SEC Discovers Securities Lending Abuses

The Securities and Exchange Commission has found that some mutual fund companies have not been adhering to securities lending regulations and has sent them deficiency letters, The Wall Street Journal reports.

For one thing, directors are not overseeing the practice carefully—particularly when an affiliated broker is lending the securities and earning a fee—and for another, funds are unfairly influencing the bidding process, an SEC official tells the paper.

Funds have long lent their securities in exchange for interest payments to help boost returns. But with the explosion of hedge funds, and their practice of short selling, the practice is becoming far more common.