Groups raise alarm over Fed, BlackRock debt-buying deal

A collection of 30 investor and sustainability focused groups have raised concerns in a letter to the Federal Reserve over potential conflicts of interest and lack of transparency and oversight in the recent agreement between the central bank and BlackRock.

On March 24, the Fed announced BlackRock as investment manager and adviser for three new programs aimed at supporting the U.S. economy amid the COVID-19 pandemic. Two of the three appointments relate to the Fed's new measures to ensure credit continues to be available to large employers: The primary market corporate credit facility, providing new bond and loan issuance; and the secondary market corporate credit facility, providing liquidity for outstanding corporate bonds.

BlackRock's financial markets advisory unit, which is separate from its traditional asset management business, was appointed as investment manager for both the PMCCF and the SMCCF.

In their March 27 letter, the groups, which include watchdog Public Citizen and Sierra Club, said the agreement could bring a concentration of financial power and a lack of limitations on public financial support for industry practices that harm the public good.

"By giving BlackRock full control of this debt buyout program, the Fed is further entwining the roles of government and private actors," the letter said. "In doing so, it makes BlackRock even more systemically important to the financial system. Yet BlackRock is not subject to the regulatory scrutiny of even smaller systemically important financial institutions."

The Federal Reserve Bank of New York outlined the "terms of assignment" for its BlackRock agreement on March 27. It said that the firm will not charge asset management fees on any exchange-traded funds within the SMCCF and will credit "all underlying fees and income that BlackRock earns" on any of the firm's ETFs back to the Fed. Moreover, as part of BlackRock's overall fiduciary duty to the SMCCF and the Fed, the firm will treat "BlackRock-sponsored ETFs on the same neutral footing as third-party ETFs."

The groups' letter raised concerns over possible conflicts of interest. "BlackRock is the largest owner of many of the firms over which it will make decisions," the letter said. "As a shareholder in nearly all companies, BlackRock stands to benefit from the propping up of certain companies and industries."

According to the agreement put out by the New York Fed, BlackRock will be "governed by stringent information barriers and conflict of interest policies currently in place" for the firm, which have been previously reviewed and found to be satisfactory to the New York Fed. It added: "The New York Fed will review these policies in light of this new engagement, and BlackRock will adjust those policies as needed. Consistent with those policies, Blackrock staff assigned to this engagement will be segregated from other BlackRock engagements and activities."

In an email Monday, a BlackRock spokesman said its financial markets advisory unit is "honored to have been selected to assist the Federal Reserve Bank of New York during this extraordinary time."

In its letter, the groups also called on the Fed and other financial regulatory agencies to bolster the "resilience of the financial system to safely handle the climate shock that is barreling towards us. Helping our economy weather this global pandemic is vital but should not accelerate climate change as part of our rescue efforts."