Yep, IB's earn-while-you-burn idea turns the whole

Yep, IB's earn-while-you-burn idea turns the whole idea of investing upside down. With DD and some trust in your broker, you buy a stock expecting a fair valuation and to share the gains of the company in the future, yet the broker is happy not only to lend out your shares to the shorts, but offer a tempting way to burn your own stock.

The SEC and FINRA are well aware of the excesses of securities lending, but don't seem too motivated to either fix the problem or, at least, make the practice more transparent.

Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority, said that a tight market for securities available for loan from investment management firms, coupled with increased pressure to find securities to borrow to meet regulatory obligations, has led to some "retailization" of the securities lending business. This is a "particular concern" for FINRA, which oversees broker-dealers, because it raises customer protection issues, he said. He spoke at a roundtable on securities lending arranged by the Securities and Exchange Commission.

SEC Chairman Mary Schapiro described the retailiziation of securities lending as "a little frightening." Schapiro yesterday oversaw the day-long SEC roundtable that covered various aspects of the institutional securities lending market, including issues concerning transparency, and pricing and trading of securities, and guidelines involving collateral reinvestment on behalf of firms lending their securities. (Borrowed shares are collateralized by the borrower.)