MFA Wants SEC to Reconsider FINRA Proposal on Securities Lending Disclosures

The Managed Funds Association ("MFA") urged the SEC to reconsider the proposed FINRA securities lending disclosure rules, cautioning that the new requirements could introduce unnecessary risks to the securities lending market. (See previous coverage.)

FINRA's proposed rule on securities lending (Rule 6500 Series: Securities Lending and Transparency Engine (SLATE^TM)) would implement SEA Rule 10c-1a ("Securities lending transparency"). The SEC Rule, adopted October 13, 2023, requires the reporting of securities lending transactions and provides for the public dissemination of loan information.

In its letter to the SEC, the MFA emphasized the need for a more restrained approach to regulatory changes. The MFA proposed the following measures:

• Limiting the scope of the proposed SLATE rules to align strictly with the mandates of Rule 10c-1a(f), avoiding the introduction of new, overly granular reporting requirements;
• Encouraging FINRA to reconsider the discretionary publication of certain "de minimis" loan transaction data, which could inadvertently reveal sensitive trading strategies;
• Advocating for the withdrawal of proposals that would require reporting and public disclosure of additional loan data elements, loan modification data elements, and new "modifiers and indicators" that exceed the scope of SEC Rule 10c-1a.

The MFA highlighted the risks posed by the proposed SLATE rules, particularly the potential for these regulations to chill short selling activity. The MFA argued that the proposed rules could exacerbate the already significant risks introduced by SEC Rule 10c-1a, including:

• The possibility of disclosing confidential trading positions, leading to manipulative trading practices such as short squeezes;
• The undermining of the SEC's intent to delay the publication of sensitive loan data to protect market participants, particularly in thinly traded securities.

The MFA further expressed concerns about FINRA's proposal to publish detailed aggregate transaction activity by borrower type, which could indirectly reveal individual loan amounts and short positions, contrary to the SEC's efforts to safeguard against such disclosures.