United States: Yes, GME Has Changed Equity Markets: The SEC Just Published Its Proposed Shorting Rule

Last month, we issued an alert noting that the Reddit/meme stock short-selling saga of January 2021 may change the U.S. equity markets. Now, less than a year after that frenzy and the ensuing Congressional hearings, and less than 2 months after the SEC Staff published its report on the January events, the SEC has published Proposed Rule 10c-1 to govern what is estimated to be a $1.5 trillion securities lending market.

As noted in the adopting release of the Proposed Rule, there is little real-time, publicly information in the securities lending market, so this Proposed Rule 10c-1 is intended to close data gaps, minimize information asymmetries, and improve price comparison in the market. But, perhaps more significantly, the SEC has also stated that the Proposed Rule could help the Commission:

• more efficiently target broker-dealers for locate examinations;
• examine broker-dealers for Regulation SHO compliance;
• fine tune disgorgement estimations; and
• oversee broker-dealer compliance with the Exchange Act.

The main takeaway may therefore simply be the prospect of increased enforcement against broker-dealers in the shorting world.

Also of note, under the Proposed Rule, within 15 minutes of executing a loan, lenders of securities would need to provide to a registered national securities association ("RNSA") details regarding:

• the loaned security and the loan itself;
• the date, time and description of a modification; and
• confidential information such as the legal name of transacting parties, whether the security is loaned from a broker-dealer's inventory, and whether the loan is being used to close out a fail to deliver.

The RNSA would also assign each loan a unique transaction identifier. In addition, by the end of the day, lenders would need to provide information regarding the total amount of each security that is owned and available to be loaned by the lender.

If a lending agent is acting on behalf of an owner in a securities lending transaction, the lending agent would provide the required information. Alternatively, the lender/lending agent may use a broker-dealer "reporting agent" to provide the information to a RNSA, subject to several conditions with which the reporting agent must comply.

The RNSA would make submitted information (other than confidential data) public as soon as practicable, although certain information would be provided only in the aggregate.

Aside from the specter of increased enforcement in the short selling space, we can also expect increased compliance costs and higher fees charged by the RNSAs receiving securities lending information.

If you want to respond to any of the 97 questions the SEC has posed to the public, you have about 2 weeks to submit a public comment!