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 lending agents.
The lawsuit claimed that these fees violated Section 36(b), Section 47(b) and Section 36(a) of the ICA.
With regard to Section 36(b), the court found that “the statute includes exceptions to its own rule. The defendants argue that one such exception, Section 36(b)(4), is fatal to the plaintiffs’ claim, and the court agrees.”
In terms of Section 47(b), the defendants disagreed it created a “private right of action for investors.” They also argued that the plaintiffs’ Section 47(b) claim must be dismissed because “(i) Sections 17(d), 17(e), and 36(a) do not include private rights of action, and (ii) the plaintiffs’ predicate Section 36(b) claim is barred by its statutory text.” The court agreed.
The court also agreed that the plaintiffs had not cited any cases where “a federal court has drawn a private right of action from Section 47(b)—standing alone or among predicate violations of the ICA.”
As for Section 36(a), which authorizes the Securities and Exchange Commission to enforce breaches of fiduciary duties involving personal misconduct, the court found that the plaintiffs “failed to overcome the strong presumption that Congress did not intend to create a private right of action under Section 36(a), and their claim must be dismissed.”
According to the court, the plaintiffs will have till September 17, 2013 to file a motion for leave to amend their lawsuit or to move for an extension of this deadline upon a showing of good cause. If neither motion is filed, the court will render a final judgment of dismissal.
The full text of the court’s ruling can be found here.
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