Disclosure Regimes
Many Believe FINRA Exceeded its Mandate On June 10, 2024, the SEC extended the period by which it must take action on FINRA’s proposed SLATE Rules from June 21, 2024 to August 5, 2024.
On April 2nd, 2026, an effusion of data from a daily trove of U.S. regulatory filings will create resources to drive many new use cases for artificial intelligence in capital markets. A clear opportunity exists in securities finance, where practitioners have repeatedly stated that major IT investments will be needed to comply with the many new regulatory mandates. “Black box” AI platforms may seem a ready solution but can also create nightmares for client reviews and lawsuits.
In our opinion, public data can clarify the rational limits of influence for predictive artificial intelligence. The best courtroom-ready models will display an audit trail based on the replication of critical decision parameters and vectors from past markets. Vendor data in securities finance may be more timely and deeper than the public releases but, for judicial purposes, the public data will provide foundational evidence for the “bounded rationality” of decision-makers, as defined by the late Herbert Simon, Nobel Laureate and the father of Artificial Intelligence.
When, on October 13, 2023, the Securities and Exchange Commission released its long-awaited final 10c-1 rule on reporting and public disclosure of securities loans (explained here), the most important passage, at least to the commercial data vendors who support the securities finance community, stated that, “the final rule could render existing securities lending data services less valuable, potentially leading to less revenue for the firms currently compiling and distributing these data for a fee.”[1] But is that true? Are bonuses and careers really at risk?? As shown in the table below, there is hope for vendors because the public data release will either omit or delay several data elements that are crucial to many important vendor applications today.
The Securities and Exchange Commission (SEC) recently adopted final rules on money market (2a-7) fund reforms. These reforms are designed to make money market funds more resilient and liquid, potentially making them safer and more attractive vehicles for mutual funds to use as collateral pools for their securities lending programs.
Persuasive Public Comment Helps Mold the Final Rule The Securities and Exchange Commission (SEC) has adopted a new rule, rule 10c-1, to increase transparency in the securities lending market. The rule requires certain persons to report information about securities loans to a registered national securities association (RNSA). The RNSA will then make certain information publicly […]
In early 2022, the Securities and Exchange Commission (SEC) proposed several significant changes to Regulations 13D and 13G, which require certain persons to disclose their beneficial ownership of equity securities. These changes seek to improve the transparency and timeliness of beneficial ownership reporting and to make it easier for investors to access and understand this information.
In its recently updated regulatory flexibility agenda, the Securities and Exchange Commission has announced its regulatory priorities for 2023. A mix of old and new business, the Commission’s 2023 plans include finalizing 29 existing proposals and placing 23 new proposals up for consideration. In a January 4, 2023 press release announcing the updated agenda, SEC Chairman Gary Gensler stated that the agency’s agenda “reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets.” Regulatory flexibility agendas are aspirational, and the SEC’s rulemaking agenda could change throughout the year.
In February of 2022, the Securities and Exchange Commission proposed new disclosures to provide more transparency into institutional investors’ short-selling activity. According to Chairman Gensler, collecting more granular data from large short sellers “would help us to better oversee the markets and understand the role short selling may play in market events.” Despite these lofty goals, industry commenters are raising serious questions about whether some elements of the proposed new disclosure regime are structurally and technologically feasible.
The Securities and Exchange Commission’s (SEC) securities lending disclosure proposal has drawn sharp rebuke from both securities lenders and borrowers. Lending principals criticized the proposal on everything from cost, lack of clarity, and overbroad scope to the rule’s general inequity. They also warned of a host of potential unintended consequences that could work against the very transparency the rule proposal was intended to foster. Some of the highlights are summarized below.
If the Securities and Exchange Commission approves the many industry requests for delay of its proposed 10c-1 reporting rule for securities loans, leaders in the Global Association of Securities Lending Associations (GASLA) should move quickly to create a more efficient and lower cost disclosure regime. Congress will not allow the SEC to ignore recent academic charges of rampant cross-border tax evasion and negligent proxy voting by index funds. Collective action is required to craft a disclosure system that improves on the SEC’s proposal.
Comments to SEC on Proposed 10c-1 Reporting by Securities Lenders Excerpts from CSFME comment letter on proposed SEC Rule 10c-1, submitted 15 December 2021 “The Honorable Gary Gensler, Chairman, U.S. Securities and Exchange Commission: “With regard to the above-cited 10c-1 disclosure system, my colleagues and I consider inclusion in the rule proposal of an optional […]
The SEC has proposed a radical and potentially very costly reporting regime for securities finance transactions to increase transparency “to brokers, dealers, and investors.” Notably, the rule release’s extensive economic analysis section includes some potential alternatives to the proposed new reporting structure. While there is no requirement for the Commission to discuss or examine the economic effects of regulatory alternatives, in this case, they have presumably listed these particular options to focus potential commenters on specific ideas they want explored.
The Securities and Exchange Commission (SEC) recently proposed a new reporting regime to increase transparency and efficiency in the securities-lending market. The SEC seeks to accomplish this by requiring anyone who loans a security on behalf of himself or another person to report material terms of those loans (and related information regarding the securities on loan) to a registered national securities association (RNSA), namely the Financial Industry Regulatory Authority (FINRA).
Make no mistake. The new 10c-1 disclosure proposal by the SEC is an Investor Protection Rule on steroids. It is also a profound escalation of regulatory support for Investor Self-Protection. Nothing less than a near real-time, stock loan ticker will result if enacted, revealing U.S. loan rates and liquidity to the investing public for the first time in history.
Bringing Securities Lending Out of the Dark. On November 18, 2021, the Securities and Exchange Commission (SEC) proposed broad disclosure rules
The Securities and Exchange Commission issued a proposal to expand investment company disclosures of their proxy voting activities. If adopted, the rules would enhance the information mutual funds, exchange-traded funds, and other regulated investment companies are required to report on Form N-PX under the Investment Company Act. These expanded disclosures are intended to make proxy voting decisions made by investment company advisers more complete, accessible, and understandable to investors.
Securities lending has proven the most challenging aspect of shadow banking for regulators to bring under a regulatory rubric. One of the most vexing aspects for regulators has to be how to make securities lenders’ decision processes about whether to recall lent securities to vote proxies more transparent to investors and the regulators themselves.
Sustainable investing is becoming more important to investors when creating portfolios. As a result, institutions often follow policies with formal environmental, social, and governance (ESG) factors to guide their investments. They commit substantial resources to ESG research and produce comprehensive reports about their compliance. But then the same institutions give away their proxy votes when they lend securities for fees to cover their bank charges. And the loans of those securities – and their proxies – go to borrowers with unknown intentions, and often with unknown identities.
One market veteran asked if there is any other space in capitalist finance where the lender knows neither the specifics of the borrower nor the purpose of the loan? Given this opacity, can ESG factors really be squared with securities lending strategies?