Two pension funds have sued BlackRock, claiming its iShares division, of which the funds are shareholders, improperly spent funds on grossly excessive compensation to securities lending agents.
In their lawsuit, filed in the United States District Court for the Middle District of Tennessee, the funds the Laborers Local 265 Pension Fund from Cincinnati and the Plumbers and Pipefitters Local No. 572 Pension Fund from Nashville point to uncited recent academic research that securities lending agents work against the interests of mutual fund investors by siphoning off securities lending profits for the benefit of mutual fund managers. The funds say iShares affiliates took at least 40% of securities lending revenues for themselves at the expense of investors.
The suit claims BlackRock violated the Investment Company Act of 1940, having systematically violated their fiduciary duties, setting up an excessive fee structure designed to loot securities lending returns properly due to iShares investors, according to court documents.
The pensions seek to have BlackRock barred from lending securities until or unless a fairly and openly negotiated contract between iShares or individual funds and an independent lending agent is agreed upon. The suit also seeks unspecified monetary damages to iShares funds and disgorgement of revenue from securities lending.
Agent lenders themselves are no strangers to securities lending lawsuits (see here, here and here for recent examples), but the BlackRock case is so far unique.
Last July, the European Securities and Markets Authority (ESMA) issued guidelines for exchange-traded funds and other UCITS funds, stipulating that all revenue net of operating costs generated by securities lending and other efficient portfolio management techniques in a UCITS fund should be returned to the fund.
(CG)