US court dismisses Northern Trust securities lending claims
A complaint by Northern Trust that the trustees of four Illinois pension funds were responsible for losses incurred from the custodian’s securities lending program was last week dismissed by a US District Judge for the Northern District of Illinois in Chicago.
The third-party complaint is a development on a November 2009 lawsuit, brought about first by the Louisana Firefighters’ Retirement System (FRS) and then included the US$8.9 billion Chicago Public School Chicago Public School Teachers' Pension & Retirement Fund; the US$499 million Pontiac General Employees' Retirement System; and the US$259 million Pontiac Police & Firemen's Retirement System.
Northern Trust's complain was dismissed on the grounds that it cannot pass on liability to the plaintiffs. An update on the case will be heard on 7 March.
In a statement Northern Trust said: "Northern Trust filed its third-party claims as part of its defence against a lawsuit brought by the FRS and its co-plaintiffs. The US District Court ruling characterised Northern Trust’s allegations as defences rather than third-party claims. By our reading, the ruling did not undermine Northern Trust’s defences to plaintiffs’ claims."
In a blog posted today, Finadium described the ruling as an important issue in the industry. “At the heart of the matter is who is responsible for gains and losses in securities lending collateral management accounts: fiduciaries who set policies or the securities lending agents who execute the policies.”
Finadium said securities lending programs should have regular monitoring and risky investments should be exposed in the portfolio. "In many of these cases we have seen clear evidence of fiduciaries agreeing to continue their programs in the current fashion. This to us is the corollary to the fiduciary accepting that the investment manager made the right decision."
Having reviewed a good number of custodial and securities lending agreements over the years, we would argue strongly that the real cause of cash collateral losses is program oversight. We have seen instances where we thought that securities lending agents had invested in securities that we would not agree with for cash collateral reinvestment pools, or that after the fact might have been seen as riskier than a board would like. At the same time, we have also seen the documentation provided by the cash collateral manager to fiduciaries letting them know what was going on quite clearly."
Reporting by: Janet Du Chenne, Global Custodian, an Asset International publication