By Ian Salisbury OF DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–When Barclays PLC (BCS) sold its prized iShares exchange-traded fund business earlier this month, much of the speculation was about whether the deal would include revenue from a lucrative side business – lending out stocks owned by iShares funds.

In fact, that aspect of iShares’ business wasn’t really Barclays’ to sell. Profits from lending out shares of the ETFs belong to the funds’ shareholders, not to Barclays or to CVC Capital Partners, the proposed buyer of iShares.

Borrowed shares are typically used by short sellers, such as hedge funds, who pay a fee for the chance to sell the shares on the open market and, with luck, repurchase them later at a lower price.

Barclays does, in fact, earn money from iShares’ securities lending, but that’s because it received a contract for the work from iShares’ board, a group of trustees meant to look out for fund shareholders’ interests.

While Barclays could in theory sell the separate business unit that holds the contract and which also handles securities lending for Barclays’ larger institutional money management unit, Barclays can’t promise CVC that the business unit will keep its ties with iShares.

“There are a lot of people that do securities lending, and the iShares board could hire somebody else,” says John McGuire, a partner at law firm Morgan Lewis in Washington, who specializes in mutual fund regulations.

Of course, Barclays’ double role – which the confusion around its sale serves to highlight – could raise questions about self-dealing.

Barclays’ commission on iShares’ securities lending revenue – 50% – appears hefty. But with the market for securities lending basically opaque, it’s difficult to judge whether iShares holders are really getting a fair deal or not.

Full Story: http://online.wsj.com/article/BT-CO-20090416-713254.html

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