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Articles Tagged with securities lending

LPL Financial Holdings (LPLA) brokers and investment advisers will now be able to offer their clients securities lending services through Goldman Sachs (GS). Under the new arrangement, LPL clients can borrow anywhere from $75,000 to $25 million against the securities held in their accounts.

In a press release, Goldman Sachs spoke about how through its Goldman Sachs Private Bank Select, LPL clients would be able to borrow these funds for “life events,” including travel or education, without having to sell their investments. However, the money borrowed cannot be used to purchase more investments. Goldman noted that its “high-tech platform” would be able to reduce wait time for a non-purpose securities- based loan from weeks to days, with no fees charged.

Over 15,000 LPL financial advisors will now be able to offer clients access to Goldman’s securities lending capabilities. The independent investment advisory firm joins 40 other such firms and broker-dealers on Goldman’s GS Select platform.

Securities Lending Comes with Significant Risks

The ability to borrow against securities is often touted as a benefit to investors. However, securities lending may not be the best choice in the long run for many investors. While such loans allow clients to borrow against what is in their accounts, certain risks come with this advantage, including forced liquidation of accounts during bad market moves.

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Direct Services LLC and Voya Investment LLC, two Voya Holdings Inc. investment adviser subsidiaries, will pay about $3.6M to settle Securities and Exchange Commission charges accusing them of failing to make certain disclosures related to securities lending. Of that amount, over $2M will go straight to mutual funds that were impacted.

The two investment advisers worked with a number of “insurance-dedicated mutual funds” that insurers affiliated with Voya Holdings and Direct Services offer to life insurance and annuity customers. The two advisers lent fund-held securities to certain parties. They then called back the securities so that the insurer affiliates would get a tax benefit. These same affiliates were record shareholders for the funds’ shares. Meantime, this led to the funds and their investors losing income while not getting to avail of the tax benefit.

According to SEC Enforcement Division Asset Management Co-Chief Anthony S. Kelly, the mutual funds and its investors were not notified that they would be losing money in order for the affiliates to get this tax benefit. The regulator said that Voya advisors did not disclose that this conflict of interest existed.

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It will be up to 11 jurors to determine if Wells Fargo & Co. (WFC) is guilty of grossly mismanaging a securities lending program and lying about the degree of risk involved or whether the economic crisis was actually at fault. The program was marketed to institutional clients, including pension funds. According to investors, the bank committed fraud by taking huge risks with what they were under the impression was a conservative program. Nearly 15% of the portfolio’s by 2007’s fall season had defaulted or was distressed. (Citigroup (C) has since bought most of Wells Fargo’s Clearland securities lending business.)

The plaintiffs contend that rather than investing money in higher grade market instruments and other safe investments, which is what they thought was being done), managers bet on structured investment vehicles and other high-risk financial instruments. Cheyne Finance, one SIV involving subprime mortgages that the bank invested in, was placed in receivership. The securities case, filed in 2011, focuses on cash collateral investments primarily made by Wells Fargo between 2005 and 2008.

Wells Fargo denies the allegations. Contrary to the attorneys for the investors, the bank’s lawyers are arguing that the securities lending business’s investments were conservative and safe and that it’s track record was pretty solid until the economic crisis. Even then, contend the attorneys, the losses suffered were not a big portion of the program. Also, claims Wells Fargo, the securities lending program was overseen at a level that was “extraordinarily high” and the investors’ best interests were primary. The banks’ legal team noted that investors were given written warnings that losses were likely.

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