EARLIER THIS YEAR YOU REQUESTED AN INFORMAL OPINION ON THE SUBJECT OF SECURITIES LENDING. SPECIFICALLY, YOU ASKED WHETHER IT IS A CONFLICT OF INTEREST UNDER OKLAHOMA LAW FOR A CUSTODIAN BANK TO LOAN SECURITIES TO A BORROWER IN A FIDUCIARY CAPACITY, WHEN IT ALSO LOANS FUNDS TO THE SAME PERSON OR FIRM IN ITS BANKING CAPACITY. AFTER RESEARCHING THE RELEVANT STATE AND FEDERAL STATUTES, AS WELL AS THE APPLICABLE FEDERAL REGULATIONS, IT APPEARS THAT THIS ACTIVITY IS PERMISSIBLE IF DONE WITH THE CONSENT OF THE RETIREMENT SYSTEM AFTER FULL DISCLOSURE BY THE CUSTODIAN BANK.
AS I UNDERSTAND THE SECURITIES LENDING TRANSACTION, SECURITIES OWNED BY THE INDIVIDUAL RETIREMENT SYSTEMS ARE HELD BY A CUSTODIAN BANK, WHICH SERVES IN A FIDUCIARY CAPACITY TO THE SYSTEMS. WITH THE CONSENT OF THE RETIREMENT SYSTEM, THE CUSTODIAN BANK THEN LOANS THE RETIREMENT SYSTEM'S SECURITIES TO BROKERAGE HOUSES FOR EITHER CASH COLLATERAL OR FOR SECURITIES OF EQUAL VALUE. THESE BORROWED SECURITIES ARE USED TO COVER SHORT SELLS AND OTHER CONTINGENCIES. IF THE BORROWED SECURITIES INCREASE IN VALUE, MORE COLLATERAL IS GIVEN, AND IF THEY DECREASE IN VALUE, SOME OF THE COLLATERAL IS RETURNED. EVENTUALLY, THE BORROWED SECURITIES ARE RETURNED TO THE CUSTODIAN BANK, AND THE COLLATERAL IS RETURNED TO THE BROKER THAT BORROWED THE SECURITIES.
IN THIS PARTICULAR CASE, THERE ARE CONCERNS BECAUSE THE CUSTODIAN BANK IS LENDING SECURITIES TO BROKERAGE HOUSES THAT ARE ALSO RECEIVING LOANS FROM THE SAME BANK WHILE PERFORMING ITS TRADITIONAL BANKING FUNCTION. IN SUCH A SITUATION, THE BANK FINDS ITSELF SERVING AS AN AGENT TO TWO POSSIBLY CONFLICTING PARTIES; AND THIS COULD CONSTITUTE A CONFLICT OF INTEREST.
AT THIS POINT, WE ARE UNAWARE OF ANY SITUATION WHERE A CUSTODIAN BANK IS LOANING THE FUNDS USED AS CASH COLLATERAL FOR A SECURITIES LENDING TRANSACTION. BUT FOR PURPOSES OF THIS OPINION WE WILL ASSUME THAT SUCH A TRANSACTION HAS OCCURRED.
INITIALLY, IT SHOULD BE NOTED THAT THE RELATIONSHIP BETWEEN THE TRUSTEE BANK AND THE INDIVIDUAL RETIREMENT SYSTEM FORMS PRINCIPAL-AGENT RELATIONSHIP. THIS TERM DENOTE A "FIDUCIARY" RELATIONSHIP WHICH RESULTS FROM THE MANIFESTATION OF CONSENT BY ONE PERSON TO ANOTHER THAT THE OTHER HALL CT FOR HIS BENEFIT AND SUBJECT TO HIS CONTROL, AND CONSENT BY THE OTHER O TO ACT." SMITH V. ST. FRANCIS HOSPITAL INC. 676 P.2D 279 (OKL. APP. 1983), CITING RESTATEMENT (SECOND) OF AGENCY, S 1 (1958); SEE ALSO, FARMERS NATIONAL GRAIN CORP. V. YOUNG, 102 P.2D 180, (OKLA. 1940), APPLEBY V. KEWANEE OIL CO., 279 F.2D 334 (10TH CIR. 1960), AND STEINBRUQGE V. HADDOCK, 281 F.2D 871 (10TH CIR. 1960).
SUCH A RELATIONSHIP EXISTS BETWEEN THE CUSTODIAN BANK ND THE RETIREMENT SYSTEM, IN THAT THE BANK IS AUTHORIZED BY THE RETIREMENT SYSTEM TO MAKE LOANS OF SECURITIES, PURCHASES OF STOCK, AND TO PERFORM OTHER FIDUCIARY DUTIES AT THE REQUEST OF THE RETIREMENT SYSTEM. SIMILARLY, A PRINCIPAL-AGENT RELATIONSHIP APPEARS TO EXIST BETWEEN THE TRUSTEE BANK AND THE VARIOUS BROKERAGE HOUSES, SINCE THE BANK, AT THE REQUEST OF THE BROKER, LOCATES AND FACILITATES THE SECURITIES LENDING TRANSACTION AND PERFORMS GENERAL BANKING SERVICES