BlackRock Advisors (BLK) has consented to be pay $12M resolve Securities and Exchange Commission charges claiming that a conflict of interest that occurred because a former portfolio manager’s outside business activity was not disclosed. Additionally, the firm agreed to a censure and will retain an independent compliance consultant to perform a review.
According to the regulator, when Daniel J. Rice III founded Rice Energy, an oil and natural gas company, he was also managing energy-focused funds and separately managed accounts at the firm. Also, he’d invested $50M in Rice Energy and was general partner.
The oil and natural gas company eventually went into a joint venture that became the biggest holding in the BlackRock Energy & Resources Portfolio. This also happened to be the biggest fund managed by Rice.
The Commission found that BlackRock was aware of Rice’s connection to Rice Energy and venture and gave its approval. However, the firm did not disclose the interest conflict to advisory clients and the registered funds’ boards.
The regulator said that BlackRock violated its fiduciary duty to make sure that no conflict of interest was created from Rice’s external business activities, or, if there were conflicts then these should have been disclosed to the clients and the fund boards. By not disclosing, notes SEC Enforcement Division director Andrew J. Ceresney, the firm withheld from clients their right to make independent decisions about whether the conflict could affect portfolio management decisions.
The SEC said that BlackRock and its chief compliance officer Bartholomew A. Battista did not report Rice’s violations to the firm’s board of directors. It said the firm should have put into place procedures and policies about employees’ outside activities and that this was a failure that was caused by Battista.
Battista, who retired from the firm a few years ago, will pay $60,000 to settle SEC charges against him. Both he and BlackRock are not denying or admitting to the findings. BlackRock, however, did consent to the entry of the order finding that it willfully violated certain sections of the Investment Advisers act and Rule 206(4)-7. The firm and Battista must cease and desist from further violations. This is the first time the SEC has brought a case over Rule 38a-1 violations for not reporting a material compliance issue.
In other BlackRock Inc. news, the money manager said it would consolidate or close certain money-market funds and incorporate new features into the other funds to comply with new rules impacting the money-fund universe. The changes are in response to new requirements by the SEC to make the industry less susceptible to investor runs when there is market turmoil.
Among the changes, beginning October 2016, specific “prime” money funds that cater to big institutional investors will have to get rid of their fixed $1/share price, and like other mutual funds, float in value. It also plans to convert its TempCash fund to a strategy that offers aspects of two other fund types. This will limit the holdings of the fund to securities that mature in a week or less. Investor consent will be needed for some of the fund changes.
Other firms that have made announced their own modifications to satisfy the Commission rules are J. P. Morgan Asset Management, Goldman Sachs Asset Management, and Fidelity Investments. The new rules mainly impact prime funds.
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