iShares Lending Profits Not Barclays' To Sell
April 16 2009 - 1:27PM
Dow Jones News
When Barclays PLC (BCS) sold its prized iShares exchange-traded
fund business earlier this month, much of the speculation was about
whether the deal would include revenue from a lucrative side
business - lending out stocks owned by iShares funds.
In fact, that aspect of iShares' business wasn't really
Barclays' to sell. Profits from lending out shares of the ETFs
belong to the funds' shareholders, not to Barclays or to CVC
Capital Partners, the proposed buyer of iShares.
Borrowed shares are typically used by short sellers, such as
hedge funds, who pay a fee for the chance to sell the shares on the
open market and, with luck, repurchase them later at a lower
price.
Barclays does, in fact, earn money from iShares' securities
lending, but that's because it received a contract for the work
from iShares' board, a group of trustees meant to look out for fund
shareholders' interests.
While Barclays could in theory sell the separate business unit
that holds the contract and which also handles securities lending
for Barclays' larger institutional money management unit, Barclays
can't promise CVC that the business unit will keep its ties with
iShares.
"There are a lot of people that do securities lending, and the
iShares board could hire somebody else," says John McGuire, a
partner at law firm Morgan Lewis in Washington, who specializes in
mutual fund regulations.
Of course, Barclays' double role - which the confusion around
its sale serves to highlight - could raise questions about
self-dealing.
Barclays' commission on iShares' securities lending revenue -
50% - appears hefty. But with the market for securities lending
basically opaque, it's difficult to judge whether iShares holders
are really getting a fair deal or not.
While individual investors may be in the dark, McGuire says the
Securities and Exchange Commission has taken steps in the past to
make sure mutual fund boards don't reflexively hire affiliated
businesses.
The iShares board has eight members. Two, including iShares
Chief Executive Lee Kranefuss, are Barclays officials. Six others
are mostly local luminaries from the San Francisco Bay Area where
iShares is based, including two Stanford professors and the head of
a local Roman Catholic charity.
Barclays' largest exchange-traded fund rivals State Street Corp.
(STT) and Vanguard Group also handle lending securities for their
own funds. It isn't known what State Street's cut is. Vanguard,
however, says all profits from its lending business go directly
back to shareholders.
While Vanguard may appear more generous in that regard, Barclays
says it dedicates more resources to share lending than Vanguard, so
iShares holders receive more money even after Barclays' cut.
Barclays doesn't provide figures to back up that claim, however.
Barclays says it also bears the costs of running the lending
business and guarantees shareholders against some losses.
As to why it seems common for funds to pick in-house lenders,
Barclays says there are practical considerations that would make
hiring an outside firm tricky.
In order to make sure its ETFs are tax-friendly for fund
holders, iShares places a number of restrictions on the way its
shares can be leant out. Complying with those could be more
difficult for an outside firm to handle, says Barclays.
-By Ian Salisbury, Dow Jones Newswires; 201-938-5219;
ian.salisbury@dowjones.com