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April 23, 2014

Compilation of SEC Staff Guidance on Securities Lending

Division of Investment Management's guidance on securities lending by open-end and closed-end investment companies provides a reminder of legal obligations in lending programs.

The Securities and Exchange Commission's (SEC's) Division of Investment Management recently published staff guidance on "Securities Lending by U.S. Open-End and Closed-End Investment Companies" (Staff Guidance).[1] The Staff Guidance does not impose any new requirements on investment companies and does not elaborate on prior SEC and staff positions. Instead, the Staff Guidance compiles into a single location prior no-action letters that the staff has issued regarding securities lending by open-end and closed-end investment companies.

The publication of the Staff Guidance serves as a reminder of the important legal obligations that arise in connection with securities lending programs. Funds, fund boards, and fund chief compliance officers should be aware of these obligations, and funds should conduct their securities lending activities accordingly. Among other things, the following should occur:

  • Boards must approve and oversee securities lending programs. This includes initial review and approval of written policies and procedures, as well as ongoing reporting and review of performance, compliance, and implementation.
  • Boards should adopt policies outlining when securities on loan should be recalled to permit proxy voting.
  • Loans must be appropriately collateralized and are subject to Investment Company Act of 1940 leverage restrictions.
  • Fund disclosure documents should describe the lending program and key risks.

In addition, the Staff Guidance includes a reminder that affiliated transaction restrictions apply to securities lending and, specifically, that SEC exemptive relief may be required where a fund seeks to lend its portfolio securities to affiliated borrowers or to compensate an affiliated lending agent with a share of revenues from the lending program.


[1]. View the Staff Guidance here.

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Partner

Richard F. Morris is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Morris's practice focuses on representing exchange-traded funds (ETFs), mutual funds, and investment advisers. He has more than 20 years of experience as an asset management lawyer and has been at the forefront of ETF representation since 2000, when he helped launch the iShares family of ETFs.

Mr. Morris counsels clients on the full range of legal, regulatory, and compliance issues applicable to ETFs, investment companies, and registered investment...

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About the Author

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Zachary E. Vonnegut-Gabovitch is an associate in Morgan Lewis's Investment Management Practice. The lawyers in our Investment Management Practice focus on regulatory issues affecting broker-dealers, investment advisers, futures clearing merchants, CTAs, swap dealers and security-based swap dealers, securities, futures and swap exchanges, crossing platforms, and clearinghouses and public and private funds.

Prior to joining Morgan Lewis, Mr. Vonnegut-Gabovitch worked at Chinatrust Commercial Bank.

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