Securities Lending

[Guest Karen Geiger]

One of the plans that I work with is planning on entering into a securities lending arrangement with its trustee. Has anyone had a good or bad experience with this type of arrangement?

[Bill Berke]

This sounds like a prohibited transaction. I would get advice and counsel from competent lawyer before doing anything.

[Kirk Maldonado]

I seem to recall that there are UBTI issues implicated in securities lending transactions.

[MoJo]

I'm going out on a limb here, but I think there is no PT if the trustee is acting only as a conduit, and the profits are used to offset plan expenses. Same with UBIT. I used to work for an insitutional trustee that did this a lot (other side of the house from me), so I'm sure there is a way....

[pjkoehler]

Karen, I assume that the securities lending arrangement entails a single entity acting as trustee with respect to 2 or more plans of unrelated sponsors, i.e. where the fiduciaries with investment management responsibility for each plan determine that their respective investment objectives can be optimized by temporarily holding specified securities that are held by the other plan. In this arrangement, the plan borrowing the security would be entilted to receive dividends and interest, as well as realized gains, in exchange for which it is obligated to return the same number of shares of the borrowed security at the termination of the agreement. There appears to be no party-in-interest involved in the transaction, so the basis for a per se PT does not exist.

There might be a basis for a self-dealing type of PT, if the transaction occurs through the trustee's exercise of the discretionary authority that makes it a fiduciary and the trustee directly or indirectly benefits from the transaction. If the trustee's discretionary authority over plan assets is restricted to executing the instructions of another fiduciary (investment committee), i.e. the trust is a directed trust, then there is little likelihood that the transaction would result in a self-dealing PT with respect to the trustee. On the other hand, if the trust is not a directed trust and the trustee exercises its discretionary authority over plan assets to enter into the agreement and receives a direct or indirect benefit, then it could be a self-dealing (including a conflict of interest) form of PT, unless there is an applicable PT exemption. In fact, the conflict of interest is probably so inherent, that to reduce the risk of exposure to a PT, it would be advisable to delegate the authority to accept or reject the agreement to an independent fiduciary, even if there is no controlling PT exemption that compels this.

Aside from these PT issues, the decision to enter into the agreement is a fiduciary act that will subject the responsible fiduciaries to scrutiny under ERISA's fiduciary responsibilty standards like any investment decision that such fiduciaries implement in the exercise of the authority that makes them fiduciaries.

[This message has been edited by PJK (edited 06-22-2000).]

[This message has been edited by PJK (edited 06-22-2000).]

[Guest]

Securities lending is a fairly routine arrangement for large pension funds. There are clearly no UBIT issues. See Code 1058 and Rev. Rul. 78-88.