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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.

While individual investors may be in the dark, McGuire says the Securities and Exchange Commission has taken steps in the past to make sure mutual fund boards don't reflexively hire affiliated businesses.

The iShares board has eight members. Two, including iShares Chief Executive Lee Kranefuss, are Barclays officials. Six others are mostly local luminaries from the San Francisco Bay Area where iShares is based, including two Stanford professors and the head of a local Roman Catholic charity.

Barclays' largest exchange-traded fund rivals State Street Corp. (STT) and Vanguard Group also handle lending securities for their own funds. It isn't known what State Street's cut is. Vanguard, however, says all profits from its lending business go directly back to shareholders.

While Vanguard may appear more generous in that regard, Barclays says it dedicates more resources to share lending than Vanguard, so iShares holders receive more money even after Barclays' cut. Barclays doesn't provide figures to back up that claim, however. Barclays says it also bears the costs of running the lending business and guarantees shareholders against some losses.

As to why it seems common for funds to pick in-house lenders, Barclays says there are practical considerations that would make hiring an outside firm tricky.

In order to make sure its ETFs are tax-friendly for fund holders, iShares places a number of restrictions on the way its shares can be leant out. Complying with those could be more difficult for an outside firm to handle, says Barclays.

-By Ian Salisbury, Dow Jones Newswires; 201-938-5219; ian.salisbury@dowjones.com