Business Day

BlackRock Agrees to Stop Pursuing Nonpublic Views

By GRETCHEN MORGENSON  JAN. 8, 2014

BlackRock, the world’s largest asset management company, has agreed to end its practice of surveying Wall Street analysts to glean clues about their views on companies before those opinions are publicly issued.

The decision was reached late Wednesday as part of a settlement with Eric T. Schneiderman, the New York attorney general. The settlement document filed in the case contended that BlackRock’s surveys “allowed it to obtain information from analysts that could reveal forthcoming revisions to their published views” on companies they followed. The firm will also pay $400,000 to cover costs of the investigation.

“BlackRock deserves credit for recognizing the need for reform when it comes to the dissemination of information that can move markets,” Mr. Schneiderman said in a statement. “Its decision to end its global analyst survey program and cooperate with my office’s investigation into the early release of Wall Street analyst sentiment is a major step forward in restoring fairness in our financial markets and ensuring a level playing field for all investors.”

Analysts’ changing assessments on the public companies they follow can make a stock plummet or soar, so receiving such information ahead of other investors can be highly profitable for traders.

As a result, regulatory rules require brokerage firms to limit the information flow from research departments to prevent the potential for trading ahead of analyst reports.

A spokesman for BlackRock, James Badenhausen, said: “We are pleased to resolve this matter and put it behind the company, paying the attorney general’s costs of the investigation amounting to $400,000 but no fine or penalty. BlackRock is committed to operating with the highest ethical standards. 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 language cited by the attorney general from several internal memos is totally inconsistent with the standards by which BlackRock does business.”

In settling with the attorney general, BlackRock neither admitted nor denied the allegations.

Black Rock, with $4.1 trillion of assets under management, has used analyst surveys for almost five years. The surveys were the subject of an article in The New York Times in July 2012.

According to internal documents obtained by The Times and cited in the article, survey questions included whether a company’s near-term profits “are more likely to surprise on the upside or downside,” and “how likely is it that the company will be taken over in the next six months?” Analysts answering this question were asked to exclude transactions that had already been announced.

Brokerage firms agreed to let their analysts participate in the surveys, the attorney general’s investigation indicated, in part because BlackRock is one of their largest clients and generates enormous trading commissions for them each year.

The attorney general’s investigation also concluded that BlackRock rewarded analysts who participated in the surveys by assigning them higher ratings in industry rankings, which enhanced the analysts’ careers, prominence and potentially their paychecks.

The attorney general’s investigation into the analyst surveys is continuing, the settlement document said, with BlackRock’s help. The inquiry will examine other money management firms that employ such surveys as well as the brokerage firms whose analysts participate in them.

From March 2009 to January 2013, the attorney general’s document showed, BlackRock collected 60,000 analyst answers indicating a corporate earnings surprise, either up or down. And for the year ending March 2010, BlackRock collected almost 8,000 answers regarding potential acquisitions, the attorney general’s investigation found.

Information gleaned from these and other questions was fed into trading algorithms designed by BlackRock’s Scientific Active Equities unit, a quantitative investment group acquired when it bought Barclays Global Investors in 2009.

The attorney general has been critical of institutions that dispense market-moving information unevenly among investors, and he began investigating BlackRock’s survey program after The Times article was published.

Another investigation led Mr. Schneiderman to Thomson Reuters, a news organization that had been providing market-moving information to some clients ahead of others. Last July, Thomson Reuters agreed to stop giving high-frequency traders who paid for the privilege an early look at consumer confidence reports.

Throughout the investigation, Mr. Schneiderman’s complaint noted, the firm contended that its surveys were designed to tap only into information that had been previously disseminated by the Wall Street analysts.

But both Mr. Schneiderman’s settlement document and The Times article cited internal correspondence indicating that firm officials hoped the analyst surveys would provide “advance information.”

An internal BlackRock document cited by the attorney general showed, for example, how the firm planned to secure the freshest information from analyst participants. BlackRock would distribute some surveys just before periods when companies would be making quarterly earnings announcements, the settlement document showed, letting the firm capture analysts’ changing expectations of companies’ results only days before earnings were to be announced.

A version of this article appears in print on January 9, 2014, on page B1 of the New York edition with the headline: BlackRock Agrees to Stop Pursuing Nonpublic Views.

© 2014 The New York Times Company