Keynote Address — 2019 ICI Securities Law Developments Conference
Director, Division of Investment Management
Dec. 3, 2019
Affiliated Securities Lending
As we work to modernize asset management regulation, we need to tackle, in particular, areas where market participants are treated differently. An important example, and current priority, is affiliated securities lending. Earlier this year we formed a team to focus on this topic because its relevance has only grown over the years given the increasingly competitive environment for fees and performance.
Advisers may be using related revenue to boost returns or to reduce the impact of expenses. To support the efficiency of their lending programs, funds generally use a securities lending agent, and the agent may be an affiliate. They pay the lending agents in a variety of ways, including on a fee-for-service basis or by sharing the revenue from securities lending. Funds that pay an affiliated agent with a share of revenue must obtain exemptive relief from the Commission.
As many of you know, the Commission last issued an exemptive order with this relief in 2004. The result is that some funds have relief and others that would like it do not. We are reviewing securities lending, in part, to seek ways to address this divide. To do that, however, we have to confront potential conflicts of interest and abuses raised by such arrangements.
In this regard, we welcome ideas on qualitative and quantitative conditions to address these potential conflicts and abuses. For example, we welcome your thoughts on some preliminary areas we are exploring:
- On the overall structure of the securities lending program, how can advisers and boards consider the appropriateness of the program on a fund-by-fund, asset class, and complex-wide basis?
- Rather than allowing a fund to use an affiliated lending agent for its entire program, should we explore conditions that require a mix of affiliated and unaffiliated agents? For example, should the Commission permit the use of affiliated agents only if limited to a certain percentage of the securities loaned? Could this help support competition, transparency and benchmarking?
- What are the current best practices on conflict assessment and management?
- Do advisers and boards have access to independent information about the performance of their securities lending agent? Are there additional disclosures that would improve the mix of information so that funds and boards are better informed in selecting lending agents?
We understand the importance of a level playing field in affiliated securities lending. Any constructive input you can provide in this area will help us work toward this goal.