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Activist Spotlight: Share Lending Under Fire

Published: December 13th, 2021
A regulatory proposal requiring big index fund managers and other institutional investors to disclose share lending programs could upend short-selling activism and drive an uptick in ESG voting.

In September, over GOP objections, the Securities and Exchange Commission introduced a proposal seeking to improve disclosures for institutional investors voting on mergers, director candidates, ESG-focused shareholder proposals and other topics.

Buried inside the 174-page package, which needs approval by commissioners, is a provision seeking to put a spotlight on the opaque multi-billion-dollar industry of share lending by institutional investors.

The provision requires institutional investors to disclose annually the number of shares they voted as well as how many shares they loaned.

The new lending measure could have far-reaching consequences and potentially upend short-seller activists who borrow shares and seek to convince investors to sell their shares, driving the price of a given stock down. At the same time, it could lead to a substantial uptick in voting by the likes of BlackRock Inc. (BLK), State Street Corp. (STT) and Vanguard Group Inc. on high-profile ESG matters.

Among its chief affects would be to convince institutions to scale back share-lending programs given the potential for a PR crisis over investor concerns that they aren’t voting shares on critical ESG topics. Investors need to own shares ahead of corporate record dates, so they can vote them on topics at subsequent annual meetings.

“Index funds always say they vote because it’s their fiduciary duty and they add that their vote is material to the three- to five-year ark of these companies,” said one ex-index fund employee. “Then why do you have 20% of the name on loan on the record date?”

Georgetown University Finance Professor Reena Aggarwal said institutions could be pressured by investors to scale back lending.

“It’s a shaming game,” she said. “Otherwise investors will respond and say, ‘you’re not meeting your fiduciary duty’ by lending out shares and not voting.’”

Increased transparency could be especially embarrassing for large institutional investors if the disclosure shows only the number of shares lent out, without putting it in the context of each fund’s total position in a company, Aggarwal said.

If they don’t disclose, NGOs and, perhaps sustainability-focused investors could call them out. Currently, large funds lend out lots of shares in big, well-known tech companies, which increasingly are targeted by activist shareholders proposals related to CEO pay, human rights, governance, antitrust and competition, the ex-investor said.

“Having to make share lending public would lead to questions like, ‘why didn’t you vote shares at Facebook, Twitter or Microsoft?’” the person said of the widely held tech names.

Editor’s note: The original version of this article was published earlier on The Deal’s premium subscription website. For access, log in to or use the form below to request a free trial.


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