Managers are resisting proposed regulatory reforms that would see them no longer being able to profit from securities lending – a practice whereby shares or other assets held in a portfolio are lent out to hedge funds or other short-sellers in return for a fee, which helps reduce costs for investors. As reported in the Financial Times this week, arrangements for how the income generated from securities lending should be shared between investors in a fund, the fund manager and lending agents vary widely. The European Securities and Markets Authority (ESMA) believes that all income, net of fees, should, “as a general rule”, be returned to the fund rather than being shared by the fund and the fund manager. Both the European Fund and Asset Management Association (Efama) and the International Securities Lending Association (Isla) disagree with the proposal. Their objections were published by ESMA on Tuesday. Kevin McNulty, chief executive of Isla, said a revenue sharing arrangement was better for fund investors than charging a flat fee as it ensured lending activity would be profitable for the fund. Were ESMA to go ahead with the proposal it would harm ETF providers like BlackRock who play a key role in securities lending. In Efama’s view, fee sharing agreements between a UCITS fund and the management company should be allowed given that managers incur costs in providing securities lending services and should be able to recoup these costs by receiving a slice of the revenue raised.