Oct. 29, 2022
First off I would like to start to say that in an ideal world where the markets are fair, orderly and efficient, security loans would be a good thing, unfortunately it is clear none of these things are present in our current markets. Securities loans with lack of proper regulation serve nothing more than a tool to be used and abused for nefarious reason by bad actors. This is because securities lending enables the unofficial addition of shares in circulation as when a broker for example lends out a share that is held by a retail investor, the retail investor is given an IOU as this share is given to the borrower, the problem then becomes that when the borrower uses the borrowed share to close out a fail to deliver, it leaves open an IOU as you are not really closing out the fail to deliver because you now owe that share to both your previous fail to deliver and now also to your new fail to deliver in which you borrowed from leading to the inflating of the number of shares in circulation, which impedes the ability for true price discovery as the supply is artificially increased. It is shocking how in the financial markets there is a lack of proper earmarking this lent out share without a due date for it to be returned, something that even small rental shops carry out on a daily basis, so why can the financial markets not do it? This further demonstrates the need to have shares properly accounted for digitally to prevent such problems. Moreover nothing in this proposed rules seeks to fix the problems in regards to voting rights and payments in lieu of dividends continuing to be allocated in processes that are blurred to investors. Now onto the points of the proposed rule, I do think that the 15 minute reporting requirement is good as the cost and effort to provide this information would help prevent fraud and the hiding in loopholes, I do think that it could be expanded into providing who is borrowing and lending the shares alongside with potentially providing real time reporting which in this digital age should be something that is very easy to do. This takes me onto my next point in that there should be more transaction by transaction reporting as it would eliminate the ability to hide within the aggregate and if the SEC is truly to bring more transparency then the ability to hide in the aggregate should be prevented at all cost as the aggregate is not transparent. I would also recommend that every retail investor who has their share lent out, be notified about this and the implication (no right to vote and no tax-qualified dividends) that it carries. This would be help everyday people and working families who lack the time and or knowledge to understand that their investment is now being lent and that they should be able to earn revenue from this. Continuing on recommendations, I shall bullet point the rest *Eliminate “onward lending” completely: If the SEC is to ensure that the markets are still fair then this is something that must be addressed and dealt with as for decades Public companies and transfer agents have pointed this as being a source of phantom shares and over voting in matters of corporate governance. This is unacceptable as it maliciously destroys companies consequently leading to everyday people and families suffering from job loss, equity decrease and smaller pensions to the benefit of a wicked few. *Every loan must have a due date and be earmarked with a special code that can be viewed on the whereabouts of the share. There must be zero tolerance for any shares that are overdue their return as this would cause for the loan to remain unsettled indefinitely and so therefore a forced buy in must be done with no special exemptions being allowed to bypass this, moreover any organization that continues to ignore the due date must be put on a blacklist in regards to ability to borrow securities and pay a fine. Any broker that continues to provide securities lending services to these blacklisted organization should have their profits seized and a fine further levied on the amount made. In conclusion it is important for the SEC to put even more stringent and firm rules in place in regards to securities lending as untracked lending chains could lead to economic fragility as obscure murky securities lending activity can hide vast destructive chains of obligations that could be a threat to both national and international security, and so therefore there must be even more transparency in this area to provide the public and companies the ability to see what’s going on as this would help provide an equal footing to those aforementioned entities and take the unfair advantage held by those seeking to borrow the shares for their purpose allowing for a fairer market and since the Dodd-Frank Act has directed the SEC to provide transparency for brokers, dealers and investors, it is clear that this proposed rule although good does not go far enough to fulfil the transparency promise of the act to retail investors and companies who will continue to face the plague of phantom shares in the capital markets.