A federal judge has dismissed a derivative claim that BlackRock overcharges iShares exchange-traded funds for its services as securities lending agent. Laborers' Local 265 Pension Fund v. iShares Trust, No. 3:13-cv-00046 (M.D. Tenn. Aug. 28, 2013). The plaintiffs had alleged that BlackRock receives 40% of the net revenue from iShares securities lending, 35% as an agent's fee and 5% for administrative fees. The court did not address the substance of this claim, but instead ruled that the plaintiffs did not have a private right of action under any of the statutory provisions on which they relied. The court dismissed the claims without prejudice, giving the plaintiffs an opportunity to amend their complaint, but successful repleading would require an entirely new theory of the case.
The plaintiffs alleged claims under Section 36(b) of the Investment Company Act of 1940, for excessive compensation to a fund adviser; under Section 47(b) of the 1940 Act, for the right to rescind an unlawful contract; and under Section 36(a), for breach of fiduciary duty. The court ruled that the Section 36(b) claim was precluded by Section 36(b)(4), which provides that the subsection does not apply to compensation in connection with transactions subject to Section 17 or rules, regulations, or orders thereunder. BlackRock had an exemptive order from Sections 17(a) and 17(d) for its securities lending agent relationship, and the court ruled that the order removes the transaction at issue from the scope of Section 36(b). The court distinguished a no-action letter on which the plaintiffs relied, Norwest Bank Minnesota (May 25, 1995), because no exemptive order was involved in the Norwest letter. The court also found that no private right of action was available under Sections 47(b) or 36(a), a view consistent with that taken by other courts that have considered those provisions in recent years.
I have placed the ruling on the FundLaw website (free registration with Yahoo Groups may be required), and it can be found in its alphabetical place at
For my post on the filing of the complaint in this case, see
John M. Baker
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
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