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SEC Fines BlackRock Over Energy Fund Manager Who Owned Oil Company

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BlackRock Advisors LLC agreed Monday to pay the Securities and Exchange Commission $12 million for failing to disclose that a top-performing energy portfolio manager was also the founder of an energy company that had a large footprint in his portfolio. 

The SEC charged BlackRock with breaching its fiduciary duty by failing to disclose to BlackRock’s board that Daniel Rice, manager of the BlackRock Energy & Resources Portfolio, was also general partner of Rice Energy, which later formed a joint venture with a publicly traded coal company that eventually became the largest holding (almost 10%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest fund Rice managed.

“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 advisor’s policies and procedures to a fund board,” Julie Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement.

According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil and natural gas company. 

Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company.

The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.   

“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 Ceresney, director of the SEC’s Division of Enforcement, in a statement. “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 said in a statement that it is “pleased too have this matter resolved,” stating that Rice retired from BlackRock in 2012.

The SEC order also finds that BlackRock and its then-chief compliance officer, Bartholomew A. Battista, caused the funds’ failure to report a “material compliance matter” — namely Rice’s violations of BlackRock’s private investment policy — to their boards of directors. BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure. 

Battista agreed to pay a $60,000 penalty to settle the charges against him.

“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,” Riewe said.

BlackRock and Battista neither admitted nor denied the findings.

BlackRock added in its statement that it has “extensive policies and procedures in place to manage conflicts of interest, including employees’ outside activities. 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.”

BlackRock agreed to be censured and consented to the entry of the SEC’s order finding that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. The firm also must engage an independent compliance consultant to conduct an internal review.

— Check out Schorsch Accused of $900M Fee-Driven Scheme on ThinkAdvisor.