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More Institutions Limit Securities LendingSubmitted by: Ted Allen, Publications

As the global credit crisis continues, several European pension funds have temporarily stopped lending shares of financial companies to discourage short selling, while two U.S. mutual fund groups have halted any new share loans.

The asset managers for the BT Pension Scheme, the largest U.K. pension fund, and Dutch pension giant ADP have stopped loaning shares of U.S. and European banks, according to Global Pensions, a London-based magazine. Paul Lee, a director at Hermes Equity Ownership Services, which manages assets for the BT fund, told the magazine that Hermes decided to take this action before the U.K.?s Financial Services Authority and the Securities and Exchange Commission acted last week to temporarily bar all short-selling of financial stocks. Regulators in Australia, the Netherlands, Belgium, France, Ireland, Germany, Canada, and Switzerland also have acted to curb short selling.

On Sept. 19, the Investment Management Association, which represents the U.K. asset managers, urged its members ?to consider carefully the implications of any participation in the lending of stock in U.K. banks, so long as current conditions prevail.? Dutch asset manager PGGM also said it would stop lending shares in financial firms, according IPE.com, a pension fund news site.

In the United States, two mutual fund groups, Vanguard Group, and Bank of America?s Columbia Management said they have suspended new loans of shares in all public companies, the Boston Globe reported. ?We have decided to stop new lending activity for now, until such time investors regain confidence in the market and the volatility abates,? a Vanguard spokesman said, according to the Globe.

In Australia, the Equipsuper pension fund suspended its share lending program in March, citing concerns about short selling, according to The Australian newspaper. The fund said it would resume lending if regulators acted to require more transparency.

The California Public Employees? Retirement System (CalPERS), the California State Teachers? Retirement System, the New York State Common Retirement Fund, and Maryland?s state pension fund have acted recently to limit the lending of financial stocks. The New Jersey Division of Investment stopped loaning shares to short sellers in July, according to the Reuters news service. The number of stocks excluded from share-lending programs varies by institution; CalPERS pulled four stocks, while the New York fund removed 19 companies.

In a Sept. 22 memo, the corporate law firm of Wachtell Lipton Rosen & Katz called on the SEC to encourage institutions and asset managers to refrain from lending the shares of financial firms or banks for 90 days. The law firm said the agency should also ?examine whether there is a potential conflict of interest? for a mutual fund or a pension fund to lend securities to a short seller whose trading activities may decrease the net asset value of the fund?s portfolio.

These voluntarily steps by institutions and asset managers to limit securities lending come as the lucrative practice has expanded in recent years. Share lending generated almost $1.7 billion in revenue for U.S. pension and mutual funds in 2006, according to the ASTEC Consulting Group.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on September 24, 2008 (boomark / email).