Brokerage firms that lend stocks to hedge funds and wealthy investors for the practice of shorting often borrow those stocks from mutual funds, earning the funds hundreds of millions of dollars in hefty fees each year. Now, the Securities and Exchange Commission wants to know whether the fund companies are plowing those fees back into the fund assets or retaining some or all of them as profits, TheStreet.com reports.
Lori Richards, director of the SECs office of compliance inspections and examinations, revealed the Commissions interest in stock loan fees in a speech three weeks ago, saying that funds that retain these fees could be making an "inappropriate use of funds money." An SEC spokesman declined to comment on the inquiry, but John Collins, a spokesman for the Investment Company Institute, said lending stocks to brokerages is a well-established practice in the fund industry and that funds return the proceeds to the pooled assets. Nonetheless, few funds offer much information about their stock-lending policies in fund prospectuses, according to TheStreet.com.