BlackRock contests plumbers and pipefitters lawsuit
05 February 2013 New York
Image: Shutterstock
A lawsuit from two pension plans had landed BlackRock鈥檚 securities lending scheme in trouble, after it was alleged that the asset management firm had taken revenue out of investors鈥� hands.
The suit claims that a number of BlackRock鈥檚 US-listed iShares exchange-traded funds (ETFs) 鈥渟ystematically violated their鈥╢iduciary duties, setting up an excessive fee structure designed鈥� to loot securities lending returns properly due to iShares鈥╥nvestors".
The Laborers' Local 265 Pension Fund of 鈥–incinnati and the Plumbers and Pipefitters Local No. 572 鈥≒ension Fund of Nashville filed the suit in Tenneessee鈥檚 Middle District Court.
BlackRock president Robert Kapito and iShares chairman 鈥∕ichael Latham are named as defendants in the suit, which alleges that they, alongside the ETFs, ran a scheme to take at least 40 percent of鈥� lending revenue.
A BlackRock statement said that the 鈥╟omplaint is without merit, adding that the firm will "contest it 鈥╲igorously".
BlackRock reportedly retains 40 to 50 percent of gross lending revenues, but regulatory initiatives could affect this in the future.
In 2012, ESMA issued guidelines on ETFs and other UCITS issues that said fund managers operating securities lending programmes on behalf of UCITS funds should return all income from lending, "net of direct and indirect operational costs", to fund investors.
BlackRock is also providing an increasing number of indemnifications to securities lending clients to cover the risk of borrower default.
In a public policy statement, co-heads of BlackRock鈥檚 cash and securities lending businesses, Rich Hoerner and Simon Mendelson, said: 鈥淚ndemnification does cover a real risk and therefore comes at a cost to provide which must necessarily be reflected in lending agent fees.鈥�
At a 2012 conference in Miami, Bruce McDougal of BlackRock tackled regulatory reform and its effects on securities lending and borrowing. He emphasised the threat that Basel III capital requirements and US Dodd-Frank Act Section 165(e) counterparty concentration limits pose to indemnification.
Basel III could make securities lending too expensive to conduct, while Section 165(e) may make it 鈥渋mpossible to lend to counterparties鈥�, according to McDougal.
But the firm is working to expand its ETF business. In January, BlackRock entered into a definitive agreement to acquire the ETF business of Credit Suisse, complimenting its existing iShares ETF range, and expanding iShares鈥� local product range in Switzerland, enabling Swiss-based clients to access the largest European ETF offering across equities, fixed income and gold.
The suit claims that a number of BlackRock鈥檚 US-listed iShares exchange-traded funds (ETFs) 鈥渟ystematically violated their鈥╢iduciary duties, setting up an excessive fee structure designed鈥� to loot securities lending returns properly due to iShares鈥╥nvestors".
The Laborers' Local 265 Pension Fund of 鈥–incinnati and the Plumbers and Pipefitters Local No. 572 鈥≒ension Fund of Nashville filed the suit in Tenneessee鈥檚 Middle District Court.
BlackRock president Robert Kapito and iShares chairman 鈥∕ichael Latham are named as defendants in the suit, which alleges that they, alongside the ETFs, ran a scheme to take at least 40 percent of鈥� lending revenue.
A BlackRock statement said that the 鈥╟omplaint is without merit, adding that the firm will "contest it 鈥╲igorously".
BlackRock reportedly retains 40 to 50 percent of gross lending revenues, but regulatory initiatives could affect this in the future.
In 2012, ESMA issued guidelines on ETFs and other UCITS issues that said fund managers operating securities lending programmes on behalf of UCITS funds should return all income from lending, "net of direct and indirect operational costs", to fund investors.
BlackRock is also providing an increasing number of indemnifications to securities lending clients to cover the risk of borrower default.
In a public policy statement, co-heads of BlackRock鈥檚 cash and securities lending businesses, Rich Hoerner and Simon Mendelson, said: 鈥淚ndemnification does cover a real risk and therefore comes at a cost to provide which must necessarily be reflected in lending agent fees.鈥�
At a 2012 conference in Miami, Bruce McDougal of BlackRock tackled regulatory reform and its effects on securities lending and borrowing. He emphasised the threat that Basel III capital requirements and US Dodd-Frank Act Section 165(e) counterparty concentration limits pose to indemnification.
Basel III could make securities lending too expensive to conduct, while Section 165(e) may make it 鈥渋mpossible to lend to counterparties鈥�, according to McDougal.
But the firm is working to expand its ETF business. In January, BlackRock entered into a definitive agreement to acquire the ETF business of Credit Suisse, complimenting its existing iShares ETF range, and expanding iShares鈥� local product range in Switzerland, enabling Swiss-based clients to access the largest European ETF offering across equities, fixed income and gold.
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