BlackRock's iShares avoids trip to the Supreme Court

Largest ETF firm wins victory in case questioning its lucrative securities-lending business.
FEB 23, 2015
The U.S. Supreme Court has declined to intervene in a lawsuit against BlackRock Inc. by investors who said the company keeps too much of what it makes from lending securities held by its iShares ETFs. The court's decision Monday, which came with no explanation, appears to end a conflict between the world's largest fund manager and a group of pension funds whose claims were originally dismissed by a federal judge in 2013, and then again by an appellate court last September. Securities lending can be a lucrative activity for fund managers, who will sell their securities to investors such as hedge funds that may want to short a stock, for instance. Fund managers often use the proceeds of securities lending to boost returns. The pension funds said a BlackRock subsidiary charged iShares fund investors a fee “disproportionately” larger than the industry norm for acting as a middleman between the funds and the institutions borrowing the securities. Those fees come at the expense of investor returns, they argued. The United States Court of Appeals for the Sixth Circuit said the case shouldn't move forward, in part because the securities-lending program was approved by the Securities and Exchange Commission and because there was no legal basis for challenging the fees. But the pension funds said other appellate courts have found that investors in other cases can bring similar lawsuits. BlackRock officials declined to comment. In the past, the firm has said the case lacks merit. C. Mark Pickrell, a lawyer who represented the pension funds, said the Supreme Court's decision was disappointing. He said it effectively ends his clients' case. “Apparently this is a problem Congress needs to fix,” said Mr. Pickrell, of the Pickrell Law Group in Nashville, Tenn. Even without this case, Laborers' Local 265 Pension v. iShares Trust, on its docket, the nine-member court will still face key decisions concerning fees on funds. Last Tuesday the high court heard arguments in Tibble v. Edison International, which centers on the question of whether an employer violated its fiduciary duty when choosing retail funds over cheaper institutional share classes. A ruling in that case is expected later this year. The Obama administration has also put increasing emphasis on the fees charged on investments of retirement savers. The Supreme Court's decision not to hear the BlackRock case was first reported Monday evening by Law360.

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