BlackRock Fund Advisors has agreed to pay a $1.5 million fine for operating an ETF without obtaining the required exemptive relief from the Securities and Exchange Commission.
According to the agency, the RIA, a subsidiary of BlackRock, operated the iShares MSCI Russia Capped ETF (the Russia Fund Company) from December 2010 through January 2015, relying on an exemptive that covered iShares Inc. and iShares Trust (iShares Future Funds Relief).
Exemptive relief from the Investment Company Act is required for ETFs to operative in order not to violate various pricing provisions of the law.
In early 2011 BlackRock realized the iShares Futures Funds Relief did not extend to the Russia Fund ETF. It subsequently received a comment letter from SEC staff about a registration it had filed for another standalone ETF that would invest in Russia securities.
In July, counsel for BlackRock Financial Advisor informed the SEC that it believed the iShares Future Fund Relief covered the two Russia funds – the one in registration and the existing Russia ETF. The SEC responded, advising that the firm not launch the additional Russia fund.
BlackRock Financial Advisors continued to operate the first Russia Fund, and in January 2015, after discussions with SEC staff, merged the fund into a newly created series of iShares, which could operate under the iShares Futures Funds relief.
Cipperman Compliance Services, an independent firm offering a third-party compliance services for the investment management industry, said this case illustrates that “the SEC is very serious about compliance with exemptive orders and ensuring that ETF sponsors strictly follow the conditions (see e.g. SEC 2016 Exam Priorities Letter). Just because you are driving safely doesn’t mean you can drive without a license.”