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.

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

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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