Brown Advisory LLC; Notice of Application, 4938-4941 [2017-00778]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 10 (Tuesday, January 17, 2017)]
[Notices]
[Pages 4938-4941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00778]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IA-4605/803-00229]


Brown Advisory LLC; Notice of Application

January 10, 2017.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an exemptive order under Section 206A 
of the Investment Advisers Act of 1940

[[Page 4939]]

(the ``Advisers Act'') and Rule 206(4)-5(e).

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Applicant:  Brown Advisory LLC (``Applicant'' or ``Adviser'').

Relevant Advisers Act Sections:  Exemption requested under section 206A 
of the Advisers Act and rule 206(4)-5(e) from rule 206(4)-5(a)(1) under 
the Advisers Act.

Summary of Application:  Applicant requests that the Commission issue 
an order under section 206A of the Advisers Act and rule 206(4)-5(e) 
exempting it from rule 206(4)-5(a)(1) under the Advisers Act to permit 
Applicant to receive compensation from certain government entities for 
investment advisory services provided to the government entities within 
the two-year period following a contribution by a covered associate of 
the Applicant to an official of the government entities.

Filing Dates:  The application was filed on July 18, 2016, and an 
amended and restated application was filed on November 22, 2016.

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 Commission by 5:30 
p.m. on February 6, 2017, and should be accompanied by proof of service 
on Applicant, in the form of an affidavit or, for lawyers, a 
certificate of service. Pursuant to rule 0-5 under the Advisers Act, 
hearing requests should state the nature of the writer's interest, any 
facts bearing upon the desirability of a hearing on the matter, 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: Brown Advisory LLC, 901 
South Bond Street, Suite 400, Baltimore, MD 21231.

FOR FURTHER INFORMATION CONTACT: Vanessa M. Meeks, Senior Counsel, or 
Parisa Haghshenas, Branch Chief, at (202) 551-6825 (Division of 
Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site at https://www.sec.gov/rules/iareleases.shtml or 
by calling (202) 551-8090.

Applicant's Representations

    1. Applicant is a Maryland limited liability company registered 
with the Commission as an investment adviser under the Advisers Act. 
Applicant provides discretionary investment advisory services to 
individuals and institutions.
    2. The individual who made the campaign contribution that triggered 
the two-year compensation ban (the ``Contribution'') is Douglas Godine 
(the ``Contributor''). The Contributor is the head of business 
development for the Adviser's private client team and has been with the 
Adviser for five years. The Contributor's role focuses on oversight of 
business development for the private client and Outsourced Chief 
Investment Officer (``OCIO'') teams. Applicant submits that, because 
the Contributor, in his OCIO role, oversees business development 
activities related to clients that may include entities covered by Rule 
206(4)-5(f)(5), he is a covered associate as defined by Rule 206(4)-
5(f)(2)(ii).
    3. Seven of the Adviser's clients are agencies, authorities, or 
instrumentalities of the State of Maryland (the ``Clients''). The 
Clients are government entities as defined in Rule 206(4)-5(f)(5)(i).
    4. The recipient of the Contribution was Larry Hogan (the 
``Candidate''), who, at the time of the Contribution was the governor-
elect of Maryland, and at the time of this Application is Maryland's 
Governor. The Maryland Governor is the chief executive of the state and 
can influence investment decisions, including the hiring of an 
investment adviser, for the state and for other entities that are 
overseen by boards composed of individuals appointed by the Maryland 
Governor (``Gubernatorial Appointees''). Due to his office and the 
power of appointment, the Maryland Governor is an ``official'' of the 
Clients as defined in Rule 206(4)-5(f)(6)(ii). None of the 
Gubernatorial Appointees serving at the time of the Contribution were 
appointed by the Candidate, who had not yet taken office.
    5. The Contribution that triggered rule 206(4)-5's prohibition on 
compensation under rule 206(4)-5(a)(1) was recorded on January 12, 
2015, for the amount of $1,000 made out to ``Larry Hogan for 
Governor.'' Applicant submits that the contribution was made by the 
Contributor for purely personal reasons, separate and apart from the 
Contributor's role with the Adviser. The Contribution was made at the 
request of a family friend with whom the Contributor has been friends 
for about a decade. The Contributor and his friend are active together 
in their local sports community, and they have been active participants 
together in their children's sports teams. In the past, the Contributor 
has provided support for other causes at the request of the friend, 
including monetary support. The friend invited the Contributor to a 
dinner at a restaurant in Annapolis for members of the local community. 
Applicant submits that the Contributor was unaware the event was a 
fundraiser for the Candidate until he attended the event, and that the 
Contributor had no prior contact, affiliation with, or intention to 
contribute to the Candidate. Applicant represents that the Contributor 
did not seek out or initiate contact with the Candidate and that he was 
briefly introduced to the Candidate at the event, but at no time was 
there any mention of the Adviser or the Clients.
    6. The Clients' decisions to invest with the Adviser occurred long 
before the Candidate commenced his campaign for office in January 2014, 
before the Candidate was elected in November 2014, and before the 
Contribution was made in January 2015. The earliest of the Clients made 
a commitment to invest with the Adviser in 2004, and the most recent 
Client did so in 2012. Applicant represents that none of the Clients 
have materially increased the amounts of assets managed by the Adviser, 
initiated new investment mandates, or opened new accounts with the 
Adviser since the Contribution was made. The Contributor has had no 
interaction with the Clients, with any representative of the Clients, 
or with the Clients' boards.
    7. The Adviser became aware of the Contribution when it conducted a 
check of campaign contribution disclosures on June 8, 2016. Within one 
week, the Contributor requested the return of the full Contribution 
from the Candidate. This request was granted and a check refunding the 
full Contribution was received on July 15, 2016. After identifying the 
Contribution, the Adviser took steps beginning on June 8, 2016 to 
establish an escrow account, and the Adviser has deposited an amount 
equal to the sum of all fees paid to the Adviser and its affiliates, 
directly or indirectly, with respect to the Clients since the date of 
the Contribution, January 12, 2015. Additional fees or other 
compensation accruing in favor of the Adviser and its affiliates will 
continue to be deposited into the escrow account or will not be 
collected from the Clients until it is determined whether exemptive 
relief will be granted to the Adviser.

[[Page 4940]]

    8. The Applicant's Political Contributions Policy (the ``Policy'') 
was adopted and published in January 2011, before Rule 206(4)-5's 
compliance date and long before the Contribution was made. All 
contributions by employees to federal, state, and local office 
incumbents and candidates are subject to pre-clearance, not post-
contribution reporting, under the Policy. There is no de minimis 
exception from pre-clearance for small contributions. Both before and 
after the Rule's compliance date, the Adviser has conducted a series of 
compliance training sessions that addressed the Policy, including 
reiterating the need to pre-clear all political contributions, together 
with an annual policy compliance attestation by all employees. The 
Adviser also circulates periodic reminders of the Policy to employees. 
The compliance testing conducted by the Adviser includes periodic 
searches of campaign contribution databases for the names of employees, 
such as the search that identified the Contribution.

Applicant's Legal Analysis

    1. Rule 206(4)-5(a)(1) under the Advisers Act prohibits a 
registered investment adviser from providing investment advisory 
services for compensation to a government entity within two years after 
a contribution to an official of the government entity is made by the 
investment adviser or any covered associate of the investment adviser. 
Each of the Clients is a ``government entity,'' as defined in rule 
206(4)-5(f)(5), the Contributor is a ``covered associate'' as defined 
in rule 206(4)-5(f)(2), and the Candidate is an ``official'' as defined 
in rule 206(4)-5(f)(6).
    2. 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].''
    3. Rule 206(4)-5(e) provides that the Commission may exempt an 
investment adviser from the prohibition under Rule 206(4)-5(a)(1) upon 
consideration of the factors listed below, among others:
    (1) Whether the 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) Whether the investment adviser: (i) Before the contribution 
resulting in the prohibition was made, adopted and implemented policies 
and procedures reasonably designed to prevent violations of the rule; 
and (ii) prior to or at the time the contribution which resulted in 
such prohibition was made, had no actual knowledge of the contribution; 
and (iii) after learning of the contribution: (A) Has taken all 
available steps to cause the contributor involved in making the 
contribution which resulted in such prohibition to obtain a return of 
the contribution; and (B) has taken such other remedial or preventive 
measures as may be appropriate under the circumstances;
    (3) Whether, at the time of the contribution, the contributor was a 
covered associate or otherwise an employee of the investment adviser, 
or was seeking such employment;
    (4) The timing and amount of the contribution which resulted in the 
prohibition;
    (5) The nature of the election (e.g., federal, state or local); and
    (6) The contributor's apparent intent or motive in making the 
contribution which resulted in the prohibition, as evidenced by the 
facts and circumstances surrounding such contribution.
    4. Applicant requests an order pursuant to section 206A and rule 
206(4)-5(e), exempting it from the two-year prohibition on compensation 
imposed by rule 206(4)-5(a)(1) with respect to investment advisory 
services provided to the Clients within the two-year period following 
the Contribution.
    5. Applicant submits that the exemption is necessary and 
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. Applicant further submits that the 
other factors set forth in rule 206(4)-5(e) similarly weigh in favor of 
granting an exemption to the Applicant to avoid consequences 
disproportionate to the violation.
    6. Applicant contends that given the nature of the Rule violation, 
and the lack of any evidence that the Adviser or the Contributor 
intended to, or actually did, interfere with any client's merit-based 
process for the selection or retention of advisory services, the 
interests of the Clients are best served by allowing the Adviser and 
its Clients to continue their relationship uninterrupted. Applicant 
states that causing the Adviser to serve without compensation for a 
two-year period could result in a financial loss that is more than 
1,949 times the amount of the Contribution that exceeded the de minimis 
threshold. Applicant suggests that the policy underlying the Rule is 
served by ensuring that no improper influence is exercised over 
investment decisions by governmental entities as a result of campaign 
contributions and not by withholding compensation as a result of 
unintentional violations.
    7. Applicant represents the Policy was adopted and published in 
January 2011, before the Rule's compliance date and long before the 
Contribution was made. Applicant further represents that, at all times, 
the Policy has conformed to the requirements of the Rule and has been 
even broader than what was contemplated by the Rule. Both before and 
after the Rule's compliance date, the Adviser has conducted a series of 
compliance training sessions that addressed the Policy, including 
reiterating the need to pre-clear all political contributions, together 
with an annual policy compliance attestation by all employees. The 
compliance testing conducted by the Adviser includes periodic searches 
of campaign contribution databases for the names of employees, such as 
the search that identified the Contribution.
    8. Applicant asserts that at no time did any employee of the 
Adviser other than the Contributor have any knowledge that the 
Contribution had been made before its discovery by the Adviser in June 
2016.
    9. Applicant asserts that after learning of the Contribution, the 
Adviser and the Contributor promptly took steps to obtain a return of 
the Contribution and to implement additional measures to prevent future 
error, including providing supplemental training to all employees on 
the Policy to ensure that other employees fully understand the Policy 
and do not make the same mistake as the Contributor.
    10. Applicant states that after learning of the Contribution, it 
confirmed that the Contributor had no contact with any representative 
of the Clients and will have no contact with any representative of the 
Clients for the duration of the two-year period beginning January 12, 
2015.
    11. Applicant asserts that the Clients' decisions to invest with 
the Adviser occurred long before the Candidate commenced his campaign 
for office in January 2014, before the Candidate was elected in 
November 2014, and before the Contribution was made in January 2015. 
Applicant states that, at the time of the Contribution, the Candidate 
had not exercised or even obtained the appointment power reserved to 
his State office. The Contributor is a longtime Maryland resident and 
voter, and

[[Page 4941]]

Applicant states that the Contributor's violation of the Policy and the 
Rule resulted from the Contributor's failure to appreciate the 
regulatory significance of the Contribution, which was intended as a 
friendly gesture toward a social acquaintance.
    12. Applicant submits that neither the Adviser nor the Contributor 
sought to interfere with the Clients' merit-based selection process for 
advisory services, nor did they seek to negotiate higher fees or 
greater ancillary benefits than would be achieved in arms' length 
transactions. Applicant further submits that there was no violation of 
the Adviser's fiduciary duty to deal fairly or disclose material 
conflicts given the absence of any intent or action by the Adviser or 
the Contributor to influence the selection process. Applicant contends 
that in the case of the Contribution, imposition of the two-year 
prohibition on compensation does not achieve the Rule's purposes and 
would result in consequences disproportionate to the mistake that was 
made.

Applicant's Conditions

    The Applicant agrees that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. The Contributor will be prohibited from discussing the business 
of the Applicant with any ``government entity'' client for which the 
Official is an ``official,'' each as defined in Rule 206(4)-5(f), until 
January 12, 2017.
    2. The Contributor will receive a written notification of the 
conditions and will provide a quarterly certificate of compliance until 
January 12, 2017. Copies of the certifications will be maintained and 
preserved in an easily accessible place for a period of not less than 
five years, the first two years in an appropriate office of the 
Applicant, and be available for inspection by the staff of the 
Commission.
    3. The Applicant will conduct testing reasonably designed to 
prevent violations of the conditions of the Order and maintain records 
regarding such testing, which will be maintained and preserved in an 
easily accessible place for a period of not less than five years, the 
first two years in an appropriate office of the Applicant, and be 
available for inspection by the staff of the Commission.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00778 Filed 1-13-17; 8:45 am]
BILLING CODE 8011-01-P