Compliance April 21, 2015

Manager Conflict Brings Scrutiny to BlackRock Advisors

BlackRock Advisors has settled allegations from the Securities and Exchange Commission (SEC) that it breached its fiduciary duty to certain clients "by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager."
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BlackRock agreed to pay a $12 million penalty, according to the SEC. The firm also must engage an independent compliance consultant to conduct an internal review related to the SEC’s allegations.

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. The SEC’s explanation continues: “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%) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.”

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The SEC’s order argues 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. 

Further, the SEC’s order finds that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the funds’ failure to report a “material compliance matter,” in the form of 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,” the SEC suggests. 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, notes 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,” she says.

BlackRock 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, but BlackRock and Battista neither admitted nor denied the findings, the SEC says. 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. 

Data & Research April 21, 2015

Dramatically Short on Financial, Retirement Goals

Most Americans are anxious about their finances and aspire to be more financially responsible, a survey finds.
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Americans are urgently aware that they should improve their finances, but the majority aren’t doing anything to improve them. That disconnect was the major finding of the 2015 Northwestern Mutual Planning & Progress Study.

Fifty-eight percent of Americans believe their financial planning needs improvement, 21% are “not at all confident” they’ll be able to reach their financial goals, and more than one third (34%) have not taken any steps to plan for their financial future. While they said they are concerned about retirement, 43% of Americans have not spoken to anyone about retirement planning.

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More than two-thirds (67%) expect financial crises comparable to the Great Recession of 2008 to occur again, but only 38% are confident their financial plans will withstand such a downturn, and nearly a quarter (23%) do not believe their plans can weather economic ups and downs.

“Intending one thing and doing another is human, but it’s an impulse we should all fight hard to resist,” says Rebekah Barsch, vice president of planning and sales at Northwestern Mutual. “How many of us know we should eat better and exercise more, but fail to take action? It’s similar with finances. We know it’s important, but we excuse ourselves, consciously or not, because it’s easy. Of course, intentions only get us so far. And when the stakes are high, it’s taking action that’s critical.”

The survey found that Americans are most concerned about the unknown and unexpected, with their greatest financial fear being “an unplanned financial emergency,” and that fear is paralyzing. Over the last four years, the number of Americans age 25 and older who say they are non-planners and have no financial goals has doubled, from 7% in 2012, to 14% in 2015.

“Some people might instinctively know they need to address their financial futures, but fear gets the best of them, and they ignore the issue, hoping it works itself out one way or another,” Barsch says. “We tell them the best remedy for fearing and ignoring is planning, preparing and protecting.”

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