## Facts

- BlackRock Advisors, LLC, a registered investment adviser, employed Daniel J. Rice III as an energy-sector portfolio manager for registered funds, private funds, and separate accounts.
- In 2007, Rice formed and funded Rice Energy, L.P., an oil and natural gas production company in which Rice had a substantial personal investment; BlackRock’s private-investment policy required preapproval for such outside investments.
- In 2010, Rice Energy entered a joint venture with Alpha Natural Resources, Inc. (ANR), a public company whose stock was held in client portfolios Rice managed; ANR later became a major, and in at least one fund the largest, portfolio holding.
- BlackRock knew of Rice’s involvement with Rice Energy and the ANR joint venture, and internal legal/compliance personnel warned the arrangement could create conflicts of interest.
- BlackRock did not disclose Rice’s outside business interest or the related conflict to the boards of the registered funds or to separate-account clients, and did not report the matter to fund boards as a material compliance matter.
- Bartholomew A. Battista, BlackRock’s chief compliance officer, approved outside business activities but did not recommend adoption of written monitoring and escalation procedures to ensure conflicts were identified and disclosed to clients and fund boards.

## Issues

1. Whether BlackRock’s failure to disclose a portfolio manager’s outside business interest and related conflict operated as a fraud or deceit on advisory clients under Advisers Act § 206(2).
2. Whether BlackRock failed to adopt and implement written compliance policies and procedures reasonably designed to prevent Advisers Act violations, in violation of Advisers Act § 206(4) and Rule 206(4)-7.
3. Whether BlackRock and its CCO caused registered funds to violate Investment Company Act Rule 38a-1 by failing to report a material compliance matter to fund boards.

## Decision

- The SEC instituted administrative cease-and-desist proceedings and resolved the matter by settlement, with respondents consenting to findings and remedies without admitting or denying them (except jurisdiction).
- The SEC found BlackRock willfully violated Advisers Act § 206(2) by failing to disclose a material conflict of interest arising from Rice’s outside business and the joint venture with an issuer held in client portfolios.
- The SEC found BlackRock violated Advisers Act § 206(4) and Rule 206(4)-7 by failing to adopt and implement written policies and procedures reasonably designed to address employee outside business activities, related conflicts, and required disclosures/escalation.
- The SEC found BlackRock and Battista caused certain registered funds to violate Rule 38a-1 by not reporting the matter to fund boards as a material compliance matter.
- Sanctions included censure and cease-and-desist relief; BlackRock paid a $12 million civil penalty and agreed to retain an independent compliance consultant; Battista paid a $60,000 civil penalty.

## Legal Principles

- An adviser’s fiduciary duty requires full and fair disclosure of material conflicts of interest so clients and fund boards can evaluate and address them; nondisclosure may violate Advisers Act § 206(2).
- Advisers Act Rule 206(4)-7 requires advisers to adopt and implement written compliance policies and procedures reasonably designed to prevent violations, including procedures to identify, monitor, and escalate conflicts tied to employee outside activities.
- Under Rule 38a-1, material compliance matters—such as significant policy violations and conflicts creating substantial compliance risk—must be reported to registered fund boards; advisers and CCOs may be liable for causing a fund’s reporting failures.

## Conclusion

The SEC concluded that BlackRock’s nondisclosure of a portfolio manager’s significant outside business conflict, and the firm’s inadequate written compliance monitoring and escalation procedures, violated the Advisers Act and caused registered funds’ board-reporting failures under Rule 38a-1, warranting cease-and-desist relief, censure, monetary penalties, and compliance undertakings.


In re BlackRock Advisors, LLC, Investment Advisers Act Release No. 4065 (Apr. 20, 2015)