ttj, here's some info on Fidelity's Fully Paid Lending Program -
I spoke with Bruce Chanenchuk (800-481-8313), the head of the dept, after receiving a call asking me if I was interested in loaning shares of another security.
Bruce told me that Fidelity will not lend shares out of individuals accounts unless the account holder has executed a Master Securities Lending Agreement (MSLA). It is a separate agreement from any previously executed margin agreement.
Main reason for the MSLA -
In other words, if your broker borrows shares from your account, these shares are no longer insured and you will lose the value of the shares if your broker goes belly up.
The protection given by Fidelity for the uninsured loaned shares -
I signed up for the lending program and Fidelity deposited the collateral at Wells Fargo Bank. The amount of the collateral was adjusted daily to reflect the closing value of the loaned shares.
I don't know how other brokerages handle loaned shares, but, I do know this:
A shareholder on another message board busted his broker for lending out his shares. There was something suspicious on one of his statements, so he hired a securities lawyer to look into it. Turns out his broker did loan out shares without the shareholders knowledge. He said he would receive all back interest that would be due to him had he consented to a loan. He was also pursuing further damages.
Another item I found interesting was that Fidelity rarely looks to borrow listed companies shares from individual investors. Their massive mutual fund operation usually has plenty of shares "in house" to fill the requests of shorts. I thought that maybe this was a little underhanded. Bruce told me that their mutual fund managers are eager to lend shares and receive the interest in order to increase their returns. Also, he said that the managers are, of course, bullish on the stocks in their portfolios and don't feel that sells to short coupled with buys to cover have a meaningful longer term effect on share prices.