On February 21, 2014, two shareholders of the BlackRock Global Allocation Fund, Inc. filed a shareholder derivative action against BlackRock Advisors, LLC, the fund’s investment adviser, and BlackRock Investment Management, LLC and BlackRock International Limited, the fund’s sub-advisers (collectively, BlackRock), in the U.S. District Court for the District of New Jersey, alleging that BlackRock violated its fiduciary duty to the fund under Section 36(b) of the 1940 Act by receiving advisory fees from the fund so disproportionately large that they bear no reasonable relationship to the value of the services provided to the fund and could not have been the product of arm’s-length bargaining.
To support the excessive fee claim, the plaintiffs assert that BlackRock serves as sub-adviser to three non-BlackRock funds, to which it provides substantially the same investment advisory services as it provides to the fund at advisory fee rates up to 109% less than the fund’s advisory fee rate. The plaintiffs allege that this difference in advisory fee rates is not explained by the additional administrative and other services that BlackRock provides to the fund under the fund’s investment management agreement that are not also provided to the sub-advised funds. The plaintiffs claim that, in addition to fees payable to BlackRock under the investment management agreement, the fund pays separate accounting services and call center fees to BlackRock as well as administrative fees to State Street, the fund’s third- party administrator. The plaintiffs allege that the majority of the additional services BlackRock purports to provide to the fund under the investment management agreement are actually provided under these separate arrangements for additional compensation.
The plaintiffs also allege that economies of scale realized by BlackRock in providing advisory services to the fund have not been passed on to the fund. The plaintiffs assert that under the fund’s current breakpoint schedule, very large increases in fund assets have resulted in very small decreases in the rate of advisory fees paid by the fund. For example, the plaintiffs note that while the fund’s assets under management increased from $45.7 billion on October 31, 2010 to $52.4 billion on October 31, 2011, the fund’s effective advisory fee rate decreased only one basis point during this period, from 0.68% to 0.67%. In addition, the plaintiffs compared the fund’s breakpoint schedule to the breakpoint schedule of one of the sub-advised funds, noting that under the sub-advised fund’s breakpoint schedule, a 12-basis-point fee reduction takes effect at $100 million in assets, whereas, under the fund’s breakpoint schedule, a similar 12-basis-point fee reduction does not take effect until $30 billion in assets.
Finally, the plaintiffs allege that the fund’s board of directors has approved the investment management agreement with BlackRock each year, upon information and representations provided by BlackRock, without devoting the time and attention necessary to independently assess the fees paid or to effectively represent the interests of fund shareholders.
The plaintiffs request a declaration that BlackRock violated Section 36(b); that BlackRock be permanently enjoined from further violations of Section 36(b); that BlackRock pay compensatory damages, including repayment of unlawful and excessive advisory fees, lost investment returns on those amounts and interest; and that the fund’s investment management agreement be rescinded.