SCOTUS may decide iShares securities lending dispute
19 January 2015 New York
Image: Shutterstock
The US Supreme Court has been asked to weigh into a dispute over the fees that BlackRock affiliates charged for securities lending services, with the two pension funds arguing that an appellate split needs to be resolved for the good of the mutual funds industry.
The Laborers’ Local 265 Pension Fund and Plumbers and Pipefitters Local No 572 Pension Fund want the Supreme Court to overturn a Court of Appeals for the Sixth Circuit ruling that a 35 percent fee for all net securities lending revenue was not excessive.
The lawsuit was launched against iShares and other BlackRock businesses in January 2013, accusing them of violating amendments to the Investment Company Act by charging unnecessarily high securities lending fees because of their affiliated relationship.
The 1970 amendments to the Investment Company Act were aimed at increasing director liability for breach of fiduciary duty.
In September 2014, the Sixth Circuit upheld the district court’s finding them in favour of BlackRock and its businesses.
BlackRock Institutional Trust Company, as the lending agent of the iShares exchange-traded funds in which the pension funds are shareholders, charged a 35 percent fee for its services, while BlackRock Fund Advisors, also a defendant, charged a separate fee as investment adviser to iShares.
The pension funds wanted the fees to be combined so that so that BlackRock Fund Advisors could be investigated over violating its fiduciary duty under the Investment Company Act by receiving excessive compensation.
But the district court, and later, the Sixth Circuit, disagreed, finding that a 2002 Securities and Exchange Commission exemption order permitted iShares to pay fees to an affiliated lending agent based on a share of the revenues generated.
The Sixth Circuit ruled: “BlackRock Institutional Trust Company receives a fee of 35 percent in exchange for its services as lending agent. The allegations in the complaint focus on this lending fee."
"Nowhere in the complaint do the plaintiffs protest the separate fee that BlackRock Fund Advisors receives pursuant to its investment-advisory agreement with iShares. The plaintiffs have therefore forfeited their aggregation argument.”
“And even if the complaint had contained specific allegations protesting BlackRock Fund Advisors’s investment advisory fee, that fee is altogether separate from the lending fee charged by BlackRock Institutional Trust Company and thus provides no logical basis for aggregating the two.”
In their Supreme Court petition, filed on 29 December, the pension funds claimed that BlackRock’s actions and the Sixth Circuit’s interpretation of the Investment Company Act are “exactly the problem that Congress intended to remedy when it enacted the 1970 amendments”.
They also argued that the Supreme Court should take up their appeal because “BlackRock manages one third of US pension funds, [and] the national impact of the Sixth Circuit’s decision is enormous”.
The Laborers’ Local 265 Pension Fund and Plumbers and Pipefitters Local No 572 Pension Fund want the Supreme Court to overturn a Court of Appeals for the Sixth Circuit ruling that a 35 percent fee for all net securities lending revenue was not excessive.
The lawsuit was launched against iShares and other BlackRock businesses in January 2013, accusing them of violating amendments to the Investment Company Act by charging unnecessarily high securities lending fees because of their affiliated relationship.
The 1970 amendments to the Investment Company Act were aimed at increasing director liability for breach of fiduciary duty.
In September 2014, the Sixth Circuit upheld the district court’s finding them in favour of BlackRock and its businesses.
BlackRock Institutional Trust Company, as the lending agent of the iShares exchange-traded funds in which the pension funds are shareholders, charged a 35 percent fee for its services, while BlackRock Fund Advisors, also a defendant, charged a separate fee as investment adviser to iShares.
The pension funds wanted the fees to be combined so that so that BlackRock Fund Advisors could be investigated over violating its fiduciary duty under the Investment Company Act by receiving excessive compensation.
But the district court, and later, the Sixth Circuit, disagreed, finding that a 2002 Securities and Exchange Commission exemption order permitted iShares to pay fees to an affiliated lending agent based on a share of the revenues generated.
The Sixth Circuit ruled: “BlackRock Institutional Trust Company receives a fee of 35 percent in exchange for its services as lending agent. The allegations in the complaint focus on this lending fee."
"Nowhere in the complaint do the plaintiffs protest the separate fee that BlackRock Fund Advisors receives pursuant to its investment-advisory agreement with iShares. The plaintiffs have therefore forfeited their aggregation argument.”
“And even if the complaint had contained specific allegations protesting BlackRock Fund Advisors’s investment advisory fee, that fee is altogether separate from the lending fee charged by BlackRock Institutional Trust Company and thus provides no logical basis for aggregating the two.”
In their Supreme Court petition, filed on 29 December, the pension funds claimed that BlackRock’s actions and the Sixth Circuit’s interpretation of the Investment Company Act are “exactly the problem that Congress intended to remedy when it enacted the 1970 amendments”.
They also argued that the Supreme Court should take up their appeal because “BlackRock manages one third of US pension funds, [and] the national impact of the Sixth Circuit’s decision is enormous”.
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