
[Federal Register: January 11, 2010 (Volume 75, Number 6)]
[Notices]               
[Page 1421-1425]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja10-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-2971/803-200]

 
BlackRock, Inc.; Notice of Application

January 4, 2010.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an exemptive order under Section 206A 
of the Investment Advisers Act of 1940 (the ``Advisers Act'').

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Applicant: BlackRock, Inc. (``Applicant'' or ``BlackRock'').

Relevant Advisers Act Sections: Exemption requested under section 206A 
of the Advisers Act from subsections (a)(2)(iii)(A)(3) and 
(a)(2)(iii)(B) of Advisers Act rule 206(4)-3.

Summary of Application: Applicant requests that the Commission issue an 
order under section 206A of the Advisers Act exempting it and its 
investment advisory subsidiaries from Advisers Act rule 206(4)-
3(a)(2)(iii)(A)(3), which requires any cash solicitor for an investment 
adviser to provide a prospective client with a separate solicitor's 
disclosure document at the time of the solicitation, and from Advisers 
Act rule 206(4)-3(a)(2)(iii)(B), which requires an investment adviser 
to receive a prospective client's written acknowledgement of receipt of 
the separate solicitor's document prior to entering into any advisory 
contract with that client.

Filing Dates: The application was filed on April 27, 2009, and an 
amended and restated application was filed on October 30, 2009.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving Applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the SEC by 5:30 p.m. on 
February 10, 2010 and should be accompanied by proof of service on 
Applicant, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
may request notification of a hearing by writing to the Commission's 
Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090. Applicant, BlackRock, Inc., c/o Howard 
B. Surloff, 40 East 52nd Street, New York, New York 10022.

FOR FURTHER INFORMATION CONTACT: Sarah G. ten Siethoff, Senior Counsel, 
or Daniel S. Kahl, Branch Chief, at (202) 551-6787 (Office of 
Investment Adviser Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 100 F Street, NE., Washington, DC 20549-
0102 (telephone (202) 551-5850)).

Applicant's Representations

    1. Applicant is a publicly traded holding company conducting 
investment management and ancillary businesses primarily through a 
variety of directly or indirectly wholly owned registered investment 
advisory

[[Page 1422]]

subsidiaries (the ``BlackRock Advisory Subsidiaries''). A substantial 
portion of the BlackRock Advisory Subsidiaries' business involves 
advising high net worth clients through a ``wrap fee'' program 
(``Private Investors'') and advising institutional clients generally 
through traditional separate account arrangements (``Institutional 
Separate Accounts'' or ``ISA''). Broker-dealer subsidiaries controlled 
by Merrill Lynch & Co., Inc. (``Merrill Lynch'') solicit clients for 
the Private Investors and ISA businesses.
    2. On September 29, 2006, BlackRock acquired substantially all of 
Merrill Lynch's global investment management business (the ``MLIM 
Business'') from Merrill Lynch in exchange for issuing a substantial 
equity interest in itself to Merrill Lynch (the ``Transaction''). That 
equity interest, as of January 1, 2009, represented a 48.2% economic 
interest in BlackRock and a 44.2% voting interest in BlackRock. A 
substantial portion of BlackRock's current Private Investors and ISA 
businesses, including the investment advisory clients serviced by these 
businesses, were acquired in the Transaction and formerly were 
important parts of the MLIM Business.
    3. On December 26, 2008, BlackRock and Merrill Lynch entered into 
an Exchange Agreement pursuant to which Merrill Lynch and BlackRock 
agreed to exchange (i) 49,865,000 shares of BlackRock common stock held 
by Merrill Lynch for a like number of shares of BlackRock's Series B 
non-voting convertible participating preferred stock, and (ii) 
12,604,918 shares of BlackRock's Series A non-voting convertible 
participating preferred stock held by Merrill Lynch for a like number 
of shares of Series B Preferred Stock (the ``Exchange''), in effect 
reducing Merrill Lynch's voting interest in BlackRock to 4.6%, while 
its economic interest remains largely unchanged at 46.3% on a fully 
diluted basis.
    4. Prior to the Transaction, broker-dealer subsidiaries controlled 
by Merrill Lynch (``ML Broker-Dealers''), through their registered 
representatives, solicited clients for the investment adviser 
subsidiaries controlled by Merrill Lynch that conducted the Private 
Investors and ISA portions of the MLIM Business, in exchange for a cash 
fee and in reliance on subsection (a)(2)(ii) of rule 206(4)-3 under the 
Advisers Act (the ``Control-Affiliate Solicitor Provision''). The 
Control-Affiliate Solicitor Provision allows ``partner[s], officer[s], 
director[s] or employee[s] of a person which controls, is controlled 
by, or is under common control with [an] investment adviser'' to 
solicit clients for the investment adviser in exchange for a cash fee 
so long as the solicitor discloses the identity of his employer and the 
nature of the affiliation between his employer and the recommended 
adviser at the time of the solicitation or referral. The Control-
Affiliate Solicitor Provision does not require solicitors and advisers 
to follow any other particularized requirements in making these 
required disclosures. The ML Broker-Dealers never used the independent 
solicitor disclosure procedures contained in subsection (a)(2)(iii) of 
rule 206(4)-3 under the Advisers Act (the ``Independent Solicitor 
Provision''), which contains several specific requirements that an 
independent solicitor must follow, when referring clients to the MLIM 
Business because Merrill Lynch controlled both the MLIM Business and 
the ML Broker-Dealers.
    5. Notwithstanding Merrill Lynch's significant economic stake in 
BlackRock, due to the particular and unique facts and circumstances of 
the BlackRock-Merrill Lynch relationship, BlackRock has concluded that 
Merrill Lynch does not ``control'' it for purposes of the Advisers Act. 
In addition to the absence of voting power indicative of control, 
BlackRock and Merrill Lynch have entered into a stockholder agreement 
in connection with the Transaction (the ``Stockholder Agreement'') that 
contractually denies Merrill Lynch the right to decide how to vote its 
BlackRock shares on any matter other than a very limited number of 
extraordinary proposals (primarily related to issues impacting Merrill 
Lynch's ownership interest in BlackRock), prohibits Merrill Lynch from 
otherwise attempting to influence or control BlackRock, and imposes a 
number of other limitations governing the BlackRock voting securities 
Merrill Lynch beneficially owns. The Stockholder Agreement's 
limitations on Merrill Lynch's rights as a holder of BlackRock voting 
securities, and as an investor in BlackRock generally, deny Merrill 
Lynch the power and ability to control BlackRock ordinarily associated 
with the ownership of such a large economic stake in a company.\1\
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    \1\ BlackRock has not asked the Commission to confirm, and the 
Commission is not confirming, BlackRock's conclusion that Merrill 
Lynch does not control it within the meaning of the Advisers Act.
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    6. BlackRock represents that the Stockholder Agreement, as well as 
several other agreements entered into in connection with the 
Transaction, serve to create a long-standing close affiliation between 
BlackRock and Merrill Lynch for the purpose of achieving their mutual 
business and economic objectives, even though they do not result in 
Merrill Lynch ``controlling'' BlackRock within the meaning of the 
Advisers Act. The Stockholder Agreement, as well as these other 
agreements, are publicly available in BlackRock's filings with the 
Commission.
    7. The nature of the close, ongoing relationship between BlackRock 
and Merrill Lynch is publicly disclosed, discussed and summarized on 
BlackRock's internet website, BlackRock's Form ADV Part II, in 
BlackRock's client documentation, in BlackRock's periodic filings under 
the Securities Exchange Act of 1934, as amended (the ``Exchange Act''), 
and in other generally available public information. BlackRock 
represents that this comprehensive disclosure serves to ensure that the 
exact nature and extent of the close affiliation between BlackRock and 
Merrill Lynch is readily apparent to the public and the market at 
large.
    8. BlackRock represents that BlackRock and the BlackRock Advisory 
Subsidiaries will abide by the following solicitation procedures:
    a. The referral agreement between BlackRock and Merrill Lynch (the 
``BLK-MER Referral Agreement'') requires that ML Broker-Dealers 
disclose to potential clients the relationship between Merrill Lynch 
and BlackRock at the time of a referral to a BlackRock Advisory 
Subsidiary. ML Broker-Dealers will provide prominent written disclosure 
to potential clients regarding the relationship between Merrill Lynch 
and BlackRock at or prior to the time of a referral to a BlackRock 
Advisory Subsidiary. This prominent written disclosure will also 
address Merrill Lynch's resulting conflict of interest in recommending 
BlackRock.
    b. When a ML Broker-Dealer solicits any prospective client for a 
BlackRock Advisory Subsidiary, the prospective client will receive the 
BlackRock Advisory Subsidiary's written disclosure statement required 
by Rule 204-3 promulgated under the Advisers Act (the ``ADV Part II 
Disclosure Document''). The BlackRock Advisory Subsidiary's ADV Part II 
Disclosure Document will be delivered by the BlackRock Advisory 
Subsidiary (and not by the solicitor) not later than the time that a 
fully executed investment advisory contract is provided to the client, 
although not necessarily at the time of the solicitation itself. The 
BlackRock Advisory Subsidiary's ADV Part II Disclosure Document will 
contain detailed disclosures about the nature of the affiliation 
between Merrill Lynch and BlackRock and specifically

[[Page 1423]]

draw potential clients' attention to the inherent bias a ML Broker-
Dealer has to recommend a BlackRock Advisory Subsidiary. BlackRock will 
ensure that these additional disclosures conform, in all material 
respects, to the disclosures required by the Independent Solicitor 
Provision.
    c. If a BlackRock Advisory Subsidiary accepts a client referred by 
a ML Broker-Dealer, the prospective client will enter into a written 
investment management agreement with the BlackRock Advisory Subsidiary. 
Clients referred through the Private Investors channel will be provided 
with and will generally execute a form investment management agreement 
that will contain further disclosures about the nature of the 
relationship between Merrill Lynch and BlackRock in addition to those 
that will be provided in the BlackRock Advisory Subsidiary's ADV Part 
II Disclosure Document and at the time of the referral. Clients 
referred through the ISA channel will often be provided with a form 
investment management agreement with similar disclosures, but many 
prefer to use their own form investment management agreement and 
consequently these disclosures may not appear in the investment 
management agreement. BlackRock Advisory Subsidiaries will not 
separately charge any client any explicit amount, in addition to the 
advisory fee, for the cost of obtaining that client's account, and no 
differential with respect to the amount or level of advisory fees 
charged by a BlackRock Advisory Subsidiary will be attributable to the 
solicitation arrangements with ML Broker-Dealers described in the 
Application.
    d. BlackRock Advisory Subsidiaries and ML Broker-Dealers will 
engage in this solicitation arrangement pursuant to the BLK-MER 
Referral Agreement. BlackRock represents that the BLK-MER Referral 
Agreement complies with subsections (A)(1) and (A)(2) of the 
Independent Solicitor Provision.

Applicant's Legal Analysis

    1. Section 206A of the Advisers Act grants the Commission the 
authority to ``conditionally or unconditionally exempt any person or 
transaction * * * from any provision or provisions of [the Advisers 
Act] or of any rule or regulation thereunder, if and to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of [the Advisers Act].''
    2. Section 206 of the Advisers Act is a general anti-fraud 
provision applicable to investment advisers. Rule 206(4)-3 (``the Cash 
Solicitation Rule'') was adopted under section 206(4) of the Advisers 
Act because the Commission determined that the nature of the conflict 
of interest mandated disclosure to clients of cash compensation 
arrangements between solicitors and recommended investment advisers, 
which alerts clients to the personal incentive the solicitor has to 
recommend one particular adviser over another.
    3. The Control-Affiliate Solicitor Provision (subsection (a)(2)(ii) 
of the Cash Solicitation Rule) applies to anyone who is ``(A) a 
partner, officer, director or employee of [the] investment adviser, or 
(B) a partner, officer, director or employee of a person which 
controls, is controlled by, or is under common control with [the] 
investment adviser.'' All investment advisers and solicitors must meet 
certain threshold requirements to rely on the Cash Solicitation Rule 
regardless of any affiliation between the investment adviser and the 
solicitor. However, where the Control-Affiliate Solicitor Provision 
applies, the Cash Solicitation Rule requires only that either (1) the 
solicitor's status as a partner, officer, director or employee of the 
adviser be disclosed to the prospective client; or (2) the solicitor's 
status as a partner, officer, director or employee of a company 
affiliated with the adviser, along with the nature of the affiliation 
between the solicitor's employer and the investment adviser, be 
disclosed to the prospective client at the time of the solicitation or 
referral.
    4. The Independent Solicitor Provision (subsection (a)(2)(iii) of 
the Cash Solicitation Rule) contains several specific requirements: (A) 
The written solicitation agreement between the adviser and solicitor 
must contain specific terms; (B) the solicitor must deliver to the 
prospective client, at the time of solicitation, the adviser's ADV Part 
II Disclosure Document and a separate written disclosure document 
described in subsection (b) of the Cash Solicitation Rule (the 
``Independent Solicitor Disclosure Document'' and the required delivery 
of both the adviser's ADV Part II Disclosure Document and the 
Independent Solicitor Disclosure Document being the ``Part II and 
Independent Solicitor Disclosure Document Delivery Requirement''); (C) 
the adviser must receive a signed and dated acknowledgement of the 
client's receipt of the ADV Part II Disclosure Document and the 
Independent Solicitor Disclosure Document prior to, or at the time of, 
entering into any written or oral investment advisory contract (the 
``Signed Acknowledgement Requirement''); and (D) the adviser must make 
a bona fide effort to ascertain whether the solicitor has complied with 
the terms of the written solicitation agreement and must have a 
reasonable basis for believing that the solicitor has so complied.
    5. The Independent Solicitor Disclosure Document must contain the 
following information: (i) The names of the solicitor and investment 
adviser; (ii) the nature of the relationship, including any 
affiliation, between the solicitor and the investment adviser; (iii) a 
statement that the solicitor will be compensated for his solicitation 
services by the investment adviser; (iv) the terms of such compensation 
arrangement, including a description of the compensation paid or to be 
paid to the solicitor; and (v) the amount, if any, for the cost of 
obtaining his account the client will be charged in addition to the 
advisory fee, and the differential, if any, among clients with respect 
to the amount or level of advisory fees charged by the investment 
adviser if such differential is attributable to the existence of any 
arrangement pursuant to which the investment adviser has agreed to 
compensate the solicitor for soliciting clients for, or referring 
clients to, the investment adviser.
    6. BlackRock asserts that, as articulated in the adopting release 
for the Cash Solicitation Rule, the key policy rationale underlying the 
limited disclosure regime of the Control-Affiliate Solicitor Provision 
is that ``[a]s long as a client is aware that the recommended adviser 
is the solicitor's employer or a close affiliate of the solicitor's 
employer, there appears to be little need to require the imposition of 
additional disclosure and recordkeeping requirements.'' BlackRock 
further asserts that the Control-Affiliate Solicitor Provision reflects 
the argument advanced by commenters considering the Cash Solicitation 
Rule that ``there is little basis for assuming that potential clients 
will be any less aware of the inherent bias when an employee recommends 
an adviser who is a person associated with his employer than when he 
recommends the advisory services of his own employer.'' Thus, BlackRock 
submits, one rationale for expanding the scope of the Control-Affiliate 
Solicitor Provision to include persons part of an organization that is 
closely affiliated with the recommended adviser is that it should be 
readily apparent to the public that the close affiliation between the 
solicitor and adviser creates an inherent bias to recommend the 
affiliated adviser.
    7. Pursuant to the Exchange, Merrill Lynch beneficially owns 
approximately

[[Page 1424]]

a 46.3% economic interest in BlackRock on a fully diluted basis; 
however, its ownership of BlackRock's outstanding voting securities is 
reduced to approximately 4.9%. Although BlackRock asserts that this 
relationship is not a ``control'' relationship as defined under the 
Advisers Act, the disclosure of Merrill Lynch's ownership of such a 
large block of BlackRock's capital stock, combined with the economic 
stake represented thereby, is sufficient to provide the same alert to 
the investing public and potential clients as to a ML Broker-Dealer's 
``inherent bias'' in recommending a BlackRock Advisory Subsidiary and 
is, in effect, a ``close affiliation'' for the purposes of satisfying 
the concerns underlying the Cash Solicitation Rule and the rationale 
for the less onerous disclosure elements of the Control-Affiliate 
Solicitor Provision.
    8. The unique affiliation relationship between BlackRock and 
Merrill Lynch is consistently discussed, summarized and disclosed on 
BlackRock's Internet Web site, BlackRock's Form ADV Part II, in 
BlackRock's client documentation, in BlackRock's filings under the 
Exchange Act, in registration statements for BlackRock's funds 
registered under the Investment Company Act of 1940 and in other 
generally available public information. BlackRock submits that these 
multiple avenues of disclosure serve to ensure that the exact nature 
and extent of the close affiliation between BlackRock and Merrill Lynch 
is readily apparent to the public and market at large. In addition, ML 
Broker-Dealers would provide prominent written disclosure to potential 
clients regarding the relationship between Merrill Lynch and BlackRock 
at or prior to the time of a referral to a BlackRock Advisory 
Subsidiary. This prominent written disclosure would also address 
Merrill Lynch's resulting conflict of interest in recommending 
BlackRock.
    9. BlackRock seeks only exemptions from subsections 
(a)(2)(iii)(A)(3) and (a)(2)(iii)(B) of the Cash Solicitation Rule--the 
Part II and Independent Solicitor Disclosure Document Delivery 
Requirement and the Signed Acknowledgement Requirement. BlackRock 
submits that the BLK-MER Referral Agreement contains terms that satisfy 
subsections (a)(2)(iii)(A)(1)-(2) of the Cash Solicitation Rule. 
BlackRock proposes to adhere to subsection (a)(2)(iii)(C) of the Cash 
Solicitation Rule, which requires that the recommended investment 
adviser make a bona fide effort to ascertain whether the solicitor has 
complied with the referral agreement, and have a reasonable basis for 
so believing. BlackRock has represented that BlackRock Advisory 
Subsidiaries' ADV Part II Disclosure Documents would contain, in all 
material respects, the disclosures required by the Independent 
Solicitor Disclosure Document. Subsection (b)(5) of the Cash 
Solicitation Rule requires that the Independent Solicitor Disclosure 
Document disclose the terms of the compensation arrangement between the 
solicitor and the recommended adviser. BlackRock Advisory Subsidiaries' 
ADV Part II Disclosure Documents would disclose in general terms the 
fact that ML Broker-Dealers are compensated by the BlackRock Advisory 
Subsidiaries for their solicitation activities, but the details 
regarding the amount of compensation and the methods by which such 
amounts are determined would not be disclosed. BlackRock argues that 
this information would not be informative in this context because 
particularized disclosure as to the solicitation fee paid to ML Broker-
Dealers would not help draw a potential client's focus to the 
significant economic benefit that ML Broker-Dealers derive due to 
Merrill Lynch's approximately 46.3% economic interest in BlackRock.
    10. BlackRock submits that the purpose of the detailed requirements 
of the Independent Solicitor Provision is to ensure that the fact of a 
solicitor's bias in favor of a recommended adviser is presented in a 
clear and unmistakable manner that ensures that potential clients 
become aware of this bias. BlackRock argues that the inherent bias on a 
ML Broker-Dealer's part to recommend a BlackRock Advisory Subsidiary is 
clearly disclosed and unmistakable as a result of the close affiliation 
between Merrill Lynch (the solicitor's parent entity) and BlackRock 
(the recommended adviser's parent entity) such that, within the policy 
framework of the Cash Solicitation Rule, these additional disclosures 
need not be expressly made in a separate Independent Solicitor 
Disclosure Document.
    11. BlackRock asserts that the Commission granting the order 
requested by its application would be appropriate in the public 
interest because (i) it would preserve for current and future Merrill 
Lynch brokerage clients the significant investment experience and 
resources of BlackRock currently available to such clients, while at 
the same time ensuring that such clients will continue to receive the 
protections intended by the Cash Solicitation Rule, (ii) requiring 
strict compliance with the Independent Solicitor Provision would create 
risks that client investment options might be reduced as a result of ML 
Broker-Dealers being discouraged from recommending BlackRock Advisory 
Subsidiaries, (iii) clients might find a change in procedure and 
documentation confusing and burdensome, and (iv) additional costs 
associated with such strict compliance might ultimately result in 
greater expenses for clients.

Applicant's Conditions

    1. The Applicant will rely on the Order only for so long as the 
Cash Solicitation Rule in effect as of the date of the Order is 
operative. If the Commission, subsequent to the date of the Order, 
adopts a new rule governing the payment of cash fees by registered 
investment advisers to persons soliciting clients on their behalf (a 
``New Cash Solicitation Rule''), the Applicant agrees to rely on the 
Order only until the compliance date for such New Cash Solicitation 
Rule.
    2. The Applicant will rely on the Order only for so long as Merrill 
Lynch beneficially owns 25% or more of the Applicant's outstanding 
capital stock. If Merrill Lynch ever ceases to beneficially own at 
least 25% of the Applicant's outstanding capital stock, the Applicant 
represents that it will not rely on the relief granted by the Order.
    3. The Applicant will require that the BlackRock Advisory 
Subsidiaries and the ML Broker-Dealers provide clear disclosure of the 
Applicant's relationship with Merrill Lynch to potential clients 
referred to BlackRock Advisory Subsidiaries by ML Broker-Dealers in 
exchange for a cash fee. This disclosure will be provided by ML Broker-
Dealers' disclosure to potential clients of the relationship between 
Merrill Lynch and BlackRock at the time of a referral to a BlackRock 
Advisory Subsidiary pursuant to the BLK-MER Referral Agreement, and via 
delivery of (i) a BlackRock Advisory Subsidiary's ADV Part II 
Disclosure Document; and (ii) a form investment management agreement 
provided to each client referred to a BlackRock Advisory Subsidiary 
through the Private Investors channel and often provided to clients 
referred through the ISA channel. The Applicant will require that all 
such disclosures be substantially similar to the disclosures described 
in the Application and be provided pursuant to procedures substantially 
similar to those described in the Application. Additionally, the ML 
Broker-Dealers will provide prominent written disclosure to potential 
clients regarding the relationship between Merrill Lynch and BlackRock 
at or prior to the time of a referral to a BlackRock Advisory 
Subsidiary. This prominent written

[[Page 1425]]

disclosure will also address Merrill Lynch's resulting conflict of 
interest in recommending BlackRock.
    4. The Applicant will require the BlackRock Advisory Subsidiaries 
to comply with subsection (a)(2)(iii)(C) of the Cash Solicitation Rule. 
Further, the Applicant represents that it will require the BlackRock 
Advisory Subsidiaries to continue to comply with subsection (A)(2) of 
the Independent Solicitor Provision. To comply with subsection 
(a)(2)(iii)(C) of the Cash Solicitation Rule, the Applicant agrees to 
require the BlackRock Advisory Subsidiaries to make a bona fide effort 
to ascertain whether ML Broker-Dealers have complied with the terms of 
the BLK-MER Referral Agreement, any amendment thereof, or any 
subsequently executed referral agreement with ML Broker-Dealers, and 
have a reasonable basis for believing that ML Broker-Dealers have so 
complied.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-196 Filed 1-8-10; 8:45 am]
BILLING CODE 8011-11-P

