[ by Melanie Gretchen ] "Skin in the game" is a hot-button topic on Wall Street these days, particularly for Wall Street bankers and traders, who are accustomed to receiving a sizable bonus each and every year.  When they deliver large profits or gains to their firm's bottom line, they can expect to huge year-end bonus awards.  When they deliver little or no profit, (or shudder to think) take a sizable net loss for the year - which can happen during the industry's down market cycles - then they typically can expect small bonuses.  Rarely, if ever, will they have to return money to the firm - i.e., giveback or clawback. What contributes mightily to the success of these Wall Streeters is that they have little or no personal risk in their trades and investments - i.e., "they have no skin in the game. They're "playing with other people's money, so some feel empowered to take enormous risks and hold oversized positions, because that's the best way to create "supersized" returns.  While they may scale back during weak market conditions, they may still have incentive to trade large and risky.  It's still not their money.  And, anyway, there's always hope and expectation that the down market cycle will hang around for just a year or two, at most.  After that, it's time to get rich again. Tails I Win, Heads You Lose. With Wall Street firms in a vulnerable position - suffering through an extended cycle just 3 years after being bailed out by the government -  Congress and the general public have found their voices.  Their protests against this "compensation arrangement gone wild" can be heard loud and clear.  And the bottom line is that protesters are calling for Wall Streeters to "have skin in the game," and share in both the gains and the losses. Wall Street firms are responding by introducing or expanding deferred compensation and/or clawback arrangements.  While not everyone is completely satisfied, many acknowledge that it's a start to a better system - and an apparent end to the "win-win" scenario for traders, bankers and managers. Potential for Conflict. However, the introduction of "Skin in the Game" can pose unintended results.  Take, for example, BlackRock fund manager Daniel Rice III, who manages $4.5 billion in energy investments with his co-manager, Denis Walsh III.  Over the past decade, their $953 million BlackRock Energy & Resources Fund has outperformed 96% of its peers, according to Morningstar.  But Mr. Rice has a side job as an oil man, and that poses some questions and concerns - principally the fund manager and oil man roles present a conflict of interest.

The Oil Baron. In 2005, Mr. Rice created Rice Energy, and he currently is the principal investor in the company.  In turn, his sons serve as CEO, CFO, and chief geologist.  A subsidiary of the company, Rice Drilling B, operates in Pennsylvania's Marcellus Shale, a rich vein of oil and gas deposits.

The Fund Manager. Wearing his other hat, Mr. Rice bought a small stake in Rice Energy, or in Rice affiliates, for his BlackRock Energy & Resources Fund beginning in 2009.  At the time, it accounted for less than 2% of the fund's assets.  Starting in 2010, however, Mr. Rice has increased the fund's exposure to Rice and Rice affiliates, which brought the fund's stake in the combined companies to 9% of fund assets.

Defense. BlackRock contends that more than 2/3's of the position came through acquisitions of companies the fund already owned and that the rest of the purchases were driven by cash inflows at the fund.  The law may not point Mr. Rice either way, Tamara Frankel, a law professor at Boston University said, though she leaned toward putting investors' interests first:

"There's probably no rule that requires that under these exact, specific conditions, you may not invest this way... [p]eople who hold other people's money must manage for the other people's benefit and may not have interests that conflict with theirs."

Possibilities. In the event that the venture between Rice Drilling and affiliate, Alpha, blew up, Mr. Rice admittedly has a lot to lose.  Last summer, Rice Drilling B raised $60 million in a private debt offering under Regulation D, a federal rule that allows issuers to sell securities without registering them with the SEC. That was the 25th largest of 392 such energy offerings in the U.S. last year, says an expert on unlisted financings.

"Maybe if the [joint venture] is very small, they might have a plausible argument that any potential conflict isn't material. But if I were an investor in these funds, I would want [these potential conflicts] disclosed." -- Thomas Hazen, a professor of securities law at the University of North Carolina at Chapel Hill.

Damage Control. To prevent potential conflict, Mr. Rice has agreed "to recuse himself from all decisions made by all Rice Energy entities" involving the Alpha joint venture, a BlackRock spokeswoman said.  In addition, he avoids taking "material information about the joint venture that could restrict BlackRock's ability to trade in shares of [Alpha]." Everything withstanding, Mr. Rice has a lot to gain.  After the 1% he owns owns of Rice Energy, the rest is held by the Dan Rice Irrevocable Trust.  He isn't a trustee, but his children are its sole beneficiaries. For further details, go to [WSJ, 6/1/12].