Northern Trust Asset Management, BlackRock Inc. and State Street Global Advisors are giving clients a bigger chunk of the profits from securities that are being lent by their investment vehicles such as collective trusts, mutual funds and ETFs.
The Securities and Exchange Commission began an industrywide sweep in the fall of 2013, examining affiliate relationships in securities lending, said Christopher Kemp, senior principal consultant at ACA Compliance Group Holdings LLC in Boston. The SEC has been looking at the issue since at least 2004, sources said.
All three firms hire another unit of their company to conduct securities lending. Using affiliated entities also had been the subject of lawsuits by institutional investors, who maintained the amount of securities lending profits kept by the affiliates was too high.
The latest manager to implement changes is Northern Trust. It changed the share of profits retained by its agent, Northern Trust Bank, to 30% from 40% for securities lending in most of the funds in the Northern Trust Global Investments Collective Fund Trust, according to information provided by Northern Trust, Chicago.
“The fee changes were the result of an annual review of securities lending practices, market dynamics, risk management and other factors,“ spokesman John O'Connell said in a statement.
BlackRock spokeswoman Tara McDonnell said in a statement the firm implemented its changes to more closely reflect each fund's objectives and lending capacity. BlackRock, New York, twice cut its share of the lending revenue it splits with investors in its iShares exchange-traded funds and in mutual funds. In the first quarter of 2014, company officials dropped a “one-size-fits-all” policy — under which it kept a uniform 35% of the profits — and began keeping between 15% and 30%, depending on the fund.
In January of this year, BlackRock lowered its take to 28.5% on some of its investment vehicles, said Ms. McDonnell.
The Laborers Local 265 Pension Fund, Cincinnati, and the Plumbers and Pipefitters Local No. 572 Pension Fund, Nashville, sued BlackRock in U.S. District Court in Nashville in January 2013, alleging it charged excessive fees by taking 35% of the profits from securities lending in its iShares ETFs and an additional 5% of the revenue to cover administrative fees.
The case was dismissed that August on procedural grounds; last week, the U.S. Supreme Court declined to hear an appeal.