April 21, 2015

SEC Enforcement Spotlight — BlackRock Advisors

By the C|C Whistleblower Lawyer Team

BlackRockBlackRock Advisors LLC agreed to pay a $12 million penalty to settle SEC charges it breached its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.  The firm also must engage an independent compliance consultant to conduct an internal review.  See SEC Press Release

According to the SEC, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company.  Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company.  Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10 percent) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.

The SEC found that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.  According to the SEC’s Director of Enforcement Andrew J. Ceresney, “BlackRock violated its fiduciary obligation to eliminate the conflict of interest created by Rice’s outside business activity or otherwise disclose it to BlackRock’s fund boards and advisory clients.”  By this failure, “BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions.”

BlackRock’s former chief compliance officer Bartholomew A. Battista was also charged with failing to adopt and implement policies and procedures for outside activities of employees.  He agreed to pay a $60,000 penalty to settle the charges against him.  BlackRock agreed to be censured and consented to the entry of the SEC’s order finding that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  The order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940.  It is apparently the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board.


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