Wednesday, December 15, 2021

Beneficial Owners: "Most at risk, yet least served" by Disclosures

Comments to SEC on Proposed 10c-1 Reporting by Securities Lenders

Author: Ed Blount

Most at Risk but Least Served

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 section on alternatives to be a genuine invitation to propose reasonable changes. We assume that the Commission must already realize that the mandated disclosure system, as currently proposed, will likely not achieve its goals.

"We support those goals but believe the proposed data model and reporting framework is conceptually flawed, and recommend an extension to allow consideration of alternatives, including lender-owned data trusts and the ESG use cases that we have previously described.


"Simply stated, Beneficial Owners are most at risk, yet least served by the proposed disclosures:

"1. The free 10c-1 public disclosure, as specified, lacks critical fields for benchmarking the risk-adjusted returns of Securities Lenders. As a result, the 10c-1 data, though perhaps more expansive, will not be useful to Beneficial Owners.

"a. Boards of directors and trustees will still expect monthly benchmark reports.
"b. Agents will still have to subcontract for their reporting solutions.

"2. Beneficial Owners will likely not use the 10c-1 data, despite subsidizing its collection and dissemination to regulators and borrowers. Only an alternative system can close the gaps to avoid the imposition of a costly and ineffective disclosure rule.

"3. The current 30-day comment period is insufficient for testing either the proposed or alternative disclosure systems.


"Unanticipated Costs and Consequences

  • "This comment letter presents our opinion that the 10c-1 rule proposal will not succeed as currently specified. ...

If rule 10c-1 is adopted, FINRA will pass compliance costs through fees to lenders and agents. Lending agents, in turn, will pass the costs of compliance through to their lending clients. Most beneficial owners participate in securities lending to generate marginal income. If lenders are forced to bear the final cost of compliance with rule 10c-1, they may find their margins so thin that they can no longer justify their lending activities, pulling their liquidity from the market. ...

  • "In addition, with lenders dependent upon their agents for reporting to the RNSA, the rule could make it more difficult for lenders to switch agents. This inability to move between agents could weaken lenders' positions when negotiating fees with their agents.

The Proposing Release acknowledges each of these potential outcomes in its proposal as 'indirect costs,' and indicates that they are mitigated by other factors like the increased competition between lending programs and between broker-dealers resulting from better access to information.[1]
We do not believe this to be a convincing rebuttal. ...


"Conclusion: An Extension is Needed to Research Alternatives

"Given the Proposing Release’s short 30-day comment period as well as the intervening holidays, there is insufficient time to complete the research required to inform the Commission’s considerations for a final rule 10c-1; to respond meaningfully to the 97 questions posed; or to analyze alternatives to the proposed reporting system.

"We echo the requests of the securities industry’s professional Associations[2] to extend the comment period for the Proposal."


"cc: Professional Associations"

[1] The proposal stated that, "This may pose indirect costs on these broker-dealers' and lending programs' customers. Such costs would include the cost of switching to a new broker-dealer or lending program, the loss of potentially more suitable options for such services if the exiting entity was highly specialized, and potentially higher prices associated with reduced competitive pressures." Proposing Release, 86 FR at 69843 et seq

[2] Comment Letter, The Securities Industry and Financial Markets Association, The SIFMA Asset Management Group, The Risk Management Association, The Managed Funds Association, The Investment Company Institute, The Investment Adviser Association and The Security Traders Association, collectively the “Associations,”


Journal Commentaries


Keep Regulation Functional (October 2008)

CSFME’s Executive Director Ed Blount interviews SEC Chairman Chris Cox.
American Banking Association Banking Journal


The Bear Market Posse, or Counterparty Risk Management during the Recent Turmoil (Sept.  2008)

by Ed Blount
The RMA Journal, v91n1, 28-32, 5 pages Sep 2008.


Searching for New Paradigms at BIS (July 2008)

by Ed Blount
Unexpected deficiencies in bank capital after recent market turmoil has regulators rethinking aspects of Basel II and “value at risk.”  
American Banking Association Banking Journal


Will Basel II Affect The Competitive Landscape? (September 2003)

By Ed Blount
Newly elected Basel Committee Chairman Caruana, Governor of the Bank of Spain, gives his views on the revised Basel capital accord, relative to its potential effects on competition and risk management in banking markets.
American Banking Association Banking Journal​