In Laborers’ Local 265 Pension Fund v. iShares Trust, No. 13-6486, 2014 U.S. App. LEXIS 18627 (6th Cir. Sept. 30, 2014), the United States Court of Appeals for the Sixth Circuit affirmed the dismissal of claims alleging violations of the fiduciary duties imposed by Sections 36(a) and 36(b) of the Investment Company Act of 1940 (ICA), 15 U.S.C. § 80a-35(a), (b). The Court held that (1) a plaintiff may not aggregate a lending agent’s fees with an affiliate’s fees in order to find the affiliate breached Section 36(b), and (2) that there is no implied private right of action in Section 36(a). The Court’s holding effectively limits the ability of plaintiffs to bring Section 36 claims.
Plaintiffs, pension funds, were shareholders in exchange-traded funds issued by iShares, Inc. and iShares Trust (collectively, “iShares”), which lends its securities holdings to various borrowers. BlackRock Institutional Trust Company, N.A. (“BTC”) is iShares’ lending agent, and receives 35% of all securities-lending net revenue in exchange for its services (the “lending fee”). BlackRock Fund Advisors (“BFA”) is the investment advisor for iShares, and receives a separate fee for its services. Plaintiffs alleged, among other claims, that BFA and BTC violated Section 36(b) of the ICA by charging an excessive lending fee. Plaintiffs also alleged that BFA and BTC had violated Section 36(a) of the ICA by using investor assets without sufficiently compensating investors.
Defendants moved to dismiss the complaint for failure to state a claim. The United States District Court for the Middle District of Tennessee granted defendants’ motion to dismiss, holding that (1) plaintiffs’ section 36(b) claim was barred because the SEC had issued an Exemption Notice expressly permitting BTC to charge the 35% lending fee and (2) section 36(a) does not provide a private right of action. Plaintiffs appealed.
The Sixth Circuit affirmed. The Court held that dismissal of the section 36(b) claim was proper for two reasons. First, dismissal of the claim as to BTC, the lending agent, was proper because the SEC had issued an exemption order allowing BTC to charge the 35% lending fee. Second, the Court rejected plaintiffs’ argument that BTC’s and BFA’s claims could be aggregated, and held that dismissal of the claim as to BFA, the investment advisor, was proper as well. The Court, citing precedent United States Court of Appeals for the Second Circuit, held that BTC’s lending fee could not be aggregated with BFA’s investment advisor fee in determining the merits of Plaintiff’s Section 36(b) claim against BFA. The Court noted that the plain language of Section 36(b) undermines the argument that fees should be aggregated before weighing investment advisor liability. Section 36(b) provides that an action for violation of the section may not be brought against “any person other than the recipient of such compensation or payments.” 15 U.S.C. § 80a-35(b)(3). The court also rejected plaintiffs’ legislative history argument, noting both that the relevant portions of section 36(b) are unambiguous and that the legislative history plaintiff relied upon was unavailing. Finally, the court rejected plaintiffs’ argument that the SEC had adopted their aggregation practice, finding the unrelated no-action letter plaintiffs relied upon distinguishable.
Next, the Court held that the district court’s dismissal of plaintiffs’ Section 36(a) claim was also proper. In so holding, the Court, addressing an issue of first impression for the Sixth Circuit, rejected plaintiffs’ argument that Section 36(a) contains an implied private right of action. The Court noted that the United States Supreme Court has set forth four factors to be used in evaluating whether a private right of action is implied in a statute: (1) whether the plaintiff is one of the class for whose special benefit the statute was enacted; (2) whether there is indication of legislative intent to either create or deny a private right of action; (3) whether a private right of action is consistent with the underlying purpose of the legislative scheme; and (4) whether inferring a federal private right of action would be inappropriate because the cause of action is traditionally relegated to state law. In looking to these factors, the Court noted that neither the text nor the structure of the ICA indicated an intent to create a private right of action. It also noted that Congress had chosen to create an express private right of action in Section 36(b), which “strongly impli[ed]” the absence of that right in Section 36(a), which has no express right. Section 36(a) also supports that holding, as it focuses on the persons regulated by the statute, rather than the individuals protected and does not contain any “rights creating” language. Finally, the Court rejected plaintiff’s legislative history argument on the grounds that the statute is unambiguous and legislative intent is thus irrelevant, and because the legislative history presented did not indicate an intent to create a private right of action.
iShares imposes two important limitations on liability under Sections 36(a) and 36(b) of the ICA. First, individuals and companies upon whom Section 36(a) imposes fiduciary duties may not be sued by private citizens. Only the SEC may enforce such a violation. Second, a plaintiff may not aggregate the fees of two investment company affiliates for the purposes of proving the merits of a Section 36(b) claim. Individuals and entities facing claims under either of these sections should keep iShares in mind when formulating their defenses.