TRANSAMERICA LIFE INSURANCE COMPANY
Inc Neal J.
Joseph P. Platt
SEC Charges BlackRock Advisors With Failing to Disclose Conflict of Interest to Clients and Fund Boards
FOR IMMEDIATE RELEASE
Washington D.C., April 20, 2015 —
The Securities and Exchange Commission today charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.
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.
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. Rice Energy 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. 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 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.”
The SEC’s 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.
“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.”
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 order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940. Battista also consented to the entry of the order finding that he caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1. BlackRock and Battista are required to cease and desist from committing or causing any further violations. BlackRock and Battista neither admitted nor denied the findings.
The SEC’s investigation was conducted by Janene M. Smith, David A. Becker, and Brian E. Fitzpatrick and supervised by Jeffrey B. Finnell of the SEC Enforcement Division’s Asset Management Unit.
1. This matter concerns investment adviser BlackRock’s failure to disclose a conflict of
interest involving the outside business activity of one of its portfolio managers. Daniel J. Rice, III
was a well-known, long-standing top-performing energy sector portfolio manager. Rice joined
BlackRock in 2005 and managed BlackRock energy-focused registered funds, private funds, and
separate accounts. In 2007, Rice founded Rice Energy, L.P. – a Rice family-owned-and-operated
oil and natural gas production company. Rice was the general partner of Rice Energy and
personally invested approximately $50 million in the company. Rice’s three sons were the CEO,
CFO, and VP of Geology of Rice Energy. In February 2010, Rice Energy formed a joint venture
with Alpha Natural Resources, Inc. (“ANR”), a publicly-traded coal company held in the
BlackRock funds and accounts managed by Rice. By June 30, 2011, ANR stock was the largest
holding (9.4%) in the Rice-managed $1.7 billion BlackRock Energy & Resources Portfolio,
primarily as a result of ANR acquiring two other public companies held in that portfolio.
BlackRock knew of Rice’s involvement with and investment in Rice Energy as well as the joint
venture with ANR, but failed to disclose Rice’s conflict of interest to the BlackRock funds’ boards
of directors or to BlackRock advisory clients.
2. BlackRock also 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) of the Advisers Act and Rule 206(4)-7 thereunder, concerning the
outside activities of its employees, including how they should be assessed and monitored for
conflict purposes, and when an employee’s outside activity should be disclosed to the BlackRock
funds’ board of directors or to BlackRock advisory clients. BlackRock’s chief compliance officer
(“CCO”), Bartholomew A. Battista, caused BlackRock’s compliance-related violations.
3. BlackRock and Battista also caused the registered funds’ failure to have the funds’
chief compliance officer report to the funds’ boards of directors – in violation of Rule 38a-
1(a)(4)(iii)(B) under the Investment Company Act of 1940 – Rice’s violations of BlackRock’s
private investment policy. BlackRock and Battista knew about Rice’s violations, and knew or
should have known that they were not reported to the funds’ boards.
4. BlackRock Advisors, LLC, a Delaware limited liability company headquartered in
Wilmington, Delaware, is an investment adviser registered with the Commission. According to its
Form ADV filed in June 2014, BlackRock has assets under management of approximately $452
billion. BlackRock is a subsidiary of BlackRock, Inc., an investment management firm with assets
under management of approximately $4.3 trillion as of December 31, 2013.
5. Bartholomew A. Battista, age 56 and a resident of Sicklerville, New Jersey, was
the CCO of BlackRock during the relevant period. Battista joined BlackRock in 1998.
Other Relevant Individual and Entities
6. Daniel J. Rice III was a managing director at BlackRock and a co-portfolio
manager of approximately $4.5 billion in energy sector assets held in BlackRock registered and
private funds as well as separately managed accounts. Rice joined BlackRock in January 2005 and
separated from the firm in December 2012.
7. Rice Energy, LP (“Rice Energy”) was a Delaware limited partnership
headquartered in Canonsburg, PA. Rice Energy was founded by Rice in February 2007. During
the relevant period, Rice Energy was a Rice family-owned-and-operated oil and gas exploration
and production company that focused on drilling oil and natural gas wells. In January 2014, Rice
Energy, Inc., a Rice Energy affiliate, completed its $1 billion initial public offering of 50 million
shares of common stock, at a price of $21 per share (NYSE: RICE).
A. Rice’s Outside Business Activity Created a Conflict of Interest at BlackRock
8. In late 2004, BlackRock recruited Rice to join BlackRock. Rice joined BlackRock
in January 2005 as a managing director and co-portfolio manager of energy sector assets held in
BlackRock registered funds, private funds, and separately managed accounts. As an incentive to
join the company, BlackRock agreed to pay Rice a portion of the annual investment advisory fees
earned on the Rice-managed funds and separate accounts – as a result, Rice was one of
BlackRock’s most highly compensated portfolio managers.
9. In December 2006 and while employed at BlackRock, Rice formed and funded the
Rice Energy Irrevocable Trust (the “Rice Energy Trust”) to hold interests in “Rice Energy,” which
referred to energy companies that Rice intended to create in the future and be managed by his adult
children. Rice funded the trust with approximately $2.4 million in gifts as well as $23.5 million in