Bank of New York Mellon agreed to pay a total of $34 million to settle securities lending litigation brought by South Carolina Treasurer Curtis M. Loftis Jr.
The deal is contingent on the bank retaining the state's global master trust and custody contract for 10 years, according to the settlement document, which was obtained by Pensions & Investments from the Treasurer's office through a Freedom of Information Act request.
Mr. Loftis originally sought $200 million in damages and fees from BNY Mellon, alleging the bank caused losses in state securities lending reinvestment funds. Mr. Loftis' complaint was filed on Jan. 26, 2011, in South Carolina state court.
BNY Mellon agreed to settle the case while denying “any and all allegations and liability” or “any breach of the (securities lending agreement),” according to the settlement.
About $20 million will be credited to the collateral reinvestment fund of the $27.3 billion South Carolina Retirement Systems, Columbia, and $5 million will go into the same type of fund for state operating accounts. Legal fees total $9 million.
The settlement stipulates that BNY Mellon will be awarded a 10-year contract for global master trust and custody for the approximately $40 billion of state funds that Mr. Loftis oversees, including retirement system assets.
In December 2011, Mr. Loftis initiated a global custody search and BNY Mellon, the incumbent, was permitted to rebid. An internal evaluation committee determined that BNY Mellon’s proposal “would be most advantageous to the state,” according to the settlement. The evaluation committee was made up of employees from the Treasurer’s office, the South Carolina Retirement System Investment Commission, and the South Carolina Public Benefit Authority, Columbia, the administrative arm of the state retirement system.
Annual custody fees will be reduced by 20% if the investment commission opts to place at least $3 billion on the managed account platform of HedgeMark International, a BNY Mellon subsidiary. The settlement notes that BNY Mellon's fees before service rebates will total about $2.6 million per year.
“I am very, very pleased with the results of the negotiations. They have resulted in a true alignment of interest and a partnership that can help us manage a very modern, progressive portfolio,” said Mr. Loftis in an e-mailed statement.
Reynolds Williams, chairman of the investment commission, noted that custodial fees were not paid under the prior arrangement with BNY Mellon and were instead were paid from securities lending revenue. Mr. Williams was adamant that custody fees not be paid with retirement system assets. He provided his comments through Danny Varat, a commission spokesman.
Mr. Loftis said “make no mistake about it, we paid for those (custodial) services with cash … we are moving the payment of custody services to (a) `budget line' so that they (are) transparent,” in an e-mail response to a request for clarification.
Kevin Heine, a BNY Mellon spokesman, declined to comment.