SEC Implements Rule 10c-1a for Enhanced Reporting in Securities Lending Market

Merger Notification

What you need to know?

In essence, Effective Jan 2, 2024, SEC’s Rule 10c-1a mandates securities loan reporting to FINRA, boosting market transparency. It affects lenders, borrowers, broker-dealers, and imposes new operational challenges.

Please see SEC Implements Rule 10c-1a pdf for a in depth research memo that goes through the updates in greater detail.

New SEC Rule Sheds Light on Securities Lending Transactions

On October 13, 2023, the Securities and Exchange Commission (SEC) introduced and adopted Rule 10c-1a under the Securities Exchange Act of 1934. This Final Rule fortifies transparency in the securities lending market with the obligation of reporting securities loan information to FINRA, enabling lenders, borrowers, broker-dealers, regulators, and investors to benefit alike.

Analysis and Overview

The SEC adopted Rule 10c-1a in October 2023, and it will become effective on January 2, 2024. The rule requires “covered persons” to report certain securities loan information to FINRA, which will then make some of that information publicly available. The rule defines “covered persons” broadly, including anyone who agrees to a covered securities loan on behalf of a lender, as well as those who agree to a covered securities loan as a lender when an intermediary is not used. The rule imposes a number of reporting requirements on covered persons, including the need to provide information on the amount of securities loaned, key economic terms of the loan, and the loan’s date and tenor. Covered persons must report this information to FINRA by the end of the day on which the loan is effected or modified. The rule is intended to increase transparency and efficiency in the securities lending market, and will provide market participants with access to pricing and other material information in a timely manner. It will also aid regulators in their oversight of the securities lending market. The SEC has set out a timeline for implementation, which includes deadlines for FINRA to propose and adopt rules, for covered persons to begin reporting information, and for FINRA to make information publicly available. While the authorities found do not directly address the overall impact of the rule on the securities lending industry, it is clear that the rule will increase transparency and impose new reporting requirements on market participants.

Who is Held Accountable and What Needs Reporting?

Who is Held Accountable?

Under Rule 10c-1a, “covered persons” are primarily responsible for reporting. This includes:

  1. Intermediaries: These are entities that facilitate securities lending transactions between lenders and borrowers. They can be likened to a real estate agent who connects home sellers with buyers.
  2. Non-Intermediary Lenders: These are entities or individuals who lend securities directly, without an intermediary. Imagine a person lending their own car to a neighbor without going through a car rental service.
  3. Broker-Dealers who Borrow from Clients: These are brokerage firms that borrow securities from their clients. Think of it as a library borrowing books from its patrons for specific purposes.

What Needs Reporting?

The rule requires detailed reporting of securities lending transactions. This includes:

  • Loan Amount: The total value or number of securities lent.
  • Economic Terms: Details like interest rates, fees, and rebates associated with the loan.
  • Loan Date and Tenor: The start date and duration of the loan.

Single-Sided Reporting System

The system primarily focuses on the lender’s side of the transaction. This is akin to tracking only the outgoing flights from an airport rather than both departures and arrivals.

Use of Reporting Agents

Covered persons may delegate the reporting task to “reporting agents.” This is similar to a company outsourcing its accounting to a specialized firm. These agents must:

  • Have legal agreements with both the clients (lenders/borrowers) and FINRA.
  • Maintain updated lists of clients.

Examples for Better Understanding:

  1. Example of an Intermediary: A financial institution acts as a middleman, connecting a large pension fund wanting to lend securities with a hedge fund looking to borrow them. The institution must report the details of this transaction.
  2. Example of a Non-Intermediary Lender: An individual investor directly lends shares to a small investment firm. The investor is responsible for reporting this transaction as per Rule 10c-1a.
  3. Example of a Broker-Dealer Borrowing from Clients: A brokerage firm borrows shares from its clients’ portfolios to facilitate short sales. The firm must report these transactions, detailing the terms and volume of the borrowed securities.

In essence, Rule 10c-1a ensures a transparent view of the securities lending market by mandating detailed reporting from key participants. This increased transparency is like having a detailed map of all the roads in a city, making it easier for everyone to understand traffic flows and patterns.

Breadth of Reportable Securities

Coverage of Reportable Securities

Rule 10c-1a necessitates reporting on a comprehensive collection of securities, which encapsulates:

Equity Securities: These constitute shares denoting a fraction of ownership in a business, synonymous to holding a piece of a pie. Partnership comes with its share of profits and losses.

Debt Securities: These investment tools embody a formal obligation to reimburse borrowed finances, somewhat akin to an IOU. An illustrative example would be a bond, issued by an enterprise or governmental body, that pledges to pay back the loan along with interest.

Crypto Asset Securities: These denote digital securities, frequently grounded in blockchain technology, comparable to virtual tokens used in online ventures, but here, they stand for tangible investments or ownership interests.

Regulatory Adherence: These securities are bound by statutory regulations, falling under systems such as the Consolidated Audit Trail (CAT), Trade Reporting and Compliance Engine (TRACE), or the Real-Time Transaction Reporting System (RTRS).

Examples of Reportable Securities:

An example of an equity security that falls under Rule 10c-1a would be shares issued by a corporation to amass capital.

A government-issued bond, functioning as a debt security, being sold and exchanged in the market is also a reportable security.

A blockchain-sustained investment asset, categorized as a crypto asset security, is accountable under the rule, provided it adheres to regulatory compliances.

Public and Private Data Elements

Blog Post Section: Public and Confidential Data Elements in SEC’s Rule 10c-1a

Understanding the Reporting Requirements Under Rule 10c-1a

The Securities and Exchange Commission’s Rule 10c-1a, effective from January 2, 2024, introduces detailed reporting requirements for securities loans. This rule, part of the broader regulatory framework aimed at enhancing transparency in financial markets, necessitates that “covered persons” provide specific public and confidential data elements to FINRA.

Public Data Elements

Covered persons under Rule 10c-1a are required to report several public data elements, which include:

  • The legal name of the security issuer and its associated identifiers like ticker symbols.
  • The date and time when the securities loan transaction was executed.
  • Key details about the loan, such as the amount and the termination date.
  • The type of collateral used for the securities loan.

These public data elements are essential for providing transparency and aiding in market surveillance.

Confidential Data Elements

In addition to public data, Rule 10c-1a mandates the reporting of certain confidential information, which includes:

  • The legal names of the parties involved in the securities loan.
  • Specific details of the loan arrangement.
  • Information indicating whether the loan is used to close out a fail to deliver.

This confidential information, while crucial for regulatory oversight, is not made publicly available to protect the privacy and confidentiality of the parties involved.

Relevance of Cases and Statutes

While Rule 10c-1a is a specific regulation under the Securities Exchange Act of 1934, understanding its context and implications can be enhanced by looking at relevant legal cases and statutes.

  • Sec. & Exch. Comm’n v. AT&T Inc.: This case, although not directly related to Rule 10c-1a, sheds light on the SEC’s regulatory authority and its emphasis on disclosure requirements. It highlights the broader context of how the SEC enforces transparency in financial reporting and communications with investors.
  • American Petroleum Institute v. Securities and Exchange Commission: This case provides insights into how the SEC’s rules are interpreted, especially regarding reporting requirements and public disclosure. It underscores the balance the SEC seeks between transparency and the protection of sensitive information.
  • 15 U.S.C. § 78m: This statute outlines various reporting requirements for issuers of securities, setting the legislative backdrop for rules like 10c-1a. It illustrates the legal framework within which the SEC operates and the extent of its authority to mandate disclosures and reporting.

By understanding these cases and statutes, one can better appreciate the rationale and legal foundation behind Rule 10c-1a’s reporting requirements. This rule is a step forward in the SEC’s ongoing efforts to enhance market transparency and integrity, benefiting investors and market participants alike.

Modifications and Reporting Deadlines

Any alterations on the public data elements must be reported to FINRA by covered persons. The required information must reach FINRA by the end of the day on which a securities loan is executed or altered.

Executable FINRA Responsibilities

FINRA is tasked with assigning unique tags to each securities loan, making certain data publicly accessible, and storing aggregate transaction activity and loan rate data.

Compliance Timeline and Impact on Industry

Rule 10c-1a will come into force on January 2, 2024, and come with a 24-month implementation period. This timeframe could implicate operational and compliance hurdles for market participants.

Antagonistic Opinions and Roll-out Concerns

The final rule has not been without contention due to its deviations from the initial proposal, the ramifications of concurrent rule implementations, and the ambitious roll-out timeline.

In summary, SEC’s adoption of Rule 10c-1a signifies a major stride toward amplified transparency in the securities lending market. However, its enactment will necessitate diligent handling of its intricate mandates and schedules.

Relevant Cases

  • Zalazar v. Capital Force LLC, 23-21512-CIV-ALTONAGA/Damian (S.D. Fla. Jun. 26, 2023)

    This case is not directly relevant to the research request, as it does not mention SEC’s Rule 10c-1a. However, it does discuss securities law more generally, including the Securities Exchange Act and the Florida Securities and Investor Protection Act, which may provide useful background information.

    “In Count I, Plaintiff accuses Costantini, Talia Brown, and the Corporate Defendants of violating Section 10(b) of the Securities Exchange Act (“Exchange Act”), 15 U.S.C. section 78j(b), and the corresponding regulation at Rule 10b-5, 15 C.F.R. section 240.10b-5. (See id. ¶¶ 116-27). In Count II, Plaintiff states a violation of Section 20(a) of the Exchange Act, 15 U.S.C. section 78t(a), against all three Individual Defendants. (See id. ¶¶ 128-34). Count III alleges – against all Corporate and Individual Defendants – a claim for a violation of the Florida Securities and Investor Protection Act, Florida Statute section 517.011. (See id. ¶¶ 135-43).”

    “LEGAL STANDARDS A. Federal Rule of Civil Procedure 12(b)(6) “To survive a motion to dismiss [under Federal Rule of Civil Procedure 12(b)(6)], a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (alteration added; quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A pleading withstands a motion to dismiss if it alleges “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.””

  • Sec. & Exch. Comm’n v. Keener, No. 20-CV-21254-BLOOM (S.D. Fla. Aug. 8, 2022)

    This case does not appear to be directly relevant to the research request, as it does not mention SEC’s Rule 10c-1a or securities lending. However, it does discuss other SEC rules and regulations, and may provide some background information on the SEC’s enforcement powers and remedies.

    “SEC v. K.W. Brown and Co., 555 F.Supp.2d 1275, 1311 (S.D. Fla. 2007). In SEC. v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004), the Eleventh Circuit found that a CEO breached his fiduciary duty to his company and shareholders for the financial gain of his family; “[d]eliberately tipping material nonpublic information for family members’ financial gain is a bad thing, and doing it twice in a year is doubly so.” Id. at 1304 (alteration added).”

    “SEC v. Megalli, No. 1:13-CV-3783-AT, 2015 WL 13021472, at *3 (N.D.Ga. Dec. 15, 2015) (the very nature of insider trading tends to render it economically dangerous, because “insider trading is a flagrant, deliberate, and serious violation of the federal securities laws; in no sense is it merely technical.”) Defendant’s conduct was recurrent over the course of the three-year period.”

    “(ECF No. 123); see also 15 U.S.C. § 78o(a).”

Relevant Statutes

  • Section 78j – Manipulative and deceptive devices, 15 U.S.C. § 78j

    15 U.S.C. § 78j is relevant to the research request because it prohibits certain manipulative and deceptive devices in connection with securities transactions, and specifically addresses the loan or borrowing of securities. However, the authority does not mention SEC’s Rule 10c-1a specifically, so it is not clear whether the statute is directly applicable to the new rule.

    “It shall be 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- (a) (1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security other than a government security, 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. (2) Paragraph (1) of this subsection shall not apply to security futures products. (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement 1 any manipulative or deceptive device or contrivance 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. (c) (1) 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. (2) Nothing in paragraph (1) may be construed to limit the authority of the appropriate Federal banking agency (as defined in section 1813(q) of title 12), 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.”

    “STATUTORY NOTES AND RELATED SUBSIDIARIES EFFECTIVE DATE OF 2010 AMENDMENT Amendment by sections 929L(2) and 984(a) of Pub.”

    “L. 111-203, title IX, §984(b), July 21, 2010, 124 Stat. 1933, provided that: “Not later than 2 years after the date of enactment of this Act [July 21, 2010], the Commission shall promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities.”[For definitions of terms used in section 984(b) of Pub.”

Other Relevant Publications.

  • SEC adopts rules requiring the reporting of securities loans and the disclosure of short sales

    This analysis is highly relevant to the research request. It discusses the adoption of Rule 10c-1a, which requires certain persons to report securities loan information to FINRA, and explains the rule’s requirements in detail. It also discusses the adoption of Rule 13f-2, which requires institutional investment managers to report short position and short activity data, and the amendment to the CAT NMS Plan. The analysis provides information on the compliance deadlines for each rule.

    On October 13, 2023, the Securities and Exchange Commission (SEC) adopted new Rule 10c-1aunder the Securities Exchange Act of 1934, as amended (1934 Act), requiring certain persons to report securities loan information to the Financial Industry Regulatory Authority (FINRA) and requiring FINRA to make publicly available certain securities loan information that it receives.The SEC also adopted new Rule 13f-2 under the 1934 Act and related Form SHO requiring institutional investment managers that meet or exceed certain prescribed thresholds to report on Form SHO certain short position and short activity data for equity securities.”

    “Reporting of Securities Loans – Rule 10c-1a Rule 10c-1a requires “covered persons” to report certain securities loan information regarding “reportable securities” to a “registered national securities association” (RNSA), in the format and manner required by the RNSA and within the time periods set forth in Rule 10c-1a (Rule 10c-1a Information).”

    “Covered persons or reporting agents, as applicable, are required to provide the information set forth in Rule 10c-1a(c) through (e), if applicable, to FINRA by the end of the day on which a covered securities loan is effected or modified.”

    “Rule 10c-1a will become effective on January 2, 2024, and the implementation period adopted by the SEC requires that: FINRA propose rules under Rule 10c-1a(f) within four months of January 2, 2024 the proposed FINRA rules become effective no later than January 2, 2025 covered persons begin reporting Rule 10c-1a Information to FINRA on January 2, 2026 (or the next business day after) FINRA publicly reports Rule 10c-1a Information within 90 calendar days of January 2, 2026 (or the next business day after).”

  • SEC Adopts Rules on Short Sales and Securities Lending

    This analysis is highly relevant to the research request. It discusses the SEC’s adoption of Rule 10c-1a, which imposes new reporting requirements for securities lending, and explains the rule’s impact on various market participants. However, as an analysis written by another lawyer, it only has persuasive value.

    “Securities Lending Reporting The SEC has adopted Exchange Act Rule 10c-1a, which requires certain “covered persons” to report specified information about securities loans to a registered national securities association (RNSA) in the format and manner required by the RNSA, and within specified time periods. The RNSA would then make certain information reported to it available to the public on the SEC’s Electronic Data Gathering, Analysis, and Retrieval System (EDGAR). The scope of persons required to report under Rule 10c-1a includes any “covered person” who agrees to a “covered securities loan.” Rule 10c-1a defines a “covered person” as: (i) a person who agrees to a covered securities loan on behalf of a lender other than a clearing agency; (ii) a person who 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 (iii) a broker or dealer when borrowing fully paid or excess margin securities. The defined term “covered person” did not exist in the rule as originally proposed but was added in the final rule to provide clarity.2 Accordingly, under the final rule, the lender has the obligation to report unless the lender is using an intermediary (i.e., a securities lending agent), in which case the intermediary is required to report.3Likewise, where there is no intermediary, the lender will have to report unless the borrower is a broker-dealer of whom the lender is a customer and the broker-dealer is borrowing fully-paid or excess margin securities.”

  • SEC Adopts Securities Lending Reporting Rules

    This analysis is highly relevant to the research request. It discusses the specifics of SEC’s Rule 10c-1a, including who must report, what must be reported, and key changes from the proposal. It also touches on the rule’s impact on the securities lending industry, noting that the SEC considered many comment letters in making changes to the final rule.

    “On October 13, 2023, the US Securities and Exchange Commission (SEC) adopted Rule 10c-1a requiring the reporting and dissemination of certain details regarding securities lending transactions. New Rule 10c-1a under the Securities Exchange Act of 1934 requires generally that specified information about securities loans be reported to the Financial Industry Regulatory Authority Inc. (FINRA) in accordance with rules that FINRA will eventually adopt for these purposes; and FINRA make publicly available certain information about these transactions within certain timeframes and keep confidential certain information it receives. Who Must Report? Rule 10c-1a will require any “covered person” who agrees to a “covered securities loan” to provide specified information to FINRA.”

    “Rule 10c-1a will become effective 60 days following the date of publication of the adopting release in the Federal Register. The compliance dates for Rule 10c-1a require that FINRA propose rules to implement Rule 10c-1a within four months of the final rule’s effective date and that FINRA’s rules become effective no later than 12 months after the effective date of Rule 10c-1a; covered persons report the information required by Rule 10c-1a to FINRA starting on the first business day 24 months after the effective date of Rule 10c-1a (the reporting date); and FINRA make specified information publicly available within 90 calendar days of the reporting date.”

  • SEC Adopts New Securities Lending Reporting Rule

    This analysis is highly relevant to the research request, as it discusses the SEC’s adoption of Rule 10c-1a and provides a detailed summary of the rule’s requirements and implications for the securities lending industry.

    “On October 13, 2023, the Securities and Exchange Commission (the “SEC”) adopted new Rule 10c-1a (the “Securities Lending Rule”), requiring the reporting of certain securities lending transactions. Certain material terms of securities lending transactions relating to “reportable securities” are required to be reported to a registered national securities association (“RNSA”) by the end of the day on which the loan is agreed or modified.”

    “The SEC states that the purpose of the new rule is to increase the transparency and efficiency of the securities lending market. The Securities Lending Rule will provide market participants with access to pricing and other material information in a timely manner, as well as aid regulators in their oversight of the securities lending market.”

    “RNSAs are required to propose rules to implement the Securities Lending Rule within four months of the effective date and must be approved by the SEC.”

  • SEC Adopts Rule Amendments Requiring Increased Disclosure of Short Selling and Securities Lending Activities of Institutional Market Participants

    This analysis is relevant to the research request because it discusses the SEC’s adoption of Rule 10c-1a, which requires securities lending market participants to report certain terms and data related to loans. However, the analysis does not directly address the overall impact of the rule on the securities lending industry.

    “New Rule 10c-1a will require securities lending market participants who act as agent or principal in making a loan of certain equity and debt securities to report specified terms of, and data related to, the loan. Most significantly, the data will include the amount of securities loaned, key economic terms of the loan (including rates, fees, rebates, and type and amount of collateral posted), as well as the loan’s date and tenor.”

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