Oct. 31, 2022
October 31, 2022 Hello, 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.