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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
new 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
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
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.