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. -Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.Today the Securities and Exchange Commission (SEC) charged BlackRock Advisors, LLC (NYSE: BLK) with failing to disclose a conflict of interest. The company has agreed to pay a mere $12 million to settle the charges. Of course this is just a drop in the bucket for the New York based investment management firm. As the world's largest asset manager it manages over $4.6 trillion in assets.
The order claims that Daniel J. Rice III was managing accounts at BlackRock when he founded Rice Energy (NYSE: RICE) based in Pittsburgh. Rice invested approximately $50 million in the company and then formed a joint venture with coal producer Alpha Natural Resources Inc. (NYSE:ANR), based in Abingdon, Va. Alpha Natural Resources soon became one of the largest holdings of BlackRock's Energy & Resources Portfolio, which also happens to be Rice's largest managed fund. The conflicts of interest here abound.
According to the SEC, BlackRock knew about this arrangement but did not disclose it to the boards of the BlackRock registered funds.
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. 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. -Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.The SEC also charged the then-chief compliance officer Bartholomew A. Battista with failing to identify and report the failure as well. Battista has agreed to settle the charges for $60,000.
Strangely, Rice was not named in the order.
To read the full order click here.