Conflicts of Interests

In this paper, I am going to talk about Blackrock that had to pay $12 million in fine as SEC convicted than in conflicts of interest case. Blackrock violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940 (SEC, 2015). We will look into Vanguards policies to verify what they are doing to discourage such conflicts of interests. Then we will discuss what managers can do using policies and laws to avoid such COI,

Keywords: conflicts of interests, COI

The organization 

            Blackrock is an investment firm that manages money on behalf of its investors/customers (Blackrock, n.d). One of BlackRock’s portfolio manager, Damien Rice who was managing a portfolio of energy funds, was also running a family owned oil and natural gas company name “Rice Energy” that partnered up with a coal company. As a portfolio manager of Blackrock’s energy portfolio manager Damien Rice made $1.7 billion investment in the publicly traded coal company that was also a partner of “Rice Energy” which he started investing $50 million of his own money (Lynch, 2015). According to SEC, BlackRock was aware of Damien Rice’s activities and approved of Rice’s activities, but failed to disclose the conflict to the boards of the BlackRock funds and to clients (Lynch, 2015). Blackrock’s chief of compliance during this time, Bart Battista, also paid a fine of $60,000 in connection with the case, investigators said. Neither admitted wrongdoing as a result of the agreement (Marino, 2015). According to SEC Damien Rice used Blackrock’s email address (his work email address) to conduct “Rice Energy’s” business, which was a conflict of interest and Blackrock failed to report it to investors or board (Marino, 2015).

The Law         

In the USA there is a law and Blackrock was found to be willfully violating the law, by SEC. Blackrock 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, the then chief compliance officer for Blackrock caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1 (SEC, n.d.). Per 206(2) and 206(4) of the Investment Advisers Act of 1940, Damen Rice, as a fiduciary to his customers could not invest in a business that had relations with his own business without informing that to clients (SEC,n.d.).  Rule 38a -1 requires investment company and an investment adviser registered with the Commission to implement policies and procedures designed to prevent violation of the federal securities laws, and designate a chief compliance officer (“CCO”) to administer them by October 5, 2004 ( Morrison and Forester, 2004).

The USA has a matured capital market, and this should not be a surprise that there is an existing law to discourage such conflicts of interests. Bart Battista, the then chief compliance officer, decided to look the other way and ignored the law, as the result, he had to pay $60,000 in fine (Marino, 2015).  This case is a great example of why law alone is not enough if management is not interested in implementing those laws as organizational policies. Blackrock took additional measures in form of more policies after this incident (Marino, 2015).

The Policy

In my research, I found Blackrock’s policies can be found at and under Governance Document we need to refer to Code of Business Conduct and Ethics document. In this PDF we need to refer to section 3. Conflicts of Interest where it says “Conflicts of interest may arise when a person’s private interest interferes, or appears to interfere, with the interests of BlackRock, or where the interests of an employee or the firm are inconsistent with those of a client or potential client, resulting in the risk of damage to the interests of BlackRock or one or more of its clients. (Blackrock, 2017). This policy pertains to the conflict of the incident we discussed above. Per this policy we can see how the conflict of interests aroused when Damien Rice’s private interest interfered or appeared to interfere with the interest of the client and potential client, resulted in the risk of damage to the interests of BlackRock or one or more of its clients.  

Ways that managers can use both policy and the existing laws 

            First of all, I believe it is possible for managers to construct policies within organization around the laws the country has or if the organization deals with customers from a different country, the policies should cover the laws of other countries too.

            Now, another factor is, manager’s responsibility does not end at constructing a code of conduct or just having a policy in an organization. The manager needs to make sure every employee is aware of those policies, understands the importance of policies and understands well the consequences of violating the policies and laws.

            Implementing policies is going to be challenging, management should make sure the existing employees are aware of the organizational policies, the laws they might have to deal with and consequences of violating them. And this process has to be implemented for every new employee who comes abroad. It is will be best if there is a refresher every year or so.

            Finally, after implanting the policies, management still needs to make sure that employees are compliant. So there should be auditors to make sure each employee are compliant with the organizational policies.

Do laws and policies help promote ethical behavior?  Do you feel that the laws, as they are currently, are sufficient and effective?

            Laws and policies promote ethical behavior to a certain extent. As long as one employee’s goals are aligned with organization’s goals, their behavior will be driven by policies and laws. But when an employee is acting on his or her own interest, it might not be aligned with the policy or law. Now, management can make sure during the recruitment that employee’s goals are aligned with employer’s goals. And implementing a policy and making sure each employee comply with those will help management make sure employees are ethical.

            We already have enough laws, but an employee who is acting upon his or her self-interest, might violet policies and laws. While laws are usually made by regulatory bodies or the government in a nation (Democracy or in a republic) so those laws are often retroactive. With so much innovation going on and disruptions happening in industries, there will always be people who will break some laws and regulators will try to bring in regulations afterward. We can observe the cryptocurrency industry. There are a lot of scams and regulators are trying to bring in regulations and laws to protect general people. So, to answer the question, we have enough laws those are in general effect, but there are new industries coming up based on technology where we need the `law.


Retrieved on 6/25/2018. Retrieved from

Lynch, S. N (April, 2015). BlackRock to pay $12 million in SEC conflict of interest case. Retrieved from

Marino, J (Apr, 2015). Ex-BlackRock fund manager didn’t disclose a conflict regarding the biggest holding in his biggest fund. Retrieved from

Retrieved on 6/25/2018. Retrieved from

Retrieved on 6/25/2018. No Action Letter. Retrieved from https9://

SEC (Jan, 2007). Investment Advisers Act of 1940 – Section 206(4) and Rule 206(4)-3 Emanuel J. Friedman; EJF Capital LLC. Retrieved from

Retrieved on 5/26/2018. Retrieved from

BlackRock (April, 2017). Code of Business Conduct and Ethics. Retrieved from

Author: pachubabu

I love trying different cuisine, hiking, travelling and blogging about personal finance ,investing & health/fitness