Global fund manager BlackRock has agreed to pay the US Securities and Exchange Commission (SEC) $12 million to settle claims that the firm failed to disclose a conflict of interest to investors regarding a portfolio manager’s outside activities. The SEC complaint issued Monday sanctions CCO Bartholomew Battista, stating he is responsible for the violations.
Daniel Rice III joined BlackRock in 2005 to manage energy-focused registered funds, private funds and separate accounts. During his time at the firm, he also founded oil and gas company Rice Energy and formed a joint venture with Alpha Natural Resources (ANR), a coal company held by the BlackRock funds he managed. By 2011, ANR had grown to become the largest holding in the $1.7 billion BlackRock Energy & Resources Portfolio managed by Rice.
Although BlackRock and Battista knew of Rice Energy’s involvement with ANR, the firm breached its fiduciary duty by failing to disclose the conflict of interest to the BlackRock funds’ boards of directors and to BlackRock investors, the complaint alleges.
The case marks the first time that the SEC has charged violations of Rule 38a-1: failing to report a material compliance matter—such as violations of policies and procedures—to a fund board. GPs would be wise to make note of the case, compliance consultant Todd Cipperman told pfm, because it is likely that the SEC will be focusing on the rule in future cases.
BlackRock also did not have written compliance policies regarding the outside activities of its employees, the SEC claims. As CCO, Battista “caused BlackRock’s failure to adopt and implement these policies and procedures,” according to the complaint.
The case is likely to prompt private equity managers to review their policies on employees’ outside activities and personal investing, noted Cipperman. “A lot of CCOs are going to start pushing the issue. Firms at least need to have a procedure to monitor it and figure out what to do if there’s a risk to the firm,” he added.
Aside from paying the fine, BlackRock is also required to hire an independent compliance consultant for two years to review its policies and procedures.