On October 13, 2023, the Securities and Exchange Commission (SEC) adopted new Rule 10c-1a under the Securities Exchange Act of 1934, as amended (1934 Act), requiring certain persons to report securities loan information to the Financial Industry Regulatory Authority (FINRA) and requiring FINRA to make publicly available certain securities loan information that it receives.¹ The SEC also adopted new Rule 13f-2 under the 1934 Act and related Form SHO requiring institutional investment managers that meet or exceed certain prescribed thresholds to report on Form SHO certain short position and short activity data for equity securities. Additionally, the SEC adopted an amendment to the National Market System plan governing the Consolidated Audit Trail (CAT NMS Plan) requiring the reporting of reliance on the bona fide market making exception in Regulation SHO. Each rule is discussed in turn below.

Reporting of Securities Loans – Rule 10c-1a

Rule 10c-1a requires “covered persons” to report certain securities loan information regarding “reportable securities” to a “registered national securities association” (RNSA), in the format and manner required by the RNSA and within the time periods set forth in Rule 10c-1a (Rule 10c-1a Information). FINRA is currently the only RNSA, and as such, “RNSA” is hereinafter referred to as FINRA.

            Who is required to report Rule 10c-1a Information?

Any covered person who agrees to a “covered securities loan” on behalf of them self or another person is required to report Rule 10c-1a Information to FINRA. Rule 10c-1a(j)(1) defines “covered person” to mean:

• any person who agrees to a covered securities loan on behalf of a lender (intermediary) other than a clearing agency when providing only the functions of a central counterparty or a central securities depository pursuant to Rules 17Ad-22(a)(2) and (3) of the 1934 Act
• any person who agrees to a covered securities loan as the lender when an intermediary is not used unless lending to a broker or dealer borrowing fully paid or excess margin securities
• a broker or dealer when borrowing fully paid or excess margin securities pursuant to Rule 15c3-3(b)(3) of the 1934 Act

Rule 10c-1a(j)(2) defines “covered securities loan” to mean:

• a transaction in which any person on behalf of them self or one or more other persons, lends a “reportable security” to another person, excluding (1) a position at a clearing agency that results from central counterparty services or central securities depository services pursuant to Rules 17Ad-22(a)(2) and (3) of the 1934 Act, and (2) the use of margin securities by a broker or dealer, except when such margin securities are loaned to another person

Rule 10c-1a(j)(3) defines “reportable security” to mean “any security or class of an issuer’s securities for which information is reported or required to be reported to the consolidated audit trail as required by Rule 613 of the 1934 Act and the CAT NMS Plan…, [FINRA’s Trade Reporting and Compliance Engine (TRACE), or the Municipal Securities Rulemaking Board’s Real-Time Transaction Reporting System (RTRS)], or any reporting system that replaces one of these systems.”

A covered person may instead rely on a reporting agent to satisfy their reporting obligations regarding the Rule 10c-1a Information, provided that the covered person enters into a written agreement with a reporting agent that agrees to provide the Rule 10c-1a Information on behalf of the covered person to FINRA and the covered person provides the reporting agent with timely access to the Rule 10c-1a Information.² Rule 10c-1a(b) establishes certain other required standards for reporting agents, which include the following:

• provide the Rule 10c-1a Information to FINRA in the format and manner required by FINRA and within the time periods set forth in Rule 10c-1a(c) through (e) and establish maintain, and enforce written policies and procedures reasonably designed to ensure that the above occurs
• enter into a written agreement with FINRA permitting the reporting agent to provide Rule 10c-1a Information to FINRA on behalf of a covered person
• provide FINRA with a list naming each covered person on whose behalf the reporting agent provides Rule 10c-1a Information and provide FINRA with any updates to the list by the end of the day the list changes
• preserve for not less than three years, with the first two years in an easily accessible place: (i) the Rule 10c-1a Information obtained by the reporting agent from the covered person, including the time of receipt, and the corresponding Rule 10c-1a Information provided by the reporting agent to FINRA, including the time of transmission to FINRA; and (ii) the written agreements entered into with the covered person and FINRA

Covered persons may hire third-party vendors to assist with reporting the Rule 10c-1a Information to FINRA instead of using a reporting agent. However, unlike with the use of a reporting agent, the covered person would still have the obligation to report the Rule 10c-1a Information to FINRA.

            What information is required to be provided to FINRA and by when?

Covered persons or reporting agents, as applicable, are required to provide the information set forth in Rule 10c-1a(c) through (e), if applicable, to FINRA by the end of the day on which a covered securities loan is effected or modified.

Rule 10c-1a(c) prescribes the following information to be reported in connection with a covered securities loan being effected:

• the legal name of the security issuer, and the Legal Entity Identifier (LEI) of the issuer, if the issuer has a non-lapsed LEI
• the ticker symbol, International Securities Identification Number (ISIN), Committee on Uniform Securities Identification Procedures (CUSIP), or Financial Instrument Global Identifier (FIGI) of the security, or other security identifier
• the date the covered securities loan was effected
• the time the covered securities loan was effected
• the name of the platform or venue where the covered securities loan was effected
• the amount, such as size, volume, or both, of the reportable securities loaned
• the type of collateral used to secure the covered securities loan
• for a covered securities loan collateralized by cash, the rebate rate or any other fee or charges
• for a covered securities loan not collateralized by cash, the securities lending fee or rate, or any other fee or charges
• the percentage of collateral to value of reportable securities loaned required to secure such covered securities loan
• the termination date of the covered securities loan
• whether the borrower is a broker or dealer, a customer (if the person lending securities is a broker or dealer), a clearing agency, a bank, a custodian, or other person

Rule 10c-1a(d) prescribes the following information to be reported in connection with a covered securities loan modification:

• if the modification occurs after the required information in Rule 10c-1a(c) is provided to FINRA and results in a change to information previously required to be provided by such section: (i) the date and time of the modification; (ii) the specific modification and the specific information in Rule 10c-1a(c) being modified; and (iii) the unique identifier assigned to the original covered securities loan under Rule 10c-1a(g)(1) or (3) (discussed more fully below)
• if the modification is to a covered securities loan for which reporting was not required on the date the loan was agreed to or last modified and results in a change to any of the data elements in Rule 10c-1a(c): (i) the information in Rule 10c-1a(c) as of the date of modification and the date and time of the modification.

Rule 10c-1a(e) prescribes the following information to be reported in connection with a covered securities loan being effected, which will not be made publicly available by FINRA:

• if known, the legal name of each party to the covered securities loan, other than the customer from whom a broker or dealer borrows fully paid or excess margin securities, the Central Registration Depository (CRD) or Investment Adviser Registration Depository (IARD) Number, the market participant identifier (MPID), and the LEI of each party to the covered securities loan and whether such person is the lender, the borrower, or an intermediary between the lender and the borrower
• if the person lending securities is a broker or dealer and the borrower is its customer, whether the security is loaned from a broker’s or dealer’s securities inventory to a customer of such broker or dealer
• if known, whether the covered securities loan is being used to close out a fail to deliver pursuant to Rule 204 of Regulation SHO or to close out a fail to deliver outside of Regulation SHO.

            What is FINRA required to do under the rule?

FINRA is required to implement rules regarding the format and means by which covered persons or reporting agents, as applicable, will report the Rule 10c-1a Information.³ FINRA is also required under Rule 10c-1a(g) to make publicly available the following Rule 10c-1a Information not later than the morning after the covered securities loan is effected or modified:

• the unique identifier assigned by FINRA

• the information FINRA receives under Rule 10c-1a(c) or (d), other than the amount or volume of the reportable securities loaned (which is to be made publicly available on a delayed basis on the 20^th business day after the covered securities loan is effected or modified)
• make publicly available, on a daily basis, information regarding the aggregate transaction activity and distribution of loan rates for each reportable security and the security identifier(s) for which FINRA determines it’s appropriate to identify.⁴

Regarding retention and availability of the Rule 10c-1a Information, Rule 10c-1a(h) requires FINRA to retain the information collected pursuant to Rule 10c-1a(c) through (e) in a convenient and usable standard electronic data format for a period of five years and to make the information in Rule 10c-1a(c) and (d) publicly available on FINRA’s website or similar venues, without use restrictions, for at least five years. FINRA is also required to “establish, maintain, and enforce reasonably designed written policies and procedures to maintain the security and confidentiality of the confidential information required by” Rule 10c-1a(e). In addition, FINRA is required to make the information collected pursuant to Rule 10c-1a(b)(4) and (c) through (e) available to the SEC or other persons as the SEC may designate by order upon a demonstrated regulatory need.

In connection with the above, FINRA may establish and collect reasonable fees under Rule 10c-1a(i).

            What is the compliance deadline(s) for the rule?

Rule 10c-1a will become effective on January 2, 2024, and the implementation period adopted by the SEC requires that:

• FINRA propose rules under Rule 10c-1a(f) within four months of January 2, 2024
• the proposed FINRA rules become effective no later than January 2, 2025
• covered persons begin reporting Rule 10c-1a Information to FINRA on January 2, 2026 (or the next business day after)
• FINRA publicly reports Rule 10c-1a Information within 90 calendar days of January 2, 2026 (or the next business day after).

Short Position and Short Activity Reporting by Institutional Investment Managers – Rule 13f-2

As noted above, Rule 13f-2 requires institutional investment managers⁵ (Managers) that exceed certain reporting thresholds to report their short positions and short activity data on Form SHO for equity securities.⁶ Specifically, Rule 13f-2(a) requires Managers to file a report on Form SHO with the SEC within 14 calendar days after the end of each calendar month with regard to each equity security the Manager and all accounts over which the Manager (or any person under the Manager’s control) has investment discretion⁷ over provided one of the following thresholds is met:

1. For each equity security that is of a class of securities that is registered pursuant to section 12 of the 1934 Act or for which the issuer of that class of securities is required to file reports pursuant to section 15(d) of the 1934 Act, either of the following thresholds is met:

1. A monthly average gross short position⁸ at the close of regular trading hours⁹ in the equity security with a US dollar value of $10 million or more, or
2. A monthly average gross short position at the close of regular trading hours as a percentage of shares outstanding in the equity security of 2.5%or more.

2. For each equity security that is of a class of securities that is not registered pursuant to section 12 of the 1934 Act or for which the issuer of that class of securities is not required to file reports pursuant to section 15(d) of the 1934 Act the following threshold is met: 

1. A gross short position in the equity security with a US dollar value of $500,000 or more at the close of regular trading hours on any settlement date during the calendar month.

Form SHO consists of a cover page which includes certain identifying information regarding the Manager and Information Tables. Information Table 1 presents a Manager’s end of month gross short position in the equity security for which information is being reported at the close of regular trading hours on the last settlement date of the calendar month, as well as certain identifying information about that security and about the issuer of that security. Information Table 2 presents a Manager’s net change in short position (represented as a number of shares) for each settlement date during the calendar month, in addition to certain identifying information about that security and about the issuer of that security.

Form SHO and any amendments thereto must be filed with the SEC via EDGAR, the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, and in an eXtensible Markup Language specific to Form SHO. In the event a Manager determines that its Form SHO filing contains errors affecting the accuracy of the short sale data reported, the Manager must file an amended and restated Form SHO within ten calendar days of discovering the error. Any amendments must restate Form SHO in its entirety and check the “Amendment and Restatement” box on the cover page of Form SHO. Additionally, amendments must be filed sequentially and a Manager must describe the revisions being made and the reasons for the revisions, and indicate whether data from any additional Form SHO reporting periods (up to the past 12 calendar months) is or are affected by the amendment. If any additional Form SHO reporting periods are affected by the amendment, the Manager must file a separate amendment for each previous calendar month affected (up to the past 12 calendar months) and describe the revisions being made and the reason for the revisions.

All Form SHO information is deemed subject to a confidential treatment request under the SEC’s Rule 83 and, as such, individual Form SHOs will not be made publicly available. The SEC will publish, on an aggregated basis, certain information regarding each equity security reported by Managers on Form SHO. No time frame was provided for publication in Rule 13f-2, however, the SEC stated in the Adopting Release that it estimates “that it will publish aggregated data derived from Form SHO reports within one calendar month after the end of the reporting calendar month.”¹⁰

            Amendment to the CAT NMS PLAN

In connection with the adoption of Rule 13f-2, the SEC also adopted an amendment to the CAT NMS Plan to require CAT reporting firms that are reporting short sales to report whether the order was effected in connection with the bona fide market-making exception in Rule 203(b)(2)(iii) of Regulation SHO.

            Compliance Deadline

Rule 13f-2, Form SHO and the amendment to the CAT NMS Plan will become effective on January 2, 2024. Managers will be required to comply with Rule 13f-2 and Form SHO beginning January 2, 2025. The SEC will begin publishing the aggregated short sale related data collected, pursuant to Rule 13f–2, on April 2, 2025. The compliance deadline for the amendment to the CAT NMS Plan is July 2, 2025.

___________

1 “Reporting of Securities Loans,” Release No. 34-98737; File No. S7-18-21 (Nov. 3, 2023) (Adopting Release).

[View source.]