Chris Lazarini analyzed the recent decision in Laborers’ Local 265 Pension Fund vs. iShares Trust, where the Sixth Circuit, in a case of first impression, held that no implied private right of action exists under Section 36(a) of the ICA of 1940. Chris provided the analysis for Securities Litigation Commentator. The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the Securities Litigation Commentator, please click here to sign up for the newsletter.
Laborers’ Local 265 Pension Fund vs. iShares Trust, No. 13-6486 (6th Cir., 9/30/14)
In a case of first impression, the Sixth Circuit determines that no implied private right of action exists under Section 36(a) of the Investment Company Act of 1940.
As part of its regular mutual fund operations, iShares lends its securities holdings to various borrowers who pay interest on the loans. The practice generates substantial net revenue for iShares, 35% of which is paid to its lending agent, Defendant Black Rock Institutional Trust (“BTC”), pursuant to a Lending Agreement between iShares and BTC. BTC wholly owns Defendant BlackRock Fund Advisors (“BFA”), the investment adviser for iShares, which receives advisory fees for its services and which engaged BTC as lending agent. Plaintiffs, several iShares pension fund shareholders, sought to challenge BTC’s 35% lending fee as excessive and in violation of various provisions of the Investment Company Act of 1940 (“ICA”). The district court granted Defendants’ Rule 12(b)(6) motion to dismiss and this appeal followed.
On appeal, Plaintiffs focused only on their claims under Sections 36(a) and 36(b) of the ICA. Conducting a de novo review, the Court affirms the dismissal. It first rejects Plaintiffs’ Section 36(b) argument that BFA (the investment adviser) received excessive compensation because its advisory fees should be aggregated with BTC’s lending fees. The Court finds that Plaintiffs did not protest BFA’s advisory fees in the complaint and, therefore, forfeited the right to make the aggregation argument on appeal. The Court goes on to explain multiple reasons why the Section 36(b) claim would fail even if the advisory fees had been challenged in the complaint. Notably, the Court recognizes the separate nature of BFA’s advisory fees and BTC’s lending fees and concludes that there is no logical basis for aggregating them.
Turning to the Section 36(a) claim, the Court states that the issue of whether an implied private right of action exists under the Section is one of first impression in the Sixth Circuit. The Court recognizes that all circuits that have considered the issue in the wake of Alexander v. Sandoval, 532 U.S. 275 (2001), have held that an implied private right of action does not exist. Sandoval stands for the proposition that the “express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others.” Id., at 290.
Applying this standard, the Court first examines the text of Section 36(a) and concludes that the presumptive answer is that no private right of action exists because the Section reads: “The Commission is authorized to bring an action . . .” Next, the Court focuses on Section 36(b), which was amended by Congress in 1970 to expressly create a private right of action, and concludes that the absence of a similar amendment to Section 36(a) suggests that Congress’ omission of a similar amendment to Section 36(a) was intentional. The Court also notes that the text of Section 36(a) does not contain any rights-creating language, instead focusing on the persons regulated rather than the individuals protected. Finally, the Court concludes that even though the ICA has broad remedial purposes, those remedial purposes must yield to the unambiguous text and structure of the statute.