US - The US Securities and Exchange Commission is investigating possibleconflicts of interest by securities lending providers and the lendingagents they work with.
The SEC launched its “sweep exam” in the second half of last year, andexaminers are currently reviewing the data received from firms that were questioned, confirmed Gene Gohlke, associate director at the SEC’s Office of Compliance, Inspections and Examinations. Between five and 20 firms were sent letters demanding information on their lending operations, but Gohlke refused to specify names.
While the SEC has not written a final report into potential conflicts of interest, there are “early indications that there may be some conflicts of interest,” confirmed the SEC.
The review is examining the relationships and possible conflicts of interest between fund advisory firms that provide securities lending services and the lending agents that firms hire to handle the actual securities lending.
“There are a variety of potential conflicts of interest here, particularly if an agent is related to a fund – there can be conflicts of interest in deciding how the fees will be split between the fund and the agent,” said Gohlke.
Plan sponsors should question the fees as a fiduciary issue, cautioned Don Trone, president of the Foundation for Fiduciary Studies. “The custodian running the lending programme typically charges a fee for the service and then splits the net proceeds 50/50 with the plan sponsor,” he said. “Yet it is the plan sponsor that typically incurs the risk if the lending goes bad. Overall, what appears to be a ‘riskless’ strategy is fraught with problems – there is no free lunch on Wall Street.”
The SEC also wants to ensure that fund managers and advisers choose lending agents based on strict fiduciary considerations, free from the influence of conflicts of interest, said Kevin Goodman, assistant regional director for the SEC’s Pacific Regional Office.
“If an investment adviser is lending securities for clients or helping its clients choose a lending agent, that adviser has a fiduciary duty to act in the best interest of the client,” Goodman noted.
“Investment advisers should be performing reasonable [due] diligence to determine which lending agent benefits the clients most.”
Goodman recently addressed the issue of securities lending conflicts of interest at an industry conference. At issue as well is a new SEC rule stipulating that investment advisers and mutual funds must have chief compliance officers (CCOs). According to Goodman, these CCOs should oversee securities lending to ensure that the process is structured in the best interests of the clients.
State Street was the only firm to confirm to Global Pensions that theyhad received the SEC letter.
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