SEC Approves FINRA Securities Lending and Borrowing Rules

The Securities and Exchange Commission (SEC) has approved three proposed rule changes from the Financial Industry Regulatory Authority (FINRA) related to securities lending and borrowing, which are amendments and adoptions of New York Stock Exchange (NYSE) rules.
By Jake Safane(2147484770)
The Securities and Exchange Commission (SEC) has approved three proposed rule changes from the Financial Industry Regulatory Authority (FINRA) related to securities lending and borrowing, which are amendments and adoptions of New York Stock Exchange (NYSE) rules. FINRA currently incorporates some NYSE rules in its own rulebook, but they only apply to NYSE members, so by adopting the rules as their own, the rules will apply to all FINRA members.

The first rule, FINRA Rule 4314, requires a FINRA member that acts as agent in a securities lending transaction to disclose its capacity as agent, and when a member lends or borrows securities from the counterparty that acts as agent, then the member would be required to keep detail of the transaction with the agent and each principal for whom the agent is acting. The rule also establishes that a party has the right to liquidate a transaction whenever the other party becomes subject to certain considerations such as admitting in writing that it is unable to pay its debts. FINRA Rule 4314 also stipulates that FINRA members can not transact with non-FINRA members, unless there is a written agreement. When a member enters into a securities lending transaction with a non-FINRA member, the FINRA member is required to determine whether the other party is acting as principal or agent. If the non-member is acting as agent, the member would be required to keep details of the transaction.

The second rule, FINRA Rule 4330, “prohibits a member from lending, either to itself or others, securities that are held on margin for a customer and that are eligible to be pledged or loaned, unless the firm first obtains a written authorization from the customer permitting the lending of the customer’s securities.” The rule also requires additional disclosure requirements for any member that borrows fully paid or excess margin securities carried for the account of any customer, such as notifying FINRA at least 30 days prior to first engaging in such transactions. In addition, the rule requires parties to conduct due diligence before engaging with another party in these transactions.

The last rule, FINRA Rule 4340, requires members to establish certain clarity measures for its customers. For example, members need to set up a lottery system for any securities it holds that may be redeemed before maturity, and through the lottery system, the member can allocate to its customers the securities being redeemed. The rule also requires members to provide notice to all customers at least once a year, plus new customers at the opening of an account, of the manner in which they may access the allocation procedures for redemptions on the member’s website or via a hard copy if the customer requests it. In addition, the rule “would prohibit a member from allocating securities to any of its accounts or those of its ‘associated persons’ in a redemption offered on terms favorable to the called parties until all other customers’ positions have been satisfied.”

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