SEC to Pursue Asset Managers in Hidden Conflict of Interest Cases


BlackRock agreed to pay $12 million to the SEC today to resolve civil charges it breached its fiduciary duties by failing to disclose a conflict of interest with a portfolio manager.

The BlackRock Advisors LLC portfolio manager was the founder and general partner of an oil-and-natural gas company as well as manager of energy-focused funds and BlackRock. His company formed a joint venture with a coal company that became the largest holding of BlackRock Energy & Resources Portfolio, the largest fund he managed for BlackRock. BlackRock was aware of and approved the transactions but did not disclose the conflict of interest to its advisory clients or the fund boards.

It is the first SEC case for failure to report a material compliance matter to a fund board under Rule 38a-1. This rule under the Investment Company Act of 1940 was adopted in 2003. It requires a written report to a fund’s board of director’s concerning each material compliance matter no less than annually. A material compliance matter is defined as any compliance matter which the fund’s board of directors would reasonably need to know to oversee compliance. The law expressly includes violations of the Federal securities laws and violations of the policies and procedures of the fund within the definition of a material compliance matter.

BlackRock and its then-chief compliance officer agreed to the entry of the SEC’s order finding violations of the Investment Advisers Act of 1940 and Rule 206(4)-7 but neither admitted nor denied any of the findings.

Last year, Blackrock Institutional Trust Company was one of 19 firms fined for violations of Rule 105 of Regulation M. Rule 105 prohibits the short sale of stock within five business days of participating in an offering for that stock. It paid more than 1.6 million between penalties and disgorgement.

More hidden conflict of interest cases should be expected, according to the Reuters article covering the story. Co-head of the SEC’s asset management enforcement unit Julie Riewe gave a speech earlier this year indicating that the securities regulator planned to file a series of cases after unearthing numerous examples of hidden conflicts.

Similar fines have been the subject of a whistleblower reward. Paradigm Capital Management’s $2.2 settlement last year involved the failure to disclose a conflict of interest.

Based on the SEC comments, this area is probably ripe for whistleblowers. The SEC whistleblower program will pay rewards to eligible individuals between 10 and 30 percent of monetary sanctions exceeding $1 million. To consult with one of our securities whistleblower attorneys, please contact us.

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