In January 2013, Laborers’ Local 265 Pension Fund in
Cincinnati and Plumbers and Pipefitters Local No. 572 Pension Fund in Nashville,
filed the suit in the U.S. District Court for the Middle District of Tennessee,
Nashville Division (see “Pension
Funds Sue BlackRock”).
The lawsuit alleged that the defendants—BlackRock
Institutional Trust Company, N.A., a national banking association that provides
securities lending services to the iShares investment companies and other funds,
and BlackRock Fund Advisors, which manages and advises the iShares funds with
respect to their investment activities—were wrongly enriched through lending agreements
at the expense of investors and violated provisions of the Investment Company
Act of 1940 (ICA).
The suit alleged that the lending agreement provided
excessive compensation to the BlackRock defendants, with this compensation being
derived from revenue generated by certain securities lending transactions, also
known as short-selling transactions.
The lending agreement provided that the defendants received
a fee of 35% of the net revenue earned from short-selling transactions in
exchange for its services. The plaintiffs alleged that an additional 5% of the
short-selling revenue is awarded to the BlackRock affiliates for administrative
fees, resulting in a 40/60 division of revenue between the BlackRock affiliates
and the iShares funds. The plaintiffs further contend that this is excessive
compared to peer mutual funds and compared to funds employing unaffiliated
The lawsuit claimed that these fees violated Section
36(b), Section 47(b) and Section 36(a) of the ICA.