Sec Lending Practices Said to Draw SEC Scrutiny

October 18, 2004 ( - The mutual fund trading scandal may well be on the verge of triggering another fiduciary concern for plan sponsors.

More than a year after New York Attorney General Eliot launched the  first fusillade in the mutual fund trading scandal, the Securities and Exchange Commission (SEC) is now looking into possible misconduct involving funds in the $700-billion securities lending market, according to a Reuters report, citing sources familiar with the situation.  

Specifically, SEC examiners are looking at whether gains from securities lending return to the mutual funds that provide the shares, Lori Richards, director of the SEC Office of Compliance Inspections and Examinations (OCIE), said in a speech last week.

The report cites sources “close to the case” as noting that the SEC is targeting three issues:

  • allocation of securities lending gains;
  • disclosure of lending practices; and
  • possible under-the-table dealings with intermediaries who handle lending transactions.

“It is clear that the SEC has found evidence that funds’ securities lending business is being directed to particular entities based on whether they provide a kickback to the fund managers,” Mercer Bullard, a professor at the University of Mississippi School of Law and a former SEC official is quoted as saying in the report.