Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
March 09, 2015 01:00 AM

Money managers cut their securities lending profits

Clients get a bigger cut of the pie amid lawsuits and probe by the SEC

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Christopher Kemp said SEC exams into affiliate relationships have caused in-house boards to review fees.

    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.

    SSgA fee reductions

    SSgA, another major player in what is called third-party securities lending, began some fee reductions in 2010, cutting State Street's share to 30% from 50%. SSgA fund documents for 2014 show SSGA fund investors now get 85% of the profit from securities lending.

    State Street spokeswoman Anne McNally did not reply to multiple requests for information on when the reductions took place and what prompted them.

    State Street was the defendant in a class-action suit filed in April 2010 by one small Massachusetts 401(k) plan on behalf of hundreds of other retirement plans covered by the Employee Retirement Income Security Act. The suit alleged State Street took an “unreasonably large” — 50% — share of the net income generated from lending securities owned by a collective trust that the firm ran for the institutional investors. State Street's action amounted to “fiduciary self-dealing and enrichment in violation of the defendants' fiduciary obligations,” the suit said.

    State Street settled the lawsuit last year, paying plaintiffs $10 million and agreeing to inform fund investors about details of the revenue split and other securities lending information.

    Last month, Northern Trust agreed to pay $36 million to settle a securities lending suit filed by 1,500 corporate pension plans. The suit said, among other things, that keeping 40% of the profits was unreasonable and the company violated ERISA's prohibitions against self-dealing and from engaging in transactions with parties in interest.

    Northern Trust still faces another suit by the approximately $14 billion Los Angeles City Employees' Retirement System over the revenue split and losses incurred during the financial crisis.

    Northern Trust had disclosed to shareholders in April 2014 that it had received a subpoena from the SEC over its securities lending practices.

    Other publicly held third-party securities lenders — including BNY Mellon Corp. unit The Drefyus Family of Funds, which hired its parents as its securities lending agent, and BMO Asset Management, which hired an affiliate for securities lending — do not break out their revenue split for investors.

    Mike Dunn, a spokesman for BNY Mellon, in a statement cited other information Dreyfus provides for investors, including the extent to which funds can lend portfolio securities, information on cash collateral and the risks of securities lending. The statement did not explain why the revenue split was not included in the publicly disclosed information. Northern Trust, BlackRock and SSgA also are disclosing some of the same information.

    BMO financial group spokesman Nini Krishnappa said for “competitive reasons we're not able to disclose our fee split.”

    Little transparency

    It's no secret that U.S. asset managers provide barely a sliver of transparency into their securities lending program, said Josh Galper, managing partner of Finadium LLC, Boston, a securities lending consultant.

    Mr. Galper said the terms of the profit split and the securities that have been loaned often are not disclosed.

    Mr. Kemp said the SEC's exam caused in-house boards that oversee mutual funds and ETFs to question portfolio managers and management as to whether investors are getting as good of a fee split as an outside securities lending provider would offer.

    “They don't want to be caught with their pants down,” he said of the boards.

    A paper written in 2013 by John Adams, a finance professor at the University of Texas, Arlington, concluded the level of “self-dealing is potentially greater” when money managers use affiliates to conduct securities lending because the split of profits can be set up to put the interests of the corporate parent over those of investors.

    Mr. Adams found the returns to investors from securities lending are 40% lower when a specific fund uses an affiliated agent that is part of the same company.

    One money manager with a third-party securities lending program, Vanguard Group Inc., Malvern, Pa., doesn't make a profit on securities lending. The company does charge investors for securities lending costs, such as agent fees, broker rebates, and program costs, said Jim Rowley, a senior analyst in Vanguard's investment strategy group. He said those expenses average around 5%.

    “We believe since clients bear the risk from lending securities, they should receive the reward, “ Mr. Rowley said.

    Related Articles
    Italy's Arco pension fund taps State Street for securities lending
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit