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SEC approves Finra securities lending rules
10 December 2013
Gives the go-ahead for proposed rule change on lending and borrowing of securities
The US Securities and Exchange Commission (SEC) has approvednew rules on securities lending and borrowing.
The three rules, which were proposed by the Financial Industry Regulatory Authority (Finra), cover the permissible use of client securities, requirements on callable securities, and a new requirement for a member firm acting as an agent in a securities lending or borrowing transaction to disclose its capacity as an agent.
Rule 4330 prohibits a member firm from lending securities held on margin for a client that are eligible to be pledged or loaned unless the client gives written authorisation.
A member firm that borrows full paid or excess margin securities carried for a client account must comply with Securities Exchange Act Section 15(e) and notify Finra at least 30 days before borrowing. Before engaging in a securities borrowing transaction with a client, the member firm must have reasonable grounds to believe the loan of securities is appropriate for the client’s financial situation.
Under Rule 4340, each member firm with possession or control of a callable security is required to identify the security and establish an impartial lottery system to allocate securities among its clients in the event of a partial redemption or call.
Rule 4314 aims to make a distinction between principals and agents in securities lending and borrowing transactions. A member firm acting as an agent must maintain books and records to reflect the details of the transaction with the agent and principal.
The rule allows a member firm engaged in a securities lending or borrowing agreement with another member firm to liquidate the transaction when the other party becomes subject to one of the specified liquidation conditions.