Reporting of Securities Loans

Federal RegisterNov 3, 2023

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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.

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,

parties to securities lending

transactions are not currently required to report the material terms of those transactions.

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.

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.”

Further, the FSOC 2020 Annual Report noted data gaps in certain important financial markets including transaction data for securities lending arrangements.

See Reporting of Securities Loans,

Release No. 34-93613 (Nov. 18, 2021), 86 FR 69802 (Dec. 8, 2021) (“Proposing Release”), 86 FR 69804-21.

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).

See

Proposing Release, 86 FR 69803.

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 https://home.treasury.gov/system/files/261/FSOC2021AnnualReport.pdf.

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 https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-andSecurities-Lending-Markets.pdf

(“Office of Financial Research Reference Guide” or “OFR Reference Guide”).

OFR Reference Guide, at 5,

available at https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.

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 https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.

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.

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.

See

OFR Reference Guide, at 64,

available at https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.

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.

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.

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.

This incremental income not only helps defined-benefit pension funds to generate income, but also provides investment company investors with additional returns.

See

Proposing Release, 86 FR 69804.

See

Proposing Release, 86 FR 69804.

See

Proposing Release, 86 FR 69804.

See

Proposing Release, 86 FR 69804.

Traditionally, securities lending and borrowing transactions have been conducted on a bilateral basis.

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.

See

Proposing Release, 86 FR 69805.

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.

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.

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.

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.

See

Proposing Release, 86 FR 69805.

See

Proposing Release, 86 FR 69805.

See

Proposing Release, 86 FR 69805.

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

and lend securities on behalf of their customers for a fee.

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.

Agent lenders provide potential borrowers with the inventory of securities available for lending on a daily basis.

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.

See infra

Part VII.A.

See

Proposing Release, 86 FR 69805.

See

Proposing Release, 86 FR 69805.

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.

Section 984(b) of the Dodd-Frank Act mandates that the Commission increase transparency of information available to brokers, dealers, and investors.

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).

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”).

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.

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.

On balance, the final rule requirements are designed to achieve the objectives of the proposed rule,

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.

See

Proposing Release, 86 FR 69851-53.

Proposing Release, 86 FR 69804.

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

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).

As proposed, all securities would be within the scope of the rule.

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.

See, e.g.,

proposed Rules 10c-1(b) and (d).

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.

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.

See

proposed Rule 10c-1(a)(1)(i)(A).

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.

Such a reporting agent would be required to establish, maintain, and enforce policies and procedures as well as preserve records.

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.

See

proposed Rule 10c-1(a)(1)(ii)(A).

See

proposed Rules 10c-1(a)(2)(i) and (2)(iv).

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.

To track the securities lending transaction, the proposed rule would require an RNSA to assign each securities lending transaction with a unique transaction identifier.

Loan modifications would be provided to an RNSA if the modifications to the loan involved any of the terms required to be reported.

The terms of the loan modification, but not the parties to the loan, would be made public.

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.

Such information would be made publicly available by an RNSA on an aggregated basis per security.

See

proposed Rule 10c-1(e).

See

proposed Rule 10c-1(b).

See

proposed Rule 10c-1(c).

See

proposed Rule 10c-1(c).

See

proposed Rule 10c-1(e).

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.

Proposed Rule 10c-1 would have required an RNSA to keep certain information confidential, subject to the provisions of applicable law.

See

Proposing Release, 86 FR 69816.

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.

See

proposed Rule 10c-1(g)(3).

In response to the Proposing Release, the Commission received numerous comments expressing a diversity of

perspectives,

which are discussed in detail below. Many commenters supported enhanced transparency of information about securities loans.

Other commenters did not support the rule.

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.

Comment letters to the proposed rule are

available at https://www.sec.gov/comments/s7-18-21/s71821.htm.

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

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.

The final rule will also provide regulators with information that may be used in conjunction with other

information that is currently available to regulators to help assess market events.

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:

• Modifies the scope of persons required to report by:

○ 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;

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;

See

17 CFR 240.10c-1a(j)(1) (“final Rule 10c-1a(j)(1)”).

○ Excluding clearing agencies from the new definition of “covered person” when engaged only in certain central counterparty or central securities depository activities;

○ Separating the requirements for covered persons and reporting agents into distinct paragraphs;

and

See

final Rules 10c-1a(a) and 17 CFR 240.10c-1a(b) (“final Rule 10c-1a(b)”).

○ 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

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.

See

17 CFR 240.10c-1a(j)(4) (“final Rule 10c-1a(j)(4)”).

See

final Rule 10c-1a(a)(2).

• 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;

and

See

final Rule 10c-1a(j)(3).

• 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.

See

17 CFR 240.10c-1a(j)(2) (“final Rule 10c-1a(j)(2)”).

• Streamlines information required to be reported by:

○ 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;

and

See

proposed Rule 10c-1(e).

○ 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.

See

17 CFR 240.10c-1a(d)(1)(ii) (“final Rule 10c-1a(d)(1)(ii)”).

• 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.

See

17 CFR 240.10c-1a(d)(2) (“final Rule 10c-1a(d)(2)”).

• Modifies the timing of reporting by:

○ 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;

and

See

final Rules 10c-1a(c) and 10c-1a(e).

○ 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.

See

final Rule 10c-1a(d).

• Specifies the treatment of open-ended loans in existence prior to the final rule.

See

final Rule 10c-1a(d)(2).

• Modifies the responsibilities of an RNSA by:

○ 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;

See

final Rule 10c-1a(j)(5).

○ 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

See

17 CFR 240.10c-1a(g) (“final Rule 10c-1a(g)”).

○ 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

See

final Rule 10c-1a(g)(2).

○ 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).

○ 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

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.

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)(

) 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,

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

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

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 https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/

(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 https://www.occ.treas.gov/publications-and-resources/[]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

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

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).

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, https://listingcenter.nasdaq.com/rulebook/nasdaq/rules.

See also

FINRA Regulatory Notice 21-29 (Aug. 13, 2021),

available at, https://www.finra.org/rules-guidance/notices/21-29

(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

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

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

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

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

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 https://www.financialresearch.gov/working-papers/files/OFRwp-2016-08_Pilot-Survey-of-Securities-Lending.pdf

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 § 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

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 https://www.finra.org/filing-reporting/trace/faq

(“[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., https://www.finra.org/filing-reporting/trace/trace-foreign-sovereign-debt.

240

See, e.g., https://www.catnmsplan.com/faq

(

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 https://www.sec.gov/rules/sro/msrb/2018/34-83038-ex5.pdf.

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 https://www.msrb.org/sites/default/files/RTRS-Specifications.pdf.

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 Jiří Król, 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

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 https://www.spglobal.com/marketintelligence/en/mi/products/securities-finance.html.

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 https://www.sec.gov/litigation/investreport/34-81207.pdf.

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 https://www.finra.org/rules-guidance/notices/21-19.

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 https://www.sifma.org/wp-content/uploads/2021/10/SIFMA-Comments-on-FINRA-RN-21-19-Final.pdf.

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 https://www.bis.org/publ/work768.pdf.

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

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 no

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