BlackRock Advisors agreed to a $12 million penalty to settle charges by the Securities and Exchange Commission today that 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.
BlackRock also must hire an independent compliance consultant to conduct an internal review, the SEC said in a release.
According to the SEC’s order, portfolio manager 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 fund he managed. The SEC’s order finds 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.
Rice stopped managing the fund in July 2012 and resigned from BlackRock in December of that year after articles in the Wall Street Journal raised questions about conflicts of interest. At the time, Rice told the Journal there was no actual conflict of interest.
“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,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “By failing to make such a disclosure, BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions.”
In response to today's settlement, BlackRock said in a statement that it has extensive policies and procedures in place to manage conflicts of interest, including employees’ outside activities. "However, this has been a learning experience for our firm, and we have taken a number of additional steps to further enhance our policies and procedures regarding, among other things, our employees' outside business activities. As a fiduciary for our clients, we take even the appearance of conflicts of interest extremely seriously.”
The SEC’s order also finds that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the fund's failure to report a “material compliance matter” – namely Rice’s violations of BlackRock’s private investment policy – to their boards of directors. BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure, the SEC said. Battista agreed to pay a $60,000 penalty to settle the charges against him. BlackRock and Battista neither admitted nor denied the findings.
“This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the advisor’s policies and procedures to a fund board,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.