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Vedder Thinking | Articles SEC Settles Conflict-of-Interest Case Against BlackRock and Former Chief Compliance Officer Concerning Portfolio Manager's Outside Business Activities


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On April 20, 2015, the United States Security and Exchange Commission (SEC) announced that it had reached a settlement with BlackRock Advisors LLC and BlackRock’s former Chief Compliance Officer, Bartholomew A. Battista, relating to an undisclosed conflict of interest involving a BlackRock portfolio manager.

According to the SEC, in 2007 Daniel J. Rice III, portfolio manager for various energy-focused funds and separate accounts at BlackRock since 2005, formed Rice Energy, L.P., a family-owned and operated oil and gas company of which Mr. Rice was the general partner and in which he personally invested $50 million. The SEC order stated that in 2010, Rice Energy formed a joint venture with Alpha Natural Resources, Inc. (ANR), a publicly traded coal company whose common stock was held in the various funds and accounts Mr. Rice managed for BlackRock. The SEC stated that by midyear 2011, ANR was the largest holding of the BlackRock Energy & Resources Portfolio, a registered fund managed by Mr. Rice. The SEC found that BlackRock knew and approved of Mr. Rice’s involvement with Rice Energy and the joint venture with ANR but failed to disclose the conflict of interest to relevant BlackRock funds’ boards and advisory clients.

The SEC found that BlackRock willfully violated Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any activity that operates as a fraud or deceit upon an advisory client, and that BlackRock breached its fiduciary duty to the relevant funds and advisory clients by failing to disclose the conflict of interest involving Mr. Rice's outside business activities to the funds' boards and advisory clients. The SEC also found that BlackRock failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, as required by Section 206(4) and Rule 206(4)-7, concerning the monitoring and assessment of employees' outside activities for conflicts of interest and the reporting of such conflicts of interest to fund boards and advisory clients. The SEC further found that Mr. Battista, the former CCO, caused these violations. Finally, the SEC found that BlackRock and Mr. Battista caused the relevant registered BlackRock funds to violate Rule 38a-1 under the 1940 Act as a result of Mr. Battista's failure to disclose the conflict of interest involving Mr. Rice to the funds' boards.

In settlement of these charges, BlackRock consented to the entry of an order finding that it committed the violations described above and agreed to pay a $12 million penalty. Mr. Battista also consented to the entry of an order finding that he caused the violations described above and agreed to pay a $60,000 penalty. Neither BlackRock nor Mr. Battista admitted or denied the charges.

The SEC staff stated, “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.”

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Cody J. Vitello


Nathaniel Segal