Lending Data and
Analytics
6. Short Selling Transparency
C. Economic Effects of the Final Rule
1. Benefits of Increased Transparency in the Securities Lending
Market
2. Regulatory Benefits
3. Direct Compliance Costs
4. Other Costs
5. Reduced Benefits From Alternative Arrangements
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Report Loan Sizes Without a Delay
2. Alternative Timeframes for Reporting or Dissemination
3. Only Require Dissemination of Aggregate or Wholesale
Statistics
4. Require Reporting of Shares Available To Lend and Shares on
Loan
5. Restrict Covered Persons to Broker-Dealers
6. Expand Reporting Agents Beyond Broker-Dealers and Clearing
Agencies
7. Publicly Releasing the Information in 10c-1a(e)
8. Additional Information in the Reported or Disseminated
Information
9. Only Allow an RNSA To Charge Fees to Data Reporters
10. Longer Holding Period Requirement
11. Longer Implementation Period
12. Report to the Commission Rather Than to an RNSA
13. Report Through an NMS Plan
X. Paperwork Reduction Act
XI. Regulatory Flexibility Act Certification
XII. Other Matters
I. Introduction
The securities lending market is opaque.\1\ There is a general lack
of comprehensive information on current market conditions in the
securities lending market. Although various market participants, such
as certain registered investment companies (``investment companies''),
are required to periodically make certain disclosures regarding their
securities lending activities,\2\ parties to securities lending
[[Page 75645]]
transactions are not currently required to report the material terms of
those transactions.\3\ The lack of public information and data gaps
creates inefficiencies in the securities lending market. The gaps in
securities lending data render it difficult for end borrowers and
lenders alike to ascertain market conditions and to know whether the
terms that they receive are consistent with market conditions. These
gaps also impact the ability of the Commission, RNSAs and other self-
regulatory organizations (``SROs''), and other Federal financial
regulators to oversee transactions that are vital to fair, orderly, and
efficient markets.\4\ Indeed, the size of the U.S. securities lending
market can only be estimated as the data currently available with
respect to securities lending transactions are ``spotty and
incomplete.'' \5\ Further, the FSOC 2020 Annual Report noted data gaps
in certain important financial markets including transaction data for
securities lending arrangements.\6\
---------------------------------------------------------------------------
\1\ See Reporting of Securities Loans, Release No. 34-93613
(Nov. 18, 2021), 86 FR 69802 (Dec. 8, 2021) (``Proposing Release''),
86 FR 69804-21.
\2\ See, e.g., Form N-CEN, Item C.6 (requiring general
disclosures relating to an investment company's securities lending
activities); Form N-PORT, Items B.4 and C.12 (requiring disclosure
by certain investment companies of certain aggregate information on
borrowers of loaned securities and collateral received for loaned
securities); 17 CFR 274.101; 17 CFR 274.150. See also Investment
Company Reporting Modernization, Release No. 34-79095 (Oct. 13,
2016), 81 FR 81870 (Nov. 18, 2016) (discussing, among other things,
requirements for securities lending disclosures on Form N-PORT by
certain investment companies).
\3\ See Proposing Release, 86 FR 69803.
\4\ In its 2021 Annual Report, the Financial Stability Oversight
Council (``FSOC'') provides that ``[c]entralized monitoring of
securities lending activities is difficult due to the lack of
comprehensive, standardized statistics on securities lending
activities . . . the estimated value of securities on loan globally
was $3.1 trillion at the end of September 2021, up from $2.5
trillion at the end of September 2020 . . . U.S. securities continue
to account for the majority of global securities on loan, accounting
for 58 percent of global securities on loan as of the end of
September 2021.'' See FSOC 2021 Annual Report, at 46, available at
<a href="https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf</a>.
See also Viktoria Baklanova, Adam Copeland & Rebecca McCaughrin,
Reference Guide to U.S. Repo and Securities Lending Markets (Off. of
Fin. Research, Working Paper No. 15-17, 2015), at 5, available at
<a href="https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-andSecurities-Lending-Markets.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-andSecurities-Lending-Markets.pdf</a>
(``Office of Financial Research Reference Guide'' or ``OFR Reference
Guide'').
\5\ OFR Reference Guide, at 5, available at <a href="https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf</a>.
\6\ See FSOC 2020 Annual Report, at 187. See also the FSOC 2020
Annual Report describing securities lending as ``support[ing] the
orderly operation of capital markets, principally by enabling the
establishment of short positions and thereby facilitating price
discovery and hedging . . . it is estimated that at the end of
September 2020 the global securities lending volume outstanding was
$2.5 trillion, with around 57 percent of it attributed to the U.S,''
at 45, available at <a href="https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf</a>.
---------------------------------------------------------------------------
Private vendors have attempted to address the opacity in the
securities lending market by offering systems that provide data to
borrowers and lenders of securities, such as systems that are only
available to those who voluntarily provide their transaction data to
the data vendor.\7\ However, data gaps remain despite the private
vendor attempts to address opacity in the securities lending market.
The private systems are limited to voluntary submissions of data.
Further, the data captured by these private vendors is not available to
the general public without a subscription, and is not available in one
centralized location. Only subscribers to the private vendor have
access to such data, which only provides a limited view into securities
lending activity. No single vendor has access to pricing information
that reflects all securities lending transactions that take place. In
addition, data from certain private vendors is limited to loans from a
lending program to a broker or dealer and do not capture loans from a
broker or dealer to an end borrower. There have also been calls from
industry observers and market participants for the Commission to
consider measures to provide additional transparency in the securities
lending market.\8\
---------------------------------------------------------------------------
\7\ See OFR Reference Guide, at 64, available at <a href="https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf</a>.
\8\ See Proposing Release, 86 FR 69803 n.11.
---------------------------------------------------------------------------
II. Background
Securities lending is the market practice by which securities are
transferred temporarily from one party, a securities lender, to
another, a securities borrower, for a fee.\9\ A securities loan is
typically a fully collateralized transaction. Securities lenders are
generally large institutional investors including investment companies,
central banks, sovereign wealth funds, pension funds, endowments, and
insurance companies.\10\ Owners of large, static, unleveraged
portfolios, mainly pension funds, increasingly cite securities lending
as an important income-enhancing strategy with minimal, or at least
controlled, risk.\11\ This incremental income not only helps defined-
benefit pension funds to generate income, but also provides investment
company investors with additional returns.\12\
---------------------------------------------------------------------------
\9\ See Proposing Release, 86 FR 69804.
\10\ See Proposing Release, 86 FR 69804.
\11\ See Proposing Release, 86 FR 69804.
\12\ See Proposing Release, 86 FR 69804.
---------------------------------------------------------------------------
Traditionally, securities lending and borrowing transactions have
been conducted on a bilateral basis.\13\ Generally, when an end
investor wishes to borrow securities, it may obtain a loan from its
broker or dealer from the broker's or dealer's inventory or through
customer margin accounts, or the broker or dealer will borrow the
securities from a lending agent with whom it has a relationship and
will then re-lend the securities to its customer. Loans from lending
programs to brokers or dealers occur in what is referred to by market
participants as the ``Wholesale market,'' while loans from a broker or
dealer to the end borrower occur in what is referred to by market
participants as the ``Customer market'' (sometimes also known as the
``retail market''). Obtaining a securities loan often involves an
extensive search for counterparties by brokers or dealers.\14\
---------------------------------------------------------------------------
\13\ See Proposing Release, 86 FR 69805.
\14\ See Proposing Release, 86 FR 69805.
---------------------------------------------------------------------------
Brokers and dealers are the primary borrowers of securities; they
borrow for their market making activities or on behalf of their
customers.\15\ Brokers and dealers who borrow securities typically re-
lend those securities or use the securities to cover fails to deliver
or short sales arising from proprietary or customer transactions.\16\
While the identities of the ultimate securities borrowers are usually
unknown, anecdotally, hedge funds rank among the largest securities
borrowers and access the lending market mainly through their prime
brokers.\17\ Brokers and dealers may also lend securities that are
owned by the broker or dealer, customer securities that have not been
fully paid for (i.e., have been purchased with a margin loan from the
broker or dealer), and the securities of customers who have agreed to
participate in a fully paid securities lending program offered by their
broker or dealer.\18\
---------------------------------------------------------------------------
\15\ See Proposing Release, 86 FR 69805.
\16\ See Proposing Release, 86 FR 69805.
\17\ See Proposing Release, 86 FR 69805.
\18\ See Proposing Release, 86 FR 69805.
---------------------------------------------------------------------------
Other securities lending transactions are often facilitated by a
third party. Custodian banks have traditionally been the primary
lending agent or intermediary \19\ and lend securities on behalf of
their customers for a fee.\20\ Advances in technology and operational
efficiency have made it easier to separate securities lending services
from custody services. Such developments have given rise to specialist
third party agent lenders, who have established themselves as an
alternative to custodian banks.\21\ Agent lenders provide potential
borrowers with the inventory of securities available for lending on a
daily basis.\22\
---------------------------------------------------------------------------
\19\ As discussed below, in Part VII.A, the final rule defines
the term ``intermediary'' as a person that agrees to a covered
securities loan on behalf of the lender.
\20\ See infra Part VII.A.
\21\ See Proposing Release, 86 FR 69805.
\22\ See Proposing Release, 86 FR 69805.
---------------------------------------------------------------------------
[[Page 75646]]
III. Statutory Mandate
Section 984(a) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') added section 10(c) to the Exchange
Act to provide the Commission with authority over securities
lending.\23\ Section 984(b) of the Dodd-Frank Act mandates that the
Commission increase transparency of information available to brokers,
dealers, and investors.\24\
---------------------------------------------------------------------------
\23\ Section 984(a) of the Dodd-Frank Act, now section 10(c)(1)
of the Exchange Act, makes it unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national
securities exchange to effect, accept, or facilitate a transaction
involving the loan or borrowing of securities in contravention of
such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors. 15 U.S.C. 78j(c)(1). Section 10(c)(2) of
the Exchange Act states that nothing in section 10(c)(1) may be
construed to limit the authority of the appropriate Federal banking
agency (as defined in 12 U.S.C. 1813(q)), the National Credit Union
Administration, or any other Federal department or agency having a
responsibility under Federal law to prescribe rules or regulations
restricting transactions involving the loan or borrowing of
securities in order to protect the safety and soundness of a
financial institution or to protect the financial system from
systemic risk. 15 U.S.C. 78j(c)(2).
\24\ Section 984(b) of the Dodd-Frank Act directs the SEC to
``promulgate rules that are designed to increase the transparency of
information available to brokers, dealers, and investors with
respect to loan or borrowing securities.'' Public Law 111-203, sec.
984(b), 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
On November 18, 2021, to supplement the publicly available
information involving securities lending, close the data gaps in this
market, and minimize information asymmetries between market
participants, the Commission proposed Rule 10c-1 under the Exchange Act
(``proposed Rule 10c-1'' or ``proposed rule'').\25\ Proposed Rule 10c-1
was designed to provide investors and other market participants with
access to pricing and other material information regarding securities
lending transactions in a timely manner. The Commission stated that the
data collected and made available by the proposed rule would improve
price discovery in the securities lending market and lead to a
reduction of the information asymmetry faced by end borrowers and
beneficial owners in the securities lending market.\26\ In addition,
the Commission stated its preliminary belief that the proposed rule
would close securities lending data gaps, increase market efficiency,
and lead to increased competition among providers of securities lending
analytics services and reduced administrative costs for broker-dealers
and lending programs.\27\ On balance, the final rule requirements are
designed to achieve the objectives of the proposed rule,\28\ as
discussed below, in Parts VII and IX, and are designed to increase the
transparency of information available to brokers, dealers, and
investors with respect to loans or borrowing securities.
---------------------------------------------------------------------------
\25\ See Proposing Release, 86 FR 69851-53.
\26\ Proposing Release, 86 FR 69804.
\27\ Proposing Release, 86 FR 69804.
\28\ See Proposing Release, 86 FR 69804.
---------------------------------------------------------------------------
IV. Proposed Rule 10c-1
The Commission proposed that any person that loans a security on
behalf of itself or another person (a ``Lender'') provide certain
securities lending information (``Rule 10c-1 information'') to an RNSA
\29\ in the time periods specified by the proposed rule (e.g.,
transaction data elements and confidential data elements would be
reported within 15 minutes after each loan is effected).\30\ As
proposed, all securities would be within the scope of the rule.\31\
---------------------------------------------------------------------------
\29\ See proposed Rule 10c-1(a). Proposed Rule 10c-1 referred to
``Rule 10c-1 information'' as ``the information in paragraphs (b)
through (e) of this section.'' These paragraphs specifically
included transaction data elements, loan modification data elements,
confidential data elements, and securities available to loan and
securities on loan.
\30\ See, e.g., proposed Rules 10c-1(b) and (d).
\31\ See Proposing Release, 86 FR 69807 n.60.
---------------------------------------------------------------------------
The proposed rule stated that a bank, clearing agency, broker, or
dealer that acts as an intermediary to a loan of securities (lending
agent) on behalf of a person that owns the loaned securities
(beneficial owner) shall provide the Rule 10c-1 information to an RNSA
on behalf of the beneficial owner within the time periods specified by
the proposed rule or enter into a written agreement with a broker or
dealer that agrees to provide the Rule 10c-1 information to an RNSA
(reporting agent) in accordance with the proposed rule's
requirements.\32\ The proposed rule also provided that a beneficial
owner would not be required to provide Rule 10c-1 information to an
RNSA if a lending agent acts as an intermediary to the loan of
securities on behalf of the beneficial owner.\33\
---------------------------------------------------------------------------
\32\ See proposed Rule 10c-1(a)(1)(i)(A).
\33\ See proposed Rule 10c-1(a)(1)(i)(B).
---------------------------------------------------------------------------
The proposed rule would have permitted persons required to report
(including intermediaries) to enter into a written agreement with a
reporting agent that is a broker or dealer to provide the Rule 10c-1
information to an RNSA.\34\ Such a reporting agent would be required to
establish, maintain, and enforce policies and procedures as well as
preserve records.\35\ The reporting agent would also be required to
provide an RNSA with an updated list of persons on whose behalf the
reporting agent is providing information under the proposed rule.\36\
---------------------------------------------------------------------------
\34\ See proposed Rule 10c-1(a)(1)(ii)(A).
\35\ See proposed Rules 10c-1(a)(2)(i) and (2)(iv).
\36\ See proposed Rule 10c-1(a)(2)(iii).
---------------------------------------------------------------------------
The proposed rule would have required that an RNSA make certain
reported information publicly available as soon as practicable but no
later than the next business day.\37\ To track the securities lending
transaction, the proposed rule would require an RNSA to assign each
securities lending transaction with a unique transaction
identifier.\38\ Loan modifications would be provided to an RNSA if the
modifications to the loan involved any of the terms required to be
reported.\39\ The terms of the loan modification, but not the parties
to the loan, would be made public.\40\ In addition, proposed Rule 10c-1
required that by the end of each business day information concerning
securities ``on loan'' and ``available to loan'' would be provided to
an RNSA.\41\ Such information would be made publicly available by an
RNSA on an aggregated basis per security.\42\
---------------------------------------------------------------------------
\37\ See proposed Rule 10c-1(e).
\38\ See proposed Rule 10c-1(b).
\39\ See proposed Rule 10c-1(c).
\40\ See proposed Rule 10c-1(c).
\41\ See proposed Rule 10c-1(e).
\42\ See proposed Rule 10c-1(e)(3).
---------------------------------------------------------------------------
Not all information reported to an RNSA would have been made
publicly available under the proposed rule. Certain information
reported to an RNSA would be necessary for regulatory functions, but
would not have been made publicly available due to the likelihood that
it would identify market participants or reveal investment
decisions.\43\ Proposed Rule 10c-1 would have required an RNSA to keep
certain information confidential, subject to the provisions of
applicable law.\44\
---------------------------------------------------------------------------
\43\ See Proposing Release, 86 FR 69816.
\44\ See proposed Rules 10c-1(d) and (e)(3).
---------------------------------------------------------------------------
The proposed rule would have allowed an RNSA to charge fees to
lenders, but prohibited an RNSA from charging for or limiting the use
of the publicly reported data. Specifically, the proposed rule would
have required an RNSA to make the published information available
without use restrictions and without charge, for at least five
years.\45\
---------------------------------------------------------------------------
\45\ See proposed Rule 10c-1(g)(3).
---------------------------------------------------------------------------
In response to the Proposing Release, the Commission received
numerous comments expressing a diversity of
[[Page 75647]]
perspectives,\46\ which are discussed in detail below. Many commenters
supported enhanced transparency of information about securities
loans.\47\ Other commenters did not support the rule.\48\ Certain
commenters addressed the scope of the proposed rule and the timing for
reporting information to an RNSA as discussed below, in Parts VII.A
through VII.G.
---------------------------------------------------------------------------
\46\ Comment letters to the proposed rule are available at
<a href="https://www.sec.gov/comments/s7-18-21/s71821.htm">https://www.sec.gov/comments/s7-18-21/s71821.htm</a>.
\47\ See, e.g., Letter from Jaime Klima, Chief Regulatory
Officer, NYSE Group, Inc. (Jan. 7, 2022) (``NYSE Letter 2''), at 1
(stating that ``regulatory oversight of the securities lending
market will be meaningfully enhanced if Rule 10c-1 is adopted'');
Letter from Marcia E. Asquith, Executive Vice President, FINRA,
(Jan. 7, 2022) (``FINRA Letter''), at 1 (stating that ``the public
dissemination of securities lending information under the Proposal
will, among other benefits, improve price discovery in the
securities lending market, reduce information asymmetries, close
data gaps, and increase market efficiency''); Letter from Kevin
Kennedy, Senior Vice President, Nasdaq, Inc. (Jan. 11, 2022)
(``Nasdaq Letter''), at 3 (supporting the proposal to make ``certain
data elements publicly available, thereby increasing the
transparency of the securities lending market and reducing
competitive advantages that may exist in the marketplace''); Letter
from Andrew Park, Americans for Financial Reform Education Fund
(Jan. 7, 2022) (``AFREF Letter 1''), at 1, 3 (stating ``there is an
urgent need to require securities lenders to provide greater details
of their loans to a registered national securities association
(RNSA) . . . [m]arket participants and regulators alike will greatly
benefit from the greater transparency that comes from reporting
every securities lending transaction as a result of the proposed
changes to Rule 10c-1 . . .''); Letter from Stephen W. Hall, Legal
Director and Securities Specialist, and Jason Grimes, Senior
Counsel, Better Markets, Inc. (Jan. 7, 2022) (``Better Markets
Letter''), at 5 (stating that ``increasing transparency into the
securities lending market, as the Proposal would do, is sound public
policy. It will increase the transparency that investors, other
market participants, and regulators (including the SEC) have into
the opaque securities lending market.''); Letter from James J.
Angel, Ph.D., CFP, CFA, Associate Professor of Finance, McDonough
School of Business, Georgetown University (Jan. 4, 2022) (``James J.
Angel Letter''), at 2 (stating that ``increasing transparency in the
securities lending market will reduce the price dispersion seen in
the market. Better information about the price and availability of
securities lending will allow asset owners . . . to make sure that
they are getting proper value for their securities lending.'');
Letter from Gregory Babyak, Global Head of Regulatory Affairs,
Bloomberg L.P. (Jan. 31, 2022) (``Bloomberg L.P. Letter''), at 1
(stating ``[w]e appreciate the Commission's endeavor to improve the
transparency and efficiency of the securities lending market by
increasing the availability of information regarding securities
lending transactions.''); see also Letter from Brian Lamb, CEO,
Equilend Holdings, LLC (Mar. 29, 2022) (``Equilend Letter'')
(expressing general support for the proposed rule); Letter from
Chris Iacovella, Chief Executive Officer, American Securities
Association (Jan. 7, 2022) (``ASA Letter''), at 1 (stating
``investors, especially retail investors, have no idea what the cost
to borrow a security in the market is at any given time. The SEC and
the public need transparency into what a loan costs . . .''); Letter
from Aron Szapiro, Head of Retirement Studies and Public Policy,
Morningstar, Inc. (Jan. 7, 2022) (``Morningstar Letter''), at 4
(expressing general support for increasing transparency in the
securities lending market and that the public will obtain a ``well-
informed view'' of the securities lending market from the proposed
data publication); Letter from Joseph P. Kamnik, Chief Regulatory
Counsel, Options Clearing Corp. (Jan. 7, 2022) (``OCC Letter'');
Form Letter from John Burkle, et al. (Aug. 16, 2022) (expressing
support for increased transparency in the securities lending
market); Letter from Aaron Swaney (Jan. 4, 2022) (``Requiring
entities with significant involvement in the markets to report their
activities . . . is quite reasonable and very necessary.''); Letter
from Peter Antosh, Lawyer (Jan. 4, 2022) (``. . . the information
received and shared via this proposed rule would also . . . increase
the public's access to reliable pertinent market information,
improving overall market efficiency''); Letter from Tim DG (Aug. 16,
2022) (``This rule is essential to give retail and more importantly,
the regulators more insight to keep fraudulent behaviors at bay.'');
Letter from Adam Slee (Aug. 16, 2022) (``We need greater
transparency in the market to help ordinary people be able to better
understand what is going on[;] this is a good step in the right
direction.''); Letter from Tim R. (Aug. 16, 2022) (``This proposal
will help true price discovery.''); Letter from Don M. Cromer (Oct.
31, 2022) (``I believe strongly in the transparency of our markets,
and I feel that this rule is a strong step in the right direction,
and I hope to see many more like it.'').
\48\ See, e.g., Letter from Kevin To, Data Boiler Technologies,
LLC (Jan. 7, 2022) (``Data Boiler Technologies Letter''), at 4;
Letter from Stephen John Berger, Managing Director, Global Head of
Government & Regulatory Policy, Citadel (Apr. 4, 2022) (``Citadel
Letter'').
---------------------------------------------------------------------------
V. Overview of Final Rule
The final rule requires covered persons \49\ to provide securities
loan information concerning reportable securities \50\ to an RNSA,\51\
in the format and manner required by an RNSA,\52\ and within specified
time periods \53\ (``Rule 10c-1a information'').\54\ The term ``covered
person'' is defined to mean: (1) any person that agrees to a covered
securities loan on behalf of a lender (``intermediary''); (2) any
person that agrees to a covered securities loan as a lender when an
intermediary is not used unless 17 CFR 240.10c-1a(j)(1)(iii) (``final
Rule 10c-1a(j)(1)(iii)'') applies to a broker or dealer borrowing fully
paid or excess margin securities; \55\ or (3) a broker or dealer when
borrowing fully paid or excess margin securities.\56\ In addition, 17
CFR 240.10c-1a(a) (``final Rule 10c-1a(a)'') specifies that any covered
person that agrees to a covered securities loan must comply with the
rule.\57\
---------------------------------------------------------------------------
\49\ See infra Part VII.A (discussing the definition of the term
``covered person'').
\50\ See 17 CFR 240.10c-1a(j)(3) (``final Rule 10c-1a(j)(3)'').
\51\ See 17 CFR 240.10c-1a(j)(5) (``final Rule 10c-1a(j)(5)'').
\52\ See 17 CFR 240.10c-1a(f) (``final Rule 10c-1a(f)'').
\53\ See 17 CFR 240.10c-1a(c) (``final Rule 10c-1a(c)''); 17 CFR
240.10c-1a(d) (``final Rule 10c-1a(d)''); 17 CFR 240.10c-1a(e)
(``final Rule 10c-1a(e)'').
\54\ The change in designation from proposed Rule 10c-1 to final
Rule 10c-1a conforms with Federal Register requirements for rule
designations.
\55\ See Proposing Release, 86 FR 69803 n.9.
\56\ See 17 CFR 240.10c-1a(j)(1)(i) (``final Rule 10c-
1a(j)(1)(i)''); 17 CFR 240.10c-1a(j)(1)(ii) (``final Rule 10c-
1a(j)(1)(ii)''); final Rule 10c-1a(j)(1)(iii).
\57\ In addition, as discussed below, in Part VII.E, the use of
the term ``agrees to a covered securities loan'' clarifies that the
Rule 10c-1a information is not limited to securities loans that have
been settled. If there are multiple lenders to the same loan, to
avoid duplicative reporting, the parties could coordinate to file a
single, combined report.
---------------------------------------------------------------------------
If any person agrees to a covered securities loan on behalf of the
lender (an ``intermediary''), the intermediary has the obligation to
provide Rule 10c-1a information to an RNSA.\58\ If an intermediary is
not used, the lender is required to provide Rule 10c-1a information to
an RNSA.\59\ If a covered securities loan consists of a broker or
dealer borrowing fully paid or excess margin securities, only the
broker or dealer is required to provide the Rule 10c-1a information to
an RNSA, not the lender.\60\
---------------------------------------------------------------------------
\58\ See final Rule 10c-1a(j)(1)(i).
\59\ See final Rule 10c-1a(j)(1)(ii).
\60\ See final Rule 10c-1a(j)(1)(iii).
---------------------------------------------------------------------------
However, in a change from the proposed rule, as discussed below, in
Part VII.A, the final rule excludes from the definition of the term
``covered person'' a clearing agency when providing only the functions
of a central counterparty as defined pursuant to 17 CFR 240.17Ad-
22(a)(3) (``Rule 17Ad-22(a)(2)'') of the Exchange Act or a central
securities depository as defined pursuant to 17 CFR 240.17Ad-22(a)(3)
(``Rule 17Ad-22(a)(3)'') of the Exchange Act.\61\ Thus, a clearing
agency is not required to report Rule 10c-1a information to an RNSA for
a covered securities loan when acting in the capacity or engaged in
activities as a central counterparty or a central securities depository
in connection with a covered securities loan.
---------------------------------------------------------------------------
\61\ See final Rule 10c-1a(j)(1)(i).
---------------------------------------------------------------------------
The final rule permits a covered person to rely on a reporting
agent that is a broker, dealer, or registered clearing agency to
provide Rule 10c-1a information to an RNSA to fulfill such covered
person's reporting obligation.\62\ To do so, the covered person must
enter into a written agreement with a reporting agent, that agrees to
provide Rule 10c-1a information to an RNSA, and provide such reporting
agent with timely access to such information.\63\ If the reporting
agent receives the Rule 10c-1a information from the covered person on a
timely basis, the reporting agent assumes responsibility for
[[Page 75648]]
compliance with the reporting requirements under the final rule.
---------------------------------------------------------------------------
\62\ See 17 CFR 240.10c-1a(a)(2) (``final Rule 10c-1a(a)(2)'').
\63\ See 17 CFR 240.10c-1a(a)(2)(i) (``final Rule 10c-
1a(a)(2)(i)''); 17 CFR 240.10c-1a(a)(2)(ii) (``final Rule 10c-
1a(a)(2)(ii)'').
---------------------------------------------------------------------------
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
(except for a position at a clearing agency that results from certain
central counterparty or central securities depository services).\64\ In
addition, the use of margin securities, as defined in 17 CFR 240.15c3-
3(a)(4) (``Rule 15c3-3(a)(4)''), by a broker or dealer is not a covered
securities loan for purposes of the final rule unless the broker or
dealer lends such margin securities to another person.\65\
---------------------------------------------------------------------------
\64\ See 17 CFR 240.10c-1a(j)(2)(i) (``final Rule 10c-
1a(j)(2)(i)''); 17 CFR 240.10c-1a(j)(2)(ii) (``final Rule 10c-
1a(j)(2)(ii)'').
\65\ See 17 CFR 240.10c-1a(j)(2)(iii) (``final Rule 10c-
1a(j)(2)(iii)'').
---------------------------------------------------------------------------
The term ``reportable security'' 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 as required by
Rule 613 of the Exchange Act and the CAT NMS Plan (``CAT''), the
Financial Industry Regulatory Authority's Trade Reporting and
Compliance Engine (``TRACE''), or the Municipal Securities Rulemaking
Board's (``MSRB'') Real-Time Transaction Reporting System (``RTRS''),
or any reporting system that replaces one of these systems.\66\
---------------------------------------------------------------------------
\66\ See final Rule 10c-1a(j)(2)(ii).
---------------------------------------------------------------------------
The final rule requires a covered person, directly or indirectly
through a reporting agent, to report three types of data, which
together comprise the Rule 10c-1a information. The first type of data
concerns the material terms of the covered securities loan and must be
provided to an RNSA by the end of the day on which the covered
securities loan is effected (``data elements'').\67\ The second type of
data concerns modifications to a covered securities loan and must be
provided to an RNSA by the end of the day on which a covered securities
loan is modified, if the modification occurs after other information
about the covered securities loan has already been provided to an RNSA,
and results in a change to such information.\68\ The third type of data
concerns confidential information in connection with a covered
securities loan and must be provided to an RNSA by the end of the day
on which a covered securities loan is effected.\69\ The final rule
requires that an RNSA keep the third type of information confidential
subject to applicable law.\70\ The final rule also requires an RNSA to
make the Rule 10c-1a information available to the Commission; or other
persons as the Commission may designate by order upon a demonstrated
regulatory need.\71\
---------------------------------------------------------------------------
\67\ See final Rule 10c-1a(c).
\68\ See 17 CFR 240.10c-1a(d) (``final Rule 10c-1a(d)'').
\69\ See final Rule 10c-1a(e).
\70\ See 17 CFR 240.10c-1a(g)(4) (``final Rule 10c-1a(g)(4)'').
\71\ See 17 CFR 240.10c-1a(h)(2) (``final Rule 10c-1a(h)(2)'').
---------------------------------------------------------------------------
An RNSA is required to make publicly available the following
information not later than the morning of the business day \72\ after
the covered securities loan is effected: \73\ (1) the unique identifier
assigned to a covered securities loan by an RNSA \74\ and the security
identifier; \75\ (2) the data elements, except for loan amount; \76\
and (3) information pertaining to the aggregate transaction activity
and the distribution of rates among loans and lenders (``distribution
of loan rates'') \77\ for each reportable security and related unique
identifier.\78\ An RNSA is also required to make publicly available the
loan amount on the twentieth business day after the covered securities
loan is effected along with loan and security identifying
information.\79\
---------------------------------------------------------------------------
\72\ Similar to the proposed rule, the final rule does not
specify, for purposes of compliance with the final rule, exactly
what time is the ``end of the business day,'' ``morning of the
business day,'' or what holidays should not be considered a
``business day,'' to give an RNSA the discretion to structure its
systems and processes as it sees fit and implement its rules
accordingly. See, e.g., Proposing Release, 86 FR 69816 n.104. The
Commission did not receive any comments addressing this point. As an
example, for times set by an RNSA for other reporting regimes, an
RNSA has set reporting for 6 p.m. (see, e.g., <a href="https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest">https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest</a>) or times
depending on whether transactions are executed during or after
system hours or on non-business days (see, e.g., <a href="https://www.finra.org/rules-guidance/rulebooks/finra-rules/6730">https://www.finra.org/rules-guidance/rulebooks/finra-rules/6730</a>).
\73\ See 17 CFR 240.10c-1a(g)(1) (``final Rule 10c-1a(g)(1)'').
\74\ See 17 CFR 240.10c-1a(g)(1)(i)(A) (``final Rule 10c-
1a(g)(1)(i)(A)'').
\75\ See 17 CFR 240.10c-1a(g)(1)(i)(C) (``final Rule 10c-
1a(g)(1)(i)(C'') and 17 CFR 240.10c-1a(g)(5) (``final Rule 10c-
1a(g)(5)'').
\76\ See 17 CFR 240.10c-1a(g)(1)(i)(B) (``final Rule 10c-
1a(g)(1)(i)(B)'').
\77\ See infra Part IX.C.1 (Benefits of Increased Transparency
in the Securities Lending Market).
\78\ See final Rule 10c-1a(g)(5).
\79\ See 17 CFR 240.10c-1a(g)(2) (``final Rule 10c-1a(g)(2)'').
---------------------------------------------------------------------------
In addition, an RNSA is required to make publicly available any
modification to the data elements, except for modification to the loan
amount, not later than the morning of the business day after the
covered securities loan is modified.\80\ An RNSA is also required to
make publicly available modifications to the loan amount on the
twentieth business day after the loan amount is modified along with
loan and security identifying information.\81\
---------------------------------------------------------------------------
\80\ See 17 CFR 240.10c-1a(g)(3)(i) (``final Rule 10c-
1a(g)(3)(i)'').
\81\ See 17 CFR 240.10c-1a(g)(3)(ii) (``final Rule 10c-
1a(g)(3)(ii)'').
---------------------------------------------------------------------------
The final rule requires an RNSA to implement rules regarding the
format and manner of its collection of information and make publicly
available such information in accordance with rules promulgated
pursuant to 15 U.S.C. 78s(b) (``section 19(b)'') and 17 CFR 240.19b-4
(``Rule 19b-4'') of the Exchange Act.\82\ The final rule also contains
requirements regarding an RNSA's data retention and availability.\83\
Specifically, an RNSA must maintain the information on its website or a
similar means of electronic distribution, without use restrictions, for
a period of at least five years.\84\ In addition, the final rule
permits an RNSA to establish and collect reasonable fees pursuant to
rules promulgated pursuant to section 19(b) and Rule 19b-4.\85\
---------------------------------------------------------------------------
\82\ See final Rule 10c-1a(f).
\83\ See 17 CFR 240.10c-1a(h) (``final Rule 10c-1a(h)'').
\84\ See 17 CFR 240.10c-1a(h)(3) (``final Rule 10c-1a(h)(3)'').
\85\ See 17 CFR 240.10c-1a(i) (``final Rule 10c-1a(i)'') and
section 19(b). See also 15 U.S.C. 78o-3 (``section 15A'').
---------------------------------------------------------------------------
Final Rule 10c-1a is designed to provide access to timely,
comprehensive securities loan information to market participants, the
public, and regulators, which will help provide borrowers and lenders
with better tools to assess the terms of their securities loans and
enhance the ability of regulators to oversee the securities lending
market. In addition, the final rule will result in the public
availability of new information for investors and other market
participants to consider in the mix of information about the securities
lending market and the securities markets generally to better inform
their decisions.\86\ The final rule will also provide regulators with
information that may be used in conjunction with other
[[Page 75649]]
information that is currently available to regulators to help assess
market events.
---------------------------------------------------------------------------
\86\ As discussed in the Proposing Release, currently available
data on the securities lending market are incomplete, as private
vendors do not have access to pricing information that reflects all
transactions. This, in part, reflects the voluntary submission of
transaction information by subscribers to vendors and is compounded
by the uncertain comparability of data due to, among other things,
the variability of the transaction terms disseminated, as well as
how those terms are defined. As no single vendor has information for
all securities lending transactions that take place, some persons
pay to subscribe to multiple vendors' systems in order to capture as
much of the currently available data as they determine to purchase,
which can be expensive. See Proposing Release, 86 FR 69807 (citing
Beneficial Owners Demand Independent Benchmarking, Global Inv., 2017
WLNR 5380098 (Feb. 2, 2017)).
---------------------------------------------------------------------------
VI. Overview of Changes From Proposed Rule
The Commission is adopting final Rule 10c-1a with certain
modifications from the proposed rule made in response to comments. The
final rule:
<bullet> Modifies the scope of persons required to report by:
[cir] Specifying the persons who have a reporting obligation with a
new definition of ``covered person'' to distinguish persons who have a
reporting obligation from those persons who do not; \87\ specifically,
requiring reporting by any person that agrees to a covered securities
loan on behalf of the lender, any person that agrees to a covered
securities loan as a lender if an intermediary is not used, or a broker
or dealer when borrowing fully paid or excess margin securities, and
providing that an intermediary need not be a certain type of entity;
---------------------------------------------------------------------------
\87\ See 17 CFR 240.10c-1a(j)(1) (``final Rule 10c-1a(j)(1)'').
---------------------------------------------------------------------------
[cir] Excluding clearing agencies from the new definition of
``covered person'' when engaged only in certain central counterparty or
central securities depository activities;
[cir] Separating the requirements for covered persons and reporting
agents into distinct paragraphs; \88\ and
---------------------------------------------------------------------------
\88\ See final Rules 10c-1a(a) and 17 CFR 240.10c-1a(b) (``final
Rule 10c-1a(b)'').
---------------------------------------------------------------------------
[cir] Adding a new definition for ``reporting agent'' to specify
that a covered person may rely on a reporting agent that is a broker,
dealer, or registered clearing agency \89\ provided there is a written
agreement between the covered person and the reporting agent under
which the reporting agent agrees to establish, maintain, and enforce
policies and procedures to ensure compliance with the final rule and if
the covered person provides timely information to the reporting
agent.\90\
---------------------------------------------------------------------------
\89\ See 17 CFR 240.10c-1a(j)(4) (``final Rule 10c-1a(j)(4)'').
\90\ See final Rule 10c-1a(a)(2).
---------------------------------------------------------------------------
<bullet> Modifies the scope of securities for which loans must be
reported by adding a new definition for ``reportable security'' to mean
any security or class of an issuer's securities for which information
is reported or required to be reported to the CAT, TRACE, or RTRS, or
any reporting system that replaces one of these systems; \91\ and
---------------------------------------------------------------------------
\91\ See final Rule 10c-1a(j)(3).
---------------------------------------------------------------------------
<bullet> Specifies the type of loan transaction to which the final
rule applies by defining a new term ``covered securities loan,'' which
excludes the use of margin securities by a broker or dealer (e.g.,
rehypothecation) other than the lending of such margin securities by a
broker or dealer, as well as a position at a clearing agency that
results from certain central counterparty or central securities
depository services.\92\
---------------------------------------------------------------------------
\92\ See 17 CFR 240.10c-1a(j)(2) (``final Rule 10c-1a(j)(2)'').
---------------------------------------------------------------------------
<bullet> Streamlines information required to be reported by:
[cir] Removing the requirements in paragraph (e) of the proposed
rule to provide securities ``available to loan'' and securities ``on
loan'' information to an RNSA and the requirement for an RNSA to make
such information public; \93\ and
---------------------------------------------------------------------------
\93\ See proposed Rule 10c-1(e).
---------------------------------------------------------------------------
[cir] Replacing the requirement to report a description of the loan
modification with a requirement to report the specific modification and
the specific data element being modified.\94\
---------------------------------------------------------------------------
\94\ See 17 CFR 240.10c-1a(d)(1)(ii) (``final Rule 10c-
1a(d)(1)(ii)'').
---------------------------------------------------------------------------
<bullet> Specifies that all data elements for covered securities
loans that were not required to be reported on the date agreed to or on
the date last modified, but which subsequently become covered
securities loans, must be reported when the covered securities loan is
modified.\95\
---------------------------------------------------------------------------
\95\ See 17 CFR 240.10c-1a(d)(2) (``final Rule 10c-1a(d)(2)'').
---------------------------------------------------------------------------
<bullet> Modifies the timing of reporting by:
[cir] Replacing the requirements to report data elements and
confidential data elements to an RNSA within 15 minutes after each loan
is effected with requirements to report such elements by the end of the
day on which a covered securities loan is effected; \96\ and
---------------------------------------------------------------------------
\96\ See final Rules 10c-1a(c) and 10c-1a(e).
---------------------------------------------------------------------------
[cir] Replacing the requirement to report loan modification data
elements to an RNSA within 15 minutes after each loan is modified with
a requirement to report such elements by the end of the day on which a
covered securities loan is modified.\97\
---------------------------------------------------------------------------
\97\ See final Rule 10c-1a(d).
---------------------------------------------------------------------------
<bullet> Specifies the treatment of open-ended loans in existence
prior to the final rule.\98\
---------------------------------------------------------------------------
\98\ See final Rule 10c-1a(d)(2).
---------------------------------------------------------------------------
<bullet> Modifies the responsibilities of an RNSA by:
[cir] Defining the term ``RNSA'' to specify that such term refers
to an association of brokers and dealers that is registered as a
national securities association pursuant to 15 U.S.C. 78o-3 (``section
15A'') of the Exchange Act; \99\
---------------------------------------------------------------------------
\99\ See final Rule 10c-1a(j)(5).
---------------------------------------------------------------------------
[cir] Separating an RNSA's data publication requirements into new
paragraph (g) of the final rule to more clearly delineate an RNSA's
requirements from the reporting requirements applicable to covered
persons and reporting agents; \100\
---------------------------------------------------------------------------
\100\ See 17 CFR 240.10c-1a(g) (``final Rule 10c-1a(g)'').
---------------------------------------------------------------------------
[cir] Replacing the requirement for an RNSA to publish the loan
amount (as well as any modifications to loan amount) as soon as
practicable and instead: (1) make the loan amount public on the
twentieth business day after the covered security loan is effected (or
modified), and (2) make specified loan and security identifying
information public on the twentieth business day after the covered
security loan is effected (or modified); \101\
---------------------------------------------------------------------------
\101\ See final Rule 10c-1a(g)(2).
---------------------------------------------------------------------------
[cir] Adding a new requirement to paragraph (g) of the final rule
for an RNSA to publish, on a daily basis, information pertaining to the
aggregate transaction activity and distribution of loan rates for each
reportable security in order to provide market participants with timely
access to loan rate information that incorporates information about
loan sizes; \102\ and
---------------------------------------------------------------------------
\102\ See final Rule 10c-1a(g)(5).
---------------------------------------------------------------------------
[cir] Removing the requirement in paragraph (g) of the proposed
rule that collected information be made available to the public
``without charge,'' and removing the requirement in paragraph (h) of
the proposed rule that fees only be paid from persons who provide Rule
10c-1a information directly to an RNSA.\103\
---------------------------------------------------------------------------
\103\ See proposed Rule 10c-1(h).
---------------------------------------------------------------------------
In addition, the final rule includes some technical modifications,
such as modifying the rule designation to conform with Federal Register
requirements as well as additional technical or conforming
modifications that are minor and not substantive. Responses to comments
requesting clarification about the cross-border scope of the rule are
also provided below, in Part VII.M. Further, the Commission is
providing compliance dates requiring that: (1) RNSAs propose rules
pursuant to final Rule 10c-1a(f) within four months of the effective
date of final Rule 10c-1a; (2) the proposed RNSA rules are effective no
later than 12 months after the effective date of final Rule 10c-1a; (3)
covered persons report Rule 10c-1a information to an RNSA starting on
the first business day 24 months after the effective date of final Rule
10c-1a (the ``reporting date''); and (4) RNSAs publicly report Rule
10c-1a information pursuant to final Rules 10c-1a(g) and (h)(3) within
90 calendar days of the reporting date.
[[Page 75650]]
VII. Discussion of the Final Rule
A. Scope of Persons With Reporting Obligations--10c-1a(j)(1)
Proposed Rule
The proposed rule would have required that any person that loans a
security on behalf of itself or another person shall provide Rule 10c-1
information to an RNSA.\104\ The Proposing Release stated that the term
``person,'' for purposes of the Exchange Act, means a natural person,
company, government, or political subdivision, agency, or
instrumentality of a government.\105\
---------------------------------------------------------------------------
\104\ See proposed Rule 10c-1(a). See also Proposing Release, 86
FR 69807.
\105\ See Proposing Release, 86 FR 69807 (citing 15 U.S.C.
78c(a)(9)).
---------------------------------------------------------------------------
The proposed rule also stated that ``a bank, clearing agency,
broker, or dealer, that acts as an intermediary to a loan of securities
(lending agent) on behalf of a person that owns the loaned securities
(beneficial owner) shall . . . provide the Rule 10c-1 information to an
RNSA . . . .'' \106\ However, if a person loaned a security on behalf
of itself, and an intermediary did not act on its behalf, such person
would be the one required to provide the Rule 10c-1 information to an
RNSA.\107\
---------------------------------------------------------------------------
\106\ See proposed Rules 10c-1(a)(1)(i)(A)(1) and 10c-
1(a)(1)(i)(B) (stating that ``[a] beneficial owner is not required
to provide the Rule 10c-1 information to an RNSA if a lending agent
acts as an intermediary to the loan of securities on behalf of the
beneficial owner'').
\107\ See proposed Rule 10c-1(a)(1).
---------------------------------------------------------------------------
The Commission proposed that when ``a bank, clearing agency,
broker, or dealer'' acts as an intermediary (or ``lending agent'') on
behalf of a person that owns loaned securities the lending agent would
have the reporting obligation.\108\ When discussing the rationale for
this requirement, the Commission stated that lending agents are in the
best position to know when securities have been loaned from the
portfolios that the lending agent represents, and that the owner may
not know that the lending agent has lent securities from their
portfolio until after the time prescribed by proposed Rule 10c-1 to
provide Rule 10c-1 information to an RNSA.\109\ The Proposing Release
also stated that custodian banks have traditionally been the primary
lending agent or intermediary and lend securities on behalf of their
customers.\110\
---------------------------------------------------------------------------
\108\ See proposed Rule 10c-1(a)(1)(i)(A).
\109\ See Proposing Release, 86 FR 69809.
\110\ See Proposing Release, 86 FR 69805.
---------------------------------------------------------------------------
The Commission proposed a single-sided approach of only applying
the rule's reporting requirements to securities lenders and
intermediaries acting on behalf of lenders, and not to borrowers. The
Proposing Release explained that such an approach could avoid the
potential double counting of transactions.\111\ It also explained that
lenders are more likely to have access to the Rule 10c-1 information,
but a borrower may not be privy to all of the information required to
be provided to an RNSA under the proposed rule.\112\ The Commission
also stated that to the extent smaller entities engage in securities
lending, they generally employ lending agent intermediaries, which
would relieve them from having to provide proposed Rule 10c-1
information to an RNSA.\113\ Accordingly, the Commission stated its
preliminary belief that requiring only securities lenders or
intermediaries to a loan of securities to provide the proposed Rule
10c-1 information will alleviate the potential for the double counting
of transactions and limit the burdens of proposed Rule 10c-1 to larger
institutions.\114\
---------------------------------------------------------------------------
\111\ See Proposing Release, 86 FR 69807.
\112\ See Proposing Release, 86 FR 69807.
\113\ See Proposing Release, 86 FR 69808.
\114\ See Proposing Release, 86 FR 69808.
---------------------------------------------------------------------------
Final Rule
Many commenters requested additional clarity regarding the market
participants that would be required to provide the proposed Rule 10c-1
information to an RNSA.\115\ As discussed below in this part, to
address commenter concerns, and to specify which persons are required
to provide Rule 10c-1a information to an RNSA, the final rule defines
the term ``covered person'' to mean: (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 or central securities depository; (2) any person that
agrees to a covered securities loan as a lender when an intermediary is
not used, unless the borrower is a broker or dealer borrowing fully
paid or excess margin securities; or (3) a broker or dealer when
borrowing fully paid or excess margin securities.\116\ Accordingly, if
a person uses an intermediary, such as a lending agent that is a
custodian bank, to run its lending program to lend securities to other
persons on its behalf, the custodian bank is the covered person for
purposes of the final rule.\117\ If,
[[Page 75651]]
however, a person does not use an intermediary to lend securities on
their behalf, such person is the covered person for purposes of the
final rule. For example, a fund is a covered person for purposes of the
final rule if that fund runs its own lending program and lends
securities to other persons without the use of an intermediary, such as
custodian bank. Further, a broker or dealer who borrows fully paid or
excess margin securities from its customer is the covered person for
purposes of the final rule, and the customer of the broker or dealer is
not a covered person.
---------------------------------------------------------------------------
\115\ See Letter from Susan Olson, General Counsel, and Sarah A.
Bessin, Associate General Counsel, Investment Company Institute
(Jan. 7, 2022) (``ICI Letter 1''), at 8 (``there is a lack of
clarity in the Proposal regarding the concepts of `lender,'
`beneficial owner,' `lending agent,' and `reporting agent' '');
Letter from Peter J. Germain, Chief Legal Officer, Federated Hermes,
Inc. (Jan. 7, 2022) (``Federated Hermes Letter''), at 2; Letter from
Elizabeth Kent, Managing Director, Global Public Policy Group, and
Roland Villacorta, Managing Director, Securities Lending, BlackRock
(Jan. 7, 2022) (``BlackRock Letter''), at 2 (``We recommend the
Commission provide more clarity on the scope of lenders and loans
subject to the proposed requirements.''). In addition, one commenter
stated that empowering the owner of the securities to determine the
manner of reporting would reduce the implementation costs for
lenders and mitigate the risk of inaccurate data being reported. The
commenter further stated that responsibility for reporting
obligations would then be included in either the master securities
lending agreement between lender and borrower or in the securities
lending agent agreement between lender and lending agent, or both.
See Letter from Jennifer W. Han, Executive Vice President, Chief
Counsel & Head of Global Regulatory Affairs, Managed Funds
Association (Aug. 4, 2023) (``MFA Letter 3''), at 7. The final rule
permits covered persons to contract with reporting agents that are
brokers, dealers, or registered clearing agencies under certain
conditions intended to ensure that the reporting obligations are
met. A beneficial owner cannot assign the reporting obligation when
an intermediary is used, as the intermediary has the reporting
obligation under final Rule 10c-1a(j)(1)(i). However, the final rule
allows persons other than banks, brokers, dealers, and clearing
agencies to act as intermediaries (i.e., lending agents), which
could increase competition among such entities. The final rule also
permits covered persons to use third party vendors to help
facilitate the fulfillment of their reporting obligation. These
elements of the final rule should address some of the implementation
costs raised by the commenter. As the Commission stated in the
Proposing Release, lending agents are in the best position to know
when securities have been loaned from the portfolios that the
lending agent represents. Indeed, a beneficial owner might not know
that the lending agent has lent securities from the portfolio until
after the time prescribed by final Rule 10c-1a to provide Rule 10c-
1a information to an RNSA. See Proposing Release, 86 FR 69809.
Expanding reporting requirements further, as the commenter suggests,
could reduce the timeliness of the information required to be
reported.
\116\ See final Rule 10c-1a(j)(1). The final rule's approach of
requiring reporting by an intermediary if one is used, and by the
lender if an intermediary is not used, is comparable to one
commenter's recommendation ``to include a set reporting hierarchy .
. . to determine the counterparty that will be responsible to report
the required information.'' See Letter from Linklaters LLP (Apr. 1,
2022) (``Linklaters Letter''), at 5.
\117\ One commenter recommended that ``[lending] agents should
not be liable for the failure to report any information that they do
not control as the intermediary unless such information has been
provided to them by the principal in a timely manner. The rule
should also reflect that a lending agent should not be liable for
the content of information provided to it by a principal unless the
agent has actual knowledge that the information is inaccurate.'' See
Letter from Briget Polichene, Chief Executive Officer, Institute of
International Bankers (Jan. 7, 2022) (``IIB Letter''), at 10.
However, the Commission continues to believe that lending agents, as
parties to the loan, are well positioned to provide the required
Rule 10c-1a information and often are in possession of more
information concerning the loan than the principal (or beneficial
owner). See Proposing Release, 86 FR 69109-10 (``responsibility for
failing to provide 10c-1 information to an RNSA should be on the
lending agent and not the beneficial owners because the lending
agent is directly responsible for the loan of securities'').
---------------------------------------------------------------------------
The definition of ``covered person'' uses the term ``agrees to''
instead of ``loans a security'' as proposed to make clear that a
customer of a broker or dealer that loans a reportable security to the
broker or dealer in a fully paid lending arrangement is not required to
comply with the final rule. Instead, the broker or dealer that borrows
the reportable security is required to comply with the final rule and
must report Rule 10c-1a information on the covered securities loan.
Further, as discussed below, in Part VII.E, the term ``agrees to a
covered securities loan'' also provides that Rule 10c-1a information is
not limited to covered securities loans that have been settled.
One commenter recommended that the Commission not ``limit permitted
`lending agents' for purposes of the rule to banks, clearing agencies,
brokers, or dealers, as proposed,'' but instead ``permit any lending
agent that acts as an intermediary to a loan of securities to report on
behalf of a beneficial owner.'' \118\ The commenter stated that as long
as a lending agent could meet the requirements of the proposed rule,
such an expansion would ``reflect the variety of lending agents that
funds use'' and ``would facilitate reporting by beneficial owners that
prefer to use non-broker-dealer lending agents to report their
securities loans.'' \119\ The Commission agrees, and has modified the
final rule to define ``covered person'' to encompass ``[a]ny person
that agrees to a covered securities loan on behalf of the lender.''
\120\
---------------------------------------------------------------------------
\118\ See ICI Letter 1, at 5.
\119\ See ICI Letter 1, at 5.
\120\ See final Rule 10c-1a(j)(1)(i). Although the Commission is
not limiting who can act as an intermediary for the purposes of this
rule, other regulatory requirements may apply to persons who
intermediate transactions such as loans of securities. See, e.g., 15
U.S.C. 240.78o (section 15(b) of the Exchange Act) (registration
requirements); 15 U.S.C. 240.78c (sections 3(a)(4) and (5) of the
Exchange Act) (definitions of broker and dealer).
---------------------------------------------------------------------------
One commenter sought clarification of whether a ``branch or the
entity'' would be responsible for proposed Rule 10c-1 information
reporting if the branch enters into a covered securities loan, although
the commenter did not define the terms ``branch'' or ``entity.'' \121\
Determining the ``person'' required to report in complex organizational
structures will depend on the facts and circumstances. A branch or
office of a covered person, as opposed to a subsidiary or affiliate,
may not constitute a distinct covered person, but rather different
parts of the same covered person.\122\ The designation of a business
unit as a branch, office, or otherwise, is not dispositive of whether
such business unit has the obligation to report Rule 10c-1a
information.\123\ One commenter sought confirmation that a clearing
agency's provision of depository or central clearing services,
including novation, processing, settlement, netting, and incidental
services, do not make the clearing agency an intermediary to a loan of
securities.\124\ The Commission agrees that a clearing agency's
provision of depository or central clearing services \125\ to
securities lending transactions is not the type of activity that final
Rule 10c-1a is designed to cover. By acting as a central counterparty,
including by novating a loan, a clearing agency steps into the shoes of
the parties to the loan and technically may become a person that agrees
to a loan on its own behalf or on behalf of another person. However,
requiring reporting by a registered clearing agency providing such
central counterparty or securities depository services would not
provide additional transparency and would be duplicative of the
reporting requirements that apply to the loan's lender or intermediary
prior to it being cleared. Accordingly, the final rule specifically
excludes from the ``covered person'' definition a clearing agency when
providing only the functions of a central counterparty pursuant to 17
CFR 240.17Ad-22(a)(2) (``Rule 17Ad-22(a)(2)'') or a central securities
depository pursuant to 17 CFR 240.17Ad-22(a)(3) (``Rule 17Ad-
22(a)(3)'').\126\ The exclusion would not apply when the clearing
agency is acting in a different capacity (e.g., as an intermediary
providing the services of a lending agent).\127\
---------------------------------------------------------------------------
\121\ See Letter from Mary Jane Schuessler, Canadian Securities
Lending Association (Jan. 12, 2022) (``CASLA Letter''), at 3.
\122\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Release No. 34-74244 (Feb. 11,
2015), 80 FR 14564, 14652 n.813 (Mar. 19, 2015) (discussing foreign
branches and stating that ``because a branch or office has no
separate legal existence under corporate law, the branch or office
would be an integral part of the U.S. person itself''). See also
infra Part VII.M (discussing the cross-border application of final
Rule 10c-1a).
\123\ See infra Part VII.M.
\124\ See Letter from Michele Hillery, Managing Director,
General Manager of Equity Clearing and DTC Settlement Service, DTCC
(Jan. 7, 2022) (``DTCC Letter''), at 3-4. See also DTCC Letter, at 1
(stating that ``requiring the clearing agency to assume the
obligations of traditional lending agents for providing [traditional
securities depository, central counterparty, or incidental services]
would misplace the burden of responsibility and result in double
reporting.''); OCC Letter, at 9 (recommending that a clearing agency
should not assume the reporting obligations as an intermediary to a
loan of securities under the proposed rule when it is not actively
involved with the lending of securities of beneficial owners or for
their own account, but providing only central counterparty
services).
\125\ See DTCC Letter, at 2-3 (stating that it is ``a central
securities depository that . . . holds securities on behalf of its
participants and effects transfers between participant accounts by
book entry, including to facilitate the settlement of securities
lending transactions.'' Also, that ``depository activities and
related incidental services do not affect supply or demand in the
securities lending market, the pricing of securities lending
transactions, or other relevant data regarding the securities
lending market'').
\126\ See final Rule 10c-1a(j)(1)(i). Rule 17Ad-22(a)(2) of the
Exchange Act defines ``central counterparty'' to mean a clearing
agency that interposes itself between the counterparties to
securities transactions, acting functionally as the buyer to every
seller and the seller to every buyer. Rule 17Ad-22(a)(3) of the
Exchange Act defines ``central securities depository'' to mean a
clearing agency that is a securities depository as described in
section 3(a)(23)(A) of the Exchange Act. Section 3(a)(23)(A)
describes a securities depository as a person who: (i) acts as a
custodian of securities in connection with a system for the central
handling of securities whereby all securities of a particular class
or series of any issuer deposited within the system are treated as
fungible and may be transferred, loaned, or pledged by bookkeeping
entry without physical delivery of securities certificates; or (ii)
otherwise permits or facilitates the settlement of securities
transactions or the hypothecation or lending of securities without
physical delivery of securities certificates.
\127\ The Commission understands that clearing agencies do not
currently provide services related to securities loans beyond acting
as a central counterparty or central securities depository.
Registered clearing agencies that wish in the future to expand
services relating to securities loans, will be required to submit
rule filings under section 19(b) and Rule 19b-4 in which they will
be required to describe how the proposed changes would comply with
existing federal securities laws, including the final rule. Clearing
agencies that are operating under an exemption from registration
will be required to seek modifications to their exemptions that are
compliant with the final rule in order to expand the services they
provide in relation to securities loans. See section 19(b) and Rule
19b-4 of the Exchange Act.
---------------------------------------------------------------------------
Certain commenters supported the proposed single-sided reporting
structure (i.e., requiring reporting by any person that loans a
security on behalf of itself or another person, but not requiring
reporting by the borrower) to alleviate concerns about double counting
loans of securities.\128\ One
[[Page 75652]]
commenter stated that ``we strongly support the Proposal's approach of
requiring single-sided reporting . . . the approach would reduce the
potential for double counting of securities lending transactions and
limit the burden on lenders. A single-sided reporting regime avoids
problems with reconciling reports by each party to a transaction.''
\129\ Other commenters supported the application of the final rule's
reporting requirements to all lenders to facilitate a comprehensive
view of the securities lending market.\130\ In consideration of these
comments, the final rule generally employs a single-sided approach to
reporting, with the Rule 10c-1a information reporting obligations
placed on either an intermediary that agrees to a covered securities
loan on behalf of the lender, or any person that agrees to a covered
securities loan as a lender when an intermediary is not used.\131\
Consistent with the proposed rule, this approach is designed to avoid
the potential for the double counting of transactions that could arise
if both sides, borrowers and lenders, were required to report final
Rule 10c-1a information to an RNSA.\132\
---------------------------------------------------------------------------
\128\ See, e.g., ICI Letter 1, at 5; Letter from Phoebe
Papageorgiou, Vice President, Trust Policy, American Bankers
Association (Jan. 7, 2023) (``ABA Letter''), at 2-3; Letter from
Thomas Deinet, Executive Director, The Standards Board of
Alternative Investments (Jan. 21, 2022) (``SBAI Letter''), at 1
(``We support single-sided reporting, i.e., requiring the lenders
(or their agents) to report, but not duplicating the framework by
requiring borrowers to report as well.''); Letter from Joseph J.
Barry, Senior Vice President and Global Head of Regulatory Affairs,
State Street Corp. (Apr. 1, 2022) (``State Street Letter''), at 3
(stating that ``we do not object to the imposition of a single-sided
reporting obligation on the lender of a security (or its agent)'').
\129\ See ICI Letter 1, at 5.
\130\ See Morningstar Letter, at 3-4 (stating that ``we
recommend that all persons who lend should be required to report. As
some lenders may not be registrants, the public will not have a
comprehensive picture of securities lending transactions if only
those registered with the Commission are required to report to an
RNSA.''); Nasdaq Letter, at 2 (stating that ``the inclusion of all
market participants who lend provides investors with comprehensive
information from which to formulate investing strategies'').
\131\ See final Rules 10c-1a(j)(1)(i) and (ii). Final Rule 10c-
1a(j)(1)(ii) includes a technical change from the proposed rule to
add the phrase ``unless paragraph (j)(1)(iii) of this section
applies'' to clarify that only the broker or dealer when borrowing
fully paid or excess margin securities, and not the lender, has the
obligation to report in that instance.
\132\ See Proposing Release, 86 FR 69808.
---------------------------------------------------------------------------
However, one commenter opposed the proposed single-sided reporting
approach, and recommended that the final rule require reporting by SEC-
registered brokers or dealers only and for transactions in which they
act as borrowers, lenders, or lending agents.\133\ The commenter stated
that ``whether acting as borrower or lender acting in a principal or
agency capacity, [requiring SEC-registered broker-dealers to report]
would substantially reduce overall implementation costs, would not
impose costs on a single side of the market and would still provide for
sufficient market data.'' \134\ The commenter reasoned that reporting
costs would be lower, due to brokers or dealers having existing
reporting infrastructure and connectivity.\135\ The commenter cited to
the Office of the Financial Research Pilot Survey (``OFR Pilot
Survey'') \136\ to support the view that although such a structure
would be ``less comprehensive than lender reporting, the data loss
entailed should not be substantial'' and ``would be substantially
captured'' and ``sufficient.'' \137\ The commenter also stated that its
proposed structure ``would also provide better data integrity as
broker-dealers are better positioned than beneficial owners and Lending
Agents to evaluate whether a securities loan is made for the purpose of
facilitating short sales or settlement of fails rather than some other
purpose.'' \138\
---------------------------------------------------------------------------
\133\ See Letter from Fran Garritt, Director, Securities Lending
& Market Risk, and Mark Whipple, Chairman, Committee on Securities
Lending, Risk Management Association (Jan. 7, 2022) (``RMA
Letter''), at 3.
\134\ See RMA Letter, at 3.
\135\ See RMA Letter, at 13 n.19.
\136\ See A Pilot Survey of Agent Securities Lending Activity,
Off. Of Fin. Research, Working Paper No. 16-08, 2016 at 7-8,
available at <a href="https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/">https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/</a> (In its
annual reports, the FSOC identified a lack of data about securities
lending activity as a priority for the Council. This pilot data
collection was a step toward addressing this critical data need. The
voluntary pilot collection included end-of-day loan-level data for
three non-consecutive business days from seven securities lending
agents. Most but not all participating lending agents were
subsidiaries of banks.).
\137\ See RMA Letter, at 13 (stating that ``roughly 85% of loans
made by Lending Agents are to registered broker-dealer borrowers'')
(citing the OFR Pilot Survey, at 8).
\138\ See RMA Letter, at 14.
---------------------------------------------------------------------------
The Commission is not adopting the commenter's recommended
reporting structure. Requiring reporting by brokers or dealers acting
as borrowers, lenders, or lending agents introduces the same double
counting problem that the final rule's single-sided reporting approach
is designed to address.\139\ Additionally, under the final rule brokers
or dealers are permitted to act as reporting agents provided specified
requirements are met. The Commission also does not agree with the
commenter that the data lost if its recommended reporting structure
were adopted would not be substantial. The OFR Pilot Survey cited by
the commenter states that banks, credit unions, pension funds, and
hedge funds, all of whom would not be required to report covered
securities loans under the commenter's proposed structure, are the
borrowers of nearly 15 percent of the value of all outstanding
securities loans.\140\ Based on the survey, the Commission estimated
that brokers or dealers facilitate between 60 percent and 90 percent of
transactions in the equity lending market.\141\ Accordingly, while the
Commission acknowledges that the precise percentage of broker or dealer
facilitated transactions is unknown, the survey indicates that a
significant percentage of transactions in the equity lending market,
between 10 percent and 40 percent, are facilitated by non-brokers or
dealers.\142\ Therefore, the commenter's recommended approach would
exclude a significant percentage of securities lending transactions
from being reported. Any improved ``data integrity'' achieved by the
commenter's proposed structure would be undermined by its exclusion of
securities loans that do not involve an SEC-registered broker or dealer
acting as borrower, lender, or lending agent. Additionally, excluding
certain types of entities from reporting would create incentives for
market participants to agree to covered securities loans through such
excluded entities, which would further diminish the comprehensiveness
of the reported information. Instead, the Commission agrees with one
commenter's statement that, ``all lenders (or their lending or
reporting agents) should be required to report, whether or not they are
registered with the Commission. Otherwise, the data will be
incomplete.'' \143\ As such, the final rule's definition of ``covered
person'' is not limited to brokers or dealers.
---------------------------------------------------------------------------
\139\ See Proposing Release, 86 FR 69807.
\140\ See OFR Pilot Survey, at 7-8.
\141\ See Proposing Release, 86 FR 69807 n.68.
\142\ See Proposing Release, 86 FR 69807 n.68 (stating that,
``[w]hile the Commission preliminarily believes that the majority of
transactions involve broker-dealers the precise percentage is
currently unknown. Based on 2015 survey data the Commission stated
that it estimated that broker-dealers facilitate between 60% and 90%
of transactions in the equity lending market.''), citing the OFR
Pilot Survey, at 7-8. Further, custodian banks have traditionally
been the primary lending agent or intermediary and lend securities
on behalf of their customers for a fee. See, e.g., Proposing
Release, 86 FR 69805 (citing Comptroller's Handbook: Custody
Services/Asset Management, Off. Of the Comptroller of the Currency,
at 27 (Jan. 2002), available at <a href="https://www.occ.treas.gov/publications-and-resources/">https://www.occ.treas.gov/publications-and-resources/</a>[]publications/comptrollers-handbook/
files/custody-services/index-custody-services.html).
\143\ See Letter from Howard Myerson, Managing Director,
Financial Information Forum (Jan. 19, 2022) (``FIF Letter''), at 7.
See also Letter from JD Cumpson (Mar. 14, 2022).
---------------------------------------------------------------------------
One possible alternative to address double counting under the
commenter's
[[Page 75653]]
suggestion of requiring only brokers or dealers to report as lenders
and borrowers would be to require identification (such as using a flag)
of loans reported by borrowers and loans reported by lenders. However,
this would not address the lack of securities loan data from persons
that are not brokers or dealers, or the incentives to avoid reporting
by migrating to such persons. Further, expanding the reporting
obligation generally to all lenders and borrowers, and requiring each
to identify whether they are reporting as a lender or borrower, would
increase burdens unnecessarily, resulting in the collection of
duplicative (albeit identified) data by more persons.
One commenter suggested that ``it would be appropriate for the
borrower broker-dealer (not the lender customer) to provide the Rule
10c-1 information to an RNSA where such broker-dealer borrows a
customer's fully paid securities.'' \144\ The Commission agrees with
this recommendation. Such an approach would help avoid placing a
reporting obligation on customers who, upon lending fully paid or
excess margin securities, may not have timely access to the required
information and less familiarity with reporting information to RNSAs
than their broker or dealer.\145\ Therefore, the definition of the term
``covered person'' under the final rule generally does not apply to a
borrower,\146\ except in the instance of a broker or dealer borrowing
fully paid or excess margin securities from a customer.\147\ The
definition specifically includes a broker or dealer when borrowing
fully paid or excess margin securities pursuant to 17 CFR 240.15c3-
3(b)(3) (``Rule 15c3-3(b)(3)'').\148\ This definition will result in a
broker or dealer (as opposed to the customer) being responsible for
reporting Rule 10c-1a information to an RNSA if it borrows fully paid
or excess margin shares from one of its customers. Pursuant to final
Rule 10c-1a, the broker or dealer would also be responsible for
reporting Rule 10c-1a information to an RNSA should the broker or
dealer act as a lender of those shares to a third-party.\149\
---------------------------------------------------------------------------
\144\ See Letter from Kenneth E. Bentsen, Jr., President and
CEO, SIFMA (Jan. 7, 2022) (``SIFMA Letter 1''), at 18 n.66 (stating
that it ``understands this would apply where a broker-dealer borrows
securities it carries in a customer's account'').
\145\ For example, a lender may not necessarily know when a
broker or dealer has borrowed securities from its fully paid or
excess margin account if it has not reviewed the schedule of
borrowed securities provided to it pursuant to 17 CFR 240.15c3-
3(b)(3)(ii) (``Rule 15c3-3(b)(3)(ii)'') or if the collateral for the
securities loan is not provided to the lender before the close of
the business day pursuant to 17 CFR 240.15c3-3(b)(3)(iii)(A) (``Rule
15c3-3(b)(3)(iii)(A)''), whereas the broker or dealer will know that
such securities have been lent by the customer upon the broker or
dealer borrowing them. See 17 CFR 240.15c3-3 (``Rule 15c3-3''). See
also SIFMA Letter 1, at 13 (stating that ``in fully paid lending
arrangements, collateral is not required to be delivered until the
end of the business day on which the loan is entered into'').
\146\ See final Rules 10c-1a(j)(1)(i) and (ii).
\147\ See final Rule 10c-1a(j)(1)(iii).
\148\ See final Rule 10c-1a(j)(1)(iii). Paragraph (b)(3) of Rule
15c3-3 under the Exchange Act addresses a broker-dealer's borrowing
of fully paid or excess margin securities of a customer. This rule
requires, among other things, that a broker-dealer borrowing fully
paid or excess margin securities from a customer to enter into a
written agreement with the customer that, among other things,
specifies that the broker-dealer must undertake to: (1) provide the
lender collateral that fully secures the loan consisting of cash,
U.S. Treasuries, an irrevocable letter of credit issued by a bank,
or such other collateral as the Commission designates as
permissible; (2) mark the loan to market not less than daily and
provide additional collateral as necessary to fully collateralize
the loan; and (3) notify the lender that the provisions of the
Securities Investor Protection Act may not protect the lender and
that, therefore, the collateral delivered to the lender may
constitute the only source of satisfaction of the broker-dealer's
obligation to return the securities. In the adopting release for
these requirements, the Commission stated that the rule will
``compel the firm to turn over the collateral physically to the
lender.'' See Net Capital Requirements for Brokers and Dealers,
Release No. 34-18737 (May 13, 1982), 47 FR 21759, 21768 (May 20,
1982).
\149\ See final Rule 10c-1a(j)(1)(ii).
---------------------------------------------------------------------------
B. Reporting Agent Overview
1. Use of a Reporting Agent--Rule 10c-1a(a)(2)
Proposed Rule
The Commission proposed that ``[a] person required to provide Rule
10c-1 information . . . including a lending agent, may enter into a
written agreement with a broker or dealer that agrees to provide the
Rule 10c-1 information to an RNSA (reporting agent).'' \150\ The
proposed rule stated that a ``reporting agent is required to provide
the Rule 10c-1 information to an RNSA if it has entered into [the
required] written agreement . . . and is provided timely access to the
Rule 10c-1 information.'' \151\ The proposed rule also stated that
``[a]ny person that enters into [the required] written agreement . . .
with a reporting agent is not required to provide the Rule 10c-1
information to an RNSA if the reporting agent is provided timely access
to the Rule 10c-1 information.'' \152\ Therefore, under the proposed
rule, only when a person fulfilled the requirements of: (i) entering
into a written agreement with a broker or dealer that agrees to provide
the Rule 10c-1 information; \153\ and (ii) providing the reporting
agent with timely access to the Rule 10c-1 information,\154\ would the
person shift its Rule 10c-1 information reporting obligation for a loan
of securities from itself to a reporting agent.
---------------------------------------------------------------------------
\150\ See proposed Rule 10c-1(a)(1)(ii)(A).
\151\ See proposed Rule 10c-1(a)(1)(ii)(B).
\152\ See proposed Rule 10c-1(a)(1)(ii)(C).
\153\ See proposed Rule 10c-1(a)(1)(ii)(C).
\154\ See proposed Rule 10c-1(a)(1)(ii)(C).
---------------------------------------------------------------------------
The Commission in the Proposing Release stated its preliminary
belief that it is appropriate that lenders, including a lending agent,
be able to enter into a written agreement with a broker or dealer
acting as a reporting agent to provide Rule 10c-1 information to an
RNSA on behalf of the lender because such an arrangement would ease
burdens on lenders, including lending agents, that do not have and do
not want to establish connectivity to an RNSA.\155\ The Commission also
stated that the use of reporting agents could reduce the costs for non-
RNSA-members, because rather than incurring the costs associated with
directly reporting Rule 10c-1 information, such persons would have the
option to use a third-party to provide the Rule 10c-1 information to an
RNSA.\156\
---------------------------------------------------------------------------
\155\ See Proposing Release, 86 FR 69810.
\156\ See Proposing Release, 86 FR 69809.
---------------------------------------------------------------------------
Final Rule
The Commission received broad support from commenters for the
proposed rule's provisions permitting covered persons to use a
reporting agent if certain conditions are met.\157\ One commenter
stated that it ``agree[s] with the Commission that permitting the use
of reporting agents to report 10c-1 information will `ease burdens on
Lenders, including lending agents, that do not have or do not want to
establish connectivity to an RNSA.' '' \158\ The Commission continues
to believe it is appropriate to permit a covered person to use a
reporting agent to help fulfill Rule 10c-1a information reporting
obligations. Furthermore, many entities that may act as reporting
agents may have existing RNSA connectivity, experience with reporting
information to an RNSA, and economies of scale that could benefit
covered persons with final Rule 10c-1a reporting obligations.
---------------------------------------------------------------------------
\157\ See, e.g., infra note 173 (listing commenters that
requested an expansion of the types of entities that could act as
reporting agents under the final rule).
\158\ See DTCC Letter, at 4.
---------------------------------------------------------------------------
Thus, consistent with the proposed rule, the final rule requires
that, in order to use a reporting agent to fulfill its Rule 10c-1a
information reporting obligations, a covered person must: (1) enter
into a written agreement with the reporting agent, and (2) provide the
reporting agent with timely access to the
[[Page 75654]]
required Rule 10c-1a information.\159\ Requiring a written agreement
between the covered person and the reporting agent will memorialize the
contractual obligations for the reporting agent to provide the Rule
10c-1a information to an RNSA.\160\ Consistent with the Proposing
Release, for purposes of final Rule 10c-1a, ``timely access'' means
that the reporting agent has access to the Rule 10c-1a information with
sufficient time to provide such information to an RNSA (i.e., in the
format and manner required by the rules of an RNSA and within the time
periods specified in paragraphs (c) through (e) of the final rule).
However, this definition of ``timely access'' differs from the
Proposing Release in that the timing of the required reporting of
certain securities loan information to an RNSA has changed (i.e., to no
longer require reporting ``within the fifteen minutes after the
securities loan is effected or the terms of the loan are
modified'').\161\ As discussed below, in Part VII.G, the required
timing for the reporting of data elements pursuant to final Rules 10c-
1a(c), (d), and (e) is now by the end of the day on which a covered
securities loan is effected or modified.\162\
---------------------------------------------------------------------------
\159\ See final Rule 10c-1a(a)(2).
\160\ See Proposing Release, 86 FR 69822 n.129.
\161\ See Proposing Release, 86 FR 69810.
\162\ See final Rules 10c-1a(c), (d), and (e).
---------------------------------------------------------------------------
If the reporting agent is unable to provide Rule 10c-1a information
to an RNSA because it lacks timely access to it, the covered person who
enters into the written agreement with the reporting agent is
responsible for providing such information to an RNSA.\163\ Ultimately,
responsibility for non-compliance will be a facts and circumstances
determination. For instance, if the covered person fails to provide the
reporting agent with access to accurate Rule 10c-1a information, then
the covered person remains responsible for compliance with Rule 10c-
1a.\164\ However, if the reporting agent that receives timely and
accurate information from the covered person provides late or
inaccurate information to an RNSA, as discussed below in Part VII.C.1,
the reporting agent is responsible for compliance with final Rule 10c-
1a.\165\
---------------------------------------------------------------------------
\163\ For example, if a reporting agent establishes an automated
system that pulls Rule 10c-1a information directly from the records
management system of a beneficial owner, but the beneficial owner
disables the connectivity to the automated system for any reason,
the reporting agent would not have access to the Rule 10c-1a
information. As a result, the beneficial owner is required to
provide Rule 10c-1a information to an RNSA under final Rule 10c-
1a(a)(2).
\164\ See 17 CFR 240.10c-1a(a)(1) (``final Rule 10c-1a(a)(1)'').
\165\ See 17 CFR 240.10c-1a(b) (``final Rule 10c-1a(b)'').
---------------------------------------------------------------------------
2. Reporting Agent Definition--Rule 10c-1a(j)(4)
Proposed Rule
The Commission proposed that, ``[a] person required to provide Rule
10c-1 information . . . may enter into a written agreement with a
broker or dealer that agrees to provide the Rule 10c-1 information to
an RNSA (reporting agent) within the time periods specified in Rule
10c-1.'' \166\ The Proposing Release stated that limiting who can act
as a reporting agent to a broker or dealer that is regulated directly
by the Commission, would aid the Commission in overseeing compliance
with proposed Rule 10c-1 and provide RNSAs with the ability to oversee
the activity of its members that perform a reporting agent
function.\167\ The Proposing Release also stated that if reporting
agents were to include other, non-broker or dealer entities, the
Commission might lack an efficient way to oversee how the entity is
complying with its responsibility to provide Rule 10c-1 information to
an RNSA.\168\
---------------------------------------------------------------------------
\166\ See proposed Rule 10c-1(a)(1)(ii)(A).
\167\ See Proposing Release, 86 FR 69810-11.
\168\ See Proposing Release, 86 FR 69811.
---------------------------------------------------------------------------
Final Rule
The Commission received numerous comments discussing what types of
entities should be permitted to act as a reporting agent, including
differing views on the proposed rule's restriction to only brokers or
dealers.\169\ The Commission also received comment stating that there
was a lack of clarity in the Proposing Release around the term
``reporting agent.'' \170\
---------------------------------------------------------------------------
\169\ See, e.g., ICI Letter 1, at 4-5; DTCC Letter, at 4; FIF
Letter, at 7; James J. Angel Letter, at 6; IIB Letter, at 10; Letter
from Edward M. Marhefka, Managing Director, Global Head of Equities
Data and Analytics, IHS Markit (Jan. 4, 2022) (``IHS Markit
Letter''), at 4; Letter from Robert Zekraus, COO & Head of Americas,
Pirum Systems Limited (Jan. 7, 2022) (``Pirum Letter''), at 4-5;
Letter from Robert Sloan, Managing Partner, S3 Partners, LLC (Apr.
1, 2022) (``S3 Partners Letter''), at 12; Letter from Boaz Yaari,
CEO, Sharegain Ltd. (Jan. 7, 2022) (``Sharegain Letter''), at 2. But
see RMA Letter, at 13.
\170\ See ICI Letter 1, at 8.
---------------------------------------------------------------------------
The Commission received a comment supporting the requirement that
reporting agents be registered brokers or dealers and stating that it
``would allow an RNSA to oversee the activity of reporting agents and
enable it to fulfill an essential regulatory function that promotes
just and equitable principles of trade.'' \171\ Another commenter
expressed support for permitting brokers or dealers to act as reporting
agents.\172\ However, other commenters recommended that entities other
than brokers or dealers should be eligible to act as reporting
agents.\173\
---------------------------------------------------------------------------
\171\ See Nasdaq Letter, at 2.
\172\ See Equilend Letter, at 1 (stating that it ``maintains two
FINRA registered and SEC registered broker-dealers . . . and
welcomes the opportunity to act as a reporting agent for the
Proposed Rule'').
\173\ See, e.g., FIF Letter, at 7 (stating that ``[f]or other
reporting systems established by the Commission (such as CAT),
vendors that are not broker-dealers are permitted to submit reports
on behalf of reporting parties. The same approach should apply for
the proposed securities loan reporting system''); James J. Angel
Letter, at 6; IIB Letter, at 10; IHS Markit Letter, at 4-5;
Sharegain Letter, at 2 (stating that ``the qualification criteria
and application process to become a broker-dealer go far beyond the
scope of reporting services under the proposed Rule and would
unfairly restrict the market''); Letter from Tyler Gellasch,
Executive Director, Healthy Markets Association (Mar. 2, 2022)
(``HMA Letter''), at 8 (stating that ``by opening up the reporting
agent role to non-broker entities, the Proposal could promote more
competition amongst intermediaries--including lending agents--in the
securities lending marketplace''); DTCC Letter, at 4 (``we do not
believe it is necessary to limit the scope of entities that may be
reporting agents exclusively to broker-dealers'').
---------------------------------------------------------------------------
One commenter recommended that registered clearing agencies should
be eligible to serve as a reporting agent because such agencies are
subject to regulation and examination by the Commission and have
experience providing the infrastructure that would be used by, and
function as, a reporting agent.\174\ Another commenter suggested that
reporting agents should include clearing agencies that operate stock
lending platforms.\175\ Having considered the commenters'
recommendations, the Commission agrees that registered clearing
agencies should be permitted to act as reporting agents on behalf of
covered persons, and therefore be included under the final rule's
definition of the term ``reporting agent.'' \176\ Allowing registered
clearing agencies to act as reporting agents will facilitate cost-
effective and efficient reporting.\177\ Additionally, like brokers and
dealers, registered clearing agencies are subject to the Commission's
direct oversight and examination functions.\178\
---------------------------------------------------------------------------
\174\ See DTCC Letter, at 4.
\175\ See James J. Angel Letter, at 6 (stating that lending
platforms operated by clearing agencies ``could provide low-cost
reporting solutions to market participants'').
\176\ See final Rule 10c-1a(j)(4).
\177\ See IHS Markit Letter, at 15 (stating that ``[a]llowing
entities other than FINRA-registered broker-dealers to facilitate
reporting is a cost-effective and efficient way to achieve the SEC's
objectives . . . . The Commission should encourage a variety of
organizations to provide innovative and cost-effective solutions to
meet this regulation.'')
\178\ See, e.g., 15 U.S.C. 240.78q(b) (section 17(b) of the
Exchange Act).
---------------------------------------------------------------------------
[[Page 75655]]
Some commenters stated that allowing non-brokers or dealers to act
as reporting agents could facilitate low-cost service providers.\179\
Another commenter stated that ``by opening up the reporting agent role
to non-broker entities, the Proposal could promote more competition
amongst intermediaries--including lending agents--in the securities
lending marketplace.'' \180\ One commenter stated that limiting the
reporting agents to only brokers or dealers would unfairly restrict the
market for such services.\181\ Other commenters specifically stated
that certain non-brokers or dealers have existing technological
capability to be able to act as a reporting agent (e.g., data vendors
and entities that report information for other regulatory
purposes).\182\ One such commenter supported leveraging the existing
technology of non-broker-dealers to reduce implementation time and
staff training costs relating to the implementation of proposed Rule
10c-1.\183\
---------------------------------------------------------------------------
\179\ See IIB Letter, at 10 (stating that many lenders already
rely on non-broker or dealer third-party vendors to ``perform
similar functions, and such vendors would likely be willing to
provide securities lending reporting services and be low-cost
providers''). See also Letter from Edmon Blount, Executive Director,
Advanced Securities Consulting (Jan. 7, 2022) (``Advanced Securities
Consulting Letter''), at 1.
\180\ See HMA Letter, at 8.
\181\ See Sharegain Letter, at 2.
\182\ See S3 Partners Letter, at 12; Sharegain Letter, at 2; IIB
Letter, at 10.
\183\ See S3 Partners Letter, at 12.
---------------------------------------------------------------------------
Allowing clearing agencies, as well as brokers or dealers, to act
as reporting agents should help facilitate low-cost service providers,
introduce more competition, and not unduly restrict the market for
reporting agent services to only brokers or dealers.\184\ Expanding the
definition of reporting agent to include registered clearing agencies
strikes a balance between increasing participation and competition in
the marketplace for such services, while only applying the definition
to entities over which the Commission has direct oversight.\185\
Limiting who can act as a reporting agent to brokers, dealers, and
registered clearing agencies, all of which are regulated directly by
the Commission, will assist the Commission in overseeing compliance
with final Rule 10c-1a. Including other entities would leave the
Commission without an efficient way to oversee how the entity is
complying with its responsibility to provide Rule 10c-1a information to
an RNSA on behalf of a covered person. Two commenters stated that some
non-brokers or dealers should be eligible to serve as reporting agents
because they are already permitted to report information in connection
with other Commission reporting regimes and have experience doing
so.\186\ The commenters identified the CAT, TRACE, and FINRA's Large
Options Positions Report (``LOPR'') as examples of reporting regimes
that allow brokers or dealers to use non-brokers or dealers as
reporting agents. In each of the reporting regimes identified by the
commenters, the reporting requirements apply to entities that are
registered with the Commission or are a member of an RNSA or an
exchange,\187\ and that retain legal liability for compliance
notwithstanding the existence of an agreement for a third party to
provide connectivity services on behalf of the registrant.\188\
---------------------------------------------------------------------------
\184\ See infra Part IX.E.6 (stating that ``expanding reporting
agents to entities other than broker-dealers would serve to increase
the number of entities that would compete to provide lenders and
lending agents with reporting services. Thus, expanding the
eligibility of reporting agents would serve to promote more
competition in this market, potentially leading to lower fees for
lenders and lending agents that would rely on these reporting agents
for these services.'').
\185\ See Standards for Covered Clearing Agencies, Release No.
34-71699 (Mar. 12, 2014), 79 FR 29508, 29510 (May 22, 2014) (``If
the Commission registers a clearing agency, the Commission oversees
the clearing agency to facilitate compliance with the Exchange Act
using various tools that include, among other things, the rule
filing process for self-regulatory organizations (`SROs') and on-
site examinations by Commission staff. The Commission also oversees
registered clearing agencies through regular contact, including
onsite visits, by Commission staff with clearing agency senior
management and other personnel and ongoing interactions of
Commission staff with the registered clearing agencies regarding
current and expected proposed rule changes under section 19(b) of
the Exchange Act.'').
\186\ See FIF Letter, at 7-8; S3 Partners Letter, at 12.
\187\ See FINRA Rule 6810(u) (```Industry Member' means a member
of a national securities exchange or a member of a national
securities association that is required to record and report
information pursuant to the CAT NMS Plan and this Rule 6800
Series''); FINRA Rule 6730(a) (applying the TRACE reporting
obligations to FINRA members); FINRA Rule 2360(b)(5)(A)(i)b (``FINRA
member firms that conduct a business in standardized options but are
not themselves members of the options exchange on which such options
are listed and traded . . . are required under FINRA Rule
2360(b)(5)(A)(i)b to report to the LOPR system positions in
standardized options covering the same underlying security or index
that meet the 200 contract reporting threshold.'').
\188\ See, e.g., Nasdaq Rulebook, General Equity and Options
Rules--General 7: Consolidated Audit Trail Compliance, at section
8(c)(3), available at, <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>. See also FINRA Regulatory Notice 21-29 (Aug. 13,
2021), available at, <a href="https://www.finra.org/rules-guidance/notices/21-29">https://www.finra.org/rules-guidance/notices/21-29</a> (FINRA guidance on outsourcing to third party vendors and the
retention of responsibility by the FINRA member).
---------------------------------------------------------------------------
The Commission is also clarifying that the ability to use a
reporting agent does not prevent covered persons from contracting
privately with third-party vendors to assist in reporting. The proposed
rule required that ``[a]ny person that loans a security on behalf of
itself . . . shall provide to a [RNSA] the [Rule 10c-1 information].''
\189\ However, the proposed rule did not address the use of a third-
party vendor by a lender to help facilitate its reporting obligations.
The rule as adopted does not prohibit the use of third-party vendors by
covered persons. The use of third-party vendors by covered persons to
help facilitate the reporting of Rule 10c-1a information should allow
covered persons flexibility and decrease costs,\190\ and help address a
commenter's concerns with the ability of certain covered persons to
report.\191\ The difference between a covered person relying on a
reporting agent to fulfill its Rule 10c-1a reporting requirements and
using a third-party vendor to help facilitate its Rule 10c-1a reporting
is solely with respect to liability and responsibility under final Rule
10c-1a. When a covered person uses a reporting agent and meets the
conditions of the rule, the covered person may rely on a reporting
agent to fulfill its reporting obligations.\192\ However, the use of
other third-party vendors that are not reporting agents would not
relieve a covered person of its obligation to report Rule 10c-1a
information to an RNSA, as reliance on a reporting agent would.\193\
---------------------------------------------------------------------------
\189\ See proposed Rule 10c-1(a)(1). See also Proposing Release,
86 FR 69809 (stating that a lender that did not use a lending agent
or reporting agent to provide Rule 10c-1 information to an RNSA must
directly provide such information to an RNSA).
\190\ See infra Parts IX.C.3 and IX.E.6. Additionally, the use
of third party vendors by covered persons could enable the
innovation and development of novel reporting services, such as the
data trusts described by one commenter. See Advanced Securities
Consulting Letter, at 1-3.
\191\ See ICI Letter 1, at 12 (stating that ``beneficial owners
will not have the infrastructure to report'').
\192\ See final Rule 10c-1a(a)(1).
\193\ See final Rule 10c-1a(a)(2) (stating that ``a covered
person may rely on a reporting agent to fulfill its reporting
obligations under paragraph (a)(1)'' of the final rule, if certain
conditions are met)
---------------------------------------------------------------------------
Some commenters stated that providing the proposed Rule 10c-1
information to a reporting agent that is a broker or dealer could
reveal confidential information to such broker or dealer relating to
covered securities loans.\194\ One such commenter stated that
``[w]ithout an alternative, beneficial owners would either be forced to
build their own direct reporting to RNSAs to mitigate these concerns,
thereby significantly increasing their costs, or to exit the market
entirely, thereby
[[Page 75656]]
reducing overall liquidity.'' \195\ Another commenter mentioned
operational and confidentiality considerations involved with appointing
a reporting agent.\196\
---------------------------------------------------------------------------
\194\ See S3 Partners Letter, at 12; IHS Markit Letter, at 4;
Advanced Securities Consulting Letter, at 1-3.
\195\ See Pirum Letter, at 5.
\196\ See BlackRock Letter, at 3, 9.
---------------------------------------------------------------------------
Brokers, dealers, and clearing agencies, like all persons, are
subject to prohibitions on misuse of material non-public information.
Brokers, dealers, and clearing agencies are subject to Commission
examination for compliance with this,\197\ and other, requirements. To
the extent that a covered person may, nonetheless, be concerned about
providing sensitive information to another person, it may elect to hire
third party vendors for specific tasks to help with compliance
obligations. As noted above, the covered person would retain legal
responsibility for reporting.
---------------------------------------------------------------------------
\197\ See, e.g., 15 U.S.C. 240.78q(b) (section 17(b) of the
Exchange Act).
---------------------------------------------------------------------------
One commenter appeared to believe that all reporting required by
the proposed rule must be done through members of FINRA (the only
currently existing RNSA).\198\ The final rule does not require that all
covered persons that are required to report Rule 10c-1a information to
an RNSA be members of that RNSA.\199\ The final rule requires only that
reporting agents, if relied upon by a covered person to fulfill its
reporting obligations, must be a broker, dealer, or registered clearing
agency.\200\ Covered persons, including persons that are not RNSA
members, that elect not to use a reporting agent, are responsible for
providing the Rule 10c-1a information to an RNSA directly and may do so
without becoming RNSA members.\201\
---------------------------------------------------------------------------
\198\ See James J. Angel Letter, at 6.
\199\ See final Rule 10c-1a(j)(1).
\200\ See final Rule 10c-1a(j)(4).
\201\ See final Rule 10c-1a(a)(1).
---------------------------------------------------------------------------
Having considered the commenters' recommendations discussed above,
in this part, and for the foregoing reasons, the final rule defines the
term ``reporting agent'' to mean ``a broker, dealer, or registered
clearing agency that enters into a written agreement with a covered
person under paragraph (a)(2) of [the final rule].'' \202\ Therefore,
the final rule adds ``registered clearing agencies'' to the proposed
rule's scope of entities that are permitted to act as reporting agents,
which was limited to brokers or dealers.\203\
---------------------------------------------------------------------------
\202\ See final Rule 10c-1a(j)(4).
\203\ See proposed Rule 10c-1(a)(1)(ii)(A).
---------------------------------------------------------------------------
C. Reporting Agent Requirements--Rule 10c-1a(b)
1. Reporting Agent Reporting Requirements--Rule 10c-1a(b)
Proposed Rule
As discussed above, in Part VII.B, paragraph (a)(1)(ii)(B) of the
proposed rule required the reporting agent to provide the Rule 10c-1
information to an RNSA if the reporting agent had entered into a
written agreement (with the covered person) to provide the Rule 10c-1
information to an RNSA pursuant to paragraph (a)(1)(ii)(A) \204\ of the
proposed rule and the reporting agent had been provided timely access
to such Rule 10c-1 information by the covered person. The proposed
rule, in paragraphs (a)(2)(i) through (a)(2)(iv),\205\ also included
requirements for the reporting agent to assist both an RNSA and the
Commission with surveillance and compliance with RNSA requirements and
proposed Rule 10c-1.\206\ In proposing the specific requirements for
reporting agents, the Commission preliminarily believed it was
appropriate for a reporting agent to be responsible for providing Rule
10c-1 information to an RNSA, provided the reporting agent has
contractually agreed to provide such information to an RNSA and the
reporting agent has also been provided with timely access to such
information.\207\
---------------------------------------------------------------------------
\204\ See Proposing Release, 86 FR 69810 (stating ``[s]uch
written agreements under proposed Rule 10c-1(a)(1)(ii)(A) would
memorialize and provide proof of the contractual obligations for the
reporting agent to provide the Rule 10c-1 information to an
RNSA.'').
\205\ The reporting-related requirements specific to the
reporting agent, as proposed, included: paragraph (a)(2)(i) of the
proposed rule's policies and procedures requirement; paragraph
(a)(2)(ii) of the proposed rule's written agreement with an RNSA
requirement; and, paragraph (a)(2)(iii) of the proposed rule's list
of names requirement. See proposed Rules 10c-1(a)(2)(i) through
(a)(2)(iii). Proposed paragraph (a)(2)(iv) is discussed below, in
Part VII.C.2, regarding a reporting agent's recordkeeping
requirements.
\206\ See Proposing Release, 86 FR 69809.
\207\ See Proposing Release, 86 FR 69810.
---------------------------------------------------------------------------
In addition, the proposed rule's requirement that the reporting
agent enter into a written agreement with an RNSA was intended to
evidence the explicit permission the reporting agent has to provide
Rule 10c-1 information on behalf of the covered person.\208\ Similarly,
the reporting agent would also have been required to provide an RNSA
with a list of each covered person on whose behalf the reporting agent
would be providing the Rule 10c-1 information (and also to update the
list by the end of the day when the list changes).\209\ As the
Commission explained in the Proposing Release, requiring the reporting
agent to provide the identities of each covered person on whose behalf
the reporting agent is providing Rule 10c-1 information to an RNSA is
intended to provide the Commission with the ability to obtain the
identities of the covered persons from an RNSA in order to aid the
Commission with its oversight of the covered persons that have entered
into agreements with reporting agents, including with their compliance
with the proposed rule.\210\ In addition, the proposed requirement for
a reporting agent to have written policies and procedures was intended
to provide regulators with a means to examine and enforce a reporting
agent's compliance with proposed Rule 10c-1. Moreover, the proposed
recordkeeping requirements were intended to help facilitate the
Commission's oversight of reporting agents and to review the reporting
agents' compliance with the requirements to provide the Rule 10c-1
information to an RNSA.\211\
---------------------------------------------------------------------------
\208\ See Proposing Release, 86 FR 69810.
\209\ See Proposing Release, 86 FR 69810.
\210\ See Proposing Release, 86 FR 69810-11.
\211\ See Proposing Release, 86 FR 69811.
---------------------------------------------------------------------------
Final Rule
The Commission sought specific comment regarding the role and
requirements of a reporting agent. The Commission received a number of
reporting agent-related comments in response; however, most of these
comments focused primarily on a covered person's use of a reporting
agent or the eligibility requirements for a reporting agent, as
discussed above, in Part VII.B.2, rather than the requirements of an
already eligible reporting agent, as relevant here.\212\ The Commission
is adopting the specific reporting agent requirements, substantially as
proposed, but with some non-substantive modifications.
---------------------------------------------------------------------------
\212\ One commenter, however, stated that it is clearer and more
efficient to impose the obligation directly on the lending and
reporting entities when the conditions of the proposed rule are
satisfied. See ICI Letter 1, at 4 (discussing a reporting agent's
role in terms of its obligation to report for purposes of compliance
with the requirements of the proposed rule).
---------------------------------------------------------------------------
First, the requirements are relocated into a separate paragraph (b)
under the final rule.\213\ This non-substantive, technical modification
is intended to streamline and simplify the proposed rule text, by
combining into one paragraph, the requirements specific to a reporting
agent (as distinguished from the requirements applicable to the covered
person) in order to help clarify which party is ultimately responsible
[[Page 75657]]
for providing the Rule 10c-1a information to an RNSA.
---------------------------------------------------------------------------
\213\ See final Rules 10c-1a(b) through (b)(5).
---------------------------------------------------------------------------
Second, to reduce redundancy and complexity in the proposed rule
text, paragraph (b) of the final rule requires that ``any reporting
agent'' that assumes the reporting obligation on behalf of the covered
person, pursuant to paragraph (a)(2) of the final rule, comply with the
specific requirements in paragraph (b) of the final rule.\214\ A
covered person that enters into a written agreement with a reporting
agent to provide the Rule 10c-1a information to an RNSA on behalf of
the covered person as required by the final rule, and that provides the
reporting agent with timely access to the Rule 10c-1a information, may
rely on the reporting agent to fulfill the covered person's reporting
obligations under paragraph (a)(1) of the final rule.
---------------------------------------------------------------------------
\214\ See final Rule 10c-1a(j)(4), defining ``reporting agent''
to mean a broker, dealer, or registered clearing agency that enters
into a written agreement with a covered person under paragraph
(a)(2) of final Rule 10c-1a.
---------------------------------------------------------------------------
Lastly, the final rule combines the reporting-related requirements
that were previously located in paragraphs (a)(1)(ii)(B) and (a)(2) of
the proposed rule with the proposed reporting agent recordkeeping
requirements in paragraphs (a)(1)(ii)(A) and (a)(1)(ii)(B), into
paragraph (b) in the final rule.\215\
---------------------------------------------------------------------------
\215\ See final Rule 10c-1a(b). Paragraph (b)(1) of the final
rule clarifies that the reporting agent is required to comply with
the rules of an RNSA in terms of the format and manner of reporting
the required information to an RNSA and comply with the specific
time periods set forth in paragraphs (c) through (e) of final Rule
10c-1a.
---------------------------------------------------------------------------
Paragraph (b) of the final rule's specific inclusion of the term
``reporting agent,'' which is defined in final Rule 10c-1a(j)(4) to
mean a broker, dealer, or registered clearing agency that enters into a
written agreement with a covered person under paragraph (a)(2) of the
final rule, as well as inclusion of the ``assumes the reporting
obligation'' language, sets forth the reporting agent's ultimate
responsibility for reporting Rule 10c-1a information to an RNSA. The
final rule provides that a reporting agent will be required to provide
the Rule 10c-1a information to an RNSA under the new reporting regime
only when the covered person has both: (1) entered into the required
written agreement with the reporting agent, and (2) provided the
reporting agent with timely access to the Rule 10c-1a information.\216\
Thus, if a reporting agent is unable to provide the Rule 10c-1a
information to an RNSA because it lacks timely access to it, the
covered person who enters into the written agreement with the reporting
agent under paragraph (a)(2)(i) of the final rule remains responsible
for providing the required Rule 10c-1a information to an RNSA,
consistent with the proposed rule.
---------------------------------------------------------------------------
\216\ See final Rule 10c-1a(b)(1). See also final Rule 10c-
1a(a)(2).
---------------------------------------------------------------------------
Additionally, the Commission is adopting: 17 CFR 240.10c-1a(b)(1)
(``final Rule 10c-1a(b)(1)''); 17 CFR 240.10c-1a(b)(2) (``final Rule
10c-1a(b)(2)''); and 17 CFR 240.10c-1a(b)(3) (``final Rule 10c-
1a(b)(3)'') as new paragraphs (b)(1) through (b)(3) of the final rule,
the specific reporting-related requirements \217\ of a reporting agent,
substantially as they were proposed in paragraphs (a)(2)(i) through
(a)(2)(iii) of the proposed rule.\218\ Paragraph (b)(2) of final Rule
10c-1a will require a reporting agent to establish, maintain, and
enforce written policies and procedures that are reasonably designed to
provide Rule 10c-1a information to an RNSA. However, in the final rule,
as modified with non-substantive, technical, or clarifying changes to
the rule text consistent with the other changes made to the overall
final rule text, such Rule 10c-1a information is provided (by the
reporting agent) to an RNSA on behalf of a ``covered person'' (which is
a newly defined term in the final rule, rather than the term ``another
person,'' as was used in the proposed rule); and, also consistent with
the proposed rule, such information is to be provided ``in the format
and manner required by the applicable rule(s) of an RNSA, and within
the time periods specified in paragraphs (c) through (e)'' \219\ (which
is designed to clarify the proposed rule text, ``in the manner, format,
and time consistent with Rule 10c-1'' \220\). Apart from the
aforementioned changes, the policies and procedures requirement of the
reporting agent remains unchanged from the proposed rule.
---------------------------------------------------------------------------
\217\ See supra note 205 regarding paragraph (a)(2)(i) of the
proposed rule's policies and procedures requirement; paragraph
(a)(2)(ii) of the proposed rule's written agreement with an RNSA
requirement; and paragraph (a)(2)(iii) of the proposed rule's list
of names requirement.
\218\ Specifically, once the covered person enters into the
required written agreement with the reporting agent, and the covered
person provides the reporting agent with timely access to the Rule
10c-1a information, paragraph (b)(1) of the final rule specifically
requires the reporting agent to provide the Rule 10c-1a information
to an RNSA on behalf of a covered person (in the format and manner
required by the rule(s) of such RNSA and within the time periods
specified in paragraphs (c) through (e) of final Rule 10c-1a). See
final Rule 10c-1a(b)(1).
\219\ See final Rule 10c-1a(b)(2).
\220\ See proposed Rule 10c-1(a)(2)(i).
---------------------------------------------------------------------------
Additionally, consistent with the proposed rule, paragraph (b)(3)
of the final rule requires the reporting agent to enter into a written
agreement with an RNSA that permits the reporting agent to provide the
required Rule 10c-1a information to an RNSA (e.g., establish the
required connectivity with such RNSA) on behalf of a covered person.
More specifically, the final rule provides that a reporting agent shall
``[e]nter into a written agreement with an RNSA that permits the
reporting agent to provide Rule 10c-1a information to an RNSA on behalf
of a covered person.'' \221\ Other than replacing the proposed term
``another person'' with the newly defined term ``covered person'' in
the final rule, the written agreement requirement of the reporting
agent remains unchanged from the proposed rule.
---------------------------------------------------------------------------
\221\ See final Rule 10c-1a(b)(3) (replacing term ``another
person'' from paragraph (a)(2)(ii) of the proposed rule with the
term ``covered person'').
---------------------------------------------------------------------------
Moreover, the Commission is adopting 17 CFR 240.10c-1a(b)(4)
(``final Rule 10c-1a(b)(4)''), which requires the reporting agent to
``provide an RNSA with a list naming each covered person on whose
behalf the reporting agent is providing Rule 10c-1a information to an
RNSA,'' consistent with the proposed rule, although paragraph (b)(4) of
final Rule 10c-1a adds the term ``naming'' to replace the less-
descriptive term ``of,'' as was used in the proposed rule. For
consistency, the final rule also includes the newly defined term
``covered person'' in place of ``person and lending agent,'' as was
used in paragraph (a)(2)(iii) of the proposed rule. Moreover, paragraph
(b)(4) of the final rule clarifies the proposed rule by streamlining
the text, ``provide an RNSA with any updates to the list of such
persons by the end of the day such list changes,'' by removing the
extra ``on the day'' in the sentence. Also, the final rule slightly
modifies the rule text ``an updated list'' to read instead ``any
updates to the list'' to clarify that any updates (or changes) to the
list (and the updated list itself) must be provided to an RNSA ``by the
end of the day such list changes.'' \222\ A reporting agent's written
policies and procedures will need to address the above requirements.
---------------------------------------------------------------------------
\222\ See final Rule 10c-1a(b)(4).
---------------------------------------------------------------------------
2. Recordkeeping Requirements of a Reporting Agent--Rule 10c-1a(b)(5)
Proposed Rule
Paragraph (a)(2)(iv) of the proposed rule would have required that
the reporting agent maintain certain information for a period of three
years, the first two in an easily accessible place.\223\ The
information required to be maintained included the Rule 10c-1
information provided by the covered
[[Page 75658]]
person to the reporting agent, including the time of receipt, as well
as the Rule 10c-1 information that the reporting agent provided to an
RNSA, and time of transmission. Additionally, under the proposed rule,
the reporting agent would have to retain the written agreements between
the reporting agents and beneficial owners, lending agents, and an
RNSA.\224\ As the Commission explained, the proposed recordkeeping
requirements were designed to help facilitate the Commission's
oversight of reporting agents and review the reporting agents'
compliance with the requirement to provide the Rule 10c-1 information
to an RNSA.\225\
---------------------------------------------------------------------------
\223\ See proposed Rule 10c-1(a)(2)(iv).
\224\ See Proposing Release, 86 FR 69811.
\225\ See Proposing Release, 86 FR 69811.
---------------------------------------------------------------------------
Final Rule
One commenter stated that it was redundant and unnecessary for the
reporting agent to retain data, as FINRA already has the data.\226\
However, pursuant to 17 CFR 240.10c-1a(b)(5) (``final Rule 10c-
1a(b)(5)''), the reporting agent would not only be required to retain
data that it submitted to an RNSA (including time of transmission), but
would also be required to retain the data it received from the covered
person (including time of receipt), which would demonstrate compliance
with the timeliness requirements of the rule or whether the reporting
agent itself received the data in an untimely manner from the covered
person, as well as the written agreements required in order to be
eligible as a reporting agent. Such records would be helpful to
regulators in identifying and reconstructing the reasons for missing,
incomplete, or untimely data (e.g., whether it was the result of
untimely receipt by the reporting agent or issues with the reporting
agent's operations). The data would also help reporting agents respond
to Commission inquiries as to whether the reporting agent or the
covered person appropriately complied with the final rule. The records
of data submitted to an RNSA would provide context for such inquiries,
as well as allow for a comparison of data received (by the reporting
agent) and submitted to an RNSA, to the data published by an RNSA,
allowing regulators to determine whether there are issues with an
RNSA's processing of data received.
---------------------------------------------------------------------------
\226\ See James J. Angel Letter, at 7.
---------------------------------------------------------------------------
Accordingly, the Commission is adopting, in paragraph (b)(5) of
final Rule 10c-1a without substantive changes, the proposed
recordkeeping requirements contained in paragraphs (a)(2)(iv)(A) and
(B) of the proposed rule that provide for the reporting agent to
preserve for a period of not less than three years, the first two years
in an easily accessible place, both the Rule 10c-1a information
obtained by the reporting agent from the covered person pursuant to
paragraph (a)(2) of the final rule, including the time of receipt, and
the corresponding Rule 10c-1a information provided by the reporting
agent to an RNSA, including the time of transmission to an RNSA \227\;
and, the written agreements as required under paragraphs (a)(2) and
(b)(3) of the final rule.\228\
---------------------------------------------------------------------------
\227\ See final Rule 10c-1a(b)(5); 17 CFR 240.10c-1a(b)(5)(i)
(``final Rule 10c-1a(b)(5)(i)''); 17 CFR 240.10c-1a(b)(5)(ii)
(``final Rule 10c-1a(b)(5)(ii)'').
\228\ While the term ``Rule 10c-1a information'' has stayed the
same in the final rule, as also explained below, in Part VII.F, the
scope of the information required by the final rule has been
modified with the deletion of the proposed requirement to provide
information regarding the total amount of ``securities on loan'' and
``available to lend'' data, as was originally proposed.
---------------------------------------------------------------------------
D. Scope of Securities Required To Be Reported--Rule 10c-1a(j)(3)
Proposed Rule
In the Proposing Release, the Commission stated its preliminary
belief that proposed Rule 10c-1 should apply to all securities ``to
ensure that a complete picture of transactions involving the loan of
securities is provided to the RNSA.'' \229\ Accordingly, the proposed
rule would have required the reporting of loans of any security (e.g.,
both equity and debt).\230\
---------------------------------------------------------------------------
\229\ See Proposing Release, 86 FR 69808.
\230\ See proposed Rule 10c-1(a)(1). See also Proposing Release,
86 FR 69808. See, e.g., 17 CFR 230.902 (defining ``Debt securities''
as ``any security other than an equity security'' and an ``equity
security'' as defined in 17 CFR 230.405).
---------------------------------------------------------------------------
Specifically, the Commission stated that, ``if the Commission were
to limit the scope of the proposed Rule (e.g., to only equity
securities) then a significant number of securities lending
transactions would be excluded and the market efficiencies and
reduction of information asymmetry that the Commission anticipates will
result from proposed Rule 10c-1 would not accrue to non-equity
securities.'' \231\
---------------------------------------------------------------------------
\231\ See Proposing Release, 86 FR 69808 (citing A Pilot Survey
of Agent Securities Lending Activity, Off. Of Fin. Research, Working
Paper No. 16-08, 2016, at 8, available at <a href="https://www.financialresearch.gov/working-papers/files/OFRwp-2016-08_Pilot-Survey-of-Securities-Lending.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp-2016-08_Pilot-Survey-of-Securities-Lending.pdf</a>).
---------------------------------------------------------------------------
Final Rule
In response to proposed Rule 10c-1, some commenters expressed
general support for increased transparency and price discovery in the
securities lending market by increasing the amount and availability of
data in the market.\232\ Other commenters offered support for the
inclusion of all loans of securities.\233\ Another commenter expressed
the view that ``[t]here is an urgent need to require securities lenders
to provide greater details of their loans to a RNSA as outlined by the
proposed changes to Rule 10c-1 . . . [m]arket participants and
regulators alike will greatly benefit from the greater transparency
that comes from reporting every securities lending transaction as a
result of the proposed changes to Rule 10c-1, just as they have from
the trade-by-trade reporting that was instituted in the corporate bond
market since TRACE was introduced.'' \234\
---------------------------------------------------------------------------
\232\ See supra note 47.
\233\ See Nasdaq Letter, at 2; Morningstar Letter, at 4.
\234\ See AFREF Letter 1, at 3.
---------------------------------------------------------------------------
One commenter recommended that the Commission make explicit ``the
types of securities loans to which Rule 10c-1 applies so that market
participants have clarity as to which types of securities loans must be
reported.'' \235\ The final rule makes explicit the types of
transactions to which the final rule applies and the securities that
are within the scope of the final rule through two newly defined terms:
``covered securities loan'' and ``reportable security.'' The definition
of the term ``covered securities loan'' in paragraph (j)(2) of the
final rule makes explicit the types of loans to which the final rule
applies, as discussed below, in Part VII.E. The definition of the term
``covered securities loan'' refers to a transaction in which any person
on behalf of itself or one or more other persons, lends a ``reportable
security'' to another person.\236\ The final rule defines the term
``reportable security'' 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 as required by Sec. 242.613 (``Rule
613'') of the Exchange Act and the CAT NMS Plan (``CAT''), the
Financial Industry Regulatory Authority's Trade Reporting and
Compliance Engine (``TRACE''), or the Municipal Securities Rulemaking
Board's Real Time Reporting System (``RTRS''), or any reporting system
that replaces one of these systems.'' \237\ The definition of the term
``reportable security'' aligns the securities for which loans must be
reported with securities for which transactions are currently being
reported to existing reporting regimes, specifically, the CAT, TRACE,
and RTRS. At this time, data on
[[Page 75659]]
securities loans should be consistent with existing reporting regimes
for other transactions in the same securities.
---------------------------------------------------------------------------
\235\ ICI Letter 1, at 7.
\236\ Final Rule 10c-1a(j)(2).
\237\ Final Rule 10c-1a(j)(3).
---------------------------------------------------------------------------
Aligning the scope of securities for covered securities loans with
existing transaction reporting systems will provide a number of
benefits. For instance, such alignment will allow regulators to obtain
a more complete view across the different types of transactions for the
same securities. In addition, many market participants are already
familiar with the existing systems, either as reporting entities or, in
the case of TRACE and RTRS, as users of the data.
Presently, securities that fall outside of the existing reporting
regimes include: (1) for TRACE: fixed-income transactions in securities
with a maturity of one calendar year or less, such as money market
instruments,\238\ and non-U.S. dollar-denominated debt are excluded
from reporting requirements in TRACE; \239\ (2) for the CAT: equity
transactions in ``restricted securities,'' as that term is defined in
17 CFR 230.144(a)(3) (``Rule 144'') of the Securities Act,\240\ are
generally not reportable to the CAT because they are not subject to
prompt last sale reporting rules; \241\ and (3) for RTRS: municipal
securities transactions excepted under MSRB Rule G-14,\242\ including a
small number of transactions for securities without assigned Committee
on Uniform Securities Identification Procedure (``CUSIP'') numbers,
municipal fund securities (i.e., 529 Plans, ABLE programs, local
government investment pools), and inter-dealer transactions ineligible
for comparison of trade settlement date at a clearing agency.\243\ To
provide consistency with existing reporting regimes, final Rule 10c-1a
also incorporates these exclusions.
---------------------------------------------------------------------------
\238\ See, e.g., FAQ 3.1.43, available at <a href="https://www.finra.org/filing-reporting/trace/faq">https://www.finra.org/filing-reporting/trace/faq</a> (``[a]s stated in Rule 6710(a), the
definition of TRACE-Eligible Security does not include a Money
Market Instrument. Under recent amendments to Rule 6710(o)
pertaining to discount notes, ``Money Market Instrument'' means a
debt security that at issuance has a maturity of one calendar year
or less, or, if a discount note issued by an Agency, as defined in
Rule 6710(k), or a Government-Sponsored Enterprise, as defined in
Rule 6710(n), a maturity of one calendar year and one day or less
(i.e., not later than 366 days from the date of issuance, or if a
leap year, not later than 367 days from the date of issuance).'').
\239\ See, e.g., <a href="https://www.finra.org/filing-reporting/trace/trace-foreign-sovereign-debt">https://www.finra.org/filing-reporting/trace/trace-foreign-sovereign-debt</a>.
\240\ See, e.g., <a href="https://www.catnmsplan.com/faq">https://www.catnmsplan.com/faq</a> (see FAQ B11
describing the types of products in scope for reporting to the CAT).
\241\ Under the CAT NMS Plan, ``Eligible Security'' includes:
(i) all NMS Securities, meaning ``any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan, or an effective national market system plan for reporting
transactions in Listed Options,'' and (ii) all OTC Equity
Securities, meaning ``any equity security, other than an NMS
Security, subject to prompt last sale reporting rules of a
registered national securities association and reported to one of
such association's equity trade reporting facilities.'' Further,
while the CAT NMS Plan does not define ``prompt last sale reporting
rules,'' the Operating Committee has determined that transactions in
``restricted securities'' (as defined by Rule 144(a)(3)) are not
reportable to the CAT because they are not subject to prompt last
sale reporting rules. However, transactions in direct participation
programs must be reported to the CAT in Phase 2c of Industry Member
reporting.
\242\ Brokers, dealers, and municipal securities dealers
(``municipal dealers'') must report transactions in municipal
securities pursuant to MSRB Rule G-14. Pursuant to Rule G-14, each
municipal dealer reports to the MSRB or its designee information
about each purchase and sale transaction effected in municipal
securities to RTRS in the manner prescribed by Rule G-14, available
at <a href="https://www.sec.gov/rules/sro/msrb/2018/34-83038-ex5.pdf">https://www.sec.gov/rules/sro/msrb/2018/34-83038-ex5.pdf</a>.
\243\ See, e.g., Specifications for Real-Time Reporting of
Municipal Securities Transactions (Nov. 2022), at 15 (``1.2.1
Securities that Must be Reported[:] In the real-time environment,
all customer trades in municipal securities issues that have CUSIP
numbers assigned by the CUSIP Service Bureau of Standard & Poor's
must be reported, except municipal fund securities. Dealers should
not report (a) customer transactions in issues ineligible for CUSIP
number assignment and (b) municipal fund securities. For inter-
dealer trades, transactions must be reported in all municipal
securities issues eligible for comparison in RTTM [the National
Securities Clearing Corporation's (``NSCC'') Real-Time Trade
Matching (``RTTM'') web-based trade input method]. In addition, Rule
G-14 requires that the role of a clearing broker in RTTM-eligible
agency transactions effected by an introducing broker against the
principal positions of the clearing broker shall be reported . . ..
If an issue is not RTTM-eligible (because of the lack of a CUSIP
number for the security or other reasons), inter-dealer trades in
the issue are not subject to the reporting requirement.'')
(footnotes omitted), available at <a href="https://www.msrb.org/sites/default/files/RTRS-Specifications.pdf">https://www.msrb.org/sites/default/files/RTRS-Specifications.pdf</a>.
---------------------------------------------------------------------------
The Commission also received comments with suggestions to limit the
scope of securities for which loans must be reported under the proposed
rule.\244\ One commenter favored narrowing the proposed scope of
securities to only equity securities that transact in significant
volume in the U.S., namely equity securities listed or traded on a
national securities exchange ``to avoid uncertainty for non-U.S.
borrowers and lenders transacting in securities that are primarily
relevant in non-U.S. markets and to provide for a measured approach in
introducing data reporting and dissemination into the marketplace.''
\245\ Investors will also benefit from the increased transparency into
loans of equity securities that are not listed or traded on a national
securities exchange (i.e., loans of equities that are traded over-the-
counter (``OTC'')) provided by the final rule. The Commission
understands that existing lending transparency systems currently
include information about loans of exchange-listed and OTC securities.
Thus, lenders should generally already be accustomed to providing and
receiving such data. Further, OTC securities tend to be less liquid and
publicly available information about an issuer of an OTC security may
be limited or nonexistent,\246\ and thus such securities may be harder
to borrow. Accordingly, data concerning loans of less liquid
securities, such as OTC securities, will be beneficial to market
participants by reducing information asymmetries and improving pricing
efficiency by facilitating benchmarking for the loans of less liquid
securities.\247\
---------------------------------------------------------------------------
\244\ See, e.g., Federated Hermes Letter, at 2; Letter from
Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO, Global Head of
Government Affairs, Alternative Investment Management Association
(Jan. 7, 2022) (``AIMA Letter 1''), at 5; RMA Letter, at 5; ICI
Letter 1, at 7; ABA Letter, at 4.
\245\ See, e.g., RMA Letter, at 15.
\246\ See, e.g., Publication or Submission of Quotations Without
Specified Information, Release No. 34-89891 (Sept. 16, 2020), 85 FR
68124 at 68125 (Oct. 27, 2020) (Adopting Release) (``However, in
other cases, there is no or limited current public information
available about certain issuers of quoted OTC securities to allow
investors or other market participants to make informed investment
decisions.'').
\247\ See infra Part IX.C.1 (discussing the benefits of
increased transparency in less liquid lending markets).
---------------------------------------------------------------------------
Commenters also requested clarification regarding which types of
securities would be reportable,\248\ and some suggested limiting the
scope of reportable securities. For example, one commenter suggested
limiting the scope to equities for a period of time while the
Commission evaluates whether to expand the scope of reporting to
additional asset classes.\249\ Another commenter stated that the final
rule should ``capture the most relevant and appropriate securities for
the reporting regime [referring to equity securities] while not
precluding the inclusion of other securities over time as the SEC and
market participants gain more experience with the reporting regime.''
\250\ The definition of the term ``reportable security'' in the final
rule is not limited to equities for the reasons discussed below, in
this part. The definition of the term ``reportable
[[Page 75660]]
security'' in paragraph (j)(3) of the final rule will help provide
certainty to non-U.S. borrowers and lenders regarding the securities
that are within the scope of the final rule (i.e., securities or any
class of an issuer's securities for which information is reported or
required to be reported to the CAT, TRACE, or RTRS, or any reporting
system that replaces one of these systems). In addition, Part VII.M
below discusses the domestic application of the final rule, which
should also help provide certainty to non-U.S. borrowers and lenders
transacting in securities that are primarily relevant in non-U.S.
markets about the application of the final rule. With respect to taking
a measured approach in introducing data reporting and dissemination
into the marketplace, the Commission is establishing the specific
compliance dates discussed below in Part VIII. Such compliance dates
should provide adequate time for covered persons to implement systems
for data reporting and for RNSAs to implement data dissemination
systems. Another commenter recommended that the Commission begin with
reporting requirements for loans of U.S. equity securities because such
loans ``mostly occur on electronic trading platforms, making the
generation of trade data for these loans more straightforward than
loans of other asset classes.'' \251\ As discussed above, the
Commission has provided a compliance date that will provide adequate
time for covered persons to comply with the final rule, even for loans
of securities that may not occur on an electronic trading platform, and
will not further delay transparency for OTC investors, which are
primarily retail.\252\
---------------------------------------------------------------------------
\248\ See, e.g., BlackRock Letter, at 2 (``as securities lending
market dynamics differ by the asset class, we recommend the
Commission provide further clarity on which asset classes are in
scope''); ICI Letter 1, at 6.
\249\ See ICI Letter 1, at 7.
\250\ See RMA Letter, at 17 (supporting an initial definition of
``securities'' to include ``equity securities that are part of the
national market system'' because that definition ``captures the most
relevant and appropriate securities for the reporting regime while
not precluding the inclusion of other securities over time as the
SEC and market participants gain more experience with the reporting
regime'').
\251\ BlackRock Letter, at 9.
\252\ See Andrew Ang et al., Asset Pricing in the Dark: The
Cross-Section of OTC Stocks, 26 Rev. Fin. Stud. 2985-3028 (2013).
---------------------------------------------------------------------------
Some commenters requested a phased approach to the overall
implementation of the final rule, which is discussed below, in Part
VIII, including a recommendation that implementation of the final rule
begin with loans of equity securities.\253\ However, current lending
systems include data on loans of fixed income securities.\254\ Thus,
lenders should generally be accustomed to providing and analyzing data
on loans of fixed income securities. Further, as discussed below, in
Part VIII, such a phased approach is not provided for in the final rule
because it would unduly delay the public availability of Rule 10c-1a
information and limit the initial benefits of the final rule.
---------------------------------------------------------------------------
\253\ See infra note 688 and accompanying text.
\254\ See Equilend Letter, at 1 (Data Explorers was acquired by
S&P Global and manages a dataset of over $37 trillion of global
securities from 20,000 institutional funds, and over three million
intraday transactions), available at <a href="https://www.spglobal.com/marketintelligence/en/mi/products/securities-finance.html">https://www.spglobal.com/marketintelligence/en/mi/products/securities-finance.html</a>.
---------------------------------------------------------------------------
One commenter suggested excluding debt from the proposed rule,
particularly corporate debt and asset-backed securities, which the
commenter described as having small issuance sizes, diverse
characteristics, and a small number of lending transactions.\255\
However, information about loans on such securities will be beneficial
to lenders, investors, and regulators precisely because of such
characteristics. Data on such loans may be useful for lenders to assess
rates and for regulators and investors to understand the lending market
for such securities. For example, market participants will be able to
use the information made publicly available by the final rule and pool
such information across debt securities to help market participants
compare the terms of a loan of one debt security with loans of other
debt securities that have similar characteristics or time horizons.
Thus, including debt securities in the final rule will help improve the
ability of market participants to benchmark their loans of debt
securities.
---------------------------------------------------------------------------
\255\ See RMA Letter, at 16.
---------------------------------------------------------------------------
The Commission also received comment regarding the size of the debt
market. One commenter stated that ``[w]hile the number of publicly
traded equity securities of U.S. issuers is around 3,600, there are
over two million unique issuances of corporate and government bonds and
asset-backed securities in circulation.'' \256\ The same commenter
stated that utilization rates decrease as products become more
individualized and there is only a small market for shorting
bonds.\257\ Less liquid markets should benefit from the increased
transparency provided by the final rule because improving securities
lending transparency, even in the debt market, can lead to reduced
information asymmetry and increased pricing efficiency.\258\
---------------------------------------------------------------------------
\256\ RMA Letter, at 16.
\257\ See RMA Letter, at 16.
\258\ See infra Part IX.C.1 (discussing how the final rule will
affect markets with low lending volume such as corporate bonds).
---------------------------------------------------------------------------
One commenter suggested excluding government securities from the
proposed rule because ``there is sufficient liquidity and demand for
these securities on platforms and venues that have a high degree of
transparency,'' but did not provide details regarding the transparency
of the platforms and venues.\259\ As discussed below, in Part IX.B.2,
there is some transparency in the government securities lending market,
but some information may not be as timely or as robust (i.e., the data
may contain aggregated volume information) as under the final rule. The
final rule includes loans of U.S. Government securities between market
participants to help ensure that comprehensive and timely information
about these loans is made publicly available so that market
participants in the government securities lending market benefit from
increased transparency.
---------------------------------------------------------------------------
\259\ RMA Letter, at 16.
---------------------------------------------------------------------------
Some commenters requested clarification on whether ``crypto
assets'' or as some commenters referred to them, ``cryptocurrencies''
would be covered by proposed Rule 10c-1.\260\ A crypto asset, which is
also sometimes referred to as a ``digital asset,'' may meet the
definition of a ``security'' under the federal securities laws.\261\ As
defined in the final rule, paragraph 10c-1a(j)(3) applies to reportable
securities, which are securities for which transactions are reported to
the CAT, TRACE, and RTRS. Accordingly, if a crypto asset is a security
that meets one of these same criteria, the crypto asset is a reportable
security.
---------------------------------------------------------------------------
\260\ See, e.g., James J. Angel Letter, at 5; Letter from Jay
Rivera (Mar. 2, 2022); Letter from Treveri Capital LLC (Dec. 22,
2021) (``Treveri Capital Letter''), at 1.
\261\ See, e.g., Report of Investigation Pursuant to Section
21(a) of the Securities Exchange Act of 1934: The DAO, Release No.
34-81207 (July 25, 2017) (``DAO 21(a) Report''), available at
<a href="https://www.sec.gov/litigation/investreport/34-81207.pdf">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>. See also
SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
---------------------------------------------------------------------------
One commenter believed that infrequent lending of debt securities
could result in a ``far greater risk of loss of anonymity and the use
of such data to anticipate or reverse engineer the trading of
competitors.'' \262\ The final rule's requirements for end-of-day
reporting of data elements and loan modification data elements in
paragraphs (c) and (d) and delaying the publication of loan amount and
modifications to loan amount in paragraph (g) should help reduce the
potential to anticipate and reverse engineer the trading of
competitors. In addition, paragraph (g)(4) of the final rule requires
that following the receipt of confidential information pursuant to
paragraph (e) ``an RNSA shall keep such information confidential, in
accordance with the provisions of paragraph (h) of this section and
applicable law.'' \263\ Further, 17 CFR 240.10c-1a(h)(4) (``final Rule
10c-1a(h)(4)'') requires that an RNSA ``[e]stablish, maintain, and
enforce reasonably designed written
[[Page 75661]]
policies and procedures to maintain the security and confidentiality of
confidential information required by paragraph (e) of this section.''
\264\ Thus, the only existing RNSA's experience with managing nonpublic
information, coupled with the explicit requirements for protecting
confidential information in paragraphs (g)(4) and (h)(4) of the final
rule, will help ensure that an RNSA implements data security measures
that will protect anonymity.
---------------------------------------------------------------------------
\262\ RMA Letter, at 16.
\263\ Final Rule 10c-1a(g)(4).
\264\ Final Rule 10c-1a(h)(4).
---------------------------------------------------------------------------
E. Scope of Transactions Required To Be Reported--Rule 10c-1a(j)(2)
Proposed Rule
The Commission proposed that any person that ``loans a security''
on behalf of itself or another person shall provide Rule 10c-1
information to an RNSA.\265\ The Commission did not define the term
``loans a security,'' but requested comment on whether a definition was
necessary.\266\ In the Proposing Release, the Commission stated its
preliminary belief that any person that loans a security on behalf of
itself or another person should be required to provide the material
terms to an RNSA to ensure that proposed Rule 10c-1 is appropriately
``designed to increase the transparency of information available to
brokers, dealers, and investors, with respect to the loan or borrowing
of securities.'' \267\
---------------------------------------------------------------------------
\265\ See proposed Rule 10c-1(a).
\266\ See Proposing Release, 86 FR 69808 (Question 8).
\267\ See Proposing Release, 86 FR 69807. See also Public Law
111-203, sec. 984(b), 124 Stat. 1376 (2010).
---------------------------------------------------------------------------
Final Rule
Many commenters requested clarification of the scope of securities
loan transactions to which the rule's reporting requirements would
apply.\268\ One commenter stated that the proposed rule sought to
regulate ``a host of transactions that do not involve the `loan or
borrowing of securities.' '' \269\ Other commenters recommended that a
definition of the term ``loans a security'' refer only to lending for a
particular purpose.\270\ Some of those commenters expressed concerns
about including data for loans that were not considered traditional
loans in the industry, particularly loans for which the parties did not
enter into a written contract or transfer collateral, and that such
loans might ``skew the data and negatively impact the utility of the
information provided.'' \271\ Other commenters recommended that the
final rule include a defined term for the types of transactions that
are covered by the rule.\272\
---------------------------------------------------------------------------
\268\ See, e.g., Fidelity Letter, at 2; SIFMA Letter 1, at 9;
Letter from Wim Mijs, CEO, European Banking Federation (Jan. 17,
2022) (``EBF Letter''), at 1; Citadel Letter, at 4.
\269\ See Citadel Letter, at 12.
\270\ See, e.g., CASLA Letter, at 2 (recommending ``a definition
of `securities loan' . . . based on the purpose of a loan'').
\271\ See, e.g., BlackRock Letter, at 6-7.
\272\ See, e.g., Fidelity Letter, at 2; Sharegain Letter, at 3;
Letter from Kenneth E. Bentsen, Jr., President and CEO, SIFMA (Apr.
1, 2022) (``SIFMA Letter 2''), at 3; Letter from Lindsey Weber
Keljo, Asset Management Group--Acting Head, SIFMA Asset Management
Group (Jan. 7, 2022) (``SIFMA AMG Letter''), at 9; CASLA Letter, at
2; EBF Letter, at 1; RMA Letter, at 14-15; IIB Letter, at 9; FIF
Letter, at 2-3.
---------------------------------------------------------------------------
To address commenters seeking greater clarity and commenters
recommending a definition as to what types of transactions are required
to be reported, the final rule includes a definition of the term
``covered securities loan'' to mean ``a transaction in which any person
on behalf of itself or one or more other persons, lends a reportable
security to another person,'' with certain exceptions.\273\ As
discussed below, in this part, the exceptions remove from the scope of
the final rule's reporting requirements certain clearing agency
positions \274\ and certain uses of margin securities by a broker or
dealer \275\ that are not consistent with, or traditionally recognized
as, securities lending transactions.
---------------------------------------------------------------------------
\273\ See final Rule 10c-1a(j)(2).
\274\ See final Rule 10c-1a(j)(2)(ii).
\275\ See final Rule 10c-1a(j)(2)(iii).
---------------------------------------------------------------------------
The Commission received a comment recommending that the term
``loans a security'' be limited to lending to unaffiliated
borrowers.\276\ Other commenters suggested that information on
securities lending transactions between affiliates not be disseminated
under the rule,\277\ with one stating that, ``loans between a broker-
dealer and its affiliates, may not represent the actual rates available
in the securities lending market and therefore could cause confusion
and lead to misinterpretation if published.'' \278\ The Commission does
not agree that it would be appropriate to exclude loans to affiliated
borrowers from the scope of the final rule. Inter-affiliate loans may
be arms-length transactions and excepting such loans would result in
the loss of data relevant to the lending market.\279\
---------------------------------------------------------------------------
\276\ See SIFMA AMG Letter, at 9 (recommending a definition of
the term ``loans a security'' to mean to ``enter into a transaction
in which one person, on behalf of itself or another person . . .
will temporarily lend to an unaffiliated person,'' among other
things).
\277\ See, e.g., SIFMA Letter 1, at 15; RMA Letter, at 15; CASLA
Letter, at 2; IIB Letter, at 10.
\278\ See SIFMA Letter 1, at 15. See also RMA Letter, at 15
(stating that ``inter-affiliate loans frequently do not represent
market prices and should be excluded from such dissemination'').
\279\ To reduce any potential confusion and misinterpretation of
the data, an RNSA could determine to, if it is able, develop
methodologies to separate or identify such loans.
---------------------------------------------------------------------------
In addition, an exclusion for inter-affiliate loans could result in
market practices to circumvent reporting obligations. For instance, in
arranged financing, a broker or dealer ``may offer arranged financing
programs (sometimes called `enhanced lending' or `short arranging
products') through which a customer can borrow shares from the firm's
domestic or foreign affiliate and use those shares to close out a short
position in the customer's account.'' \280\ In describing arranged
financing, a market participant has stated that ``[w]ith respect to . .
. arranged financing/enhanced lending models at member firms, certain
ones may involve the loan of shares to customers from domestic
affiliates and others may involve the loan of shares to customers from
foreign affiliates.'' \281\ Thus, if the broker or dealer agrees to
provide a customer the covered securities loan through an affiliate,
such as a foreign affiliate, an exclusion for inter-affiliate loans
could exclude the securities loan entirely. Moreover, one researcher
has observed that ``owners of large portfolios . . . often conduct
their own lending programs with an affiliated agent lender . . . .''
\282\ An exclusion for inter-affiliate loans would not capture such
loans. Therefore, under the final rule a covered person is required to
report covered securities loans with affiliates.
---------------------------------------------------------------------------
\280\ See FINRA Regulatory Notice 21-19 (June 4, 2021),
available at <a href="https://www.finra.org/rules-guidance/notices/21-19">https://www.finra.org/rules-guidance/notices/21-19</a>.
\281\ See, e.g., Robert Toomey, Managing Director, and Joseph
Corcoran, Managing Director, SIFMA, SIFMA Comment on Short Interest
Position Reporting Enhancements and Other Changes Related to Short
Sale Reporting (FINRA Regulatory Notice 21-19) (Sept. 30, 2010),
available at <a href="https://www.sifma.org/wp-content/uploads/2021/10/SIFMA-Comments-on-FINRA-RN-21-19-Final.pdf">https://www.sifma.org/wp-content/uploads/2021/10/SIFMA-Comments-on-FINRA-RN-21-19-Final.pdf</a>.
\282\ See, e.g., BIS Working Papers No. 768: Over-the-Counter
Market Liquidity and Securities Lending, Nathan Foley-Fisher, et
al., Bank of International Settlement (Feb. 2019), available at
<a href="https://www.bis.org/publ/work768.pdf">https://www.bis.org/publ/work768.pdf</a>.
---------------------------------------------------------------------------
Certain commenters recommended that a definition of the term
``loans a security'' refer only to transactions made pursuant to a
written lending agreement \283\ or documented as a securities loan on
the lender's books
[[Page 75662]]
and records.\284\ One commenter stated that such an approach would
``ensure consistent reporting and avoid confusion and misinterpretation
of data by the public.'' \285\ Another commenter stated that it could
avoid ``the public dissemination of incomplete, inaccurate, and
misleading information that could have an adverse impact on the
securities lending market.'' \286\ The Commission disagrees that the
definition of the term ``covered securities loan'' should require that
the transaction be agreed to pursuant to a written securities lending
agreement such as the Master Securities Loan Agreement, or a
transaction documented as a securities loan on a lender's books and
records. Such a requirement could provide an easy way to avoid the
requirement, particularly for unregulated entities not otherwise
subject to documentation and books and records requirements. Moreover,
such a requirement could cause competitive harm to entities that are
subject to such requirements or who follow such practices as risk
management tools. Requiring the reporting of only securities loans made
pursuant to a written agreement or subject to a covered person's books
and records requirements would create confusion by introducing such
distinctions, which may be interpreted or applied differently across
the different types of persons that meet the definition of ``covered
person.'' Additionally, such requirements would result in data that
excludes reporting by covered persons that do not use written
agreements or have books and records requirements. Such gaps in the
data could contribute to the misinterpretation of data by the public,
instead of ameliorating it as the commenter suggests.\287\ Thus, the
final rule covers a wide variety of loans without limitation as to a
particular loan's design or structure by including all loans that occur
when a covered person ``agrees to a covered securities loan.'' \288\
---------------------------------------------------------------------------
\283\ See, e.g., SIFMA Letter 1, at 10; SIFMA AMG Letter, at 9;
RMA Letter, at 15; Federated Hermes Letter, at 2 (recommending to
``limit reporting only to traditional lending agreements made
pursuant to the Master Securities Loan Agreement''); S3 Partners
Letter, at 10-11.
\284\ See, e.g., SIFMA Letter 1, at 3; SIFMA AMG Letter, at 9.
\285\ See SIFMA Letter 1, at 3.
\286\ SIFMA AMG Letter, at 2.
\287\ See SIFMA Letter 1, at 3.
\288\ See final Rule 10c-1a(a). The final rule's requirement
that a covered person who ``agrees to'' a covered securities loan
must report Rule 10c-1a information to an RNSA (or rely on a
reporting agent to do so) is designed to be broad regarding when a
securities loan is required to be reported. This is designed to
ensure that differently structured securities loans are captured by
the final rule to prevent evasion (e.g., by not including specific
characteristics, like a written agreement, that can be easily
avoided), and to prevent undue delay of reporting (e.g., by not
requiring that the loan be settled, which may take days or longer
after the material terms of a securities loan have been agreed to).
---------------------------------------------------------------------------
Some commenters recommended that the term ``loans a security''
specifically refer to the temporary lending of securities against a
transfer of collateral.\289\ One of the commenters stated that such a
provision would help ``ensure consistent reporting and avoid confusion
and misinterpretation of data by the public.'' \290\ Another stated
that defining the term ``loan of securities'' to include a transfer of
collateral would ``better achieve the Commission's goals'' by avoiding
``the public dissemination of incomplete, inaccurate, and misleading
information.'' \291\ Such a definition would have been consistent with
the Proposing Release's statement that a securities loan is typically a
fully collateralized transaction.\292\ However, the proposed rule did
not limit the application of its reporting requirements to securities
loans that were fully collateralized, as it was designed to capture all
loans of securities and provide a more complete and timely picture of
trading for securities loans.\293\ While the provision of collateral is
currently a common industry practice for securities loans, it is not
necessarily a characteristic of all securities loans. For example, some
lenders may structure securities loans to include a bank guaranty,
insurance policy, or other credit enhancement in lieu of
collateral.\294\ Therefore, limiting the scope of loans covered by the
final rule to only include lending against a transfer of collateral
could leave certain loans out of the scope of the final rule's
reporting requirements. The exclusion of uncollateralized loans could
decrease the availability of pricing and activity information in the
securities lending market, resulting in the reporting and dissemination
of incomplete, inaccurate, and misleading information for which the
commenters voiced concern.\295\ Furthermore, the reporting of
uncollateralized loans would provide additional data to market
participants, and would not result in misleading duplicative
information like other types of transactions that are discussed below
in this part (e.g., loans arising from certain clearing agency
services). Additionally, such a restriction could incentivize market
participants to use credit enhancement mechanisms that differ from
collateral (e.g., bank guaranties or insurance policies) in order to
avoid the final rule's reporting requirements. Therefore, the scope of
final Rule 10c-1a's reporting requirements is not limited to only
include loans against a transfer of collateral.\296\
---------------------------------------------------------------------------
\289\ See, e.g., SIFMA Letter 1, at 16; SIFMA AMG Letter, at 9;
RMA Letter, at 15.
\290\ See SIFMA Letter 1, at 3.
\291\ See SIFMA AMG Letter, at 2.
\292\ See Proposing Release, 86 FR 69804.
\293\ See Proposing Release, 86 FR 69812.
\294\ See, e.g., 17 CFR 240.15c3-3(b)(3)(iii) (``Rule 15c3-
3(b)(3)(iii)'') (stating that a broker or dealer borrowing fully
paid or excess margin securities ``[m]ust provide to the lender,
upon the execution of the agreement or by the close of the business
day of the loan if the loan occurs subsequent to the execution of
the agreement, collateral, which fully secures the loan of
securities, consisting exclusively of cash or United States Treasury
bills and Treasury notes or an irrevocable letter of credit issued
by a bank'').
\295\ See SIFMA AMG Letter, at 2; SIFMA Letter 1, at 3.
\296\ But see supra note 148 (discussing requirements for the
provision of collateral by borrowers in the instance of fully paid
and excess margin securities).
---------------------------------------------------------------------------
One commenter recommended that the Commission limit the scope of
the rule's reporting requirements to securities loans where a lender
seeks to earn compensation or a return from the transaction.\297\ The
commenter stated that, ``[l]imiting the scope in such a way would help
focus reporting on primary transactions of interest, where the borrower
is seeking to `gain access to the security itself,' and distinguish it
from repurchase and other agreements, which are `typically used for
short-term financing.' '' \298\ Another commenter proposed limiting the
scope of securities loans to transactions in which a borrower obtains
use of the securities for a fee.\299\ However, a limitation of the
final rule's reporting requirements to only securities loans made by a
lender seeking to earn compensation or a return from the transaction,
or for a fee could potentially result in evasion, as securities loans
could be structured (e.g., via over-collateralization, haircuts, or use
of non-cash collateral with varying maturities, credit ratings, or
income characteristics) to avoid the identification of a fee. At the
very least, such a requirement could result in confusion or
inconsistent reporting as market participants may interpret differently
the loan structures that incorporate a fee or are made by lenders
[[Page 75663]]
seeking to earn compensation or a return from the transaction. If the
final rule only applied to securities loans agreed to for compensation,
a fee, or for the purpose of earning a return, securities loans made to
affiliates could be structured to fall outside the final rule's
reporting requirement (i.e., made without an expectation of return or
for no fee), while a loan still would have occurred, and the affiliate
would still benefit from possession of the loaned securities. Further,
the final rule does not exclude securities loans based on the purpose
or duration of the loan, such as for ``short-term financing,'' in order
to capture a wide variety of loans regardless of purpose or duration.
Finally, the final rule provides that a covered securities loan is a
transaction in which a person lends a reportable security, which
distinguishes covered securities loans from other agreements.
---------------------------------------------------------------------------
\297\ See, e.g., ABA Letter, at 3 (recommending ``[t]he SEC
should define covered securities lending transactions to those where
the lender is seeking to earn compensation from the transaction'').
\298\ See ABA Letter, at 3-4 (quoting the Proposing Release, 86
FR 69844 n.246). See also infra in this part, a discussion of final
Rules 10c-1a(j)(2)(iii) and (j)(2)(iii)(A) and the exclusion from
the final rule's reporting requirements of certain uses of margin
securities by a broker or dealer, which can include ``funding
trades,'' repurchase agreements, and uses of margin securities that
are not a loan to another person (e.g., rehypothecation).
\299\ See BlackRock Letter, at 7 (recommending ``the SEC should
limit the scope to traditional securities lending transactions where
the parties have entered into the loan transaction in order for a
borrower to obtain use of the securities for a fee'').
---------------------------------------------------------------------------
Multiple commenters were concerned that the proposed rule would
require that short sales or short positions be reported as securities
loans. Such commenters requested clarification of whether the proposed
rule would treat short sales as loans of securities.\300\ To provide
such clarification, under the final rule covered persons will not be
required to report short sales as defined by 17 CFR 242.200(a) (``Rule
200(a)''),\301\ but will be required to report loans that are used for
short sales.
---------------------------------------------------------------------------
\300\ See Citadel Letter, at 4 (stating that ``[t]he scope of
the Commission's proposal is unclear'' and that ``[c]ustomer short
sales . . . are not typically documented under securities lending
agreements, booked as securities loans, or treated as securities
loans for financial reporting purposes''); See also Fidelity Letter,
at 3 (stating that ``inclusion of short positions in the required
reporting . . . would be inappropriate from a securities lending
market perspective, as well as potentially misleading, as it could
result in inaccurate double counting of loans''); IHS Markit Letter,
at 3 (stating that securities loans and short sales ``are two
separate and distinct markets with different drivers, participants,
and data points and should not be conflated''); SIFMA Letter 1, at
9-12 (recommending that the Commission exclude short positions from
the scope of loans required to be reported to an RNSA); AIMA Letter
1, at 3-4; Letter from Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO,
Global Head of Government Affairs, Alternative Investment Management
Association (Apr. 1, 2022) (``AIMA Letter 2''), at 3 (short
positions would be reported under the rule proposed by the
Commission pursuant to section 929X of the Dodd-Frank Act); Letter
from Richard Karoly, Managing Director, Legal, Charles Schwab & Co.,
Inc. (Jan. 7, 2022) (``Charles Schwab Letter''), at 1-2 (short
positions are already reported under other reporting regimes such as
FINRA's Rule 4560. Short-Interest Reporting); MFA Letter 3, at 4
(stating that the Commission should ``distinguish short positions
from stock loans''). The Commission agrees with commenters who
stated that short positions are not subject to a written securities
lending agreement, nor carried on a firm's books and records as
securities loans, nor treated as securities loans for financial
reporting purposes. See, e.g., FIF Letter, at 2-3; See also SIFMA
AMG Letter, at 5 (stating that short positions are ``similar in some
respects but are outside of the securities lending activity''
targeted by the proposed rule).
\301\ Rule 200(a) provides, ``The term short sale shall mean any
sale of a security which the seller does not own or any sale which
is consummated by the delivery of a security borrowed by, or for the
account of, the seller.''
---------------------------------------------------------------------------
The Commission stated in the Proposing Release that it was not
proposing to include repurchase and sale agreements (commonly known as
``repos'') within the scope of the proposed rule because section 984 of
the Dodd-Frank Act focuses on the loan or borrowing of securities.\302\
The Proposing Release detailed distinctions between the typical
securities lending and repo markets, including that repos typically are
primarily used for short-term financing while other securities loans
typically are used to gain access to the security itself, and that
loans generally allow the lender to recall the security on demand while
repos do not.\303\ Some commenters agreed with the Commission,
recommending that repos should not fall within the meaning of the term
``loans a security'' in the proposed rule.\304\ One commenter suggested
that loans of a security should be distinguished from repos.\305\
However, one commenter stated that there is ``significant overlap in
the functionality between repos and securities lending transactions.''
\306\ The commenter also suggested ``a broad anti-evasion provision
that prohibits any person from engaging in any practice intended to
evade the rule's reporting requirements.'' \307\ The same commenter
recommended defining the term ``securities loan'' to include
repos.\308\ The Office of Financial Research (``OFR'') recently
proposed a rule to collect data on repos.\309\ Accordingly, at this
time, it is not necessary to include repos within the scope of the
final rule's information reporting requirements, as a potential OFR
rule, if adopted, could address any potential reporting gaps, thereby
reducing the incentives to evade final Rule 10c-1a.
---------------------------------------------------------------------------
\302\ See Proposing Release, 86 FR 69803 n.2.
\303\ See Proposing Release, 86 FR 69843 n.246.
\304\ See, e.g., SIFMA Letter 1, at 9 (noting that ``the
Commission is not intending to include within the scope of the
Proposed Rule the entry into repurchase agreements, which we believe
is the proper approach''); SIFMA Letter 2, at 3; BlackRock Letter,
at 2 (describing securities lending market trades as ``transactions
whereby a lender lends securities to a borrower in exchange for
collateral but excluding repurchase transactions where the purpose
of the trade is to provide cash financing in exchange for non-cash
collateral'').
\305\ See ABA Letter, at 3-4 (stating that ``[t]he SEC should
define covered securities lending transactions . . . and distinguish
it from repurchase and other agreements'').
\306\ See Better Markets Letter, at 10. See also James J. Angel
Letter, at 6-7.
\307\ See Better Markets Letter, at 10. See also S3 Partners
Letter, at 11 (expressing concern with securities lending
transactions being repapered as repos); James J. Angel Letter, at 7
(stating that ``[t]he final rule needs to define securities lending
in such a way that it deters such evasion, while not ensnaring
normal repo in the reporting requirements'').
\308\ See Better Markets Letter, at 10 (``Accordingly the SEC
should consider . . . a definition of `securities loan' or
`securities lending' that will ensure sufficient coverage of
relevant transactions, i.e., those where securities are temporarily
transferred from one party to another, for compensation, with a
commitment to return those securities in the future'').
\309\ See, e.g., OFR Factsheet: OFR's Proposed Data Collection
(Mar. 2023), available at <a href="https://www.financialresearch.gov/data/files/NCCBR_factsheet.pdf">https://www.financialresearch.gov/data/files/NCCBR_factsheet.pdf</a>; Office of Financial Research Releases
Proposal to Collect Data on Certain Repo Transactions (Jan. 5,
2023), available at <a href="https://www.financialresearch.gov/press-releases/2023/01/05/office-of-financial-research-releases-proposal-to-collect-data-on-certain-repo-transactions">https://www.financialresearch.gov/press-releases/2023/01/05/office-of-financial-research-releases-proposal-to-collect-data-on-certain-repo-transactions</a>.
---------------------------------------------------------------------------
The Commission also received comment requesting that the final rule
``make clear that the novation and processing of a securities lending
transaction by a registered clearing agency does not give rise to a new
loan or the modification of an existing loan subject to reporting under
Rule 10c-1.'' \310\ The same commenter also stated that ``[n]ovation is
. . . the legal mechanism through which NSCC guarantees to each
counterparty the performance of the obligations under a transaction
that the counterparties already negotiated and executed away from the
NSCC and that was already subject to a reporting obligation.'' \311\
Another commenter directly responded to the Proposing Release's request
for comment asking whether the Commission should define what it means
to ``loan a security.'' \312\ The commenter stated that the definition
should ``expressly exclude loan positions that result from the central
counterparty novation function that a clearing agency like OCC provides
to securities loans.'' \313\ The commenter, which is an SEC-registered
clearing agency, also stated that it ``does not have access to the
majority of information sought under proposed Rule 10c-1 . . . and,
therefore could not report such information to an RNSA.'' \314\ The
Commission agrees with the commenters' recommendations that positions
that result from central counterparty services by a clearing agency,
including the novation and processing of a securities lending
transaction, should not give rise to any
[[Page 75664]]
reporting obligation under the final rule, including the requirement to
report loan modification data elements under paragraph (d) of the final
rule. As discussed above, in Part VII.A, clearing agencies providing
the functions of a central counterparty or central securities
depository do not lend or borrow shares on their own behalf, but
instead novate or process the loans of lenders and borrowers (i.e.,
central counterparty or central securities depository services) for the
purpose of efficient clearance and settlement.\315\ Although novation
of the loan by the clearing agency technically creates a new loan in
which the clearing agency would step into the shoes of the
counterparties,\316\ the clearing agency would not be modifying the key
terms of the loan (other than changing the identities of the
counterparties to that of the clearing agency), such as the rate or
size, and requiring clearing agencies to report such loans would result
in the misleading appearance of additional loan volume containing
otherwise duplicative loan information.\317\ Therefore, the final rule
excludes from the ``covered securities loan'' definition ``a position
at a clearing agency that results from central counterparty services
pursuant to Rule 17Ad-22(a)(2) of the Exchange Act or central
securities depository services pursuant to Rule 17Ad-22(a)(3) of the
Exchange Act.'' \318\
---------------------------------------------------------------------------
\310\ See DTCC Letter, at 3; See also OCC Letter, at 10.
\311\ See DTCC Letter, at 4.
\312\ See Proposing Release, 86 FR 69808 (Question 8).
\313\ See OCC Letter, at 12.
\314\ See OCC Letter, at 12.
\315\ See DTCC Letter, at 1 (stating that the ``processing of a
securities loan transaction, including through novation and netting,
does not constitute a modification or a new transaction for
reporting purposes. Such processing does not constitute new market
activity or modify the material economic terms of the transaction,
which the parties will have already reported'' and that ``[n]ovation
is simply the legal mechanism through which NSCC guarantees to each
counterparty the performance of the obligations under a transaction
that the counterparties already negotiated and executed away from
NSCC and that was already subject to a reporting obligation'').
\316\ Under Rule 17Ad-22(a)(2), a clearing agency performs the
functions of a central counterparty when it interposes itself
between the counterparties to securities transactions, acting
functionally as the buyer to every seller and the seller to every
buyer.
\317\ See final Rule 10c-1a(j)(2)(ii). If a clearing agency
acted on behalf of the beneficial owner of the loaned security to
effect a covered securities loan, then the clearing agency would be
a ``covered person'' under paragraph (j)(1)(i) of the final rule.
\318\ See final Rule 10c-1a(j)(2)(ii).
---------------------------------------------------------------------------
The Commission also received a comment stating that ``it is not
uncommon for a lending agent to pool together available supply of a
given security across multiple lenders in their lending program'' to
satisfy a large loan of securities and reallocate such loan among the
lenders in the program, as the inventory of individual lenders changes,
to avoid recalling a loan.\319\ The commenter also stated that, in such
instances, ``[g]iven no change in the economics of the trade or any
physical movement of securities, these intraday record entries are not
market trades and should not be reported as such.'' \320\ However, the
proposed rule did not limit its information reporting requirements to
securities loans arising from ``market trades'' or the ``physical
movement of securities,'' neither of which the commenter has defined or
described in the context of the securities lending market. Changing the
party or parties to a covered securities loan, which is required to be
confidentially reported under 17 CFR 240.10c-1(e)(1) (``final Rule 10c-
1a(e)(1)''), creates a new covered securities loan that would require
reporting as a new covered securities loan to an RNSA under final Rule
10c-1a(a)(1), and not as a modification under final Rule 10c-1a(d). The
identity of the lender or lenders is a material term of a covered
securities loan.\321\ The identity of the lender is not made public,
but is important information for regulatory purposes, such as
surveillance of activity pertaining to the individual loan.\322\
Whether the parties to a covered securities loan change for purposes of
the reporting requirements under final Rule 10c-1a(e)(1) depends on how
a pool \323\ or lending program is structured (e.g., whether the pool
or lending program itself or the individual underlying participants are
the party or parties identified as the lender for the loan). For
example, if a lending program as an individual entity is the party that
is the lender of the covered securities loan, changes to the underlying
participants, inventory providers, or customers of that lending program
will not constitute a change to the parties of the covered securities
loan. In that instance, unlike the lending program, the individual
participants will not be lenders directly to the borrower of the
covered securities loan. In that case, where a covered securities loan
remains open and the only change that occurs is a reallocation among
the pool's underlying constituents, that is not a change that will
require reporting as a new covered securities loan or as a modification
under paragraph (d) because there will be no change to a data element
in paragraph (c) of the final rule.
---------------------------------------------------------------------------
\319\ See BlackRock Letter, at 7. See also, SIFMA AMG Letter, at
10 (stating that ``for bulk loans, reporting at the lending agent
level rather than the beneficial owner would reflect the actual
market loan and would avoid the reporting of loan components which
may shift throughout the allocation process'').
\320\ BlackRock Letter, at 7.
\321\ See final Rule 10c-1a(e)(1).
\322\ If the covered person is a pool (and thus is a lender of
covered securities), it is the pool that is required to be
confidentially reported as the party to the covered securities loan
pursuant to final Rule 10c-1a(e)(1). See also Proposing Release, 86
FR 69804 (``The data elements provided to an RNSA . . . are also
designed to provide the RNSA with data that could be used for
important regulatory functions, including facilitating and improving
its in-depth monitoring of member activity and surveillance of
securities markets.'').
\323\ The term ``pool'' is used here in the same manner it is
described by the commenter quoted above in this paragraph. See
BlackRock Letter, at 6-7 (also using the term ``pooled pass-through
account'').
---------------------------------------------------------------------------
However, if the multiple, individual participants are all parties
identified as lenders to the loan, with no lending program or other
entity interposed between them and the borrower, a change in their
composition (the removal or addition of a lender) would constitute an
assignment of the loan and therefore would require reporting as a new
loan pursuant to final Rule 10c-1a(a)(1). Whether a reallocation of a
loan among participants in a lending program requires the reporting of
a new covered securities loan depends upon the facts and circumstances,
including the structure of such lending program.
One commenter recommended a definition of the term ``loans a
security'' that would apply at a minimum ``any time the lender loses
the right to vote the securities during the time of the loan.'' \324\
Voting rights do not provide an adequate criterion to define what a
securities loan is because not all reportable securities necessarily
carry voting rights (e.g., some preferred stock, options, fixed-income
securities, and treasuries). However, the facts and circumstances,
including the loss of voting rights, may be an indicator as to whether
a transaction is a loan.
------------------------------------------------------------
[…truncated; see source link]Indexed from Federal Register on November 3, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.