Oct. 31, 2022
Let me begin by clarifying an error in the factsheet posted to the SEC website. It states that securities loans are transactions that are vital to fair, orderly, and efficient markets. This is simply not true. Securities lending enables the multiplication of shares in circulation. When brokers lend the shares being held for retail investors, for example, it is equivalent to replacing the bought and paid for shares with an IOU. Securities lending ignores the investors right to vote in matters of corporate governance and to receive tax-qualified dividends. Further, a fail-to-deliver (FTD) that is closed with a borrowed share is not really closed it leaves open that IOU with the lender. Therefore, securities lending harms market efficiency by inflating the number of shares in circulation, which hampers true price discovery by artificially increasing supply. I can think of no other industry in which anything of value is lent without a due date for its return. Why is securities lending different? Of course, none of this would be an issue if broker-dealers and banks kept track of whose shares they were lending. Nothing in this proposed rule fixes the problem that voting rights and payments in lieu of dividends continue to be allocated in processes that are completely opaque to investors. It seems likely that the Proposed Rule will increase the cost and reporting burden of borrowing securities, regardless of the reason for taking the loan (e.g., to cover short sales, to close a fail-to-deliver, to access voting rights, etc.). An unintended consequence could be to tilt the brokers cost/benefit analysis in favor of fails to deliver. The subject proposed rule enables and perpetuates on-going systemic problems. Real reform for securities lending must include: (1) Notifying the public about who is borrowing and lending shares (not just which companys shares are being borrowed or lent). (2) Notifying retail investors with street name shares that their shares are being lent, (because (a) they don't get to vote and (b) they don't get tax-qualified dividends). SEC must adopt a more consistent interest in regulating, monitoring, and enforcing rules that require brokers to keep accurate records of ownership.