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. The extension provides the SEC with more time to consider the proposed rule change and comments received. FINRA’s proposed rulemaking, which would implement FINRA’s Securities Lending and Transparency Engine (“SLATE”) for reporting securities loans, is mandated by the SEC’s recently adopted Rule 10c-1a of the Exchange Act.
Multiple commenters, including SIFMA, ISLA, and EquiLend, raised concerns that the proposed SLATE rules exceed the SEC’s Rule 10c-1a mandate. They argue that FINRA is requiring the reporting and public dissemination of data elements not explicitly required by the SEC regulation. Specifically, commenters noted that Rule 10c-1a instructs FINRA to implement rules for collecting information “described in paragraphs (c) through (e)” but does not give the organization authority to expand on those requirements.[1] These commenters believe that FINRA’s proposed rules should be limited to collecting only the data elements specifically outlined in Rule 10c-1a, not introducing new data points.
Data Elements Exceeding Rule 10c-1a Requirements
Commenters pointed out specific data elements that, in their opinion, exceed the requirements set forth in Rule 10c-1a.
- Expected Settlement Date: The SLATE proposal requires reporting the expected settlement date of a covered securities loan, which is not explicitly required by Rule 10c-1a.[2]
- Dollar Cost of Fees and Charges: In addition to the rebate rate or securities lending fee, FINRA proposes requiring the reporting of the dollar cost of any other fees and charges associated with the loan. This is seen as exceeding the scope of Rule 10c-1a.[3]
- Modifiers and Indicators: The SLATE proposal introduces a new category of data elements called “modifiers and indicators.” These require covered persons to provide additional information about the loan, such as whether it involves an exclusive arrangement, is with an affiliate, or remains unsettled. Commenters argue that these modifiers and indicators represent sensitive information and were not part of the SEC’s rulemaking process for Rule 10c-1a.[4]
Examples of Modifiers and Indicators:[5]
- Exclusive Arrangement indicator
- Loan to Affiliate indicator
- Unsettled Loan indicator
- Terminated Loan indicator
- Rate or Fee Adjustment indicator
- Basket Loan indicator
- LEI of Security Issuer: Although required in the final SEC rule, this data point was not part of the original SEC rule proposal open for public comment. Obtaining security issuer LEIs is considered challenging, and some commenters suggest making it optional.[6]
- Affiliate Indicator: Some commenters consider the inclusion of an indicator for loans made to affiliates unnecessary. They argue that it doesn’t add value to the reporting and could potentially expose confidential information without necessarily reflecting market rates.[7]
- Intraday Adjustments: While the SEC specifically moved away from requiring intraday reporting due to concerns about inaccurate and misleading data, FINRA’s SLATE proposal seeks to reintroduce it by mandating reporting on all intraday adjustments made to securities loans. Commenters find this contradictory to the SEC’s stance on end-of-day reporting.[8]
Data Leakage
Commenters expressed widespread concern that the proposed SLATE rules would inadvertently expose sensitive financial information. Additionally, including data elements not explicitly required by Rule 10c-1a further heightened these concerns (EquiLend). These concerns centered on the granular reporting requirements, which could reveal proprietary trading strategies (SIFMA), expose sensitive loan-level data (ISLA), and potentially leak information through venue identification. The commenters generally advocated for a more measured approach to data collection and disclosure, emphasizing the importance of safeguarding confidential information while still meeting regulatory objectives.
General Concerns
The commenters stress that introducing these additional data elements without subjecting them to the SEC’s rulemaking process, including public comment and cost-benefit analysis, is inappropriate. They believe it undermines rulemaking’s transparency and due process. They also highlight the potential burden on firms to comply with reporting requirements beyond the original scope of Rule 10c-1a.[9]
More Time to Comment
In addition to concerns about exceeding the scope of Rule 10c-1a, commenters requested an extension of the comment period, noting the limited time (21 days) to review the proposal.[10] Commenters also cited concerns about the technical specifications and pricing for fees, which were not described in detail in the proposal or were left to future rulemaking.[11]
[5] ISLA, ICI, CASLA, RMA, et al.
[6] ISLA, ICI, CASLA, RMA, et al.
[7] ISLA, ICI, CASLA, RMA, et al.
[8] SIFMA, SIFMA AMG. and ISLA, ICI, CASLA, RMA, et al.