SEC Proposes Increase in Transparency in the Securities-Lending Market

The Securities and Exchange Commission (SEC) has published proposed Exchange Act Rule 10c-1 to increase transparency and efficiency in the securities-lending market. The rule would accomplish this by requiring anyone who loans a security on behalf of himself or another person to report certain material terms of those loans and related information regarding the securities the person has on loan and available to loan to a registered national securities association (RNSA), such as the Financial Industry Regulatory Authority (FINRA).

The RNSA would then make the material terms of the securities-lending transaction available to the public. Securities lending is a way for institutional investors to generate incremental revenue for their portfolios by lending out their securities for collateral.

According to an SEC fact sheet, the terms to be provided to the RNSA, which would be made public, include the:

• Legal name of the issuer of the securities to be borrowed;
• Ticker symbol of those securities;
• Time and date of the loan;
• Name of the platform or venue, if one is used;
• Amount of securities loaned;
• Rates, fees, charges and rebates for the loan, as applicable;
• Type of collateral provided for the loan and the percentage of the collateral provided to the value of the loaned securities;
• Termination date of the loan, if applicable; and
• Borrower type (e.g. broker, dealer, bank, customer, clearing agency, custodian, etc.).

The SEC says the proposed rule is consistent with Congress’s mandate in the Dodd–Frank Act that the agency increase transparency regarding the loaning or borrowing of securities for brokers, dealers and investors by ensuring that market participants, the public and regulators have access to timely and comprehensive information about the market for securities lending.

“Securities lending and borrowing is an important part of our market structure. Currently, though, the securities-lending market is opaque,” says SEC Chair Gary Gensler. “In today’s fast-moving financial markets, it’s important that market participants have access to fair, accurate and timely information. I believe this proposal would bring securities lending out of the dark. We have put out this proposal for comment, and I look forward to hearing feedback from the public.”

The text of the proposed rule is available here. The public comment period will remain open for 30 days following publication of the proposal in the Federal Register.

Institutional investors have expressed the need for additional information about securities-lending activities. Recent surveys have found that institutional investors, such as pension funds, are increasingly using environmental, social and governance (ESG) factors in their portfolios. And a survey of leading institutional investors released by the Risk Management Association (RMA) revealed that 95% of respondents believe securities-lending activities can coexist with ESG principles.

Fifty-five percent of survey participants ranked “greater education about available options” as the top priority when it comes to applying ESG principles to their lending program. When survey participants were asked to name “measures that might facilitate the application of ESG principles to their securities-lending program,” 43% said that they want more transparency on proxy record dates and questions. A lack of timely information about proxy record dates and voting questions complicates the process of recalling stock that is on loan, RMA says.