BlackRock Inc., the world's biggest money manager, agreed to end an analyst survey program that New York Atty. Gen. Eric Schneiderman concluded could be used to execute trades based in part on nonpublic information.
BlackRock agreed to discontinue use of the analyst survey program worldwide. It was developed by Scientific Active Equities, or SAE, an investment group within Barclays Global Investors, which BlackRock acquired in 2009, according to the agreement reached with Schneiderman.
The agreement comes as money managers are facing heightened scrutiny from regulators following insider-trading probes and assessments of whether their size poses systemic risk to financial markets. Large money managers such as BlackRock, which has $4.1 trillion in assets, are among nonbank financial companies that the U.S. Financial Stability Oversight Council is evaluating to determine whether they require Federal Reserve oversight. BlackRock leveraged its size to ensure analysts would respond to the surveys, according to the agreement.
Schneiderman's investigation found that the design of the survey program "allowed it to capture more than previously published analyst views, including nonpublic analyst sentiment that could be used to trade ahead of the market reaction to upcoming analyst reports," according to the agreement.
BlackRock's conduct, according to the agreement, violated New York's Martin Act, an almost century-old law that gives the state's attorney general broad powers to target financial fraud.
New York-based BlackRock agreed to pay the state $400,000 to cover the cost of the investigation, according to the settlement. BlackRock didn't admit or deny the attorney general's findings, according to a copy of the agreement provided by Schneiderman's office.
The firm has agreed to cooperate with the attorney general's ongoing investigation related to the subject matter of the settlement, the agreement said.
"BlackRock is committed to operating with the highest ethical standards," said Brian Beades, a BlackRock spokesman. "This survey was initiated by Barclays Global Investors prior to its acquisition by BlackRock. We have discontinued its use to avoid even the appearance of any impropriety."
The scientific active equity division relies on quantitative models to make investments.
Schneiderman's investigation relied on internal BlackRock and SAE documents to determine that the survey program was also designed to collect advance revisions to analysts' published views about the companies they covered.
BlackRock said in one document cited by the attorney general that the purpose of the survey was to "get ahead of analysts' actions (upgrades/downgrades), get a direct measure of their internal probability distribution around their forecasts and get some more nuanced information about what they really think."
SAE said in an internal document that the program's success depended in part on an "analyst's willingness to really give us advance information," according to the settlement. Another SAE document cited by the attorney general included the statement, "We're agnostic as to whether the recommendations themselves are useful investment info. We are trying to front-run" the recommendations.
The survey program, begun in 2003, solicited from stock analysts at dozens of prominent brokerage firms worldwide information about the management, competitive position, earnings and views of the companies they covered, according to the agreement.
SAE could use information from its surveys of brokerage analysts to get ahead of future analyst reports on companies, according to the attorney general.
Although BlackRock said it used only publicly available information in its surveys, the attorney general said the timing of the surveys and questions included gave it access to nonpublic analyst sentiment.
Schneiderman's investigation concluded that brokerage firms responded to SAE's requests while they might have been reluctant to assist retail or other small investors.
One employee said the "obvious and unsaid incentive for most brokers is that BGI is a huge chunk of your paycheck and the analysts better fill out their surveys for such a large client," according to the settlement.
SAE rewarded participating analysts with higher ratings in financial industry magazine rankings important for name recognition and career advancement, and as a symbol of achievement, all of which could "lead to monetary gain both for those analysts and their respective brokerage firms," according to the agreement. The filing doesn't name any of the analysts or brokerages.Copyright © 2014, Los Angeles Times