On August 28, 2013, the U.S. District Court for the Middle District of Tennessee dismissed without prejudice a derivative suit filed by two union pension plans against BlackRock Fund Advisors (BFA), BlackRock Institutional Trust Company, N.A. (BTC), iShares, Inc., iShares Trust and the directors and trustees, including the independent directors and trustees, of iShares, Inc. and iShares Trust. The complaint alleged that BFA and BTC, the iShares funds’ investment adviser and securities lending agent, respectively, violated Sections 36(b), 47(b) and 36(a) of the 1940 Act by charging “grossly excessive” fees in connection with the lending of the funds’ securities, detracting from the funds’ returns. The plaintiffs sought an injunction against continued securities lending, recovery of excessive compensation, rescission of the securities lending agreements and additional damages.

In granting the defendants’ motions to dismiss, the district court first rejected the plaintiffs’ claim for relief under Section 36(b), which creates a private right of action to seek relief from breaches of fiduciary duty resulting in excessive compensation. The district court ruled that because the defendants’ securities lending arrangements were authorized by an exemptive order under Section 17 of the 1940 Act, the securities lending transactions were outside the scope of Section 36(b) because Section 36(b)(4) expressly states that Section 36(b) “shall not apply to compensation or payments made in connection with transactions subject to [Section 17 of the 1940 Act] or rules, regulations or orders thereunder.” With respect to plaintiffs’ claims under Sections 47(b) and 36(a), the district court ruled that neither statute creates a private right of action because both lack the “rights-creating language” necessary to do so under Supreme Court precedent. The district court noted that Section 47(b) merely creates a remedy for the enforcement of predicate rights of action created elsewhere in the 1940 Act. The district court ruled that the plaintiffs’ claims could not be enforced under Section 47(b) because the Section 36(b) claim was foreclosed by Section 36(b)(4) and the other alleged violations, including that of Section 36(a), did not involve 1940 Act provisions that created private rights of action.