Affiliated Agents, Boards of Directors, and Mutual Fund Securities Lending Returns
53 Pages Posted: 22 Oct 2011 Last revised: 2 Jun 2017
Date Written: February 18, 2013
Prior SEC inquiries concerning self-dealing in securities lending programs suggest potential conflicts of interest when funds employ lending agents that are affiliated with their sponsor. We posit that the level of self-dealing is potentially greater, and mutual funds’ securities lending returns are lower, when funds employ sponsor affiliated lending agents. Using a manually collected U.S. index mutual fund sample, we find that funds with sponsor affiliated lending agents have lower annual returns on lent securities and that securities lending returns are significantly higher when funds administer their own lending programs. We also find that mutual funds boards of directors provide a monitoring role in the securities lending market. Specifically, we document that multiple board of director appointments, more director fund ownership, higher board independence, and lower excess director compensation are associated with higher lending returns. Overall, the evidence has implications for mutual fund boards as they consider lending proposals from affiliated agents and for future regulatory actions.
Keywords: equity lending, securities lending, mutual funds, index funds, affiliated agents, board structure
JEL Classification: G34, G32, G20
Suggested Citation: Suggested Citation