The Risk Management Association has responded to an article in the Wall Street Journal entitled Is Your Fund Pawning Shares at Your Expense? (May 30th).
While respecting WSJ commitment to balanced reporting, the RMA took question with the articles implication that there are no regulatory constraints on fund managers who act as lending agents or the compensation that they receive from lending the securities of their funds.
In a letter to the editor of WSJ, the RMA pointed out that: through a series of exemptive orders and No-Action Letters, the Securities and Exchange Commission has developed strict requirements governing the operation of securities lending programs by registered mutual funds.
The RMA also feared that the portion of the article that discussed fees for the management of cash collateral could be misconstrued to imply that there is something unusual about an affiliated manager charging a management fee for cash collateral or that the fund is somehow being charged twice for managing the same assets.
The RMA went onto highlight the important of the Cash Sweep Rule: The Cash Sweep Rule specifically authorizes funds to invest cash balances (whether uninvested cash or securities lending collateral) in other investment companies, including affiliated funds. The exemptive order [granted by the Securities and Exchange Commission] and the Cash Sweep Rule address the various concerns around duplicative advisory fees through disclosure, and require the advisor to reimburse a fund to the extent it invests cash in a fund with sales charges or service fees. This limitation on the imposition of such service fees and sales charges may be among the reasons that the fees associated with securities lending oriented institutional vehicles can be significantly lower than management fees for typical money market investment. For example, iMoneynet quotes a weighted average institutional fee of 33 basis points for general money market funds.
The RMA also found in necessary to rise to the defense of cash collateral losses highlighted in the article, by stating that the turmoil in the financial markets was in no way confined to investments of cash collateral generating by securities lending.