Lender should read this document carefully before participating in Janney’s Fully Paid Securities Lending Program (the “Program”). In addition, Lender should carefully read the Master Securities Lending Agreement (“MSLA”) before participating.
INTRODUCTION
Janney Montgomery Scott, LLC (“Janney”) offers eligible customers the ability to lend certain of their fully paid Securities to Janney for lending to other market participants who wish to use these shares for short selling or other purposes. “Fully Paid Securities” are Securities in a customer’s account that have been completely paid for.
Lending out Fully Paid Securities may be a way to increase the yield on Lender’s portfolio, because some shares are in high demand in the Securities lending market and borrowers are willing to pay a loan fee for the use of Lender’s shares.
In the Program, Lender permits Janney to borrow from Lender any Fully Paid Securities in its portfolio and loan these Securities out in the Securities lending market. Janney will have the discretion to initiate loans of Lender’s Securities. Lender will not be asked to approve each loan before it is initiated, but Lender can sell its shares at any time or terminate its participation in the Program. Janney will pay Lender a loan fee for the shares that it borrows from Lender. Ordinarily Janney will pay Lender a percentage of the net loan fee received by Janney for lending its Securities. Janney’s net loan fee used to calculate Lender’s loan fees may be less than the gross fees received by Janney for relending Lender’s Securities because of certain deductions and charges, as explained below.
Janney will be the counterparty borrower to all of the loans Lender makes. That is, as a customer, Lender is not transacting directly on a market. Lender is transacting with Janney, which may then transact on the relevant market. For all transactions in which Lender is lending its Fully Paid Shares, Janney will be the borrower and Janney will be responsible for providing the collateral to Lender on the Securities loan and paying loan fees to Lender.
MECHANICS OF A FULLY PAID LENDING TRANSACTION
When the lending transaction takes place, Lender’s Securities will be removed from its account. In return, Janney will deposit cash collateral into an independent third party Securities Intermediary. The amount of collateral is 100% of the value of the securities on loan, using the prior day’s closing price of the security multiplied by the number of shares on loan. Janney marks-to-market all positions nightly to reflect changes in Security prices. Janney reserves the right to adjust to US industry to raise or lower the collateral amount based on local laws or market custom outside the US; however, Janney will never collateralize the stock loan for less than 100% of the value based on the prior day’s closing price. For example, customer has enrolled in the Program and Janney has subsequently borrowed 2500 shares of XYZ from this customer. XYZ’s closing price on the previous day is $83.40. The collateral is calculated by multiplying $83.40 x 2500 = $208,500.
SECURITIES LOANED OUT BY LENDER MAY NOT BE PROTECTED BY SIPC
The provisions of the Securities Investor Protection Act of 1970 may not protect you as a Lender with respect to Securities loan transactions in which you lend to Janney Fully Paid Securities. Therefore, the collateral held for Lender’s benefit by a third-party financial institution, as described in detail in paragraph 4 of the MSLA, may constitute the only source of satisfaction of Janney’s obligation in the event that Janney fails to return the Securities.
There is a risk that Janney will default or become insolvent, which could result in Janney failing to return borrowed Securities to Lender. To address this possibility, collateral for the benefit of Lender will be segregated in an account titled For the Exclusive Benefit of Its Fully Paid Securities Lending customers held at a third party Securities Intermediary, BMO Harris Bank, N.A. In the event of an Event of Default or Act of Insolvency by Janney, as defined in section 21 of the Master Securities Lending Agreement, all authority of Janney to direct or distribute collateral held by Securities Intermediary for Lenders shall terminate in favor of a third party Administrator. Thereafter, third party Administrator shall communicate with customers to facilitate the return of their Collateral. The third party Administrator is 17a-4 LLC. 17A-4 LLC can be reached at (212) 949-1724 or 15 Breeze Hill, P. O. Box 1492, Millbrook, NY 12545, or via e-mail at [email protected].
SECURITIES LOANED OUT BY LENDER ARE TYPICALLY USED TO FACILITATE SHORT SALES
The type of Securities that are generally attractive to borrowers in the Securities lending market, and which generate the highest loan fees, are “hard to borrow” Securities. When Lender lends its Fully Paid Securities, it is likely that such Securities will be used to facilitate one or more short sales where the borrower is selling shares in hopes that the stock will decline in value (the short seller later re-purchases the stock to pay back the stock loan). Since Lender is holding the shares “long” in its account, the activity of short sellers potentially could affect the long-term value of its holdings.
NOTE: If Lender does not want its Fully Paid Securities used to facilitate short sales, Lender should NOT participate in Janney’s Fully Paid Securities Lending Program.
LENDER CONTINUES TO OWN LOANED SHARES AND HAVE MARKET RISK ON THOSE SHARES
When Lender lends its shares to Janney, Lender continues to own the shares and Lender continues to have the market exposure inherent in ownership of the shares (i.e., if the share price increases while Lender own the shares but are lending them out, its equity in the position will increase. If the price goes down, its equity will decrease).
LENDER CAN SELL ITS LOANED SHARES AT ANY TIME
Even though Lender has loaned its shares to Janney, Lender can sell those shares at any time, just like any other shares in Lender’s Janney account. Lender does not have to wait for the shares to be returned to sell them. Even if the shares are not returned on time to settle Lender’s sale of the shares, Janney will be responsible for settling the sale, not Lender, and Lender will receive the proceeds from the sale of the shares on the normal settlement date for the sale.
LOAN RATES (AND THEREFORE THE FEES LENDER WILL RECEIVE) ARE SUBJECT TO FREQUENT CHANGE AND CAN GO DOWN (OR UP)
Rates for “hard to borrow” and other shares change frequently, even daily, in the Securities lending market and this can reduce (or increase) the loan fee that Lender receives for lending its shares out. Likewise, Janney may change the rate it pays Lender compared to the fees that Janney receives when it lends Lender’s Securities to third parties. If Lender has permitted Janney to borrow its Fully Paid Securities through the Program, Lender will not have direct control over when to initiate or terminate loans of specific shares (including based on rate changes). However, Lender retains the right at all times to terminate its participation in the Program (which will terminate all of its lending transactions).
POTENTIAL ADVERSE TAX CONSEQUENCES FROM RECEIVING CASH PAYMENTS IN LIEU OF DIVIDENDS ON LOANED SHARES
When Lender lends its Fully Paid Securities, Lender is entitled to receive the amount of all dividends and distributions made on or in respect of the loaned Securities. However, Lender may receive cash payments “in lieu of” dividends. If Lender is a U.S. taxpayer, cash payments in lieu of dividends are not the same as qualified dividends for tax purposes and are taxed as normal ordinary income. If Lender is not a U.S. taxpayer, Janney may be required to withhold tax on payments in lieu of dividends and loan fees to Lender at 30% unless an exception applies. Janney recommends you consult with your tax advisor for details.
If Lender permits Janney to borrow Securities from Lender through the Program, Janney may recall loaned shares from a downstream borrower prior to a dividend, so as to reduce potential negative tax consequences to Lender. However, it is solely within Janney’s discretion to recall a loan and Janney makes no guarantee to recall a loan prior to a dividend. With respect to other corporate actions affecting loaned shares, noncash distributions that Lender is entitled to receive in connection with ownership of loaned Securities will be added to the loaned Securities on the date of distribution and will be transferred to Lender at termination of the loan.
Special tax considerations may arise if shares of master limited partnerships or publicly traded partnerships are loaned out under the Program. Lender is encouraged to consult the issuer’s prospectus or its tax advisor for further information.
Janney is the Counterparty to All Fully Paid Securities Lending Transactions with Lender. Janney May Earn a Spread in Rates and May Profit or Lose in Connection with the Transaction or Other Transactions in the Same Securities.
Janney will be the counterparty (borrower) when Lender lends its shares to Janney. Any transactions that Janney may or may not enter into in other Securities lending markets are completely independent of Lender’s loan transaction to Janney. Thus, after Janney borrows shares from Lender at a given rate, Janney may or may not then lend those shares. Likewise, Janney may terminate a loan with Lender and return shares to Lender while at the same time Janney continues to lend shares of the same stock out to the marketplace. Janney’s obligation to Lender is to pay Lender the specified rate on ongoing loan transactions until such transactions are terminated by Lender or by Janney. Nothing in the Program restricts Janney’s ability to conduct stock lending and borrowing transactions with third parties, who may or may not profit in connection with the transactions. Janney may borrow shares from Lender and then lend the shares out to other parties in the Securities lending market. Janney may earn a “spread” on Securities lending transactions with Lender’s stock. This means that the rate Lender receives from Janney for its loaned Securities may be lower than the rate Janney receives from a third party on those same shares. Janney may pay part of the net loan fees (for shares Lender lend) to third parties such as Lender’s financial advisor.
THERE IS NO GUARANTEE THAT LENDER WILL RECEIVE THE BEST LOAN RATES FOR ITS SHARES
The Securities lending market is not a standardized and transparent market. Securities lending transactions generally take place “over the counter” rather than on organized exchanges where prices and transactions are transparent. There are no rules or mechanisms that guarantee or require that any given participant in the marketplace will receive the best rate for lending shares, and Janney cannot and does not guarantee that Lender will receive the most favorable rate for lending its shares. Janney may not have access to the markets or counterparties that are offering the most favorable rates, or may be unaware of the most favorable rates. As noted previously, Janney may earn a “spread” on the rate, such that the rate Lender receive is lower than the rate Janney receives.
THERE IS NO GUARANTEE THAT LENDER’S FULLY PAID SECURITIES WILL BE LOANED OUT
There is no guarantee that Lender will be able to lend (or that Janney will decide to or be able to borrow) Lender’s Fully Paid Securities. There may not be a market to lend certain of Lender’s Fully Paid Securities at a rate that is advantageous, or Janney may not have access to a market with willing borrowers. Janney, or other Janney customers, might have shares that may be loaned out that will satisfy available borrowing interest and, therefore, Janney may not borrow shares from Lender. There is no rule or requirement, nor is there anything in the applicable agreements between Lender and Janney, that requires Janney to borrow shares from Lender or requires Janney to place Lender’s interest in lending shares of a particular Security ahead of Janney’s own interests, or those of other Janney customers. If Janney is managing Lender’s lending transactions through the Program, Janney cannot and does not guarantee that all of Lender’s Fully Paid Securities that possibly could be loaned out to generate loan fees will be loaned out.
LOANS MAY BE TERMINATED AT ANY TIME BY JANNEY
When Lender lend its Fully Paid Securities, the loan may be terminated and the shares returned to Lender’s Janney account at any time. The loan may be terminated because a party that borrowed the shares from Janney (after Janney borrowed them from Lender) chose to return the shares. Janney also has the right to terminate its borrowing of shares from Lender even if Janney continues to lend the same stock through the Securities lending market. When the loan is terminated, collateral held with the third-party financial institution will be reduced accordingly. If Lender permits Janney to borrow securities from Lender through the Program, Lender will not have direct control over when to initiate or terminate loans of specific shares. Please note, however, that Lender can always terminate its participation in the Program (which will terminate all of its lending transactions).
Selling Lender’s Shares or Borrowing Against Them or Withdrawing Cash Collateral Beyond a Certain Amount Will Terminate the Loan Transaction
If Lender sells the Fully Paid Securities Lender has lent out, or if Lender borrows against the shares or withdraw cash collateral (such that the Securities become margin Securities and are no longer Fully Paid Securities), the loan will terminate and Lender will stop receiving the loan fee.
COMMISSIONS AND OTHER CHARGES
If Lender permits Janney to borrow Securities from Lender through the Program, Lender will receive a loan fee, which will accrue daily and be paid out according to the terms in the MSLA. The loan fee may be changed by Janney in its sole discretion and is calculated in accord with the annexed Schedule of Basis for Compensation for Loan. Likewise, the loan fee may be varied by agreement between certain customers and Janney, depending on the size of the customers’ loan portfolios, the types of Fully Paid Securities available in the customers’ accounts, and other factors. As noted above, Janney may also earn a “spread” on the rate.
INTEREST TREATMENT ON CASH COLLATERAL
Lender generally will not receive a separate interest payment from Janney on the cash collateral that is held for its benefit when Lender lends its Fully Paid Securities to Janney. Lender will only receive the loan fee rate that is confirmed for lending its shares.
VOTING RIGHTS
The borrower of Securities (and not Lender, as lender) has the right to vote, or to provide any consent or to take any similar action with respect to the loaned Securities if the record date or deadline for such vote, consent or other action falls during the term of the loan.