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Securities Lending

Securities lending is a practice where a fund temporarily lends out, on a collateralized basis, some of its portfolio securities. Funds often engage in securities lending through a lending agent, which may be the fund’s custodian, an affiliate, or a third party. Typically, a board approves securities lending policies that establish the parameters for the fund’s lending program—approved borrowers, restrictions on the portion of a fund’s portfolio that may be loaned, required collateral levels, how the lending agent is compensated, and similar matters.

After the securities lending program is in place, it is common for the board, in conjunction with fund management, to periodically review the appropriateness of those policies. The board, in conjunction with fund management, also may periodically evaluate the program performance and costs. Performance can be compared with projections and, using available data sources, usually can be measured against the performance of other comparable portfolios.

Relief from the 1940 Act (known as “exemptive relief”) is usually necessary if loans are made to affiliated borrowers or through an affiliated lending agent. The relief often requires directors, particularly independent directors, to have special monitoring responsibilities.