The US Senate’s Special Committee on Aging has launched an investigation into the securities lending practices of pension funds and is considering an official hearing on the matter, according to a committee staffer who asked to remain anonymous.
The staff member, speaking to Global Custodian on background, said the investigation was prompted by articles in the New York Times and the Wall Street Journal that claimed investment banks reap the benefits of securities lending while lenders (in this case pension funds) take on all the risk. The investigation apparently was not prompted by any specific requests or complaints by constituents.
J.P. Morgan, about which the New York Times article was written, did not immediately respond to a request for comment.
The staff member said the committee also has raised concerns about how, in some cases, 401(k) plans temporarily froze participants’ assets in the wake of the financial crisis – rendering them unable to withdraw from their plans – apparently as a result of counterparty risk (primarily due to exposure to Lehman) in the securities lending process.
In recent weeks the committee has sent questionnaires to major plan sponsors and investment banks around the country to gauge the scope of securities lending specifically in the 401(k) market, the staff member said. The questionnaires asked plan sponsors whether or not they participate in securities lending; investment options their lent securities are engaged in; revenues and losses they incurred due to securities lending; and transparency on the part of investment banks around their securities lending practices. As of today, the committee has not yet received any responses from its inquiries.
Apart from saying a committee hearing about securities lending could be in the pipeline, the staffer would not say what the ultimate goal of the investigation is.
Along with plan sponsors and investment banks, custodians also may be affected by the ultimate outcome of the investigation – whatever that may be – acting as agent lenders on behalf of investment banks. Global Custodian examined the debacle around cash collateral reinvestment in our Winter Plus 2009 issue in The Seductive Lure of Cash Collateral Reinvestment Returns: How securities lending overreached itself.