Northern Trust Reports SEC Subpoena Over Securities Lending

Apr 28, 2014 6:41 pm ET

(Updates with comment from company spokesman in fifth paragraph.)

April 28 (Bloomberg) -- Northern Trust Corp., the third- biggest independent custody bank, said it received a subpoena from the U.S. Securities and Exchange Commission in April related to the company’s securities lending.

“Northern Trust will fully cooperate with the SEC in this investigation,” the Chicago-based company said today in a regulatory filing that disclosed the subpoena.

Northern Trust previously disclosed that it was sued by a number of customers of its securities-lending program, according to the filing. The clients claimed Northern Trust mismanaged collateral posted by borrowers of the securities, causing losses for the lenders, the company said.

The company recorded a $19.2 million expense in the fourth quarter to settle two of the lawsuits and, as of March 31, estimated the upper end of its aggregate legal liability for “a limited number of the matters” to be $130 million.

“We believe the securities-lending practices under review are appropriate,” Doug Holt, a spokesman for Northern Trust, said in an e-mail.

Holt said the company regularly advises shareholders on matters of legal liability and the $130 million isn’t tied exclusively to the securities-lending claims. He declined to comment further on the subpoena or pending lawsuits.

The lawsuits “assert various contractual, statutory and common law claims, including claims for breach of fiduciary duty under common law and under the Employee Retirement Income Security Act,” the company said in the filing.

Extra Income

Long-term investors, including mutual funds and pension funds, sometimes seek additional earnings by lending out securities. Borrowers, including hedge funds, may pay a fee and typically post cash as collateral to protect the lender from losses. Lending agents such as Northern Trust invest the cash in low-risk debt securities with the returns going to the lender.

Bank of New York Mellon Corp., the world’s largest custody bank, agreed in 2008 to prop up funds composed of securities- lending collateral after they incurred losses on debt issued by bankrupt Lehman Brothers Holdings Inc. The losses cost BNY Mellon $425 million.