Reporting of Securities Loans

Executive Summary

On October 13, 2023, the U.S. Securities and Exchange Commission adopted a final rule that will require "covered persons" who agree to a "covered securities loan" to provide certain loan-related information to FINRA by the end of the day that the loan is effect or modified.

Covered persons include: (i) any person that agrees to a covered securities loan on behalf of the lender (intermediary) other than a clearing agency when providing only the functions of a central counterparty or a central securities depository, (ii) any person that agrees to a covered securities loan as the lender when an intermediary is not used, or (iii) the broker or dealer when borrowing fully paid or excess margin securities.

A covered securities loan refers to a transactions in which one person - either on that person's own behalf or on behalf of someone else - lends a reportable security to another person, with some exceptions. A reportable security is a security for which information is already reported or required to be reported under existing reporting regime.

The terms covered persons would be required to report to FINRA that would be made public include:

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/venue, if one is used;
amount of securities loans;
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
borrwer type (e.g., broker, dealer, customer, bank, clearing agency, custodian).

Loan terms also required to be reported to FINRA, but would not be made public, include:

the legal names of the parties to the loan;
when the leader is a broker-dealer, whether the security loaned to its customer is loaned from the broker-dealer's inventory; and
whether the loan will be used to close out a fail to deliver pursuant to Rule 204 of Reg SHO or whether the loan is being used to close out a fail outside of Reg SHO.

AIMA's enhanced summary of Rule 10c-1 can be accessed here.

Please contact Adam Jacobs-Dean or Daniel Austin with any questions regarding this proposal.

Adam Jacobs-Dean

Managing Director, Global Head of Markets, Governance and Innovation
Daniel Austin

Head of U.S. Markets Policy and Regulation

Practical Implications

If these changes are adopted as proposed, they will present the following practical implications:

Advisers should consider that a loan used to effect a short sale will be reported to FINRA.
Although the parties to the loan will not be disclosed to the public, other granular details about the loan will be available. Advisers should consider the potential consequences of this loan-level data being made public in some form.

Timeline

AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.

Key Dates
Public Reporting to Begin	April 2, 2026
Compliance Date: Reporting to FINRA to Begin	January 2, 2026
FINRA Rules Approved by SEC	January 2, 2025	New
AIMA enhanced summary of Rule 10c-1 published	March 8, 2024
Effective Date	January 2, 2024
Publication Date	October 13, 2023
AIMA letter on aggregate impact	August 11, 2023
Comment deadline for re-opened proposal	April 1, 2022
AIMA response to re-opened proposal filed	April 1, 2022
Re-opened proposal published by SEC	February 25, 2022
AIMA response to proposal filed	January 7, 2022
Proposal published by the SEC	November 18, 2021

Litigation Update

On December 12, 2023, AIMA, along with the National Association of Private Fund Managers and the Managed Funds Association filed a lawsuit asking the U.S. Court of Appeals for the Fifth Circuit to invalidate two rules adopted by the SEC that require reporting and public disclosure of securities loans and short selling activity.

Despite finalizing the two closely related rules on the same day, the SEC disregarded the interconnectedness of the rules and adopted vastly different reporting requirements. As a result, the rules would apply contradictory and incoherent approaches to two aspects of the same underlying transaction: the short sales themselves and the loans of securities to facilitate those short sales. In particular, the SEC protects the value of anonymity for short sellers in one rule, —where it acknowledges short sellers’ contributions to liquidity and price efficiency—but then in the other rule exposes short sellers’ confidential securities lending and position information on a granular basis. The SEC entirely disregarded the impact of one rule on the other, including by failing to conduct a sufficient cost-benefit analysis of both rules’ cumulative impact.

The newly adopted rules create inconsistent and burdensome reporting regimes that will increase the frequency and detail of disclosure of securities loan and short positions data, allowing market participants to imitate or trade against the underlying position holder, harming investors. In effect, the rules will discourage short selling.

The court has set the following briefing schedule:

December 12, 2023	Petition for Review
March 5, 2024	Petitioners' Opening Brief
May 6, 2024	SEC Response Brief
May 28, 2024	Petitioners' Reply Brief
July 3, 2024	Petitioners' 28(j) Letter
July 10, 2024	SEC 28(j) Letter Response
October 7, 2024	Oral argument overview