Firm Pays $12 Million Fiduciary Obligation Violation


Earlier this week, the Securities and Exchange Commission (“SEC”) filed an enforcement action against   BlackRock Advisors LLC for failing to fulfill its fiduciary duty.

According to the SEC order, while managing energy-related funds at BlackRock, Daniel J. Rice III founded Rice Energy, a family-owned and operated oil-and-natural gas company. “The company 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.” Allegedly, BlackRock knew of Rice’s relationship with both Rice Energy and the joint venture but did not disclose the relationship to the fund’s Board of Trustees and investors.

“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.”

BlackRock agreed to settle the charges and pay a $12 million penalty.  The firm also must engage an independent compliance consultant to conduct an internal review.

During the examination, the SEC also found that the Chief Compliance Officer, Bartholomew A Battista (who is no longer with the firm) failed to “report a material compliance matter” to BlackRock’s board or director.  Mr. Battista agreed to pay $60,000 to settle the charges against him.

“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 adviser’s policies and procedures to a fund board,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “BlackRock and Battista caused the funds’ failure to report Rice’s violations of BlackRock’s private investment policy and denied the funds’ boards critical compliance information alerting them to Rice’s outside business interests.”

It is essential for firms to be aware of the outside activity of all their employees. Once conflicts are identified the CEO and CCO should take prompt action to eliminate any risks, including updating policy and procedures and adding efficient disclosures to all documents.  Core Compliance customized compliance solutions can assist advisory firms with performing Risk Assessments and Mock SEC Examinations. Both services can help identify gaps in your compliance program and help protect your firm from enforcement actions.

For more information on this and other related subjects, please contact us at (619) 278-0020 to schedule a consultation.



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