A pair of U.S. pension funds have sued BlackRock (NYSE: BLK), alleging the company’s iShares ETF business improperly kept revenue from securities lending, according to media reports.
The suit also alleges the firm breached its fiduciary duties.
“The pension plans seek to recover funds rightfully owed to them as iShares shareholders, which were improperly spent by iShares’ management on grossly excessive compensation to securities lending agents affiliated with iShares and certain of their affiliates,” according to the compliant, Ignites.com reports.
BlackRock, iShares and nine directors “systematically violated their fiduciary duties, setting up an excessive fee structure designed to loot securities lending returns properly due to iShares investors,” according to the suit filed by Cincinnati-based Laborers’ Local 265 Pension Fund and Plumbers and Pipefitters Local 572 Pension Fund of Nashville.
Some regulators have been taking a closer look at the way ETF providers generate extra cash on the side through securities lending.
Funds engage in securities lending as a way to generate extra revenue. The holder temporarily transfers the security to another investor in exchange for collateral. [How ETF Securities Lending Works]
“The two pension funds allege that BlackRock officials and the iShares ETFs ran a scheme to take at least 40% of securities lending revenues – which they called ‘entirely disproportionate’ – for themselves at the expense of investors,” Reuters reports.
BlackRock over the weekend said the complaint was without merit, adding it will “contest it vigorously,” according to the article.
BlackRock said its securities lending program “has delivered above average returns to our ETF shareholders over time,” according to a Financial Times report. “To achieve this, we run the [program] ourselves while bearing all the costs, rather than outsourcing to third parties as others do. iShares has a long record of delivering the returns our ETF investors expect, and securities lending is one of the tools we use to help ensure our funds efficiently track the performance of their underlying indices.”