By Sue Reisinger, From Corporate Counsel
In the first case of its kind—but probably not the last—the U.S. Securities and Exchange Commission charged BlackRock Advisors, as well as its then-chief compliance officer, with allowing a “material compliance” violation and then failing to report the violation to the boards of its funds, or to BlackRock’s clients.
The SEC complaint said CCO Bartholomew (Bart) Battista, 56, who had been with the company since 1998, “caused BlackRock’s compliance-related violations.” It said he was no longer with the company.
In settling the complaint this week, BlackRock, one of the world’s largest asset managers, agreed to pay $12 million and be censured after it failed to disclose that one of its top portfolio managers had a conflict of interest. Battista agreed to pay a $60,000 penalty. Neither admitted nor denied the SEC’s findings.
BlackRock told CorpCounsel.com in a statement, “BlackRock has extensive policies and procedures in place to manage conflicts of interest, including employees’ outside activities.”
It continued, “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.”
Battista could not be reached for comment, and he has previously declined to discuss the matter.
The conflict of interest concerned BlackRock managing director Daniel Rice, who managed about $4.5 billion in energy sector assets while he formed an energy company and several subsidiaries. Rice, who has previously declined comment, left BlackRock at the end of 2012, after the Wall Street Journal exposed his apparent conflict.
Rice’s company, Rice Energy, hired his three sons to be CEO, CFO and vice president of geology. After Rice Energy formed a joint venture with a coal company, that company became the largest holding in BlackRock’s Energy & Resources Portfolio.
Rice also formed and funded the Rice Energy Irrevocable Trust for $2.4 million, and loaned it $23.5 million. And he loaned a Rice drilling subsidiary $24 million, according to the complaint.
“BlackRock’s legal and compliance department, including Battista, reviewed and discussed the matter and allowed Rice to form Rice Energy,” the complaint states. “BlackRock concluded that it did not see any conflict of interest with regard to Rice Energy.”
But by January 2010 BlackRock learned that Rice had made loans in violation of BlackRock’s private investment policy. “BlackRock did not report the formation or funding of the Rice Energy Trust or Rice Energy to the boards of directors of the Rice-managed registered funds or to [Rice’s] advisory clients,” the complaint states.
“BlackRock also did not advise the funds’ boards of Rice’s violations of BlackRock’s private investment policy [and] did not monitor or reassess Rice’s outside business activity and the conflicts associated” with it.
BlackRock’s legal and compliance department did in 2010 deny Rice’s request to serve on the board of the joint venture, saying, “There are potential conflicts of interest in entering joint ventures with companies that you hold in your BlackRock client portfolios and funds. By participating in a personal joint venture with an issuer that you invest in on behalf of your clients, you may create the appearance of a conflict, with respect to whose interests are being placed first (yours or the client’s).”
BlackRock then didn’t disclose Rice’s conflict, “although senior executives in BlackRock’s legal and compliance department considered the disclosure in privileged communications,” the complaint states. The failure to disclose violated the company’s fiduciary duty, it says.
The complaint also cites BlackRock and Battista for failing to adopt and implement written policies regarding employees’ outside business activities.
The SEC ordered the company to hire an independent compliance consultant to do a comprehensive review of, and report on, its written compliance policies regarding outside employee activities and any related conflicts of interest.
“This is the first SEC case to charge violations of [the Investment Company Act of 1940] for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” said Julie Riewe, co-chief of the SEC Enforcement Division’s asset management unit, in a statement.
But she has indicated there will be more to come. Earlier this year, Riewe gave a speech saying her unit “has unearthed numerous examples of hidden conflicts of interest at asset managers and is planning to file a series of cases,” according to an article by Reuters.
The SEC was kinder Wednesday to another compliance professional in an unrelated matter. It awarded about $1.5 million to an unidentified compliance whistleblower who helped the SEC nail an unnamed company for misconduct. It was the agency’s second award to an employee with internal audit or compliance responsibilities.
For more on this story go to: http://www.corpcounsel.com/id=1202724262523/BlackRock-and-ExCCO-Hit-with-SEC-Compliance-Charges#ixzz3Y9VUa1sY