The U.S. Securities and Exchange Commission (SEC) has fined the global money management and investment firm BlackRock Inc. $12 million for failing to disclose a conflict of interest between former portfolio manager Daniel J. Rice III, the funds he managed and his family business.
BlackRock has agreed to settle the charges of breaching its fiduciary duty and pay the penalty. It must also hire an independent compliance consultant to conduct an internal review.
Last year, the firm received a Wells Notice from the SEC indicating that the commission could take action against it after an investigation that began in 2012. At that time BlackRock said Rice had left the firm to avoid such issues (see Daily GPI, July 1, 2014). According to the SEC, Rice was managing energy-related portfolios when he founded Rice Energy Inc. in 2007.
The commission said Rice personally invested $50 million in the company. Rice Energy later formed a 50/50 joint venture with coal company Alpha Natural Resources Inc. in the Marcellus Shale. Eventually, Alpha became the largest holding in BlackRock's $1.7 billion energy and resources portfolio, which Rice managed, the commission said.
The SEC said 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."
Rice Energy went public early last year, raising nearly $600 million (see Shale Daily, Jan. 31, 2014). It was founded by Rice and his sons. The family, through Rice Energy Holdings LLC, still owns and controls a sizable share of the company's stock under a majority agreement with Alpha Natural Resources and an affiliate of Rice Energy's former private equity backer, Natural Gas Partners (see Shale Daily, Dec. 17, 2013). In 2013, Rice Energy purchased Alpha's interest in the JV acreage for $100 million in cash and another $200 million in stock (see Shale Daily, Dec. 10, 2013).
Currently, Rice serves as a member of Rice Energy's board of directors. The company has not commented about the investigation or the SEC's charges.
In an SEC filing last year, when it disclosed receipt of the Wells Notice, BlackRock said "the company concluded that there was no improper trading with the portfolios managed by Mr. Rice and that no clients were harmed."
The SEC also charged BlackRock's former compliance officer, Bartholomew Battista, who now serves as an advisor to the firm's legal department, with failing to implement policies and procedures for employees' outside activities that would better protect fund boards and clients against conflicts of interest. Battista has agreed to pay $60,000 penalty to settle those charges.
“BlackRock has extensive policies and procedures in place to manage conflicts of interest, including employees’ outside activities,” BlackRock spokesman Brian Beades said. “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.”