BlackRock Agrees With N.Y. to End Analyst Survey Program

BlackRock Inc., the world’s biggest money manager, agreed to end an analyst survey program that New York Attorney General Eric Schneiderman said could be used to execute trades based in part on nonpublic information.

BlackRock agreed to discontinue use of the 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 yesterday with Schneiderman.

The program relied on the willingness of analysts to provide advance information. According to statements cited in the accord, they had an incentive to do so for a large client that made up a “huge chunk” of their pay.

Data sought included analyst views on the likelihood of a surprise to their forecasted earnings estimate and the possibility a company they cover would be acquired in a merger, according to the pact. New York said analysts gave earnings predictions they had yet to make public, and that between 2009 and 2013, the survey collected about 60,000 responses indicating an earnings surprise direction other than neutral.

“This is a growing area of concern because it includes increasingly common practices,” Schneiderman said today at a press conference in Manhattan. It provides “an unfair advantage over the rest of us and creates a two-tiered system that is bad for our markets, it’s bad for our economy.”

Pay $400,000

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. It has agreed to cooperate with the attorney general’s ongoing investigation related to the subject matter of the settlement.

“BlackRock is committed to operating with the highest ethical standards,” Brian Beades, a BlackRock spokesman, said in an e-mailed statement. “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.”

Schneiderman said his continuing probe includes brokerage firms that chose to answer surveys at the expense of other clients. His office interviewed people at firms other than New York-based BlackRock as part of the inquiry, but he declined to identify them, citing the investigation. He said he would be investigating recipients of information as well as providers.

“Analysts and their firms are prohibited from providing to select clients early disclosure of research reports, and are supposed to disseminate reports to clients simultaneously,” the attorney general said. “A firm with access to analyst sentiments before those views are disclosed in published reports can front-run the market.”

Brokerage Firms

Schneiderman said brokerage firms sometimes encouraged “their analysts to participate,” and other times “it was more the analysts’ determination.”

“So we’re looking at the whole picture,” he said.

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, with $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’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.

The Unit

The Scientific Active Equity unit has more than $80 billion in assets globally and offerings include separately managed accounts, hedge funds and mutual funds. Its head and chief investment officer is Ken Kroner, who was an associate professor of economics and finance at the University of Arizona before joining BGI in 1994.

Some of the unit’s active funds underperformed peers in the aftermath of the financial crisis. The unit has seen improved performance over the past several years after making changes such as adding portfolio members and analysts, which were referenced by BlackRock Chief Executive Officer Laurence D. Fink during a conference call in July 2012 and a presentation in May. About 87 percent of the scientific equity unit’s funds outperformed their benchmarks in the five years ending Sept. 30, up from 47 percent two years earlier, according to the firm’s earnings releases.

Quantitative Models

The scientific active equity division relies on quantitative models to make investments. It focuses on consistent and reliable absolute returns through a diversified blend of investment insights that are implemented in a systemic way, according to a marketing document from April. Its hedge funds include European Diversified Equity Absolute Return, 32 Capital Ltd, Global Alpha Opportunities, Emerging Markets Alpha and Pan Asia Opportunities, the document stated.

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 is 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.”

Internal Document

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.

While BlackRock said it only used publicly available information in its surveys, the attorney general said the timing of the surveys and questions included could give 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. New York is investigating such allegations of a quid pro quo.

“There appears to be the possibility of a benefit and we’re looking into exactly how that worked in different institutions,” Schneiderman said today.

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.

Money Managers

In September, the Treasury Department’s Office of Financial Research said money managers could endanger the financial system when reaching for higher returns, herding into popular asset classes or amplifying price movements with leverage.

The Financial Stability Oversight Council, authorized under the Dodd-Frank financial regulatory law to identify companies that could pose a threat to stability, discussed and agreed to review BlackRock and Fidelity Investments, two people with knowledge of the matter said in November.

BlackRock has said the study didn’t link the size of a money manager to risks posed by certain products and practices.

Schneiderman said at the Bloomberg Markets 50 Summit in New York in September that his office was looking into combating the advantages won by securing early access to market-moving data. Calling the issue “Insider Trading 2.0,” Schneiderman said the combination of high-speed trading and early data access unfairly sets up a small group of investors to reap enormous profits.

Michigan Survey

Last year, financial information provider Thomson Reuters Corp. reached a deal with Schneiderman’s office in which it agreed to stop providing consumer survey data from the University of Michigan to certain high-frequency traders two seconds before other investors. Thomson Reuters competes with Bloomberg LP, the parent of Bloomberg News.

BlackRock, co-founded by Fink in 1988, was largely a fixed-income manager until the mid-2000s. The firm diversified beyond bonds through acquisitions including that of State Street Research & Management Co. and Merrill Lynch & Co.’s investment unit to add stocks and other assets.

Its purchase of Barclays Plc’s investment division made it into the world’s largest asset manager. Today, Schneiderman said BlackRock expanded the surveys after it purchased BGI.

“Often BlackRock would conduct their surveys of analysts long after the publication of a report and just prior to the expected publication of the next report,‘‘ Schneiderman said. ‘‘This was very important particularly during earnings reports season. This led to a greater chance of disclosure of nonpublic analyst sentiment as many analysts were responding to surveys while preparing their next reports.’’

At his press conference today, the attorney general thanked unidentified whistle-blowers who came forward.

‘‘We welcome and have benefited from people involved in the financial services sector who have come forward,’’ Schneiderman said. ‘‘We encourage others to do so.’’

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