Board Considerations Regarding Securities Lending

A recent SEC action targeted an adviser that was faulted for, among other things, lacking disclosures to its fund boards on its securities lending practices -- one of the more challenging oversight areas for boards. Fund directors may wish to review the MFDF’s white paper, which outlines the mechanics of securities lending, the legal infrastructure, business practices, and other issues. Below are a few related considerations on fund board responsibilities:

  1. The board should determine whether some or all of the funds it oversees will be permitted to engage in securities lending.
  2. The board should review and approve the contracts between the fund and the third parties that will implement and manage the fund’s securities lending program.
  3. The board should understand the risks associated with securities lending and understand the manner in which the fund’s adviser will identify, monitor and mitigate those risks.
  4. Securities lending should be conducted pursuant to written policies that have been reviewed by the board.
  5. Funds should be treated fairly in the context of larger securities lending programs.
  6. The board should seek to ensure that appropriate policies are in place to recall securities in order to vote proxies as appropriate and desired.
  7. The board should obtain regular reports about the securities lending program from fund management.
  8. The board should review the performance of the securities lending program on a regular basis.
  9. The board should actively use the CCO to help it oversee securities lending programs.