Securities lending is one of the myriad investment techniques used by funds to improve the return on their portfolios for the benefit of their shareholders. The term refers to the lending of a security by one party (sometimes called the beneficial owner) to another (the borrower) in exchange for collateral.
The U.S. Securities and Exchange Commission staff has established guidelines for securities lending activities for funds registered under the Investment Company Act. Among other things, these guidelines restrict the types of collateral that are permissible and how that collateral may be treated, impose limitations on the amount of lending, ensure the ability of a fund to recall securities in a timely manner, and address potential conflicts of interest.
Funds often engage in securities lending through a lending agent, which can be the fund’s custodian, an affiliate, or a third party. Typically, a fund’s board approves securities lending policies that establish the parameters for the lending program, such as approved borrowers and the terms of lending agent compensation. The board oversees the securities lending program, in conjunction with fund management, by periodically reviewing the appropriateness of those policies as well as the program’s performance and costs.