With Securities Lending in the Public Spotlight, Congress Gets Involved

(December 14, 2010) – Following severe portfolio losses and constraints and strained relationships between pension funds and their securities lending providers, Congress is getting involved.

During the financial crisis and since, many investors – including some of America’s largest pension plans – have seen their ability to redeem capital from securities lending programs severely curtailed. The result of seemingly imprudent cash-collateral reinvestment programs, these losses have led to numerous instances of pension funds suing the firms hired to lend securities on their behalf. While such issues have been well-covered in the niche financial press, two recent articles in prominent national newspapers – The New York Times and the Wall Street Journal – have prompted a Senate subcommittee to launch and investigation, according to Global Custodian, an aiCIO sister publication.

“The US Senate’s Special Committee on Aging has launched an investigation into the securities lending practices of pension funds and is considering an official hearing on the matter, according to a committee staffer who asked to remain anonymous,” according to a Global Custodian article. According to the source, the national media spotlight focused on this common institutional practice led to the establishment of the investigation, and was not prompted by any “specific requests of complaints” from constituents.

Regardless of the Congressional investigation’s outcome, institutional investors will continue to pursue restitution through the legal system. Funds such as Sweden’s AP1 and Chicago Public School Teachers’ Pension and Retirement Fund have sued their securities lending vendors over such losses and constraints. Additionally, a class action suit brought against BankAtlantic Bancorp, the first such suit to reach a jury verdict, ended favorable for plaintiffs.

For a further discussion of cash-collateral reinvestment, see Global Custodian’s “The Seductive Lure of Cash Collateral Reinvestment Returns: How securities lending overreached itself.”