FINRA's Proposed Partial Amendments to the Securities Lending and Transparency Engine (SLATE) Program

Earlier this year, FINRA filed with the SEC a proposed series of rules requiring, for the first time, the reporting of securities loans and providing for the public dissemination of loan information through FINRA's Securities Lending and Transparency Engine ("SLATE").[1] On November 14, 2024, FINRA filed with the SEC a partial amendment to the Original Proposal based on certain comments that FINRA received.[2]

The proposed changes are significant and are analyzed below.

If adopted, FINRA has stated that it will surveil for timely, accurate, and complete reporting to SLATE. It also should be expected that FINRA will use SLATE data in other aspects of its surveillance program, such as Regulation SHO compliance, among others.[3] Interested parties should submit comments as soon as possible and no later than 15 days after publication of the partial amendments in the Federal Register.

Background

With regard to the Original Proposal, commenters consistently noted that certain aspects of FINRA's proposed rules for SLATE exceeded the requirements of SEC Rule 10c-1a, which led to many of the proposed changes in FINRA's partial amendment. This theme of hewing a proposed rule to the authorizing regulation or statute has currency in the current legal landscape. Notably, the basis for SLATE is SEC Rule 10c-1a, which is being challenged in the U.S. Court of Appeals for the 5th Circuit, along with the SEC's proposed short-selling rules.[4] SEC Rule 10c-1a requires that certain covered persons report securities loan information to a registered national securities association ("RNSA") and that the RNSA make certain information about covered securities loans publicly available.[5] FINRA currently is the only RNSA. The petitioners in National Association of Private Fund Managers, et al., however, have argued that the securities lending and short sale rules should be vacated, among other things, because the SEC allegedly did not: (1) consider or justify contradictory approaches to disclosure of the same market activity; and (2) assess the cumulative economic impact of the rules.[6] Oral argument was held on October 7, 2024, and should the 5th Circuit vacate SEC Rule 10c-1a, in whole or in part, such action would have fundamental repercussions for FINRA's proposed rules concerning SLATE.

With this background, our summary of the proposed amendments to the originally proposed SLATE rules is below.

1. Reporting Intraday Loan Modifications and Changes to the Parties to a Loan

   The Original Proposal would have required covered persons to report: (1) intraday loan modifications; and (2) the termination of the previously reported loan and report an initial loan reflecting new parties following the addition or removal of a party. FINRA proposed to delete these requirements because commenters noted that the requirements did not comport with SEC Rule 10c-1a or related Commission guidance, respectively.
   
   

2. Modifiers and Indicators

   In the interest of facilitating a timely implementation of SLATE, FINRA stated that it proposed to delete certain originally proposed modifier and indicator requirements that would have required a covered person to identify: (1) exclusive arrangements; (2) loans to affiliates; (3) unsettled loans; (4) terminated loans; (5) rate or fee adjustments; and (6) basket loans. FINRA, however, expressly retained the requirement to populate the termination date of covered securities loans as required under Rule 10c-1a(c)(11) and noted that the deleted modifiers and indicators could be reproposed at a later date with a notice and comment period.
   
   

3. Settlement Date and Effective Date

   In the Original Proposal, covered persons would have been required to report the settlement date and effective date in covered securities loans. Commenters asserted, among other things, that these proposed data elements exceeded the requirements contained in SEC Rule 10c-1a. FINRA proposed to remove these requirements in the proposed amendments.
   
   

4. Rebate Rates, Lending Fees, and Other Fees or Charges

   FINRA proposed two changes to rebate rates, lending fees, and other fees or charges. First, FINRA stated that it proposed to add flexibility to the manner in which a covered person reports a rebate rate or lending fee or rate. Under the proposed amendments:

   [w]here a rebate rate or lending fee or rate is determined based on a spread to a benchmark or reference rate, a covered person may report: (a) the rebate rate or lending fee or rate as of the date the covered securities loan was effected; (b) the spread; and (c) the identity of the benchmark or reference rate. Alternatively, a covered person may report only the rebate rate or lending fee or rate.[7]

   Second, and because commenters stated that the provisions in the Original Proposal exceeded the requirements of SEC Rule 10c-1a, FINRA proposed that other fees or charges do not need to be reported where the rebate rate or lending fee or rate is provided.
   
   

5. Covered Person Capacity and MPID

   FINRA proposed to remove the requirement that covered persons report whether the covered person is the lender, borrower, or intermediary based on feedback that the provisions in the Original Proposal exceeded the requirements of SEC Rule10c-1a.
   
   

6. Internal Loan Identifiers

   The Original Proposal would have required covered persons to report unique internal loan identifiers assigned to the covered securities loan as well as unique internal identifiers for an associated omnibus loan. FINRA proposed deleting the latter requirement because it exceeded the requirements of SEC Rule 10c-1a. Regarding the former, which also allegedly exceeded the requirements of SEC Rule 10c-1a, FINRA proposed to more narrowly tailor the requirement to those instances where a covered person's daily submission includes two or more reports of the same covered securities loan. In those instances, and where FINRA has not yet assigned a unique identifier, FINRA proposed that the covered person report a unique identifier so that FINRA can link the reports (e.g., an initial securities loan and loan modification to terminate the loan). Commenters should consider whether this proposed modification aligns with the requirements of SEC Rule 10c-1a.
   
   

7. Reporting Deadline

   In response to, among other things, comments about the end-of-day reporting challenges under the Original Proposal, FINRA proposed to amend the loan cut-off time from 7:45 p.m. ET to 7 p.m. ET and to extend the reporting deadline from 8:00:00 p.m. ET to 11:59:59 p.m. ET.
   
   

8. Reporting Agent Supervision

   FINRA proposed to delete the requirement in the Original Proposal that a member relying on a reporting agent to report covered securities loans to SLATE had an obligation to ensure that the reporting agent was complying with Rule 10c-1a and FINRA Rule 6530 (related to SLATE). FINRA stated it would reevaluate this requirement after gaining experience with the SLATE Program. FINRA's traditional position is that the member is responsible for supervising third parties that act on the member's behalf, and while the relief provided is welcome, members will have to be attuned to this exception when interacting with the Staff in an examination or inquiry.  
    

9. Loan Transaction Activity and Rate Distribution Data

   Based on comments that the Original Proposal exceeded the requirements of SEC Rule 10c-1a and could have resulted in potential information leakage if disseminated, FINRA proposed to delete requirements that covered persons report certain subcategories of volume data such as borrower type or whether the loan was an open or term loan. FINRA proposed, however, to disseminate an aggregate volume of securities reported on the prior business day and to revisit the reporting of subcategories, subject to a review and comment period.  

   FINRA also proposed two other related amendments. First, FINRA proposed that it would disseminate, as part of the individual loan transaction data, the unique identifier assigned by FINRA to cover those situations involving a loan modification where the FINRA identifier was not yet assigned. Second, FINRA proposed that loan rate distribution statistics for loans collateralized by cash would be organized as U.S. currency and non-U.S. currency, as applicable. According to FINRA, separating the currency collateral in this way will make the disseminated information more useful. Again, it is worth considering whether these amendments adhere to the requirements in SEC Rule 10c-1a.
   
   

10. De Minimis Loan Transaction Activity

    To address comments about potential information leakage, FINRA proposed not to include aggregate volume information for a security unless there were reports submitted to SLATE on the prior business day for at least 10 distinct covered securities loans in a reportable security (as opposed to three or fewer in the Original Proposal).

Conclusion