BlackRock Inc.’s Barbara Novick was contemplating retirement a year ago when Chief Executive Officer Laurence D. Fink asked her if she would jumpstart lobbying efforts in Washington.
The acquisition of Barclays Global Investors on Dec. 1 had made BlackRock the world’s biggest asset-management firm. With $3.4 trillion client assets held in investment vehicles ranging from money-market funds to hedge funds, Fink realized he couldn’t rely on industry groups or outside lobbyists as lawmakers discussed the biggest regulatory overhaul since the 1930s. Novick, one of the firm’s eight founders, accepted.
“In the past for capital-markets issues, we used to defer to Wall Street,” Novick, 49, said in an interview from her office in New York. “But today, investors need to be included in the discussion.”
Her efforts, only the second time that BlackRock lobbied in Washington, paid off when House and Senate negotiators on June 25 rewrote financial-market rules that would have hurt hedge funds and restricted the use by pension plans of stable-value funds, which BlackRock offers. Rivals including Legg Mason Inc. have hired lobbyists over the past year as regulators seek to tighten rules on everything from the use of derivatives to mortgage-backed securities.
“Players like BlackRock have an enormous impact on the economy and the financial markets,” said Burton Greenwald, an independent fund consultant near Philadelphia. “The recent history of financial disasters has created an environment of regulation, and asset managers are very wary of collateral damage.”
Fidelity Spends Most
Asset-management firms whose main business consists of selling mutual funds do most of their lobbying through the Investment Company Institute, the Washington-based trade group that represents mutual-fund companies. The ICI is involved in issues concerning money-market funds, 401(k) and retirement savings and tax issues, Ianthe Zabel, a spokeswoman for the group, said in an e-mail. Hedge funds and private-equity funds typically go through the Managed Funds Association.
Outside of the ICI, Fidelity Investments and Vanguard Group Inc., the two largest U.S. mutual fund firms, spent the most money among peers on lobbying last year, data from Opensecrets.org show. Fidelity spent $2.9 million and Vanguard $1.2 million, compared with $390,000 for BlackRock and $580,000 for Legg Mason, according to the website, which tracks campaign spending.
“There’s a lot of trade associations and each one covers a slice, but none of them cover what I’d call investor issues on a broad basis,” Novick said.
BlackRock, started in 1988 in a one-room office in Manhattan, has lobbied once before, Novick said, in the aftermath of the mutual-fund market timing scandals disclosed in 2003 by Eliot Spitzer, who at that time was New York attorney general. Spitzer targeted firms that permitted hedge funds and brokers to make improper rapid trades in their mutual funds. After this scandal, regulators briefly discussed whether the same manager should be able to sell mutual funds and hedge funds. BlackRock hired a lobbyist to successfully argue that they should.
More recently, the firm has fostered its Washington ties by helping the government value illiquid securities during the financial crisis. BlackRock was picked to evaluate portfolios formerly owned by Bear Stearns Cos. and American International Group Inc. Last year, it became one of eight asset managers to buy toxic assets from banks under the U.S. government’s Public-Private Investment Program.
As head of BlackRock’s government relations and public policy, Novick spends a couple of days a month in Washington, preferring to take a high-speed train to the capital rather than flying. While she doesn’t have a background in politics, Novick has experience working with investors on virtually every type of fund that BlackRock sells to clients.
Novick started at BlackRock overseeing services for retail clients and the firm’s closed-end fund investors, responsible for business development, marketing and other services. She helped build the firm’s base of institutional investors in the early 1990s. As BlackRock’s business grew, she became head of the unit that later came to be called the global client group.
“Barbara built a magnificent client-service business here at BlackRock,” Fink said in an interview. “After 20 years with BlackRock, when she said she wanted to retire, I said ‘I’m not going to let you’.”
A Dozen Issues
Rather than hire a lobbyist entrenched in Washington, Fink said he wanted Novick to lead the effort because she understood issues that affected BlackRock’s investors.
“I did not want a lobbyist who had little understanding of the asset management business,” Fink says.
Novick ticks off at least a dozen issues in the proposed financial regulation that will have an impact on investors in BlackRock’s funds, and an additional seven that will affect financial advisers. Among the items on BlackRock’s list is a proposal that would have restricted the use of swaps at pension plans and the so-called Volcker rule that sought to ban proprietary trading at U.S. banks.
Both proposals were rewritten by Senate negotiators in the final version of the bill that will be presented to the president. Under the proposal to restrict banks from proprietary trading, nicknamed after former Federal Reserve Chairman Paul Volcker, lenders will now be allowed to invest in private-equity and hedge funds, although they will be limited to providing no more than 3 percent of the fund’s capital.
BlackRock won’t be directly affected by the rule, which applies only to banks. Still, it could have had an impact on prices of hedge fund and private-equity securities, Novick says. BlackRock manages more than $100 billion in alternative investments including hedge funds.
The bill also no longer includes language imposing a fiduciary duty on dealers that enter into swap contracts with public entities like municipalities and public pensions. The measure would have made it impossible for BlackRock and others to offer stable value funds, which are similar to money-market funds and use swaps to ensure liquidity, in retirement accounts.
“There’s still some uncertainty, but overall, we think it’s pretty reasonable,” Novick said about the revised bill.
Other asset managers have hired executives over the past year to deal with the government. Baltimore-based money manager Legg Mason last July hired Kevin Fromer, the former Treasury Assistant Secretary, as a senior adviser.
‘We Ran Really Fast’
As the financial regulation bill makes its way to the president’s desk, Novick has set her sights on new issues. She is concerned about the government’s Home Affordable Modification Program, or HAMP, which breaks with contract law in benefiting second loan holders, which in most cases are banks.
Fink co-founded BlackRock mainly as a fixed-income investor. Novick, who had worked with Fink at New York-based First Boston Corp., came on board to head its account-management group. Other First Boston executives that joined Fink in starting BlackRock were Robert Kapito, now the president of BlackRock, Chief Risk Officer Bennett Golub and Charles Hallac, the head of the firm’s advisory unit.
In 2006, BlackRock expanded its equity business with the purchase of Merrill Lynch & Co.’s money-management unit. In 2008, BlackRock acquired a division of Quellos Group LLC to add hedge-fund assets. Last year, the firm made its biggest acquisition so far with the purchase of Barclays Global Investors, the biggest seller of index-tracking ETFs.
BlackRock now has about 12 percent of its assets in retail mutual funds, about 15 percent in ETFs and the remainder in institutional funds.
Novick said she was thinking of leaving last year without any specific plans, except that she would slow down.
“We ran really fast for 20 years, and I thought I would regroup and explore other ideas,” says Novick. “I ended up staying.”