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.
- First, the best practice statements of GASLA associations should be amended to incorporate a version of the traditional physicians’ pledge of “Do No Harm.”
- Second, GASLA members, pressed by client demands for ESG compliance and rocked by cross-border tax scandals, should voluntarily elevate their public disclosure standards.
- Third, the revised T+1 service agreements of GASLA members in the U.S. should provide for diligent adherence to local codes of ethics when operating in any market venue.
- Fourth, GASLA members should act in concert to deter global tax fraud by validating the economic substance of new cross-border loans.
Lack of trust by civil society is a severe competitive disadvantage that cannot be endured long in today’s ESG-sensitive markets. The 2020 Cordoba Declaration of the World Medical Association defines the patient-physician relationship as a privileged bond based on trust. This mirrors the expectations that civil society has for securities finance.
All securities lenders aspiring to the Do No Harm standard should act in concert to eliminate the criminal temptations that exist in the cross-border markets. Turning a blind eye to theft from national treasuries violates client trust and is not acceptable when seeking to comply with even the most basic environmental, social and governmental (ESG) principles.
If GASLA members do not take these steps, they will continue to lose clients to fintechs and endure ever increasing compliance burdens. As a clear example, the SEC has called for an industry staffing increase, with an initial burden of more than 500 FTE’s and 200 annual FTE’s for compliance with the rule 10c-1 disclosures.
The “S” in ESG Rules All
Practitioners sometimes complain that ESG standards are ambiguous, in that there are few consensus principles. This is analogous to the client relationship in cross-border finance which, like its medical counterpart, should be based on ethical standards that exist above and beyond the civil code. Civil society expects well-paid professionals to comply with statutes and regulations but also meet a primarily moral code of democracy, one that that unambiguously “aims at improving a person’s [financial] health and wellbeing” to Do No Harm.
For their own good, senior managers in the securities lending community should act to restore trust in markets with disclosure standards and practices that strip thieves of their cover in the cross-border markets. That can be achieved by working together to create a cross-border registry that assigns a visa stamp to legitimate loans and narrows the scan for tax auditors and risk managers at custodians and brokers.
“The relationship has slowly progressed towards the empowerment of the patient.”
For decades, the “Best Practices” statements of financial and medical professionals have been following a similarly convergent path to client empowerment. Now, the rising focus on ESG represents the latest and highest expression of client demands for the best and fairest service practices. The attention of the regulators has never been higher. The proposed 10c-1 disclosures are evidence that it is time for the community to act before the regulatory reform tide engulfs them.
There is no better path to client empowerment than for service providers to help securities lenders reclaim the title to their data. GASLA members should use the SEC’s record formats and delayed implementation of the 10c-1 proposal to create registries and data trusts, under the delegated authority of a designated administrator, to meet the ESG compliance aspirations of their clients.
When applied to cross-border securities lending, the principle of “Do No Harm” can validate the unparalleled social benefits of capital markets as international supply chains for productive investment. The starting point for GASLA members should be to PUT temptation out of reach. Then, every federal economic and regulatory incentive should be awarded to those GASLA members who proactively deter abusive transactions from undermining legitimate capital flows.
 “GASLA have been working with a broad range of securities lending market participants to drive best practice, to support integration of corporate governance policies around voting, stewardship, and active ownership.” Ibid.