Fidelity's Unwanted Lending: How To Stop The Share Loan

If you're a Fidelity customer, you may be wondering how to stop the company from lending your shares without your consent. This is a common practice among brokerages, who lend stocks to traders planning on shorting companies they believe have unpromising profit margins or declining sales. While lending shares can create a passive income stream, it isn't without risks and drawbacks. For example, you lose voting rights on any lent shares, and there is a chance of the brokerage failing and losing your stock. Additionally, loaned securities are not protected by the Securities Investor Protection Corporation, leaving you uninsured against broker default. If you're looking to retain full control of your shares and avoid these potential pitfalls, it's essential to opt out of any share lending programs offered by Fidelity or your broker.

The risks of lending shares

While lending shares can be a good way to generate passive income, there are several risks to consider. Firstly, there is the risk of counterparty default, where the borrower may be unable to return the borrowed securities, potentially resulting in financial losses for the lender. This is known as counterparty default risk and is considered one of the most significant concerns in share lending.

Secondly, lenders are exposed to market risk and volatility. Sudden market fluctuations can impact the value of the securities on loan, leading to potential losses for the lender. This is especially true if the borrower defaults on the agreement or fails to return the securities on time.

Additionally, when lenders receive cash collateral, they often reinvest it to generate additional yield. However, if the reinvestment strategy is aggressive and the collateral is invested in volatile or illiquid assets, lenders may be exposed to hidden risks.

Furthermore, loaned securities are generally not protected by the Securities Investor Protection Corporation (SIPC). This means that in the event of a broker default, lenders may not have insurance and could face losses. While broker default is considered unlikely, it is still a risk to consider.

Lenders should also be aware that they may lose their voting rights on any lent shares. This can be mitigated by recalling the shares ahead of time if proxy voting is important.

Lastly, lending shares may not be a suitable strategy for all investors. It is typically recommended for larger, long-term hold positions rather than active traders. Additionally, there may be requirements to participate in share lending programs, such as a minimum asset level.

How to opt out of the program

To opt out of the securities lending program at Fidelity, you can follow these steps:

• Review the terms of the program: Before opting out, it is important to understand the terms and conditions of the securities lending program at Fidelity. Review any documentation or agreements you have related to the program to understand your rights and obligations.
• Contact Fidelity: Reach out to Fidelity's customer support or your dedicated representative, if you have one. Express your desire to opt out of the securities lending program and request information on the specific steps and requirements to do so.
• Provide necessary information: Fidelity may require specific information or documentation from you to process your request to opt out. This could include your account details, the securities you want to exclude from lending, or any other relevant information. Be prepared to provide any necessary details.
• Follow Fidelity's opt-out procedure: Fidelity will likely have a specific procedure to opt out of the securities lending program. Follow their instructions carefully to ensure a smooth and successful opt-out process. This may involve submitting a formal request, filling out specific forms, or taking other actions as instructed by Fidelity.
• Monitor your account: After opting out, keep a close eye on your Fidelity account to ensure that your securities are no longer being lent out. Stay in communication with Fidelity to confirm that your request has been processed correctly and that your shares are no longer included in the lending program.
• Consider alternative investment strategies: If you were using securities lending as an investment strategy, explore other options offered by Fidelity or consult with a financial advisor to identify alternative ways to generate income or meet your financial goals.

Remember that opting out of the securities lending program may have certain implications for your investment strategy and income generation. Be sure to carefully consider your options and seek professional advice if needed before making any decisions.

The tax implications of lending shares

When you lend your shares, the tax treatment of any dividends you receive may change. Cash distributions paid on securities lent over the dividend record date are credited as "cash-in-lieu" payments, which are typically taxed as ordinary income rather than as qualified dividend income. This means that you will likely pay a higher tax rate on these payments than you would on qualified dividends.

For example, if you would have met the holding requirements for a qualified dividend, you will not be able to use the capital gains tax rate when paying taxes on the cash-in-lieu payment. Instead, the payment will be taxed as ordinary income, resulting in a higher tax liability.

To mitigate the potential tax burden associated with receiving cash-in-lieu payments instead of qualified dividends, some investment platforms, such as Fidelity, may provide an additional credit adjustment to participating taxable accounts. This adjustment aims to offset the difference in tax treatment. However, it's important to note that this adjustment may not completely eliminate the additional tax burden.

Additionally, when you lend your shares, you may receive compensation or interest income from the borrower. This income is typically taxable and should be reported on your tax return. It's important to consult with a tax professional to understand the specific tax implications of lending your shares and to ensure compliance with the tax laws in your jurisdiction.

The impact on voting rights

When you lend your shares through Fidelity's Fully Paid Lending Program, you relinquish your voting rights for those shares. However, if you wish to vote on your lent shares, you can recall the loan in advance of the record date. This means that you can still participate in shareholder meetings and vote on matters that affect your fund and your investment.

As a shareholder, you are entitled to one vote for each dollar of net asset value you own. These votes are typically cast online, over the phone, or through postal mail, allowing your vote to be counted without needing to attend the meeting in person.

Additionally, you can change your vote at any time before the close of voting. If you change your vote, only the latest valid vote cast will be recorded.

By lending your shares, you may need to be more proactive in managing your voting rights, but you still retain the ability to exercise those rights when necessary.

The fees involved in lending shares

When it comes to the fees involved in lending shares, there are a few key costs to consider. Firstly, a stock loan fee or borrow fee is charged by a brokerage firm to a client for borrowing shares. This fee is typically paid by the borrower of the shares and is based on the difficulty of borrowing the stock, with more difficult-to-borrow stocks incurring higher fees. The stock loan fee is usually charged according to a Securities Lending Agreement (SLA) that must be completed before the stock is borrowed. The fee amount can vary depending on factors such as the demand for the stock and the availability of shares for lending.

In addition to the stock loan fee, there may be interest charges associated with the loan. The borrower of the shares typically needs to put up collateral, such as cash, treasuries, or a letter of credit, and interest may be charged on this collateral. The interest rate may be variable and determined by factors such as borrowing demand, the overall lendable supply of the security, and general market conditions. It's important to note that the interest paid on the collateral may offset part of the stock loan fee.

Another cost to consider is the opportunity cost of lending shares. By lending out your shares, you are forgoing the potential capital gains or dividends that you could have earned by holding onto those shares. This represents an indirect cost of lending shares, as you are giving up the potential for future profits.

Furthermore, there may be tax implications associated with lending shares. For example, dividends received in the form of "cash-in-lieu" payments while securities are on loan may be taxed differently than regular dividend payments. It's important to consult with a tax professional to understand the specific tax consequences of lending shares.

Lastly, there could be potential risks and costs associated with counterparty default. In the event that the borrower of the shares defaults on the agreement and is unable to return the borrowed securities, the lender may incur financial losses. This risk is typically mitigated by requiring collateral of at least 100% of the loan value, but it still represents a potential cost that lenders should be aware of.

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